2018
Annual Report
Dedicated To Making The Lives
Of Our Customers BETTER
Letter
To Our
Shareholders
There is more to banking than money. We began First Reliance
Bank twenty years ago with this tagline, and we continue to
believe that this statement still holds true and is what sets us
apart from other banks. Our Purpose, “to make the lives of our
customers better,” pays honor to this tagline and drives the
everyday activities of our associates and the strategic vision of
your bank.
Providing value to you, our shareholder, means we take care of
the needs of our customers and our communities by providing sound advice, an incredible customer
experience, competitive and easy-to-understand products, and a fair price. This service to our
customers leads to a growing and profitable company.
During 2018, your company made great strides toward our overarching goals of growth, profitability,
and efficiency. Over the past several years, we asked you to be patient as we leveraged our existing
infrastructure and grew assets in existing and new markets. Spreading operating costs over a larger
footprint will not only allow us to be more efficient, but will also position us in growth markets that
provide increased access to talented bankers and target customers.
New Markets
Our completed acquisition of Independence National Bank in Q1 2018 positioned us in the Greenville, SC
market and boosted our loans and deposits. Upstate South Carolina is arguably one of the best markets
in the Southeast. We welcomed our new associates and look forward to continued growth
opportunities in Greenville and surrounding areas.
We expanded our team in Myrtle Beach, SC by adding quality bankers with deep community
connections. We are pleased that this market grew by $9 million in loans and $13 million in deposits
during 2018. We are finalizing plans for a new Myrtle Beach branch to come online in 2019.
Lastly, we continued to expand our North Carolina presence by expanding our team in Winston-Salem
and adding bankers in the very explosive Charlotte market. We are now accepting deposits in Winston-
Salem and are actively looking for branch sites.
1
Culture and the Customer Experience
We place a lot of emphasis on our corporate culture. Our strong belief is that engaged associates will
ensure an incredible customer experience, which will, in turn, differentiate our bank. This culture is
rooted in our Values and our Purpose. We proudly discuss these concepts during the interview process
and as we onboard our new teammates. Weekly, we reinforce these Values and this Purpose through
written communication and team meetings.
We measure associate engagement both informally through conversations and feedback loops and
formally through surveys. I am pleased to report that our survey results continue to show associate
engagement of over 90%. The bank was, for the 13th straight year, voted as one of the Best Places to
Work in South Carolina; we are only one of three companies to be recognized each of the thirteen years
of this program.
The end result of engaged associates is an incredible experience for our customers. I am pleased to
report:
• 95% of our customers are satisfied with their level of service,
• 83% are likely to recommend us to family or friends (the best source for new customers),
• A 75% “net promoter score” (where 70% plus is considered world class).
Loan and Deposit Growth
With the acquisition of Independence National Bank and the growth into new markets, we grew our
gross loans outstanding by 30% during 2018. This expansion has also allowed us to increase our average
loan size while still providing quality answers in a timely manner.
2
Our net interest margin continues to perform well compared to peers due to strong asset yields and
solid base of lower priced core deposits. With our entry into new and more competitive markets and
the flattening of the yield curve, we are experiencing some compression in our margins.
As mentioned, one of the main drivers of our strong margin is our concentration of core transaction
accounts. Obtaining the main checking account for consumers and businesses is a major focus for all of
our bankers. During 2018, we added a Director of Treasury Services to work closely with our bankers
and to develop a full suite of deposit accounts and services for our business customers. We continue to
enhance our deposit offerings to retain and attract this low-cost deposit base.
3
Loan Quality
In late 2017, we brought on a new Chief Credit Officer to better align us to grow our loan portfolio and
maintain high quality. During 2018, we added to the Credit team and introduced new technology and
processes for more efficient credit approvals, closings, and fundings.
We are pleased that the quality of our loan portfolio remains high. Our acquired loans from
Independence National Bank, totalling $50.5 million, were marked-to-market upon the closing of that
transaction. As such, these loans do not carry reserves which skews some of our ALLL metrics.
Focusing on Efficiency
As previously stated, the past few years has been focused on building scale through acquisitions and
entering new markets. We asked you to be patient as we leveraged our technology, infrastruture, and
support teams to support a larger footprint and a larger asset base.
Today, market conditions are heated, and it is becoming increasingly more challenging to attract low-
cost deposits and deploy these funds in higher yielding loans. As such, we are now shifting our primary
focus to increasing our profitablity and reducing our efficiency ratio. This iniative is a multi-pronged
approach which will begin to show results in 2019 with the fuller effect coming in 2020. Our
commitment is to drive our efficiency ratio down to the mid 60’s over the next three years.
In Q4 2018, we closed our office in Loris, SC, and in Q2 2019, we will be closing our Summerville, SC
office. These markets were not providing us the growth and returns necessary to keep them open. We
continue to analyze all of our locations to ensure they are located and staffed for profitable growth.
In addition to our branch locations, we also analyze our various lines of business due to shifting markets
and consumer demograhics. We will ensure that each line of business is providing the quality returns
necessary for our long-term success.
4
As with many businesses, legacy costs build up over time as companies grow and expand. During 2018,
we took a deep dive into how we do business now and how we need to do business going forward. This
work identified in excess of $2.5 million of cost savings and revenue enhancments that will be
implemented over a judicious timeline in order to minimize the effects on our customers. The
leadership of your company and I are completely committed to realizing cost savings and bringing more
of our revenue to the bottom line.
Our Future
Banking continues to be an ever-changing and challenging industry. However, with strong leadership,
an engaged team of associates, and a sharp focus on our culture, First Reliance Bank can and will
become one of the strongest banks in the Southeast. Making the lives of our customers BETTER will
translate into a profitable company that continues to build shareholder value. I am excited about our
past 20 years and even more excited about our future peformance. Thank you for the continued
support you show to me and our associates.
Thank you and best regards,
F.R. “Rick” Saunders Jr.
President and CEO
5
First Reliance Bancshares, Inc. and Subsidiary
Report on Consolidated Financial Statements
For the years ended December 31, 2018 and 2017
First Reliance Bancshares, Inc. and Subsidiary
Contents
Page
Independent Auditor’s Report ............................................................................................................................... 1-2
Consolidated Financial Statements
Consolidated Balance Sheets ............................................................................................................................... 3
Consolidated Statements of Operations .............................................................................................................. 4
Consolidated Statements of Comprehensive Income (Loss) ................................................................................ 5
Consolidated Statements of Changes in Shareholders' Equity ............................................................................ 6
Consolidated Statements of Cash Flows .............................................................................................................. 7
Notes to Consolidated Financial Statements ................................................................................................. 8-55
Independent Auditor's Report
The Board of Directors and Shareholders
First Reliance Bancshares, Inc. and Subsidiary
Florence, South Carolina
Report on the Consolidated Financial Statements
We have audited the accompanying consolidated financial statements of First Reliance Bancshares, Inc. and its
Subsidiary which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related
consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity and cash
flows for the years then ended and the related notes to the consolidated financial statements (collectively, “the
financial statements”).
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the
risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no
such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit
opinion.
elliottdavis.com
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of First Reliance Bancshares, Inc. and its Subsidiary as of December 31, 2018 and 2017, and the results of
its operations and its cash flows for the years then ended in accordance with accounting principles generally
accepted in the United States of America.
Columbia, South Carolina
April 11, 2019
2
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2018 and 2017
Assets
Cash and cash equivalents:
Cash and due from banks
Interest-bearing deposits with other banks
Total cash and cash equivalents
Time deposits in other banks
Securities available-for-sale
Marketable equity securities
Securities held-to-maturity (fair value of $14,250,850
and $17,372,834 at December 31, 2018 and 2017, respectively)
Nonmarketable equity securities
Total investment securities
Mortgage loans held for sale
Loans receivable
Less allowance for loan losses
Loans, net
Premises, furniture and equipment, net
Accrued interest receivable
Other real estate owned
Cash surrender value life insurance
Net deferred tax assets
Mortgage servicing rights
Core deposit intangibles
Goodwill
Other assets
Total assets
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing transaction accounts
Interest-bearing transaction accounts
Savings
Time deposits $250,000 and over
Other time deposits
Total deposits
Securities sold under agreement to repurchase
Advances from Federal Home Loan Bank
Subordinated debentures
Junior subordinated debentures
Accrued interest payable
Other liabilities
Total liabilities
Shareholders’ Equity
Preferred stock
Series D non-cumulative preferred stock - 581 and 599 shares issued and outstanding
at December 31, 2018 and 2017, respectively
Series E cumulative perpetual preferred stock - 0 and 410,499 shares issued
and outstanding at December 31, 2018 and 2017, respectively
Common stock, $0.01 par value; 20,000,000 shares authorized,
2018
2017
$
$
$
$
$
$
4,638,332
29,923,656
34,561,988
253,003
33,388,645
168,151
14,107,252
1,393,500
49,057,548
12,713,361
430,795,891
(2,788,188)
428,007,703
20,310,879
1,318,104
341,519
17,306,312
7,923,572
9,023,859
684,217
690,917
2,796,830
584,989,812
103,201,256
83,251,127
120,801,341
42,870,456
126,044,529
476,168,709
16,852,981
20,000,000
4,934,877
10,310,000
447,883
4,106,913
3,494,469
21,136,350
24,630,819
102,020
26,894,719
-
17,018,132
1,359,200
45,272,051
7,885,938
333,675,253
(2,453,875)
331,221,378
18,463,156
1,094,740
1,706,765
14,293,702
4,461,063
6,357,666
-
-
3,132,443
458,621,741
86,209,099
70,642,041
118,996,069
13,874,405
63,372,449
353,094,063
13,929,651
22,000,000
4,911,963
10,310,000
253,679
3,969,060
532,821,363
408,468,416
581
-
599
2,955,593
8,002,172 and 7,887,486 shares issued and outstanding at December 31, 2018 and 2017, respectively
80,022
78,875
Non voting common stock, $0.01 par value; 430,000 shares authorized,
410,799 and 0 shares issued and outstanding at December 31, 2018 and 2017, respectively
Capital surplus
Treasury stock, at cost, 94,505 and 40,583 shares at December 31, 2018 and 2017, respectively
Nonvested restricted stock
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
4,105
50,904,763
(624,120)
(1,508,630)
4,003,616
(691,888)
52,168,449
-
46,941,229
(229,844)
(868,399)
1,573,382
(298,110)
50,153,325
$
584,989,812
$
458,621,741
See Notes to Consolidated Financial Statements
3
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended December 31, 2018 and 2017
Interest income:
Loans, including fees
Investment securities:
Taxable
Tax exempt
Other interest income
Total
Interest expense:
Time deposits
Other deposits
Other interest expense
Total
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Service charges on deposit accounts
Income from mortgage operations
Income from bank owned life insurance
Other service charges, commissions, and fees
Gain on sale of trust preferred security
Other
Total
Noninterest expenses:
Salaries and benefits
Occupancy
Furniture and equipment related expenses
Acquisition-related costs
Other
Total
Income before income taxes
Income tax expense related to ordinary operations
Income tax expense related to change in tax rate
Total income tax expense
Net income (loss)
Preferred stock dividends accrued
2018
2017
$
22,010,885
$
16,321,881
1,039,259
147,950
426,598
23,624,692
2,191,437
534,572
964,475
3,690,484
802,815
118,969
225,924
17,469,589
732,399
410,459
1,028,926
2,171,784
19,934,208
15,297,805
510,356
-
19,423,852
15,297,805
1,597,211
5,138,660
390,557
1,510,405
800,000
487,529
9,924,362
15,373,131
2,227,135
2,021,351
1,005,195
5,549,562
26,176,374
1,502,286
4,845,075
328,716
1,341,171
-
324,003
8,341,251
12,075,338
1,685,622
1,646,687
501,265
4,803,246
20,712,158
3,171,840
2,926,898
741,606
-
741,606
949,716
2,666,542
3,616,258
2,430,234
(689,360)
-
-
Net income (loss) available to common shareholders
$
2,430,234
$
(689,360)
Average common shares outstanding, basic
Average common shares outstanding, diluted
Income (loss) per common share:
Basic income (loss) per common share
Diluted income (loss) per common share
7,738,547
7,867,586
5,465,868
5,465,868
$
$
0.31
0.31
(0.13)
(0.13)
See Notes to Consolidated Financial Statements
4
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
For the years ended December 31, 2018 and 2017
Net income (loss)
Other comprehensive loss, net of tax:
Securities available-for-sale
Unrealized holding losses arising during the period
Income tax benefit
Net of income taxes
Securities held-to-maturity
Amortization of net unrealized gains
capitalized on securities transferred from available-for-sale
Income tax benefit
Net of income taxes
Other comprehensive loss
Comprehensive income (loss)
2018
2017
$
2,430,234
$
(689,360)
(449,738)
67,265
(382,473)
(76,530)
26,020
(50,510)
(14,987)
3,680
(11,307)
(22,581)
7,678
(14,903)
(393,778)
(65,413)
$
2,036,456
$
(754,773)
See Notes to Consolidated Financial Statements
5
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2018 and 2017
Preferred
Stock
Common
Stock
Capital
Surplus
Treasury
Stock
Nonvested
Restricted
Stock
Retained
Earnings
(Deficit)
Accumulated
Other
Comprehensive
Income
(Loss)
Total
Balance, December 31, 2016
$
600 $
46,798 $ 25,071,543 $
(219,106) $
(262,153) $ 2,262,742 $
(232,697) $ 26,667,727
Balance, December 31, 2017
2,956,192
78,875
46,941,229
(229,844)
(868,399)
1,573,382
(298,110)
50,153,325
Net loss
Other comprehensive loss,
net of tax
-
-
Issuance of Preferred
Stock - Series E
2,955,593
Conversion of Preferred Stock -
Series D to Common Stock
Net issuance of
Common Stock
Net change in restricted stock
Stock based compensation
Purchase of Treasury Stock
(1)
-
-
-
-
-
-
-
1
-
-
-
-
32,076
21,824,283
-
45,403
-
(10,738)
Net income
Other comprehensive loss,
net of tax
Conversion of Preferred
Stock - Series E to Common
Stock
Conversion of Preferred Stock -
Series D to Common Stock
Net issuance of
Common Stock
Net change in restricted stock
Stock based compensation
Purchase of Treasury Stock
-
-
-
-
-
-
(2,955,593)
4,105
2,951,488
(18)
18
-
1,129
954,314
-
57,732
-
-
-
-
-
(394,276)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(606,246)
-
-
(689,360)
-
(689,360)
-
-
-
-
-
-
-
(65,413)
(65,413)
-
-
-
-
-
-
2,955,593
-
21,856,359
(606,246)
45,403
(10,738)
-
-
-
-
-
(640,231)
-
-
2,430,234
-
2,430,234
-
-
-
-
-
-
-
(393,778)
(393,778)
-
-
-
-
-
-
-
-
955,443
(640,231)
57,732
(394,276)
-
-
-
-
-
-
Balance, December 31, 2018
$
581 $
84,127 $ 50,904,763 $
(624,120) $ (1,508,630) $ 4,003,616 $
(691,888) $ 52,168,449
See Notes to Consolidated Financial Statements
6
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2018 and 2017
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
2018
2017
$
2,430,234
$
(689,360)
Provision for loan losses
Depreciation and amortization expense
Gain on fair value of equity securities
Discount accretion and premium amortization
Discount accretion on purchased loans
Net gain on sale of other real estate owned
Gain on trust preferred security
Write down of other real estate owned
Disbursements for mortgages held for sale
Proceeds from sales of mortgages held for sale
Gain on sale of mortgage loans
Core deposit intangible amortization
Deferred income taxes, net of allowance
Increase in interest receivable
Increase (decrease) in interest payable
Increase in cash surrender value of life insurance
Stock based compensation expense
Decrease (increase) in other assets
Increase in mortgage servicing rights
(Decrease) increase in other liabilities
Net cash used in operating activities
Cash flows from investing activities:
Purchases of securities available-for-sale
Maturities of securities available-for-sale
Maturities of securities held-to-maturity
Purchase of trust preferred security
Proceeds from sale of trust preferred security
Net increase in marketable equity securities
Net decrease (increase) in time deposits in other banks
Net increase in loans receivable
Purchases of premises, furniture and equipment
Net cash from acquisition of Independence Bancshares, Inc.
