2020
ANNUAL REPORT
ISTHIS
OUR
TIM E
To Our
Shareholders
In a year when -- quite literally -- there was no predicting what each
day might bring, our organization was reliably solid ground on which
our customers, associates and you, our shareholders, could stand. I am
pleased and proud to report that 2020 delivered unprecedented
financial performance as well as major strides forward on our strategic
plan. The collective results highlighted in the coming pages represent
unity of purpose and vision, achievements in vital focus areas and
ongoing dedication to shareholder value.
The banking environment in the Carolinas saw significant disruptions in 2020. The two largest banks in
South Carolina sold to out-of-state suitors and another merger of two large national banks continued
with their integration plan. The foundation that we have laid over the last several years positioned our
Company to take advantage of the new banking landscape. Several years ago, we made the decision to
invest in a mortgage business line with skilled operators. We were hopeful that this investment could
have the opportunity to shine during times of stress which played out in 2020. In the following pages, I
would like to update you on the latest initiatives that we have begun to enhance your long-term
investment in our Company. Despite the economic damage brought on by the pandemic, we remain as
confident as ever that “this is our time.”
Additionally, we reached new financial watermarks in 2020 including record net income, decreased
nonperforming assets, and record volume and margin in our mortgage division. From this foundation,
the Company seized the opportunity to fortify our balance sheet as reflected by increased capital,
liquidity and loan-loss reserve ratios. Economic uncertainty, a shifting regulatory environment with the
new administration in Washington, and ever-present and growing competition persist. Regardless, First
Reliance Bank remains well-positioned to confront these challenges head-on in the pursuit of our
growth, profitability and efficiency goals.
Our Markets
During 2020, building out our existing markets was the focus rather than geographic expansion. In
2020, we identified a site for a new downtown Columbia office, which we opened in January 2021.
Additional hires were made in Charleston and Greenville. Growth in North Carolina continued at a
robust rate. Work continued on an expanded, full-service location in Winston-Salem which we opened
in June 2020, and we continued expanding our team at our Lake Norman branch as we grew in the
i
market. Finally, our markets showed uncanny resilience in these turbulent times. Economic indicators
show significantly less damage from the pandemic to our markets than national averages. Population
growth has continued to accelerate, and housing prices have appreciated rapidly.
Financial Strength
Net Income
Net income for the year was $10.6 million, or $1.32 per diluted share, compared to $4.1 million, or $0.51
per diluted share, for the same period a year ago, representing an increase of 159.6%. Our ROAA and
ROAE increased to 1.46% and 16.91%, respectively.
We took advantage of counter cyclical demand for mortgage volume post-recession in order to bolster
net income. In 2020, mortgage volume increased to $672 million from $363 million in 2019. This was our
single largest funding year in our company’s history. More importantly, we helped over 3,000 families
with their home financing needs including over 482 families finance their first homes.
First Reliance Bank was a participating lender in the Small Business Administration (“SBA”) Payroll
Protection Program (“PPP”) created under the Coronavirus Aid, Relief, and Economic Security Act. In
round one of PPP, the Company directly originated 186 PPP loans totaling $30.2 million. We were
there for our customers and our communities to help navigate this unprecedented pandemic and we
continue to help businesses through round two of PPP.
Loans and Asset Quality
Based on the uncertainty imposed by the COVID-19
pandemic, management made a strategic decision to hold
loan levels steady throughout the year. As such, gross loans
receivable decreased slightly to $478.0 million at
December 31, 2020. Asset quality remained strong during
the year, with the ratio of nonperforming assets to total
assets decreasing to 0.21% at December 31, 2020 from
0.28% at December 31, 2019.
ii
Deposit Growth
Total deposits increased by $88.9 million, or 17.6%, to $594
million at December 31, 2020 compared to December 31,
2019. Transaction accounts increased by $61.7 million,
which helped lower our cost of deposits from 1.19% during
2019 to 0.60% during 2020.
Tangible Book Value
One of the best measures of our success in building value
for our shareholders is tangible book value per share.