Proceeds from sale of other real estate owned
Net cash used in investing activities
Cash flows from financing activities:
Net (decrease) increase in demand deposits, interest-bearing
transaction accounts and savings accounts
Net increase in certificates of deposit and other time deposits
Net (decrease) increase in advances from Federal Home Loan Bank
Net increase in securities sold under agreements to repurchase
Net proceeds from issuance of common stock
Decrease in notes payable
Issuance of preferred stock
Increase in restricted stock
Accretion of debt issuance costs
Purchase of treasury stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Cash paid during the year for:
Income taxes
Interest
Supplemental noncash investing and financing activities:
Transfer from loans to other real estate owned
Net change in unrealized losses on investment securities
See Notes to Consolidated Financial Statements
7
510,356
900,631
(38,151)
97,010
206,394
(203,685)
(800,000)
-
(262,987,343)
263,027,079
(4,867,159)
195,783
670,812
(94,058)
177,054
(411,921)
57,732
650,503
(2,666,193)
(18,689)
(3,163,611)
(9,947,760)
13,148,433
2,854,814
(2,300,000)
3,100,000
(34,300)
4,349,017
(44,964,315)
(1,139,657)
2,118,594
2,618,946
(30,196,228)
(20,352,894)
63,189,511
(2,000,000)
2,923,330
955,443
-
-
(640,231)
22,914
(394,276)
43,703,797
9,931,169
24,630,819
34,561,988
8,448
3,496,280
395,565
(393,778)
$
$
$
-
882,785
-
69,555
-
(216,079)
-
550,338
(273,360,068)
275,580,706
(4,751,044)
-
3,543,946
(133,291)
(45,271)
(328,716)
45,403
(1,025,921)
(2,146,084)
537,969
(1,965,132)
(10,668,957)
1,541,157
3,347,000
-
-
(624,900)
(204)
(45,881,122)
(378,878)
-
967,000
(51,698,904)
7,193,529
9,365,015
14,000,000
2,841,125
21,856,359
(6,893,211)
2,955,593
(606,246)
15,565
(10,738)
50,716,991
(2,467,045)
27,097,864
24,630,819
158,502
2,217,055
137,540
(65,413)
$
$
$
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies
Organization:
First Reliance Bancshares, Inc. (the “Company”) was incorporated under the laws of the State of South Carolina on
April 12, 2001 to serve as a bank holding company for its subsidiary, First Reliance Bank (the “Bank”), and acquired all
of the shares of the Bank on April 1, 2002 in a statutory share exchange. First Reliance Bank was incorporated on
August 9, 1999 and commenced business on August 16, 1999. The principal business activity of the Bank is to provide
banking services to domestic markets throughout South Carolina and North Carolina. The Bank is a South Carolina
chartered commercial bank, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). The
consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after
elimination of all significant intercompany balances and transactions. In 2005, the Company formed First Reliance
Capital Trust I (the "Trust") for the purpose of issuing trust preferred securities. In accordance with current accounting
guidance, the Trust is not consolidated in these financial statements.
Management’s Estimates:
The preparation of consolidated financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance
for losses on loans, including valuation allowances for impaired loans, the valuation of real estate acquired in
connection with foreclosures or in satisfaction of loans and evaluating other-than-temporary-impairment of
investment securities. In connection with the determination of the allowances for losses on loans and valuation of
foreclosed real estate, management obtains independent appraisals in accordance with regulatory policy.
Management must also make estimates in determining the estimated useful lives and methods for depreciating
premises and equipment.
While management uses available information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary, based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review the Company’s allowances for losses on
loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances
based on their judgments about information available to them at the time of their examinations. Because of these
factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate may change
materially in the near term.
Concentrations of Credit Risk:
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of
loans receivable, investment securities, federal funds sold and amounts due from banks.
The Company makes loans to individuals and small businesses for various personal and commercial purposes
primarily throughout South Carolina and North Carolina. At December 31, 2018 and 2017, the majority of the total
loan portfolio was to borrowers from within these areas.
8
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Concentrations of Credit Risk, continued:
The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of
borrowers. Additionally, management is not aware of any concentrations of loans to groups of borrowers or
industries that would also be affected by sector-specific economic conditions.
In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries
and geographic regions, management monitors exposure to credit risk from concentrations of lending products and
practices such as loans that subject borrowers to substantial payment increases (e.g., principal deferral periods, loans
with initial interest-only periods, etc.), and loans with high loan-to-value ratios. Management has determined that
there is minimal concentration of credit risk associated with its lending policies or practices.
There are industry practices that could subject the Company to increased credit risk should economic conditions
change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-
amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans). These loans are
underwritten and monitored to manage the associated risks and management believes that these particular practices
do not subject the Company to unusual credit risk. The Company’s investment portfolio consists principally of
obligations of the United States and its agencies or its corporations and obligations of state and local governments. In
the opinion of management, there is no concentration of credit risk in its investment portfolio. The Company places
its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management
believes credit risk associated with correspondent accounts is not significant.
Debt Securities Available-for-Sale:
Debt securities available-for-sale are carried at amortized cost and adjusted to fair value by recognizing the aggregate
unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded as part of
accumulated other comprehensive income in shareholders’ equity, net of deferred income taxes. Reductions in
market value considered by management to be other than temporary are reported as a realized loss and a reduction
in the cost basis of the security. The adjusted cost basis of investments available-for-sale is determined by specific
identification and is used in computing the gain or loss upon sale.
Debt Securities Held-to-Maturity:
Investment securities held-to-maturity are stated at cost, adjusted for amortization of premium and accretion of
discount computed by the straight-line method. The Company has the ability and management has the intent to hold
designated investment securities to maturity. Reductions in market value considered by management to be other
than temporary are reported as a realized loss and a reduction in the cost basis of the security.
Marketable Equity Securities:
Marketable equity securities are carried at fair value, with changes in fair value recorded through the consolidated
statements of operations. Dividends received on marketable equity securities are included as a separate component
of interest income.
9
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Nonmarketable Equity Securities:
At December 31, 2018 and 2017, nonmarketable equity securities consist of the following:
Federal Home Loan Bank stock
Community Bankers Bank stock
Total
2018
2017
$
$
1,335,400
58,100
1,393,500
$
$
1,301,100
58,100
1,359,200
Nonmarketable equity securities are carried at cost since no quoted market value and no ready market exists.
Investment in the Federal Home Loan Bank of Atlanta (“FHLB”) is a condition to borrowing from that bank, and the
stock is pledged to collateralize such borrowings. Dividends received on nonmarketable equity securities are included
as a separate component of interest income.
Loans Receivable:
Loans receivable are stated at their unpaid principal balance, net of charge offs. Interest income is computed using
the simple interest method and is recorded in the period earned.
When serious doubt exists as to the collectability of a loan or when a loan becomes contractually 90 days past due as
to principal or interest, interest income is discontinued unless the estimated net realizable value of collateral exceeds
the principal balance and accrued interest. When interest accruals are discontinued, income earned but not collected
is reversed. Loans are removed from nonaccrual status when they become current as to both principal and interest,
when concern no longer exists as to the collectability of the principal and interest, and after a sufficient history of
satisfactory payment performance has been established.
Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an
adjustment of the related loan yields. Generally, these amounts are amortized over the contractual life of the related
loans or commitments.
The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s
problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether
all outstanding principal and interest are expected to be collected. Loans are not considered impaired if a minimal
payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period
of delay, are expected to be collected.
Allowance for Loan Losses:
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against the allowance when management believes the
collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
10
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Allowance for Loan Losses, continued:
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's
periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified
as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is
established when the discounted cash flows or collateral value or observable market price of the impaired loan is
lower than the carrying value of that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. A loan is considered impaired when, based on current
information and events, it is probable that the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for either the present value of expected future cash flows discounted
at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, a concession to the
borrower is granted that the Company would not otherwise consider, the related loan is classified as a troubled debt
restructuring. The restructuring of a loan may include the transfer from the borrower to the Company of real estate,
receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction of the
loan, modification of the loan terms, or a combination of the above.
Premises, Furniture and Equipment:
Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation
is computed by the straight-line method, based on the estimated useful lives for buildings of 40 years and for
furniture and equipment of 5 to 10 years. Leasehold improvements are amortized over the term of the lease. The
cost of assets sold or otherwise disposed of and the related allowance for depreciation is eliminated from the
accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance and
repairs are charged to current expense. The costs of major renewals and improvements are capitalized based upon
the Company's policy.
11
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Other Real Estate Owned:
Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is carried at the
lower of cost or the fair market value minus estimated costs to sell. Any write-downs at the date of foreclosure are
charged to the allowance for loan losses. Expenses to maintain such assets and subsequent changes in the valuation
allowance are included in other noninterest expense along with gains and losses on disposal.
Cash Surrender Value of Life Insurance:
Cash surrender value of life insurance represents the cash value of policies on certain current and former officers of
the Company.
Residential Mortgage Loans Held for Sale:
Loans held for sale represent loans originated or acquired by the Company with the intent to sell. The Company has
elected the lower of cost or market in accounting for residential mortgage loans held for sale. These loans are initially
recorded and carried at lower of cost of market value, with changes in fair value recognized in income from mortgage
operations. Loan origination fees are recorded when earned.
The Company issues rate lock commitments to borrowers on prices quoted by secondary market investors.
Derivatives related to these commitments are recorded as either assets or liabilities in the balance sheet and are
measured at fair value. Changes in the fair value of the derivatives are reported in current income or other
comprehensive income depending on the purpose for which the derivative is held. The Company does not currently
engage in any activities that qualify for hedge accounting. Accordingly, changes in fair value of these derivative
instruments are included in noninterest income in the consolidated statements of operations.
Mortgage Servicing Rights:
Mortgage servicing rights (“MSRs”) represent the present value of the future net servicing fees from servicing
mortgage loans. Servicing assets and servicing liabilities must be initially measured at fair value, if practicable. For
subsequent measurements, an entity can choose to measure servicing assets and liabilities based on fair value. The
Company uses the fair value measurement option for MSRs.
The methodology used to determine the fair value of MSRs is subjective and requires the development of a number
of assumptions, including anticipated prepayments of loan principal. Fair value is determined by estimating the
present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other
assumptions validated through comparison to trade information, industry surveys and with the use of independent
third party appraisals. Risks inherent in the MSRs’ valuation include higher than expected prepayment rates and/or
delayed receipt of cash flows. The value of MSRs is significantly affected by mortgage interest rates available in the
marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest
rates, the value of mortgage servicing rights declines due to increasing prepayments attributable to increased
mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing rights generally
increases due to reduced refinance activity. MSRs are carried at fair value with changes in fair value and servicing
fees (cost) recorded as a component of income from mortgage operations.
12
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Core Deposit Intangible:
As a result of an acquisition, the Company may recognize an intangible asset representing the estimated value of core
deposits assumed. The Company amortizes the intangible assets over their estimated useful lives. Core deposit
intangibles are periodically reviewed for reasonableness and are evaluated for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may not be recoverable.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business
combination. Goodwill is not amortized but tested for impairment on an annual basis, or more often, if events or
circumstances indicate there may be impairment. Goodwill impairment exists when a reporting unit’s carrying value of
goodwill exceeds its implied fair value, which is determined through a two-step impairment test. Authoritative guidance
governing the testing of indefinite lived intangible assets for impairment allows the option to first assess Goodwill by
utilizing qualitative factors in determining if it is more likely than not that carrying value exceeds fair value. If, through
this analysis, it is determined that it is more likely than not that carrying value exceeds fair value, then the next step,
referred to as Step 1, requires estimation of the fair value of the reporting unit. If the fair value of the reporting unit
exceeds its carrying value, no further testing is required. If the carrying value exceeds the fair value, further analysis is
required to determine whether an impairment charge must be recorded based upon the implied fair value of goodwill
and, if so, the amount of such charge. The Company has performed the annual impairment analysis as of December 31,
2018 and concluded no impairment exists.
Liabilities for Representations and Warranties:
The Company is exposed to certain liabilities under representations and warranties made to purchasers of mortgage
loans and servicing rights that require indemnification or repurchase of loans. At the time it issues a guarantee, the
Company is required to recognize an initial liability for the fair value of obligations assumed under the guarantee.
The Company establishes a contingency reserve for its liabilities under representations and warranties provided to
purchasers of its mortgage loans and servicing rights. This reserve is maintained at a level considered appropriate by
management to provide adequately for known and inherent losses. The reserve is based upon a continuing review of
past loss experience, estimates and assumptions of risk elements and future economic conditions. Additions to the
reserve are recorded in other expenses.
Management's judgment about the adequacy of the reserve is based upon a number of assumptions about future
events which it believes to be reasonable but which may or may not be accurate. There is no assurance that
additional increases in the reserve will not be required. The Company may from time-to-time be required to
repurchase mortgage loans previously sold to investors due to loan nonperformance. At December 31, 2018 and
2017, the Company had $0 and $125,910, respectively, recorded for potential indemnifications to other third-party
purchasers based on management’s analysis.
13
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Income Taxes:
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on
temporary differences between the amount of taxable income and pretax financial income and between the tax bases
of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are
included in the financial statements at currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provision for income taxes. In addition, deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. Interest and penalties related to income tax matters are
recognized in income tax expense.
Advertising Expense:
Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media
advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are
expensed in the period in which the direct mailings are sent. Advertising and public relations costs of $306,278 and
$261,116 were included in the Company's results of operations for 2018 and 2017, respectively.
Retirement Benefits:
A trusteed retirement savings plan is sponsored by the Company and provides retirement benefits to substantially all
officers and employees who meet certain age and service requirements. The plan includes a “salary reduction”
feature pursuant to Section 401(k) of the Internal Revenue Code. In 2004, the Company converted the 401(k) plan to
a 404(c) plan. The 404(c) plan changes investment alternatives to include the Company's stock. Under the plan and
present policies, participants are permitted to make contributions up to 15% of their annual compensation. At its
discretion, the Company can make matching contributions up to 6% of the participants’ compensation. The Company
charged $273,094 and $195,469 to earnings for the retirement savings plan in 2018 and 2017, respectively. In
addition, the Company made an elective contribution to the retirement savings plan during 2018 and 2017 totaling
$142,952 and $145,920, respectively, recorded within salaries and benefits expense.
During 2006, the Board of Directors approved a supplemental retirement plan for the directors and certain officers.
These benefits are not qualified under the Internal Revenue Code and they are not funded. For 2018 and 2017, the
supplemental retirement expense was $0. The current accrued but unfunded amount is $1,899,641 and $1,756,679 at
December 31, 2018 and 2017, respectively. However, certain funding is provided informally and indirectly by bank
owned life insurance policies. The cash surrender value of the life insurance policies is recorded as a separate line
item in the accompanying consolidated balance sheets at $17,306,312 and $14,293,702 at December 31, 2018 and
2017, respectively.
The Company has split-dollar life insurance arrangements with certain of its officers. At December 31, 2018 and 2017,
the split-dollar liability relating to these arrangements totaled $343,718 and $323,497, respectively. For 2018 and
2017, the Company recognized net expenses of $20,221 and $19,029, respectively, related to these arrangements and
recorded within salaries and benefits expense.
14
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Equity Incentive Plan:
On January 19, 2006, the Company approved the 2006 Equity Incentive Plan (the "2006 Plan") which expired January
19, 2016. The Company approved on April 20, 2017, the 2017 Equity Incentive Plan (the "2017 Plan"). These plans
provide for the granting of dividend equivalent rights, options, performance unit awards, phantom shares, stock
appreciation rights and stock awards, each of which shall be subject to such conditions based upon continued
employment, passage of time or satisfaction of performance criteria or other criteria as permitted by the plan. The
2006 Plan allowed granting up to 950,000 shares of stock to officers, employees, and directors, consultants and
service providers of the Company or its affiliates. Awards may be granted for a term of up to ten years from the
effective date of grant. The 2017 Plan allows granting up to 500,000 shares. The maximum aggregate shares subject to
options is restricted to 80,000 in any calendar year to any one participant. The aggregate number of restricted stock
shares available to be granted during any calendar to any one participant is limited to 50,000 shares. Awards may be
granted for a term of up to five years from the effective date of the grant. Under these Plans, the Board of Directors
has sole discretion as to the exercise date of any awards granted. The per-share exercise price of incentive stock
options may not be less than the market value of a share of common stock on the date the option is granted. The
related compensation cost for all stock-based awards is recognized over the service period for awards expected to
vest. Any options that expire unexercised or are canceled become available for re-issuance. The Company's equity
incentive plans are further described in Note 21.
Common Stock Owned by the Employee Stock Ownership Plan (“ESOP”):
All shares held by the ESOP are treated as outstanding for purposes of computing earnings per share. Purchases and
redemptions of the Company’s common stock by the ESOP are at estimated fair value as determined by independent
valuations. Dividends on shares held by the ESOP are charged to retained earnings. At December 31, 2018 and 2017,
the ESOP owned 487,820 and 491,353 shares of the Company’s common stock with an estimated value of $2,169,854
and $1,741,061, respectively. All of these shares were allocated to participants.
Income (Loss) Per Common Share:
Basic income (loss) per common share represents income (loss) available to common shareholders divided by the
weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect
additional common shares that would have been outstanding if dilutive potential common shares had been issued.
Potential common shares that may be issued by the Company relate to outstanding stock options and similar share-
based compensation instruments and are determined using the treasury stock method (see Note 22).
Statements of Cash Flows:
For purposes of reporting cash flows in the consolidated financial statements, the Company considers certain highly
liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash
equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day
periods. Changes in the valuation account of securities available-for-sale, including the deferred tax effects, are
considered noncash transactions for purposes of the statement of cash flows and are presented in detail in the notes
to the consolidated financial statements.
15
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Off-Balance Sheet Financial Instruments:
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. These financial instruments are recorded in the consolidated
financial statements when they become payable by the customer.
Business Combinations and Method of Accounting for Loans Acquired:
The Company accounts for its acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805,
“Business Combinations,” which requires the use of the acquisition method of accounting. All identifiable assets
acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is
recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding
credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in
FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”
Purchased credit-impaired loans (“PCI”) are accounted for under the accounting guidance for loans and debt
securities acquired with deteriorated credit quality, found in FASB Accounting Standards Codification Topic 310-30,
“Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality,” formerly American Institute of
Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer,” and initially measured at fair value, which includes estimated future credit losses
expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit
deterioration since origination and for which it is probable that all contractually required payments will not be
collected are considered to be PCI loans. Evidence of credit quality deterioration as of purchase dates may include
information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages.
The Company considers expected prepayments and estimates the amount and timing of expected principal, interest
and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess of the
loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be collected
at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount,
representing the excess of the loan’s or pool’s cash flows expected to be collected over the fair value for the loan or
pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable difference).
Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the Company’s initial
estimates are reclassified from nonaccretable difference to accretable difference and are accreted into interest
income on a level-yield basis over the remaining life of the loan. Decreases in cash flows expected to be collected are
recognized as impairment through the provision for loan losses.
Acquired non-PCI loans are recorded at their initial fair value and adjusted for subsequent advances, pay downs,
amortization or accretion of any premium or discount on purchase, charge-offs and additional provisioning that may
be required.
16
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Recently Issued Accounting Pronouncements:
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core
principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services
to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance was
effective for the Company for reporting periods beginning after December 15, 2017. The Company applied the
guidance using a modified retrospective approach. The Company's revenue is comprised of net interest income and
noninterest income. The scope of the guidance explicitly excludes net interest income as well as many other revenues
for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the majority of our
revenues will not be affected.
The Company has performed an assessment of our revenue contracts related to revenue streams that are within the
scope of the standard. Our accounting policies will not change materially since the principles of revenue recognition
from the ASU are largely consistent with existing guidance and current practices applied by our businesses. We did
not identify material changes to the timing or amount of revenue recognition. The Company records revenue from
contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts
with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify
the performance obligations in the contract, determine the transaction price, allocate the transaction price to the
performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance
obligation. Significant revenue has not been recognized in the current reporting period that results from performance
obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest and dividends earned on loans, investment
securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the
nature of its contracts with customers and determined that further disaggregation of revenue from contracts with
customers into more granular categories beyond what is presented in the consolidated statements of operations was
not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as
services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on
activity. Our accounting policies will not change materially since the principles of revenue recognition form the
Accounting Standards Update are largely consistent with existing guidance and current practices applied by our
business.
In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain
aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early
adoption is permitted.
17
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Recently Issued Accounting Pronouncements, continued:
The Company has adopted the guidance using the modified retrospective method and practical expedients for
transition. The practical expedients allow the Company to largely account for our existing leases consistent with
current guidance except for the incremental balance sheet recognition for lessees. The Company has recorded a
right-of use asset and lease liability as of March 31, 2019 totaling approximatly $6.3 million, respectively, both of
which are based on the present value of lease payments.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model
for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after
December 15, 2020. Early adoption is permitted for all organizations for periods beginning after December 15, 2018.
The Company will apply the amendments to the ASU through a cumulative-effect adjustment to retained earnings as
of the beginning of the year of adoption. While early adoption is permitted beginning in first quarter 2019, the
Company does not expect to elect that option. The Company is evaluating the impact of the ASU on our consolidated
financial statements. The Company expects the ASU will have no material impact on the recorded allowance for loan
losses given the change to estimated losses over the contractual life of the loans adjusted for expected prepayments.
In addition to our allowance for loan losses, the Company will also record an allowance for credit losses on debt
securities instead of applying the impairment model currently utilized. The amount of the adjustments will be
impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and
forecasts at that time.
In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification to
simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill
reported in their financial statements and have not elected the private company alternative for the subsequent
measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. The effective date and transition requirements for the technical corrections will be effective for
the Company for reporting periods beginning after December 15, 2020. Early adoption is permitted for interim or
annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect
these amendments to have a material effect on its financial statements.
In August 2017, the FASB amended the requirements of the Derivatives and Hedging Topic of the Accounting
Standards Codification to improve the financial reporting of hedging relationships to better portray the economic
results of an entity’s risk management activities in its financial statements. The amendments will be effective for the
Company for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The
Company does not expect these amendments to have a material effect on its financial statements.
18
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 1. Summary of Significant Accounting Policies, Continued
Recently Issued Accounting Pronouncements, continued:
In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The
amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB
Concepts Statement, Conceptual Framework for Financial Reporting-Chapter 8: Notes to Financial Statements. The
amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified
disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. The
Company does not expect these amendments to have a material effect on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not
expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Risks and Uncertainties:
In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory.
There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or
on different basis, than its interest-earning assets. Credit risk is the risk of default on the Company's loan portfolio
that results from borrower's inability or unwillingness to make contractually required payments. Market risk reflects
changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.
The Company is subject to the regulations of various governmental agencies (regulatory risk). These regulations can
and do change significantly from period to period. The Company also undergoes periodic examinations by the
regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required
loss allowances and operating restrictions from the regulators' judgments based on information available to them at
the time of their examination.
Reclassifications:
Certain captions and amounts in the 2017 consolidated financial statements were reclassified to conform with the
2018 presentation. The reclassifications did not have an impact on net income (loss) or shareholders’ equity.
19
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 2. Mergers and Acquisitions
On January 22, 2018, the Company acquired the outstanding common stock of Independence Bancshares, Inc. and its
subsidiary, Independence Bank (collectively "INB") which are headquartered in Greenville, South Carolina. In
connection with the acquisition, the Company acquired $82.3 million of assets and assumed $80.4 million of
liabilities. The total purchase price was $2.5 million consisting of cash.