During 2020, tangible book value per share grew by 20%,
reaching $8.12 at December 31, 2020, a reflection of strong
underlying performance in key business areas.
Capital
With record net income during the year, we were able to continue strengthening our capital position.
Bank Tier 1 risk-based capital increased to 14.52% at December 31, 2020 compared to 10.88% at
December 31, 2019. Bank Tier 1 leverage increased to 10.31% at December 31, 2020 compared to
9.23% at December 31, 2019.
iii
Our People
Once again, our people lead the way. Perhaps our greatest asset, these 178 bank associates did not let
the daily tumult of last year divert from their customer-first focus. Our internal culture and esprit de
corps are stronger today than ever, a reflection of their respective talents and determination to meet
customer needs and exceed expectations, no matter the obstacles.
During 2020, we undertook a broad, holistic effort to establish a roster of senior executives with depth,
insight and capability that are unprecedented in our two decades of business.
Robert F. Dozier, Jr. took on dual roles of President of the holding company, First Reliance Bancshares
Inc., and Chief Operating Officer (COO) of First Reliance Bank. We promoted Chuck Stuart to President
of our First Reliance Mortgage division, named Robert Haile as Chief Financial Officer (CFO) and
Elizabeth Bunn as Treasurer, and elevated Jeff Paolucci into the role of Chief Risk Officer (CRO). Brook
Moore was promoted to Chief Credit Officer, succeeding Jack McElveen, who will remain in a credit
leadership position with the bank.
In January of 2021, longtime banking industry executive F. Justin Strickland became President of First
Reliance Bank with a primary focus on commercial lending. These additions helped build a robust
leadership team dedicated to further positioning the Company for transformational growth.
Technology
In 2020, we took a major step in evolving our digital banking platform to exceed what is currently
found in the community banking world. Driven by our commitment to make banking easier for our
customers, we invested in a new software platform that will allow us to provide robust functionality
and an improved user experience for our customer base. This new relationship with an industry leading
digital banking platform will provide a solid foundation for future updates and additional capabilities.
Our new software platform will add needed functionality to the application – such as the ability to
open accounts online and deliver online payment options. The user interface update will also provide a
greatly improved customer experience online. As banking continues to shift into the online space,
through this investment, First Reliance Bank is well-positioned for growth by offering a digital banking
product that is superior to other community banks and competitive with national financial institutions.
Our belief is that, by partnering our high touch, first-in-class customer service with a superior digital
banking product, we will be a preferred choice for customers looking for a local financial institution
with 21st century banking capabilities.
iv
The Journey Ahead
As we Carolinians know all too well, big storms occasionally come through and reshape landscapes if
not lives. All you can do is prepare as best you can, tie down the outdoor furniture and hope for the
best.
After a year of unprecedented social shifts, there are unmistakable rays of sunshine emerging. And our
organization is well prepared for what comes next. We are encouraged by solid financial results, strong
performance in important business lines and a growing team of talented and dedicated associates. We
have a detailed strategic plan to guide us for the next decade, built on pillars of a customer-centric
culture, civic engagement and caring for each other – the principles that have guided us since the
beginning. The future again looks bright.
Thank you for your continued support for our entire organization and me personally. You have my
assurance that we will do everything in our power, every day, to continue to earn your trust.
Thank You and Best Regards,
F.R. “Rick” Saunders Jr.
Chief Executive Officer
v
First Reliance Bancshares, Inc. and Subsidiary
Report on Consolidated Financial Statements
As of and for the years ended December 31, 2020 and 2019
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 ......................................................................................... 5
Consolidated Statements of Changes in Shareholders' Equity ............................................................................ 6
Consolidated Statements of Cash Flows .......................................................................................................... 7‐8
Notes to Consolidated Financial Statements ................................................................................................. 9‐57
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, 2020 and 2019, and the related
consolidated statements of operations, comprehensive income, 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 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, 2020 and 2019, and the results
of their operations and their cash flows for the years then ended in accordance with accounting principles
generally accepted in the United States of America.