The INB transaction was accounted for using the acquisition method of accounting, and accordingly, assets acquired,
liabilities assumed, and consideration exchanged were recorded at fair value on the acquisition date. Fair values are
subject to refinement for up to a year.
The following table presents the assets acquired and liabilities assumed as of January 22, 2018, as recorded by the
Company on the acquisition date and initial fair value adjustments:
20
As Recorded byFair ValueAs RecordedINBAdjustmentsby the CompanyAssetsCash and cash equivalents4,681,439$ -$ 4,681,439$ Investment securities10,436,646 (110,297) 10,326,349 Certificates of deposit with other insitutions4,500,000 - 4,500,000 Loans54,976,229 (2,454,693) 52,521,536 Allowance for Loan Losses(1,290,000) 1,290,000 - Premises and equipment1,953,390 (412,599) 1,540,791 Core Deposit Intangible- 880,000 880,000 Other Real Estate Owned1,178,900 (524,450) 654,450 Deferred Tax Asset- 4,066,293 4,066,293 Other assets3,218,853 (106,152) 3,112,701 Total assets79,655,457$ 2,628,102$ 82,283,559$ LiabilitiesDeposits80,336,319$ (98,290)$ 80,238,029$ Other Liabilities173,602 - 173,602 Total liabilities80,509,921 (98,290) 80,411,631 Net assets acquired over liabilities assumed1,871,928$ Consideration: Cash exchanged 2,562,845$ Goodwill690,917$
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 2. Mergers and Acquisitions, Continued
The merger included the acquisition of $54.9 million in loans and $80.3 million in deposits. The loan portfolio was
purchased at a $2.5 million discount. The deposits were purchased for a premium, including an $880,000 core
deposit intangible. The amortization of the core deposit intangible is based on the cash flows used to value the asset
over approximately nine years utilizing sum of year’s digits methodology
The consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the
establishment of goodwill in the amount of $690,917, representing the intangible value of INB’s business within the
markets it served.
Merger-related charges related to the INB acquisition during 2018 and 2017 totaled $1,005,195 and $501,265,
respectively, and are recorded in the consolidated statement of operations. These merger-related expenses include
legal, accounting, auditing, investment banker, travel, and other costs associated with closing the acquisition.
Note 3. Cash and Due From Banks
The Company is required to maintain balances with the Federal Reserve computed as a percentage of deposits. At
December 31, 2018 and 2017, this requirement was $5,395,000 and $4,210,000, respectively, net of vault cash and
balances on deposit with the Federal Reserve.
Note 4.
Investment Securities
The amortized cost and estimated fair values of securities available-for-sale were:
December 31, 2018
U.S. Government sponsored agencies
Municipal securities
Mortgage-backed securities
Corporate bonds
Total
December 31, 2017
U.S. Government sponsored agencies
Municipal securities
Mortgage-backed securities
Corporate bonds
Equity securities
Total
Amortized
Cost
$ 14,160,678
1,382,787
15,904,130
2,878,863
$ 34,326,458
$ 9,701,287
1,381,692
13,313,523
2,856,293
130,000
$ 27,382,795
$
$
$
$
Gross Unrealized
Gains
Losses
Fair Value
62,666
-
47,277
-
109,943
$
293,495
49,336
398,839
306,087
$ 1,047,757
$ 13,929,850
1,333,451
15,552,568
2,572,776
$ 33,388,645
-
18,917
3,047
35,980
-
57,944
$
$
290,378
-
255,642
-
-
546,020
$ 9,410,909
1,400,609
13,060,928
2,892,273
130,000
$ 26,894,719
At December 31, 2018, the Company had marketable equity securities totaling $168,151.
21
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 4.
Investment Securities, Continued
The amortized cost and estimated fair values of securities held-to-maturity were:
December 31, 2018
U.S. Government sponsored agencies
Mortgage-backed securities
Municipals
Capitalization of net unrealized gains
on securities transferred from
available-for-sale
Total
December 31, 2017
U.S. Government sponsored agencies
Mortgage-backed securities
Municipals
Capitalization of net unrealized gains
on securities transferred from
available-for-sale
Total
Gross Unrealized
Gains
Losses
Fair Value
$
$
$
$
46,546
108,090
96,068
250,704
70,886
214,947
183,758
469,591
$
$
$
$
-
85,702
-
85,702
$ 3,430,729
8,131,776
2,688,345
$ 14,250,850
-
78,497
-
78,497
$ 3,998,623
10,083,638
3,290,573
$ 17,372,834
Amortized
Cost
$ 3,384,184
8,109,388
2,592,277
14,085,849
21,405
$ 14,107,252
$ 3,927,737
9,947,188
3,106,815
16,981,740
36,392
$ 17,018,132
The following is a summary of maturities of securities available-for-sale and held-to-maturity as of December 31,
2018. The amortized cost and fair values are based on the contractual maturity dates. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or prepay obligations with or without
penalty. Mortgage-backed securities are presented as a separate line, maturities of which are based on expected
maturities since paydowns are expected to occur before contractual maturity dates.
Due within one year
Due after one year but within five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total
Debt Securities
Available-for-Sale
Debt Securities
Held-to-Maturity
Amortized
Cost
$
2,500,000
2,500,000
13,422,328
-
18,422,328
15,904,130
$ 34,326,458
Fair Value
$
2,478,410
2,460,010
12,897,657
-
17,836,077
15,552,568
$ 33,388,645
Amortized
Cost
$
-
5,976,461
-
-
5,976,461
8,109,388
$ 14,085,849
Fair Value
$
-
6,119,074
-
-
6,119,074
8,131,776
$ 14,250,850
22
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 4.
Investment Securities, Continued
The following tables show gross unrealized losses and fair value of securities available-for-sale and securities held-to-
maturity, aggregated by investment category, and length of time that individual securities have been in a continuous
realized loss position at December 31, 2018 and 2017.
Securities Available-for-Sale
Less Than 12 Months
U.S. Government sponsored agencies
Mortgage-backed securities
Corporate bonds
Total
12 Months or More
U.S. Government sponsored agencies
Mortgage-backed securities
Municipals
Total
Total securities available-for-sale
Securities Held-to-Maturity
Less Than 12 Months
Mortgage-backed securities
Total
12 Months or More
Mortgage-backed securities
Total
Total securities held-to-maturity
December 31, 2018
Fair
Value
Unrealized
Losses
December 31, 2017
Fair
Value
Unrealized
Losses
$
-
172,307
2,572,776
2,745,083
9,016,917
10,545,054
1,333,451
20,895,422
$ 23,640,505
$
$
478,186
478,186
3,485,073
3,485,073
3,963,259
$
$
$
$
-
3,399
306,087
309,486
$
925,323
8,622,681
-
9,548,004
293,495
395,440
49,336
738,271
1,047,757
8,485,586
4,181,259
-
12,666,845
$ 22,214,849
$
1,134
1,134
-
-
84,568
84,568
85,702
3,376,656
3,376,656
3,376,656
$
$
$
$
$
11,919
88,739
-
100,658
278,459
166,903
-
445,362
546,020
-
-
78,497
78,497
78,497
At December 31, 2018, fifteen securities classified as available-for-sale and five securities classified as held-to-
maturity were in a loss position as detailed in the preceding tables. The Company does not intend to sell these
securities in the near future and it is more likely than not that the Company will not be required to sell these securities
before recovery of their amortized cost. The Company believes that, based on industry analyst reports and credit
ratings, the deterioration in value is attributable to changes in market interest rates and, therefore, these losses are
not considered other-than-temporary.
During 2018, the Company purchased a trust preferred security for $2,300,000. The Company sold the trust preferred
security during 2018 receiving gross proceeds of $3,100,000 and recognizing a gross gain of $800,000. During 2017,
no investment securities were sold.
During 2018, the Company recognized gain of $38,151 within the consolidated statement of operations related to the
increase in fair value of marketable equity securities as a result of the adoption of ASU 2016-01.
At December 31, 2018 and 2017, investment securities with a par value of $18,122,712 and $16,591,994 and a fair
market value of $17,342,165 and $16,466,616, respectively, were pledged as collateral to secure public deposits and
borrowings.
23
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses
Major classifications of loans receivable are summarized as follows at December 31:
Real estate loans:
Construction
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total loans
2018
2017
$
30,404,245
124,789,754
144,103,065
299,297,064
48,522,654
82,976,173
$ 430,795,891
$
22,889,185
101,809,108
103,960,522
228,658,815
37,246,193
67,770,245
$ 333,675,253
The Company has pledged certain loans as collateral to secure its borrowings from the Federal Home Loan Bank which
totaled $137,040,574 and $50,787,298 at December 31, 2018 and 2017, respectively.
Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various
other financial institutions. These loans are sold with the agreement that a loan may be returned to the Company
within 90 days of purchase, at any time in the event the Company fails to provide necessary documents related to the
mortgages to the buyers, or if the Company makes false representations or warranties to the buyers. Loans sold under
these agreements in 2018 and 2017 totaled $262,987,343 and $273,360,068, respectively. The Company uses the
same credit policies in making loans held for sale as it does for on-balance-sheet instruments. Sales commitments are
to sell loans at an agreed upon price and are generally funded within 60 days.
The following is an analysis of the allowance for loan losses by class of loans for the years ended December 31, 2018
and 2017.
December 31, 2018
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
Beginning
balance
Provisions
Recoveries
Charge-offs
Ending balance $ 2,788,188 $
$ 2,453,875 $
510,356
384,989
(561,032)
168,541 $
(169,726)
84,972
(587)
985,897 $
19,271
82,282
(37,537)
372,356 $ 1,526,794 $
172,517
133,450
22,062
300,704
(39,849)
(1,725)
83,200 $ 1,049,913 $
676,598 $ 1,809,711 $
257,298 $
85,778
17,318
(475)
359,919 $
669,783
402,516
66,967
(520,708)
618,558
December 31, 2017
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
$ 2,648,535 $
Beginning
balance
Provisions
Recoveries
Charge-offs
Ending balance $ 2,453,875 $
-
371,635
(566,295)
592,725 $ 1,109,400 $
(592,978)
184,284
(15,490)
168,541 $
(76,548)
53,778
(100,733)
985,897 $
448,183 $ 2,150,308 $
(63,604)
14,768
(26,991)
372,356 $ 1,526,794 $
(733,130)
252,830
(143,214)
31,536 $
175,374
78,897
(28,509)
257,298 $
466,691
557,756
39,908
(394,572)
669,783
24
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
The following is a summary of loans evaluated for impairment individually and collectively, by class, for the years
ended December 31, 2018 and 2017.
December 31, 2018
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
Allowance
Evaluated for
impairment
Individually
Collectively
Allowance
for loan losses
Total Loans
Evaluated for
impairment
Individually
Collectively
Loans
receivable
Allowance
Evaluated for
impairment
Individually
Collectively
Allowance
for loan losses
Total Loans
Evaluated for
impairment
Individually
Collectively
Loans
receivable
$
178,065 $
- $
49,382 $
15,742 $
65,124 $
2,610,123
83,200
1,000,531
660,856
1,744,587
103,665 $
256,254
9,276
609,282
$ 2,788,188 $
83,200 $ 1,049,913 $
676,598 $ 1,809,711 $
359,919 $
618,558
$ 9,624,852 $
421,171,039
30,404,245
- $ 2,684,974 $ 5,977,695 $ 8,622,669 $
138,125,370
290,674,395
122,104,780
762,731 $
47,759,923
199,452
82,776,721
$ 430,795,891 $ 30,404,245 $ 124,789,754 $ 144,103,065 $ 299,297,064 $ 48,522,654 $ 82,976,173
December 31, 2017
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
$
26,856 $
- $
- $
- $
- $
13,378 $
2,427,019
168,541
985,897
372,356
1,526,794
243,920
13,478
656,305
$ 2,453,875 $
168,541 $
985,897 $
372,356 $ 1,526,794 $
257,298 $
669,783
$ 3,441,508 $
330,233,745
22,889,185
- $ 1,759,518 $ 1,480,027 $ 3,239,545 $
102,480,495
225,419,270
100,049,590
37,205,092
41,101 $
160,862
67,609,383
$ 333,675,253 $ 22,889,185 $ 101,809,108 $ 103,960,522 $ 228,658,815 $ 37,246,193 $ 67,770,245
25
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
The following summarizes the Company’s impaired loans as of December 31, 2018.
With no related allowance recorded:
Real estate
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
With an allowance recorded:
Real estate
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Total
Real estate
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Recorded
Investment
Unpaid
Principal
Related
Allowance
Average
Balance
Interest
Income
Recognized
$ 2,570,672 $ 2,778,105 $
5,878,253
8,448,925
658,693
158,808
5,878,253
8,656,358
710,037
200,253
$ 9,266,426 $ 9,566,648 $
- $ 3,123,478 $
-
-
-
-
- $ 11,424,271 $
7,259,531
10,383,009
713,908
327,354
170,470
411,822
582,292
39,363
12,941
634,596
$
$
114,302 $
99,442
213,744
104,038
40,644
358,426 $
114,302 $
105,343
219,645
104,038
61,987
385,670 $
49,382 $
15,742
65,124
103,665
9,276
178,065 $
136,424 $
164,890
301,314
127,385
66,072
494,771 $
1,679
5,469
7,148
5,892
3,536
16,576
$ 2,684,974 $ 2,892,407 $
5,977,695
8,662,669
762,731
199,452
5,983,596
8,876,003
814,075
262,240
49,382 $ 3,259,902 $
15,742
65,124
103,665
9,276
7,424,421
10,684,323
841,293
393,426
$ 9,624,852 $ 9,952,318 $
178,065 $ 11,919,042 $
172,149
417,291
589,440
45,255
16,477
651,172
26
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
The following summarizes the Company’s impaired loans as of December 31, 2017.
With no related allowance recorded:
Real estate
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
With an allowance recorded:
Commercial and industrial
Consumer and other
Total
Total
Real estate
Residential mortgages
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Recorded
Investment
Unpaid
Principal
Related
Allowance
Average
Balance
Interest
Income
Recognized
$ 1,759,518 $ 1,759,518 $
1,480,027
3,239,545
23,362
143,034
1,480,027
3,239,545
23,362
143,034
$ 3,405,941 $ 3,405,941 $
- $ 1,838,208 $
-
-
-
-
- $ 3,525,129 $
1,503,787
3,341,995
23,362
159,772
99,814
93,134
192,948
1,349
8,479
202,776
$
$
17,739 $
17,828
35,567 $
17,739 $
17,828
35,567 $
13,378 $
13,478
26,856 $
19,668 $
25,084
44,752 $
899
1,569
2,468
$ 1,759,518 $ 1,759,518 $
1,480,027
3,239,545
41,101
160,862
1,480,027
3,239,545
41,101
160,862
$ 3,441,508 $ 3,441,508 $
- $ 1,838,208 $
-
-
13,378
13,478
26,856 $ 3,569,881 $
1,503,787
3,341,995
43,030
184,856
99,814
93,134
192,948
2,248
10,048
205,244
The following is an aging analysis of the Company’s loan portfolio at December 31, 2018:
30 - 59 Days 60 - 89 Days
Past Due
Past Due
Greater
Than
90 Days
Total
Past Due
Current
Total Loans
Receivable
Recorded
Investment>
90 Days
and Accruing
Real estate
Construction
Residential
Nonresidential
Total real estate loans
Consumer and industrial
Consumer and other
Total
$
- $
- $
- $
46,967
-
46,967
-
131,068
117,606
106,146
223,752
18,973
119,509
$ 178,035 $ 942,415 $ 362,234 $ 1,482,684 $429,313,207 $
859,533
205,588
1,065,121
23,287
394,276
694,960
99,442
794,402
4,314
143,699
- $ 30,404,245 $
123,930,221
411,172
298,231,943
48,499,367
82,581,897
30,404,245 $
124,789,754
144,103,065
299,297,064
48,522,654
82,976,173
430,795,891 $
-
114,301
-
114,301
-
31,961
146,262
27
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
The following is an aging analysis of the Company’s loan portfolio at December 31, 2017:
30 - 59 Days
Past Due
60 - 89 Days
Past Due
Greater
Than
90 Days
Total Past
Due
Current
Total Loans
Receivable
Recorded
Investment>
90 Days and
Accruing
Real estate
Construction
Residential
Nonresidential
Total real estate loans
Consumer and industrial
Consumer and other
Total
$
- $
- $
- $
- $ 22,889,185 $ 22,889,185 $
13,517
2,282,710
2,296,227
371,172
229,165
688,983
-
688,983
-
62,691
207,230
-
207,230
-
77,714
909,370
2,282,710
3,192,440
371,172
369,570
100,899,378
101,677,812
225,466,375
36,875,021
67,400,675
101,809,108
103,960,522
228,658,815
37,246,193
67,770,245
$ 2,896,564 $ 751,674 $
284,944 $
3,933,182 $ 329,742,071 $ 333,675,253 $
-
-
-
-
-
-
-
The following is an analysis of the Company’s nonaccrual loan portfolio recorded at December 31, 2018 and 2017:
Real Estate
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Troubled Debt Restructurings
2018
2017
$
664,667
205,588
870,255
673,698
321,807
$ 1,865,760
$
970,712
-
970,712
17,739
364,274
$ 1,352,725
The following table summarizes the carrying balance of troubled debt restructurings (“TDRs”) as of December 31,
2018 and 2017:
Performing TDRs
Nonperforming TDRs
Total TDRs
2018
2017
$ 3,786,544
482,552
$ 4,269,096
$ 1,207,264
519,281
$ 1,726,545
Loans classified as TDRs may be removed from this status for disclosure purposes after a specified period of time if
the TDR is subsequently restructured, and the newly restructured agreement specifies an interest rate equal to or
greater than the rate that the lender was willing to accept at the time of the restructuring for a new loan with
comparable risk, the loan is performing in accordance with the terms specified by the restructured agreement, and
certain other criteria are met. The Company has not removed any loans from TDR status through subsequent
restructurings during 2018 or 2017.
28
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
The following is an analysis of TDRs identified during 2018:
Troubled Debt Restructurings
Real Estate
Residential
Nonresidential
Commercial and industrial
Consumer and other
For the year ended December 31, 2018
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of Contracts
3
4
1
11
$
288,584
2,250,846
96,000
122,444
$
288,584
2,250,846
96,000
122,444
During the year ended December 31, 2018, we modified nineteen loans that were considered to be troubled debt
restructurings. We provided rate concessions for five of these loans and extensions for nineteen of the loans. During
the year ended December 31, 2018, three loans with an unpaid principal balance of $143,979 as of December 31,
2018 that had previously been restructured during the year subsequently defaulted during the year. Loans past due
greater than 90 days are considered to be in default.
The following is an analysis of TDRs identified during 2017:
Troubled Debt Restructurings
Real Estate
Residential
Commercial and industrial
Consumer and other
For the year ended December 31, 2017
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of Contracts
3
1
3
$
228,512
8,549
70,761
$
228,512
8,549
70,761
During the year ended December 31, 2017, we modified seven loans that were considered to be troubled debt
restructuring. We provided rate concessions for five of these loans and extensions for two of the loans. During the
year ended December 31, 2017, one loan with an unpaid principal balance of $8,549 as of December 31, 2017 that
had previously been restructured during the year subsequently defaulted during the year.
All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment
of TDRs, including those which have experienced a subsequent default, are considered in determining an appropriate
level of allowance for credit losses.
29
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
Credit Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their
debt, including, among other factors: current financial information, historical payment experience, credit
documentation, public information, and current economic trends. The following definitions are utilized for risk ratings,
which are consistent with the definitions used in supervisory guidance:
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for
the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the
added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are
considered to be pass rated loans.
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each category
at December 31, 2018:
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
Consumer
and Other
Pass
Special mention
Substandard
Doubtful
Totals
$ 410,896,319 $ 30,404,245 $ 120,829,193 $ 133,380,172 $ 284,613,610 $ 44,136,536 $ 82,146,170
493,821
336,182
-
$ 430,795,891 $ 30,404,245 $ 124,789,754 $ 144,103,065 $ 299,297,064 $ 48,522,654 $ 82,976,173
13,543,249
6,356,326
-
3,301,378
1,084,740
-
6,890,781
3,832,112
-
9,748,050
4,935,404
-
2,857,269
1,103,292
-
-
-
-
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each category
at December 31, 2017:
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
Consumer
and Other
Pass
Special mention
Substandard
Doubtful
Totals
$ 317,446,886 $ 22,839,453 $ 97,919,614 $ 95,727,012 $ 216,486,079 $ 34,318,105 $ 66,662,702
662,147
445,396
-
$ 333,675,253 $ 22,889,185 $ 101,809,108 $ 103,960,522 $ 228,658,815 $ 37,246,193 $ 67,770,245
11,278,760
4,949,607
-
2,886,987
41,101
-
5,656,005
2,577,505
-
7,729,626
4,443,110
-
2,023,889
1,865,605
-
49,732
-
-
30
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
The Company enters into financial instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments consist of commitments to extend credit and
standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss
in the event of nonperformance by the other parties to the instrument is represented by the contractual notional
amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit
policies in making commitments to extend credit as it does for on-balance-sheet instruments. Letters of credit are
conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the
same credit risk as other lending facilities.
Collateral held for commitments to extend credit and standby letters of credit varies but may include accounts
receivable, inventory, property, plant, equipment, and income-producing commercial properties.
The following table summarizes the Company’s off-balance sheet financial instruments whose contract amounts
represent credit risk for the years ended December 31:
Commitments to extend credit
Standby letters of credit
Acquired Loans:
2018
2017
$ 71,885,360
158,765
$ 43,591,232
189,089
On January 22, 2018, the Company acquired INB (see Note 2 for more information). PCI loans acquired totaled $17.3
million, and acquired performing loans totaled $35.2 million, both net of purchase discounts. The gross contractual
amount receivable for PCI loans and acquired performing loans was approximately $19 million and $36 million,
respectively, as of the acquisition date. The fair value of the total loan portfolio was estimated to be $52.5 million,
which represents a $2.5 million discount.
The following table presents changes in the carrying value of PCI loans for the year ended December 31:
Balance at beginning of period
Additions due to acquisition of INB
Change due to payments received and accretion
Advances
Balance at end of period
2018
$
-
17,313,626
(3,042,422)
395,511
$ 14,666,715
31
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 5. Loans and Allowance for Loan Losses, Continued
The following table presents changes in the nonaccretable yield for PCI loans for the year ended December 31:
Balance at beginning of period
Additions due to acquisition of INB
Reclassification to accretable yield
Change due to charge-offs
Balance at end of period
2018
$
-
1,423,522
(158,064)
(216,662)
$ 1,048,796
The following table presents changes in the accretable yield for PCI loans for the year ended December 31:
Balance at beginning of period
Additions due to acquisition of INB
Reclassification from nonaccretable yield
Accretion, net cash basis interest collections
Balance at end of period
Note 6. Premises, Furniture and Equipment
2018
-
421,179
158,064
39,038
618,281
$
$
Premises, furniture and equipment consisted of the following for the years ended December 31:
2018
2017
Land
Buildings
Leasehold improvements
Furniture and equipment
Construction in progress
Total
Less, accumulated depreciation
Premises and equipment, net
$
7,497,839 $ 6,808,794
13,782,574
551,498
7,076,492
1,382,160
29,601,518
(11,138,362)
$ 20,310,879 $ 18,463,156
14,766,184
1,021,789
9,322,077
1,308,421
33,916,310
(13,605,431)
Depreciation expense for the years ended December 31, 2018 and 2017 amounted to $832,726 and $789,440,
respectively.
At December 31, 2018 and 2017, construction in progress consists mainly of architect fees and site work for potential
new branches. As of December 31, 2018, there were no material commitments outstanding for the construction/or
purchase of premises, furniture and equipment.
32
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 7. Other Real Estate Owned
Transactions in other real estate owned for the years ended December 31, 2018 and 2017 are summarized below:
Beginning balance
Additions
Sales
Write downs
Ending balance
2018
2017
$ 1,706,765
1,050,015
(2,415,261)
-
341,519
$
$ 2,870,484
137,540
(750,921)
(550,338)
$ 1,706,765
The Company recognized net gains of $203,685 and $216,079 on the sale of other real estate owned for the years
ended December 31, 2018 and 2017, respectively.
Note 8. Mortgage Servicing Rights
The Company retains right to service the residential mortgage loans that it sells to the Federal National Mortgage
Association (“FNMA”). The Company accounts for MSRs at fair value. The changes in fair value are recorded in
income from mortgage operations.
The following table presents the activity for residential MSRs for the years ended December 31, 2018 and 2017:
Balances, beginning of year
Additions
Change in MSR market value
Balances, end of year
2018
2017
$ 6,357,666
2,995,099
(328,906)
$ 9,023,859
$ 4,211,582
2,469,977
(323,893)
$ 6,357,666
The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the
present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other
assumptions validated through comparison to trade information, industry surveys and with the use of independent
third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value
of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance
activity, which results in a decrease in the fair value of the MSRs. Measurement of fair value is limited to the
conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be
appropriate if they are applied at a different time.
At December 31, 2018, the aggregate amount of loans serviced by the Company for the benefit of others totaled
$736,793,720.
33
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 8. Mortgage Servicing Rights, Continued
The characteristics and sensitivity analysis of the MSRs are included in the following table as of December 31, 2018
and 2017.
Composition of residential loans serviced for others
Fixed-rate mortgage loans
Weighted average life
Constant prepayment rate (“CPR”)
Weighted average discount rate
Note 9. Derivatives
2018
2017
100.00%
100.00%
8.93 years
8.22 years
10.57%
9.48%
11.46%
9.43%
The derivative positions of the Company for the years ended December 31, 2018 and 2017 are reported as other assets
and liabilities and are as follows:
Derivative assets (liabilities):
Mortgage loan interest rate
lock commitments
Mortgage loan forward
sales commitments
2018
2017
Fair value
Notional value
Fair value
Notional value
$
416,076
$ 22,415,124
$
226,712
$ 19,427,832
(186,133)
22,250,000
2,305
19,250,000
The Company uses derivatives to reduce interest rate risk incurred as a result of market movements. These derivatives
primarily consist of mortgage loan interest rate lock commitments. A derivative is a financial instrument that derives its
cash flows, and therefore its value, by reference to an underlying instrument, index or reference interest rate. The
Company uses derivatives primarily to minimize interest rate risk related to its pipeline of loan interest rate lock
commitments issued on residential mortgage loans in the process of origination for sale or loans held for sale. The
Company’s derivative positions are classified as trading assets and liabilities, and as such, the changes in the fair market
value of the derivative positions are recognized in the consolidated statements of operations within income from
mortgage operations.