Columbia, South Carolina
March 23, 2021
2
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2020 and 2019
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
Marketable equity securities
Securities available‐for‐sale
Securities held‐to‐maturity (fair value of $10,746,649 at December 31, 2019)
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
Right of use asset
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
Federal Funds Purchased
Subordinated debentures
Junior subordinated debentures
Accrued interest payable
Lease liability
Other liabilities
Total liabilities
Shareholders’ Equity
Preferred stock
Series D non‐cumulative preferred stock, no par value; 559 and 572 shares issued and outstanding
at December 31, 2020 and 2019, respectively
Common stock, $0.01 par value; 20,000,000 shares authorized,
8,153,557 and 8,033,579 shares issued and outstanding at December 31, 2020 and 2019, respectively
Non voting common stock, $0.01 par value; 430,000 shares authorized, 410,499 shares issued
and outstanding
Capital surplus
Treasury stock, at cost, 234,324 and 183,591 shares at December 31, 2020 and 2019, respectively
Nonvested restricted stock
Retained earnings
Accumulated other comprehensive income
Total shareholders’ equity
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements
3
2020
2019
$
5,521,448 $
$
$
93,167,467
98,688,915
255,638
29,424
32,729,894
‐
1,076,400
33,835,718
35,641,877
477,967,634
(6,172,977)
471,794,657
18,490,548
1,545,861
164,295
18,101,821
3,452,005
12,020,612
366,454
690,917
5,360,111
9,758,115
710,167,544 $
167,274,049 $
120,890,658
166,403,732
34,103,856
105,327,947
594,000,242
5,522,872
10,000,000
‐
10,486,998
10,310,000
255,722
5,433,137
5,430,720
641,439,691
559
81,536
4,105
51,971,579
(1,679,952)
(1,486,440)
18,708,605
1,127,861
68,727,853
$
710,167,544 $
12,945,354
27,395,329
40,340,683
253,911
30,895
35,684,146
10,417,168
2,423,200
48,555,409
27,901,419
480,185,395
(3,529,855)
476,655,540
20,420,506
1,473,581
347,552
17,692,385
6,579,640
11,022,638
513,035
690,917
5,669,144
3,496,549
661,612,909
137,312,316
89,168,078
120,472,195
36,317,110
121,817,938
505,087,637
14,637,332
43,300,000
16,500,000
4,965,214
10,310,000
416,302
5,701,327
3,609,637
604,527,449
572
80,336
4,105
51,136,879
(1,283,469)
(1,253,706)
8,092,455
308,288
57,085,460
661,612,909
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended December 31, 2020 and 2019
Interest income:
Loans, including fees
Investment securities:
Taxable
Tax exempt
Other interest income
Total
Interest expense:
Time deposits
Other deposits
FHLB advances
Subordinated debt
Other interest expense
Total
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income:
Mortgage banking income
Service charges on deposit accounts
Income from bank owned life insurance
(Loss) gain on sale of investment securities
Loss on disposal of fixed assets
Loss on extinguishment of debt
Other service charges, commissions, and fees
Other
Total
Noninterest expenses:
Salaries and benefits
Occupancy
Furniture and equipment related expenses
Other
Total
Income before income taxes
Income tax expense
Net income
Average common shares outstanding, basic
Average common shares outstanding, diluted
Income per common share:
Basic income per common share
Diluted income per common share
See Notes to Consolidated Financial Statements
4
2020
2019
$ 26,776,516 $ 26,189,861
920,042
150,891
273,229
28,120,678
1,197,956
136,964
329,038
27,853,819
1,948,972
425,442
649,967
814,143
31,285
3,869,809
4,071,602
562,913
444,760
782,220
95,542
5,957,037
24,250,869
21,896,782
2,908,000
983,803
21,342,869
20,912,979
19,524,103
1,309,797
409,436
(211,018)
(528,357)
(287,199)
1,596,729
396,976
22,210,467
5,593,441
1,681,812
386,073
23,834
‐
‐
1,548,202
469,603
9,702,965
18,229,345
2,500,286
2,310,197
6,618,671
29,658,499
15,369,271
2,376,794
1,821,523
5,706,284
25,273,872
13,894,837
5,342,072
3,278,687
1,253,233
$ 10,616,150 $
4,088,839
7,919,406
7,937,617
8,037,601
8,062,486
$
$
1.34
1.32
0.52
0.51
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2020 and 2019
Net income
Other comprehensive income, net of tax:
Securities available‐for‐sale
2020
2019
$ 10,616,150 $
4,088,839
Unrealized holding gains arising during the period