Note 10. Core Deposit Intangible
The following table presents information about our intangible assets related to acquisition of INB on January 22, 2018 as
of December 31:
2018
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangibles
$ 880,000
$ 195,783
34
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 10. Core Deposit Intangible, Continued
Based on the core deposit intangibles as of December 31, 2018, the following table presents the aggregate
amortization expense for each of the succeeding years ending December 31:
2019
2020
2021
2022
2023 and thereafter
Total
Amount
$ 171,182
146,581
121,980
97,379
147,095
$ 684,217
Amortization expense of $195,783 related to the core deposit intangibles was recognized in 2018.
Note 11. Deposits
At December 31, 2018, the scheduled maturities of time deposits were as follows:
Maturing In
2019
2020
2021
2022
2023
Total
Amount
$ 151,461,022
12,270,811
1,944,497
1,719,688
1,518,967
$ 168,914,985
The Company had no brokered time deposits as of December 31, 2017. Included in total time deposits at December
31, 2018 were brokered time deposits of $4,966,726.
Time deposits that meet or exceed the FDIC insurance limits of $250,000 at December 31, 2018 and 2017 were
$42,870,456 and $13,874,405, respectively.
35
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 12. Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase generally mature on a one to thirty day basis. Under the terms of
the repurchase agreement, the Company sells an interest in securities issued by United States Government agencies
and agrees to repurchase the same securities the following business day. Information concerning securities sold
under agreements to repurchase is summarized as follows at December 31:
Balance at December 31
Maximum month-end balance during the year
Average balance during the year
Average interest rate at the end of the year
Average interest rate during the year
2018
2017
$ 16,852,981
18,649,225
16,591,130
0.15%
0.15%
$ 13,929,651
16,852,236
14,676,308
0.45%
0.47%
At December 31, 2018 and 2017, investment securities with a par value of $18,122,712 and $16,591,994 and a fair
market value of $17,342,165 and $16,466,616, respectively, were pledged as collateral for the underlying agreements.
Note 13. Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank consisted of the following at December 31:
Advances maturing
Fixed rate
January 19, 2018
February 8, 2019
August 8, 2019
February 7, 2020
Daily rate
January 17, 2019
Interest
Rate
1.42%
2.36%
2.64%
2.76%
2.65%
2018
2017
$
-
3,400,000
3,300,000
3,300,000
10,000,000
-
-
-
10,000,000
$ 20,000,000
12,000,000
$ 22,000,000
At December 31, 2018 and 2017, the Company has pledged certain loans totaling $137,040,574 and $50,787,298,
respectively, as collateral to secure its borrowings from the FHLB. Additionally, the Company’s FHLB stock is pledged
to secure the borrowings.
Note 14. Junior Subordinated Debentures
On June 30, 2005, the Trust (a non-consolidated subsidiary) issued $10,000,000 in trust preferred securities (callable
without penalty) with a maturity of November 23, 2035. Interest on these securities is payable quarterly at the three-
month LIBOR rate plus 2.75%. In accordance with generally accepted accounting principles, the Trust has not been
consolidated in these financial statements. The Company received from the trust the $10,000,000 proceeds from the
issuance of the securities and the $310,000 initial proceeds from the capital investment in the Trust, and accordingly
has shown the funds due to the trust as $10,310,000 junior subordinated debentures. Current regulations allow the
entire amount of junior subordinated debentures to be included in the calculation of regulatory capital. As of
December 31, 2018 and 2017, the Company had accrued and unpaid interest totaling $50,073 and $35,739,
respectively.
36
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 15. Borrowings
On August 5, 2016, the Company entered into subordinated debt agreements with eight lenders which totaled
$5,000,000. The debt initially bears interest at a fixed rate of 7.00% per annum until August 1, 2021 and then variable
at three-month LIBOR plus 5.86%, payable quarterly with principal and unpaid interest due at maturity, August 5,
2026. The Company recorded $111,450 in issuance costs associated with the subordinated debt, which is recorded
net within subordinated debentures and to be amortized over five years. As of December 31, 2018, remaining
issuance costs to be amortized totaled $65,123.
On July 8, 2016, the Company obtained a note with CresCom Bank in the amount of $7,000,000. The debt bore interest
at a fixed rate of 4.95% per annum with principal and interest due quarterly based on a nine year amortization of the
principal amount outstanding and any outstanding principal and unpaid interest due at maturity, July 8, 2021. The
Company recorded $115,284 in issuance costs associated with the note payable, which was recorded net within the
note payable and to be amortized over five years. The debt was securitized by the assignment of Company common
stock. The note was paid in full during 2017.
Proceeds from the subordinated debt and note payable were used to repay the Series A and Series B Preferred Stock
as described in Note 16.
Note 16. Shareholders’ Equity
Common Stock - The following is a summary of the changes in common stock outstanding for the years ended
December 31, 2018 and 2017.
Common shares outstanding at beginning of the period
Conversion of Series D preferred stock to common stock
Conversion of Series E preferred stock to non-voting common stock
Restricted stock vested
Issuance of non-vested restricted shares
Issuance of common stock
Forfeiture of restricted shares
Common shares outstanding at end of the period
2018
2017
7,887,486
1,800
410,499
132,886
-
-
(20,000)
8,412,617
4,679,881
100
-
2,212
11,000
3,100,893
(5,600)
7,887,486
During 2017, the Company initiated and completed a capital raise where 3,074,195 shares of common stock were
issued at $7.20 per share for total proceeds of $22,134,204. During 2017, the Company also issued 410,499 shares of
preferred stock for $2,955,593. Costs associated with the 2017 capital raise totaled $1,178,567, and are netted against
proceeds received within the statement of shareholders' equity. In addition, the ESOP purchased 26,698 shares of
common stock at $5.86 per share during 2017, for total proceeds of $156,450.
During 2018, the Company authorized 430,000 shares of non-voting common stock, for which the 410,499 shares of
Series E Preferred Stock issued during 2017 were converted to non-voting common stock during 2018.
Preferred Stock - The Company’s Articles of Incorporation authorizes the issuance of a class of 10,000,000 shares of
preferred stock, having no par value. Subject to certain conditions, the Company’s Board of Directors is authorized to
issue preferred stock without shareholder approval. Under the Articles of Incorporation, the Board of Directors is
authorized to determine the terms of one or more series of preferred stock, including the preferences, rights, and
limitations of each series.
37
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 16. Shareholders’ Equity, Continued
On March 6, 2009, the Company completed a transaction with the United States Treasury (the “Treasury”) under the
Troubled Asset Relief Program Capital Purchase Program, whereby the Company sold 15,349 shares of its Series A
Cumulative Perpetual Preferred Stock (the “Series A Shares”) to the Treasury. In addition, the Treasury received a
warrant to purchase 767 shares of the Company’s Series B Cumulative Perpetual Preferred Stock (the “Series B
Shares”), which was immediately exercised for a nominal exercise price. The preferred shares issued to the Treasury
qualify as Tier 1 capital for regulatory purposes. On March 1, 2013, the Treasury auctioned the subject securities in a
private transaction with unaffiliated third-party investors.
The Series A Preferred Stock was a senior cumulative perpetual preferred stock that had a liquidation preference of
$1,000 per share, paid cumulative dividends at a rate of 5% per year (approximately $767,000 annually) for the first
five years and beginning May 15, 2014, at a rate of 9% per year (approximately $1,381,000 annually). Dividends were
payable quarterly. At any time, the Company could, at its option and with regulatory approval, redeem the Series A
Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred Stock was generally non-
voting.
The Series B Preferred Stock was a cumulative perpetual preferred stock that had the same rights, preferences,
privileges, voting rights and other terms as the Series A Preferred Stock, except that dividends were to be paid at the
rate of 9% per year so long as the Series A Preferred Stock was outstanding and could not be redeemed until all the
Series A Preferred Stock had been redeemed. The Series A and Series B Preferred Shares would received preferential
treatment in the event of liquidation, dissolution or winding up of the Company.
The net amount of the accretion and amortization was treated as a deemed dividend to preferred shareholders in the
computation of income (loss) per share.
During 2016, the Company redeemed both Series A and Series B Preferred Stock outstanding totaling $15,179,709 and
$767,000, respectively. The preferred stock was repaid through borrowings obtained as described in Note 15.
The Series D Preferred Stock ("Series D Shares") is a fixed rate non-cumulative perpetual preferred stock, created July
16, 2015, with the authorized issuance of 70,000 shares. The Series D shares were created for the purpose of
converting Common Stock holders with 200 shares or less to Series D Shares. The Series D Shares have no voting
rights, and in the event dividends are declared on Common Stock, will be entitled to 4% more than those paid on the
Common Stock. Series D Shares will, with respect to ranking to include but not limited to dividends and rights upon
liquidation, be junior to the Series A Preferred Stock and the Series B Preferred Stock, and will rank senior to all
Common Stock.
On September 22, 2017, the Company issued 410,499 shares of Series E Preferred Stock ("Series E Shares"). The Series
E Shares were created in conjunction with the 2017 common stock issuance. The Series E Shares have no voting rights,
and are entitled to receive dividends as declared in the same per share amount as common stock. During 2018, the
Series E Shares were converted to 410,499 shares of non-voting common stock.
38
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 16. Shareholders’ Equity, Continued
Restrictions on Shareholders’ Equity - South Carolina banking regulations restrict the amount of dividends that can be
paid to shareholders. All of the Bank’s dividends to the Company are payable only from the undivided profits of the
Bank. At December 31, 2018, the Bank had undivided profits of $12,044,550. The Bank is authorized to dividend 100%
of net income in any calendar year without obtaining the prior approval of the South Carolina Commissioner of Banks
provided that the Bank received a composite CAMELS rating of one or two at the last Federal or State regulatory
examination. Under Federal Reserve regulations, the amounts of loans or advances from the Bank to the parent
company are also restricted.
Note 17. Other Operating Expense
Other operating expenses are summarized below for the years ended December 31:
Advertising
Office supplies, postage and printing
Telephone
Professional fees and services
Supervisory fees and assessments
Debit and credit card expenses
Insurance expenses
Net cost of other real estate owned
Core deposit amortization
Other
Total
Note 18. Income Taxes
2018
2017
$
306,279
364,275
312,631
730,057
343,855
959,931
230,268
21,874
195,783
2,084,609
$ 5,549,562
$
261,116
294,568
226,392
590,887
254,470
852,903
252,253
451,569
-
1,619,088
$ 4,803,246
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the "2017 Tax
Act"). The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably
a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after
December 31, 2017.
The Company recognized the income tax effects of the 2017 Tax Act in its 2017 financial statements in accordance
with Staff Accounting Bulletin 118, which provides guidance for the application of ASC Topic 740, Income Taxes, in the
reporting period in which the 2017 Tax Act was signed into law. As such, the Company's financial results reflect the
income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is complete and provisional
amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is
incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income
tax effects of the 2017 Tax Act have not been completed and a reasonable estimate could not be determined as of
December 31, 2017.
39
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 18. Income Taxes, Continued
Income tax provision for the years ended December 31, 2018 and 2017 is summarized as follows:
Provision
Current income tax expense
Federal
State
Total current
Deferred income tax expense (benefit)
Federal
State
Total deferred
Change in valuation allowance
Total income tax expense
2018
2017
$
$
-
70,794
70,794
30,912
41,400
72,312
589,897
19,579
609,476
3,543,946
(104,591)
3,439,355
61,336
741,606
104,591
$ 3,616,258
$
The components of deferred tax assets and deferred tax liabilities as of December 31, are as follows:
Deferred tax assets:
Allowance for loan losses
Accumulated depreciation
Net operating losses
Non-accrual interest
Unrealized loss on securities available for sale
Deferred compensation
Federal and state credits
Other real estate owned
Purchase accounting on acquisition
Other
Gross deferred tax assets
Less, valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accumulated depreciation
Prepaid expenses
Market to market adjustments
Other
Total gross deferred tax liabilities
Net deferred tax assets recognized
40
2018
2017
$
$
585,519
2,945
8,670,310
10,829
224,520
507,915
15,493
24,636
309,455
135,056
10,486,678
(555,433)
9,931,245
515,314
-
4,917,421
18,478
153,572
433,955
-
115,571
-
139,463
6,293,774
(323,961)
5,969,813
-
22,645
1,943,298
41,730
2,007,673
$ 7,923,572
71,713
25,141
1,383,094
28,802
1,508,750
$ 4,461,063
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 18. Income Taxes, Continued
Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a
tax asset will not be realized, a valuation allowance is required to reduce the net deferred tax assets to net realizable
value. As of December 31, 2018, management has determined that it is more likely than not that the majority of the
deferred tax asset from continuing operations will be realized. In 2018, the balance in the valuation allowance
changed by $231,472. The remaining valuation allowance relates to the parent company’s state operating loss
carryforwards for which realizability is uncertain.
The Company has federal net operating losses of $38,719,915 and $21,910,113 for the years ended December 31,
2018 and 2017, respectively. The Company has state net operating losses of $13,648,822 and $8,007,529 for the
years ended December 31, 2018 and 2017, respectively. In addition, the Company has Alternative Minimum Tax
("AMT") credit carryforwards which have been reclassified to taxes receivable to reflect the refundable nature of the
credits under the Tax Cuts and Jobs Act.
The Company measures deferred tax assets and liabilities using enacted tax rates that will apply in the years in which
the temporary differences are expected to be recovered or paid. Accordingly, the Company's deferred tax assets and
liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate from 34 percent to 21
percent, resulting in a $2,666,542 increase in income tax expense for the year ended December 31, 2017 and a
corresponding $2,666,542 decrease in net deferred tax asset as of December 31, 2017.
A reconciliation between the income tax expense and the amount computed by applying the federal statutory rate of
21% and 34% to income before income taxes for the years ended December 31, 2018 and 2017 follows:
Tax expense at statutory rate
State income tax expense (benefit), net of federal income tax benefit
Tax-exempt interest income
Disallowed interest expense
Life insurance surrender value
Impact of tax rate change
Change in valuation allowance
Other, net
Total
2018
2017
666,086
71,395
(30,839)
949
(82,017)
-
61,336
54,696
741,606
$
995,145
(41,706)
(40,395)
615
(111,764)
2,666,542
104,591
43,230
$ 3,616,258
$
$
The Company had analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no
liability related to uncertain tax positions. Tax returns for 2015 and subsequent years are subject to review by taxing
authorities.
41
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 19. Related Party Transactions
Certain parties (principally certain directors and executive officers of the Company, their immediate families and
business interests) are loan customers of the Company. In compliance with relevant law and regulations, the
Company’s related party loans are made on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with persons not related to the lender and do not involve
more than the normal risk of collectability. As of December 31, 2018 and 2017, the Company had related party loans
totaling $1,422,497 and $1,408,086, respectively.
Deposits from directors and executive officers and their related interests totaled $1,610,022 and $1,100,287 at
December 31, 2018 and 2017, respectively.
Note 20. Commitments and Contingencies
In the ordinary course of business, the Company may, from time to time, become a party to legal claims and disputes.
At December 31, 2018, management and legal counsel are not aware of any pending or threatened litigation or
unasserted claims or assessments that could result in losses, if any, that would be material to the consolidated
financial statements.
The Company has entered into a number of operating leases for properties relating to its branch banking and
mortgage operations. The leases have various initial terms and expire on various dates. The lease agreements
generally provide that the Company is responsible for ongoing repairs and maintenance, insurance and real estate
taxes. The leases also provide for renewal options and certain scheduled increases in monthly lease payments. Rental
expenses recorded under leases for the years ended December 31, 2018 and 2017 were $937,904 and $564,876,
respectively.
The minimal future rental payments under non-cancelable operating leases having remaining terms in excess of one
year, for each of the next five years and thereafter in the aggregate are:
2019
2020
2021
2022
2023 and thereafter
Amount
$
468,467
453,869
447,280
447,280
3,006,270
$ 4,823,166
42
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 21. Equity Incentive Plan
On January 19, 2006, the Company adopted the the 2006 Plan, which provides for the granting of dividend equivalent
rights options, performance unit awards, phantom shares, stock appreciation rights and stock awards, each of which
are subject to such conditions based upon continued employment, passage of time or satisfaction of performance
criteria or other criteria as permitted by the 2006 Plan. The 2006 Plan, which was amended on September 17, 2010,
allows the Company to award, subject to approval by the Board of Directors, up to 950,000 shares of stock to officers,
employees, and directors, consultants and service providers of the Company or its affiliates. Awards may be granted
for a term of up to ten years from the effective date of grant. Under the 2006 Plan, our Board of Directors has sole
discretion as to the exercise date of any awards granted. The per-share exercise price of incentive stock awards may
not be less than the market value of a share of common stock on the date the award is granted. Any awards that
expire unexercised or are canceled become available for re-issuance. The Plan expired January 19, 2016.
On April 20, 2017, the Company approved the the 2017 Plan (collectively "the Plans"). The 2017 Plan allows granting
up to 500,000 shares. The maximum aggregate shares subject to options is restricted to 80,000 in any calendar year to
any one participant. The aggregate number of shares subject to awards of restricted stock is restricted to 50,000 in
any calendar year to any one participant. Awards may be granted for a term of up to five years from the effective date
of the grant.
The Company can issue the restricted shares as of the grant date either by the issuance of share certificate(s)
evidencing restricted shares or by documenting the issuance in uncertificated or book entry form on the Company's
stock records. Except as provided by the Plans, the employee does not have the right to make or permit to exist any
transfer or hypothecation of any restricted shares. When restricted shares vest, the employee must either pay the
Company within two business days the amount of all tax withholding obligations imposed on the Company or make
an election pursuant to Section 83(b) of the Internal Revenue Code to pay taxes at grant date.
Restricted shares may be subject to one or more objective employment, performance or other forfeiture conditions
established by the Plan Committee at the time of grant. Under the terms of the Plans, the restricted shares will vest
completely based on the individual grants vesting period, which is between four and seven years. The shares are
forfeited entirely if the participant terminates employment for any reason other than changes in control. Any shares
of restricted stock that are forfeited will again become available for issuance under the Plan. An employee or director
has the right to vote the shares of restricted stock after grant until they are forfeited. Compensation cost for
restricted stock is equal to the market value of the shares at the date of the award and is amortized to compensation
expense over the vesting period. Dividends, if any, will be paid on awarded but unvested stock.
During 2018 and 2017, the Company issued 132,886 and 112,212 shares, respectively, of restricted stock pursuant to
the 2017 Equity Incentive Plan, as amended. As of December 31, 2018 and 2017, 579,838 and 461,500 shares,
respectively, issued under the Plans vest between the fourth and seventh anniversary of the date of grant, depending
on the individual restricted stock grant and thus will be fully vested in 2024, subject to meeting the performance
criteria of the Plan. During 2018 and 2017, 26,618 and 2,212 shares, respectively, were issued which vested during
each of the respective years. The weighted-average fair value of restricted stock issued during 2018 and 2017 was
$7.39 and $7.00 per share, respectively. During 2018 and 2017, 27,930 and 5,600 shares, respectively, were either
forfeited or cancelled having a weighted average price of $2.05. Also, during 2018 and 2017, 26,618 and 2,212 shares
were exercised, respectively. The weighted-average fair value of restricted stock exercised during 2018 and 2017 was
$3.82 and $6.33, respectively. Deferred compensation expense of $294,069 and $127,659 during 2018 and 2017,
respectively, was recorded in salaries and employee benefits expense.
43
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 21. Equity Incentive Plan, Continued
During 2018 and 2017, the Company issued 40,000 and 160,000, respectively, stock options pursuant to the 2017
Equity Incentive Plan.
The fair value of each 2018 and 2017 option granted was estimated on the date of the grant using the Black-Scholes
option pricing, resulting in a total expense of $92,958 and $316,844, respectively. The Black-Scholes model with
assumptions is presented below:
Grant date
Total number of options granted
Expected volatility
Expected term
Expected dividend
Risk-free rate
Grant date fair value
September 25, 2017
160,000
20.58%
7 years
0.00%
2.12%
$7.20
January 18, 2018
40,000
20.58%
7 years
0.00%
2.55%
$7.75
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2018
Options exercisable as of December 31, 2018
Weighted-
Average
Remaining
Life (Years)
Weighted-
Average
Exercise
Price
$
7.20
7.75
-
-
7.26
7.23
4.80
4.77
Options
160,000
40,000
-
-
200,000
50,496
The Company recognized stock-based compensation costs related to stock options of $57,532 and $45,403 for the
years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, there was $306,867 of total unrecognized compensation cost related to the outstanding
stock options that will be recognized over the remainder of their vesting schedule.
At December 31, 2018, there were 300,000 stock awards available for grant under the 2017 Equity Incentive Plan.
44
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 22. Income (Loss) Per Common Share
Net income (loss) available to common shareholders represents net income (loss) adjusted for preferred dividends
including dividends declared, accretions of discounts and amortization of premiums on preferred stock issuances and
cumulative dividends related to the current dividend period that have not been declared as of period end.
The following is a summary of the income (loss) per common share calculations for the years ended December 31,
2018 and 2017.
Income (loss) available to common shareholders
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders
Basic income (loss) per common share:
Net income (loss) available to common shareholders
Average common shares outstanding - basic
Basic income (loss) per common share
Diluted income (loss) per common share:
Net income (loss) available to common shareholders
Average common shares outstanding - basic
Dilutive potential common shares
Average common shares outstanding - diluted
2018
2017
$ 2,430,234
-
$ 2,430,234
$
$
(689,360)
-
(689,360)
2018
2017
$ 2,430,234
$
(689,360)
7,738,547
5,465,868
$
0.31 $
(0.13)
$ 2,430,234
$
(689,360)
7,738,547
5,465,868
129,039
7,867,586
-
5,465,868
Diluted income (loss) per common share
$
0.31
$
(0.13)
Note 23. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions
by regulators that, if undertaken, could have a direct adverse material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-
sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
ratios (set forth in the table below) of Tier 1, Common Equity Tier 1 (“CET1”), and total capital as a percentage of
assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 150%. Tier 1 capital of the Bank
consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus
certain intangible assets, while CET1 is comprised of Tier 1 capital, adjusted for certain regulatory deductions and
limitations. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for
purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.
45
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 23. Regulatory Matters, Continued
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the
leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%. All
others are subject to maintaining ratios 1% to 2% above the minimum.
Effective March 31, 2015, quantitative measures established by applicable regulatory standards, including the newly
implemented Basel III revised capital adequacy standards and relevant provisions of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (“Dodd Frank Act”), require the Bank to maintain (i) a minimum ratio of Tier 1
capital to average total assets, after certain adjustments, of 4.00%, (ii) a minimum ratio of Tier 1 capital to risk-
weighted assets of 6.00%, (iii) a minimum ratio of total-capital to risk-weighted assets of 8.00% and (iv) a minimum
ratio of CET1 to risk-weighted assets of 4.50%. A “well-capitalized” institution must generally maintain capital ratios
2% higher than the minimum guidelines.
In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, the Bank will
also be required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital
requirements. This buffer will be required to consist solely of CET1, but the buffer will apply to all three risk-based
measurements (CET1, Tier 1 and total capital). The capital conservation buffer began to be phased in incrementally
over time, beginning January 1, 2016 at 0.625% and will be fully effective on January 1, 2019, and will ultimately
consist of an additional amount of Tier 1 capital equal to 2.5% of risk-weighted assets.
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements
at December 31, 2018 and 2017.
(Dollars in Thousands)
December 31, 2018
The Bank
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Common Equity Tier 1 Capital
(to risk-weighted assets)
December 31, 2017
The Bank
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Common Equity Tier 1 Capital
(to risk-weighted assets)
Note 24. Unused Lines of Credit
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 56,216
53,191
53,191
53,191
12.05% $ 37,308
27,981
11.41
22,380
9.51
20,986
11.41
8.00% $ 46,635
37,308
6.00
27,975
4.00
30,313
4.50
10.00%
8.00
5.00
6.50
$ 44,979
42,514
42,514
42,514
12.32% $ 29,211
21,908
11.64
17,893
9.50
16,432
11.64
8.00% $ 36,514
29,211
6.00
18,257
4.00
23,734
4.50
10.00%
8.00
5.00
6.50
The Bank had available at December 31, 2018 several unsecured lines of credit, which were unused, to purchase up to
$10,000,000 of federal funds from one unrelated correspondent institution. Also, as of December 31, 2018, the Bank
had the ability to borrow funds from the FHLB of up to $168,753,000. At that date, $20,000,000 had been advanced.
46
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 25. Fair Value Measurements
Generally accepted accounting principles (“GAAP”) provide a framework for measuring and disclosing fair value that
requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the
measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a
nonrecurring basis (for example, impaired loans).
Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. GAAP also establishes a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair
value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time
to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held
for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically
involve application of the lower of cost or market accounting or the writing down of individual assets.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and
liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation techniques
for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not
observable in the market. These unobservable assumptions reflect estimates of assumptions that
market participants would use in pricing the asset or liability. Valuation techniques include the use of
option pricing models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Securities Available-for-Sale and Marketable Equity Securities - Securities available for sale are recorded at fair value
on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are measured using independent pricing models or other model-based valuation techniques
such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and
other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as
the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the counter
markets and money market funds. Level 2 securities include mortgage backed securities issued by government
sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-
backed securities in less liquid markets.
47
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 25. Fair Value Measurements, Continued
Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is
considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of
interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired.
Once a loan is identified as individually impaired, management measures impairment. The fair value of impaired
loans is estimated using one of several methods, including the collateral value, market value of similar debt,
enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring a specific
allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded
investment in such loans. At December 31, 2018 and 2017, a significant portion of impaired loans were evaluated
based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair value
of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When
an appraised value is not available or management determines the fair value of the collateral is further impaired
below the appraised value and there is no observable market price, the Company records the loan as nonrecurring
Level 3.
Mortgage Loans Held for Sale - Mortgage loans held for sale are comprised of loans originated for sale in the
ordinary course of business. The fair value of mortgage loans originated for sale in the secondary market is based on
purchase commitments or quoted prices for the same or similar loans and are classified as recurring Level 2.