Reclassification adjustment for realized (gains) losses included in earnings
Income tax expense
Net of income taxes
856,232
211,018
(247,677)
819,573
1,410,271
(37,245)
(336,391)
1,036,635
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 income
Comprehensive income
‐
‐
‐
(49,616)
13,157
(36,459)
819,573
1,000,176
$ 11,435,723 $
5,089,015
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, 2020 and 2019
Preferred
Stock
Common
Stock
Capital
Surplus
Treasury
Stock
Nonvested
Restricted
Stock
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, December 31, 2018
581
84,127
50,904,763
(624,120)
(1,508,630)
4,003,616
(691,888)
52,168,449
Balance, December 31, 2019
572
84,441
51,136,879
(1,283,469)
(1,253,706)
8,092,455
308,288
57,085,460
Net income
Other comprehensive income,
net of tax
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
‐
‐
(9)
‐
‐
‐
‐
‐
‐
9
‐
‐
‐
305
173,432
‐
58,684
‐
(659,349)
Net income
Other comprehensive income,
net of tax
‐
‐
‐
‐
Conversion of Preferred Stock ‐
Series D to Common Stock
(13)
13
‐
‐
‐
Net issuance of Common Stock
Net change in restricted stock
Stock based compensation
Purchase of Treasury Stock
‐
‐
‐
‐
1,187
775,855
‐
58,845
‐
(396,483)
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
4,088,839
‐
4,088,839
‐
‐
‐
254,924
‐
‐
‐
1,000,176
1,000,176
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
173,737
254,924
58,684
(659,349)
‐
10,616,150
‐
10,616,150
‐
‐
‐
(232,734)
‐
‐
‐
819,573
819,573
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
777,042
(232,734)
58,845
(396,483)
‐
‐
‐
‐
‐
‐
Balance, December 31, 2020
$
559 $
85,641 $ 51,971,579 $ (1,679,952) $ (1,486,440) $ 18,708,605 $ 1,127,861 $ 68,727,853
See Notes to Consolidated Financial Statements
6
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2020 and 2019
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses
Depreciation expense
Loss (gain) on change in fair value of marketable equity securities
Discount accretion and premium amortization on investment securities
Discount accretion on purchased loans
Loss on disposal of fixed assets
Net gain on sale of other real estate owned
Loss (gain) on sale of investment securities
Write down of other real estate owned
Originations of mortgages held for sale
Proceeds from sales of mortgages held for sale
Mortgage banking income
Proceeds from sale of Paycheck Protection Program loans
Loss on sale of Paycheck Protection Program loans
Core deposit intangible amortization
Loss on extinguishment of debt
Amortization of debt issuance costs
Deferred income taxes, net of allowance
Increase in cash surrender value of life insurance
Stock based compensation expense
Increase in mortgage servicing rights, net
Increase in accrued interest receivable
Increase in other assets
Decrease in accrued interest payable
Increase (decrease) in other liabilities
Net cash provided by (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
Proceeds on sales of securities available‐for‐sale
Proceeds from sale of marketable equity securities
Net (increase) decrease in nonmarketable equity securities
Net increase in time deposits in other banks
Net increase in loans receivable
Purchases of premises, furniture and equipment
Proceeds from disposal of premises, furniture and equipment
Proceeds from sale of other real estate owned
Net cash used in investing activities
See Notes to Consolidated Financial Statements
7
2020
2019
$ 10,616,150 $
4,088,839
(672,380,825)
684,164,470
2,908,000
811,654
1,471
75,516
(284,393)
528,357
(62,027)
211,018
‐
(19,524,103)
29,867,166
453,302
146,581
287,199
21,784
2,851,747
(409,436)
58,845
(997,974)
(72,280)
(5,924,322)
(160,580)
1,265,694
34,453,014
983,803
814,612
(13,410)
60,105
(277,741)
‐
(27,676)
(23,834)
500
(363,125,349)
353,530,732
(5,593,441)
‐
‐
171,182
‐
30,337
1,020,697
(386,073)
58,684
(1,998,779)
(155,477)
(175,949)
(31,581)
(988,862)
(12,038,681)
(1,000,000)
10,758,505
1,693,631
2,700,000
‐
1,346,800
(1,727)
(28,127,914)
(1,133,733)
1,723,680
290,006
(11,750,752)
(8,289,581)
5,842,664
3,643,639
1,485,000
150,666
(1,029,700)
(908)
(49,537,156)
(990,793)
66,554
204,400
(48,455,215)
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2020 and 2019