Other Real Estate Owned - Foreclosed assets are adjusted to fair value upon transfer of the loans to OREO. Real
estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling
costs at the date of foreclosure. The initial recorded value may be subsequently reduced by additional allowances,
which are charges to earnings if the estimated fair value of the property less estimated selling costs declines below
the initial recorded value. Fair value is based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level
2. When an appraised value is not available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the Company records the foreclosed
asset as nonrecurring Level 3.
Mortgage Servicing Rights - Mortgage servicing rights do not trade in an active market with readily observable
market data. As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted
cash flow model to calculate the present value of estimated future net servicing income. The Company stratifies its
mortgage servicing portfolio on the basis of loan type. The assumptions used in the discounted cash flow model are
those that market participants would use in estimating future net servicing income. Assumptions in the valuation of
mortgage servicing rights may include estimated loan repayment rates, the discount rate, servicing costs, and the
timing of cash flows, among other factors. The Company measures mortgage servicing rights as recurring Level 3.
48
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 25. Fair Value Measurements, Continued
Derivatives - The Company’s valuation techniques and inputs to internally-developed models depend on the type of
derivative and nature of the underlying rate, price or index upon which the derivative's value is based. Key inputs can
include yield curves, credit curves, foreign-exchange rates, prepayment rates, volatility measurements and
correlation of such inputs. Where model inputs can be observed in a liquid market and the model does not require
significant judgment, such derivatives are typically classified as Level 2 of the fair value hierarchy. Examples of
derivatives classified as Level 2 include interest rate lock commitments written for our residential mortgage loans
that we intend to sell. When instruments are traded in less liquid markets and significant inputs are unobservable,
such derivatives are classified as Level 3. Additionally, significant judgments are required when classifying financial
instruments within the fair value hierarchy, particularly between Level 2 and 3, as is the case for certain derivatives.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis by level
within the hierarchy at December 31, 2018 and 2017.
Total
Level 1
Level 2
Level 3
December 31, 2018
Available-for-sale securities:
U.S. Government sponsored agencies
Municipal securities
Mortgage-backed securities
Corporate bonds
Total available-for-sale securities
Marketable equity securities
Mortgage loans held for sale
Mortgage servicing rights
Derivative assets (liabilities):
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
Available-for-sale securities
U.S. Government sponsored agencies
Municipal securities
Mortgage-backed securities
Corporate bonds
Equity security
Total available-for-sale securities
Mortgage loans held for sale
Mortgage servicing rights
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
$
$
$
$ 13,929,850
1,333,451
15,552,568
2,572,776
33,388,645
168,151
12,713,361
9,023,859
416,076
(186,133)
$ 55,523,959
$
Total
9,410,909
1,400,609
13,060,928
2,892,273
130,000
26,894,719
7,885,938
6,357,666
226,712
2,305
$ 41,367,340
$
49
-
-
-
-
-
-
-
-
-
-
-
$ 13,929,850
15,552,568
15,552,776
2,572,776
33,388,645
168,151
12,713,361
-
416,076
(186,133)
$ 46,500,100
December 31, 2017
Level 1
Level 2
$
$
$
-
-
-
-
-
-
-
9,023,859
-
-
9,023,859
Level 3
-
-
-
-
-
-
-
6,357,666
$
9,410,909
1,400,609
13,060,928
2,892,273
130,000
26,894,719
7,885,938
-
-
-
-
-
-
-
-
-
-
-
226,712
2,305
$ 35,009,674
$
-
-
6,357,666
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 25. Fair Value Measurements, Continued
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Balance, December 31, 2016
Transfers into/out of Level 3
Purchases, sales, issuances and settlements, net
Total net gains (losses) included in:
Net income
Balance, December 31, 2017
Transfers into/out of Level 3
Purchases, sales, issuances and settlements, net
Total net gains included in:
Net income
Balance, December 31, 2018
Mortgage
Servicing
Rights
$ 4,211,582
-
2,469,977
(323,893)
6,357,666
-
2,995,099
(328,906)
$ 9,023,859
The Company has no liabilities measured at fair value on a recurring basis.
Certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not
measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for
example, when there is evidence of impairment). The following table presents the assets and liabilities measured at
fair value on a nonrecurring basis at December 31, 2018 and December 31, 2017, aggregated by level in the fair value
hierarchy within which those measurements fall.
December 31, 2018
Impaired loans, net specific reserve
Other real estate owned
Total assets at fair value
December 31, 2017
Impaired loans, net specific reserve
Other real estate owned
Total assets at fair value
Total
Level 1
Level 2
Level 3
$
$
$
$
9,446,787
341,519
9,788,306
Total
3,414,652
1,706,765
5,121,417
$
$
$
$
Level 1
-
-
-
-
-
-
$
$
$
$
Level 2
-
-
-
-
-
-
$
$
$
$
9,446,787
341,519
9,788,306
Level 3
3,414,652
1,706,765
5,121,417
50
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 25. Fair Value Measurements, Continued
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31, 2018
and December 31, 2017, the significant unobservable inputs used in the fair value measurements were as follows:
Fair Value as of
December 31,
2018
Valuation Technique
Significant
Observable Inputs
Significant Unobservable
Inputs
Impaired loans, net
$
9,446,787
Appraisal Value
of specific
reserve
Appraisals and/or
sales of comparable
properties
Other real estate
$
341,519
owned
Appraisal
Value/Comparison
Sales/Other estimates
Appraisals and/or
sales of comparable
properties
Appraisals discounted 5%
to 30% for sales
commissions and other
holding cost
Appraisals discounted 10%
to 20% for sales
commissions and other
holding cost
Fair Value as of
December 31,
2017
Valuation Technique
Significant
Observable Inputs
Significant Unobservable
Inputs
Impaired loans, net
$
3,414,652
Appraisal Value
of specific
reserve
Appraisals and/or
sales of comparable
properties
Other real estate
$
1,706,765
owned
Appraisal
Value/Comparison
Sales/Other estimates
Appraisals and/or
sales of comparable
properties
Appraisals discounted 5%
to 30% for sales
commissions and other
holding cost
Appraisals discounted 5%
to 10% for sales
commissions and other
holding cost
51
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 25. Fair Value Measurements, Continued
Fair Value of Financial Instruments
The following table includes the estimated fair value of the Company’s financial assets and financial liabilities. The
methodologies for estimating the fair value of financial assets and financial liabilities measured on a recurring and
nonrecurring basis are discussed above. The methodologies for estimating the fair value for other financial assets
and financial liabilities are discussed below. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation methodologies. However, considerable
judgement is required to interpret market data in order to develop the estimates of fair value. Accordingly, the
estimates presented below are not necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation techniques may have a material effect
on the estimated fair value amounts at December 31, 2018 and 2017.
Cash and cash equivalents
Securities available-for-sale
Marketable equity securities
Securities held-to-maturity
Loans held for sale
Loans held for investment, net
Nonmarketable equity securities
Deposits
Federal Home Loan Bank advances
Subordinated debentures
December 31,
2018
2017
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$ 34,561,988 $ 34,561,988
33,388,645
168,151
14,250,850
12,713,361
426,199,683
1,393,500
477,204,481
20,020,000
14,546,533
33,388,645
168,151
14,107,252
12,713,361
428,007,703
1,393,500
476,168,709
20,000,000
15,244,877
24,630,819 $ 24,630,819
26,894,719
26,894,719
-
-
17,372,834
17,018,132
7,885,938
7,885,938
330,393,325
331,221,378
1,359,200
1,359,200
354,507,494
353,094,063
22,013,200
22,000,000
16,135,281
15,221,963
Cash and cash equivalents
The carrying amount approximates fair value for these instruments.
Investment securities
The fair value of investment securities are generally determined using widely accepted valuation techniques including
market prices, matrix pricing, and broker-quote-based applications.
Loans held for sale
Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of on-to-four family
residential real estate loans originated for sale to qualified third parties. Fair value is based upon the contractual
price to be received from these third parties, which may be different than cost.
Loans held for investment
Fair values are estimated for portfolios of loans with similar financial characteristics if collateral-dependent. Loans
are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows through
the estimated maturity using estimated market discount rates that reflect observable market information
incorporating the credit, liquidity, yield and other risks inherent in the loan. The estimate of maturity is based upon
the Company’s historical experience with repayments for each loan classification, modified, as required, by an
estimate of the effect of the current economic and lending conditions.
52
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 25. Fair Value Measurements, Continued
Fair value for significant non-performing loans is generally based upon recent external appraisals. If appraisals are
not available, estimated cash flows are discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows and discounted rates are judgmentally
determined using available market information and specific borrower information.
Loan fair value estimated using exit price notion as of December 31, 2018 based on adoption of ASU 2016-01. The
methods used to estimate fair value of loans do not necessarily represent an exit price as of December 31, 2017.
Nonmarketable equity securities
Nonmarketable equity securities are carried at original cost basis, as cost approximates fair value and there is no
ready market for such investments.
Deposits
The fair value of deposits with no stated maturity date, such as noninterest-bearing demand deposits, savings and
money market and checking accounts, is based on the discounted value of estimated cash flows. The fair value of
time deposits is based upon the discounted value of contractual cash flows. The discount rate is estimated using the
rates currently offered for deposits of similar remaining maturities.
Notes payable
The fair carrying value of notes payable is estimated by using discounted cash flow analyses based on incremental
borrowing rates for similar types of instruments These are classified as Level 2.
Subordinated debentures
The fair value of subordinated debentures is estimated by using discounted cash flow analyses based on incremental
borrowing rates for similar types of instruments These are classified as Level 2.
Federal Home Loan Bank advances
Fair value is estimated based on discounted cash flows using current market rates for borrowing with similar terms
and are classified as of Level 2.
Note 26. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements
are issued. Recognized subsequent events are events or transactions that provide additional evidence about
conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing
financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did
not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring
through April 11, 2019, the date the financial statements were available to be issued and no subsequent events
occurred requiring accrual or disclosure.
53
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 27. First Reliance Bancshares, Inc. (Parent Company Only)
Condensed Balance Sheets
Assets
Cash
Investment in banking subsidiary
Equity securities
Nonmarketable equity securities
Investment in trust
Deferred tax asset
Other assets
Total assets
Liabilities
Junior subordinated debentures
Subordinated debentures
Accrued interest payable
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Operations
Income
Rental income from banking subsidiary
Interest income
Gain on sale of trust preferred security
Dividend from banking subsidiary
Gain on fair value of equity securities
Total income
Expenses
Salaries and employee benefits
Equipment expense
Interest expense
Acquisition-related costs
Other expenses
Total expenses
Income (loss) before income taxes and equity in
undistributed income of banking subsidiary
Equity in undistributed earnings of banking subsidiary
Net income (loss) before income taxes
Income tax (benefit) expense
Net (loss) income
54
December 31,
2018
2017
$ 3,235,365
62,420,978
168,151
58,100
310,000
1,338,543
81,897
$ 67,613,034
$ 17,814,362
46,161,090
130,000
58,100
310,000
1,019,787
66,438
$ 65,559,777
$ 10,310,000
4,934,877
199,708
15,444,585
52,168,449
$ 67,613,034
$ 10,310,000
4,911,963
184,489
15,406,452
50,153,325
$ 65,559,777
$
For the years ended
December 31,
2018
2017
-
12,023
800,000
2,100,000
38,151
2,950,175
351,801
57,630
765,076
1,005,195
293,160
2,472,862
$
450
9,296
-
-
-
9,746
169,427
19,034
922,867
501,265
104,712
1,717,305
477,313
1,653,666
(1,707,559)
1,121,142
2,130,979
(299,256)
$ 2,430,234
$
(586,417)
102,943
(689,360)
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2018 and 2017
Note 27. First Reliance Bancshares, Inc. (Parent Company Only), Continued
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred income tax (expense) benefit
Increase in restricted stock
Gain on sale of trust preferred security
Gain on fair value of equity securities
Stock based compensation expense
Increase (decrease) in accrued interest payable
Increase in other assets
Net equity in undistributed earnings of banking subsidiary
Net cash used in operating activities
Cash flows from by investing activities
Purchase of securities available for sale
Purchase of trust preferred security
Proceed from sale of trust preferred security
Net cash provided by (used in) investing activities
Cash flows from financing activities
Net decrease in notes payable
Net proceeds from issuance of common stock
Net increase of preferred stock
Accretion of debt issuance costs
Increase in restricted stock
Capital contribution to subsidiary
Purchase of treasury stock
Net cash (used in) provided by financing activities
(Decrease) increase in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, ending of year
For the years ended
December 31,
2018
2017
$ 2,430,234
$
(689,360)
(318,756)
(640,231)
(800,000)
(38,151)
57,732
15,219
(15,459)
(1,653,666)
(963,078)
-
(2,300,000)
3,100,000
800,000
102,943
(606,246)
-
-
45,403
(72,840)
(66,439)
(1,121,142)
(1,801,435)
(100,000)
-
-
(100,000)
-
955,443
-
22,914
(640,231)
(15,000,000)
(394,276)
(15,056,150)
(6,893,211)
21,856,359
2,955,593
15,565
(606,246)
-
(10,738)
17,317,322
(14,578,997)
17,814,362
$ 3,235,365
15,415,887
2,398,475
$ 17,814,362
55
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888.543.5510