Cash flows from financing activities:
Net increase in demand deposits, interest‐bearing transaction
accounts and savings accounts
Net decrease in certificates of deposit and other time deposits
Net (decrease) increase in advances from Federal Home Loan Bank
Net (decrease) increase in federal funds purchased
Net decrease in securities sold under agreements to repurchase
Issuance of subordinated debentures
Net proceeds from issuance of common stock
(Increase) decrease in nonvested restricted stock
Purchase of treasury stock
Net cash provided by financing activities
Net increase 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
Transfer of securities held‐to‐maturity to securities available‐for‐sale
Net change in unrealized gains on investment securities
Initial recognition of right‐of‐use asset
Initial recognition of lease liability
2020
2019
107,615,850
(18,703,245)
(33,300,000)
(16,500,000)
(9,114,460)
5,500,000
777,042
(232,734)
(396,483)
35,645,970
39,698,865
(10,779,937)
23,300,000
16,500,000
(2,215,649)
‐
173,737
254,924
(659,349)
66,272,591
58,348,232
5,778,695
40,340,683
34,561,988
$ 98,688,915 $ 40,340,683
$
348,416 $
4,030,389
(44,786)
5,988,618
$
44,722 $
8,723,537
819,573
‐
‐
183,257
‐
1,000,176
6,192,913
6,192,913
See Notes to Consolidated Financial Statements
8
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
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, 2020 and 2019, the majority of the total
loan portfolio was to borrowers from within these areas.
9
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
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. The amortization of
premiums and accretion of discounts are recognized in interest income using methods approximating the interest
over the period to maturity.
Debt securities held‐to‐maturity:
Debt 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.
10
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
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.
Nonmarketable equity securities:
At December 31, 2020 and 2019, nonmarketable equity securities consist of the following:
Federal Home Loan Bank stock
Community Bankers Bank stock
Total
2020
2019
$ 1,018,300 $ 2,365,100
58,100
$ 1,076,400 $ 2,423,200
58,100
Nonmarketable equity securities are carried at cost since there is 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.
11
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
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.
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 impaired. For these loans, an allowance is established when the discounted cash flows, collateral
value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general
component covers non‐impaired 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 through 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, less estimated costs to sell, if the loan is collateral dependent. Large groups
of smaller balance homogeneous loans are collectively evaluated for impairment.
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 consolidated statements of operations
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.
12
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
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
and directors 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 or market value, with any subsequent decreases in fair value
recognized in mortgage banking income. 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 mortgage banking 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. The
Company’s servicing assets are initially measured at fair value and are subsequently measured using either the
fair value method or the amortization method, depending on the asset class, which has been determined to be
vintage (or loan origination) year.
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.
13
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Mortgage servicing rights, continued:
MSRs accounted for using the fair value method are carried at fair value with changes in fair value, changes due
to paydowns and payoffs of underlying loans, and servicing fees (cost) recorded in “mortgage banking income” on
the consolidated statements of operations.
For MSRs accounted for using the amortization method, the amortization is determined in proportion to, and over
the period of, the estimated net servicing income and recorded in mortgage banking income on the consolidated
statements of operations. These MSRs are evaluated quarterly for possible impairment. If the impairment
evaluation indicates that the carrying amount of the servicing assets exceeds their fair value, the carrying amount
is reduced by recording a charge to income in the amount of such excess and establishing a valuation reserve
allowance. If impairment is determined to be other‐than‐temporary, a direct write‐off of the carrying amount
would be recorded. Beginning in 2020, the Company began accounting for new MSR vintage year classes using
the amortization method.
Core deposit intangible:
As a result of a business combination, 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. 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 requires estimation of the fair value of the
reporting unit by quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, no further
testing is required. An impairment charge is recognized if the carrying value of the reporting unit’s goodwill exceeds
its implied fair value. The Company has performed the annual impairment analysis as of December 31, 2020 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 assesses the need to recognize an initial liability for the fair value of obligations assumed
under the guarantee.
14
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Liabilities for representations and warranties, continued:
If determined to be necessary based on the nature of the guarantee, the Company will establish 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 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 any 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
increases in the reserve will not be required in future periods. The Company may from time‐to‐time be required
to repurchase mortgage loans previously sold to investors due to loan nonperformance. Based on management’s
analysis of current representations and guarantees,
liability for potential
indemnifications to other third‐party purchasers was not necessary at December 31, 2020.
it was determined that a
Revenue recognition:
In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred
to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for
those goods or services. To determine revenue recognition for arrangements that an entity determines are within
the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the
Company satisfies a performance obligation.
The Company only applies the five‐step model to contracts when it is probable that the entity will collect the
consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract
inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods
or services that are promised within each contract and identifies those that contain performance obligations, and
assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount
of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.
Service Charges on Deposit Accounts: The Bank earns fees from its deposit customers for account
maintenance, transaction‐based and overdraft services. Account maintenance fees consist primarily of account
fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is
satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction‐based
fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such
as non‐sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the
transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
15
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Revenue recognition, continued:
Check Card Fee Income: Check card fee income represents fees earned when a debit card issued by the
Bank is used. The Bank earns interchange fees from debit cardholder transactions through the VISA payment
network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction
value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the
card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income.
Gains/Losses on OREO Sales: Gains/losses on the sale of OREO are included in noninterest income and are
generally recognized when the performance obligation is complete. This is typically at delivery of control over the
property to the buyer at the time of each real estate closing.
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.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not the tax
position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such positions are then measured based on the largest
benefit that has a greater than 50% likelihood of being realized upon settlement.
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 were
$245,155 and $200,187 for 2020 and 2019, respectively, and are recorded within other noninterest expense.
Retirement benefits:
A 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.
16
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Retirement benefits, continued:
The Company charged $273,755 and $242,670 to salaries and benefits expense for the retirement savings plan in
2020 and 2019, respectively. In addition, the Company made elective contributions to the employee stock
ownership plan during 2020 and 2019 totaling $261,056 and $154,384, respectively, which is 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 2020 and 2019, the
supplemental retirement expense was $182,791 and $169,881. The current accrued but unfunded amount is
$2,222,703 and $2,054,855 at December 31, 2020 and 2019, 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 $18,101,821 and
$17,692,385 at December 31, 2020 and 2019, respectively.
The Company has split‐dollar life insurance arrangements with certain of its officers. At December 31, 2020 and
2019, the split‐dollar liability relating to these arrangements totaled $388,026 and $365,200, respectively. For
2020 and 2019, the Company recognized net expenses of $22,826 and $21,482, respectively, related to these
arrangements, which are recorded within salaries and benefits expense.
Stock‐based compensation:
The Company can issue stock options, restricted stock, and other stock‐based awards under various plans to
directors, officers and other key employees. The Company accounts for stock compensation in accordance with
Accounting Standards Codification (“ASC”) Topics 718 and 505. Under those provisions, the Company has adopted
a fair value‐based method of accounting for employee stock compensation plans, whereby compensation cost is
measured at the grant date based on the value of the award and is recognized on a straight‐line basis over the
service period, which is usually the vesting period, taking into account retirement eligibility. As a result,
compensation expense relating to stock options and restricted stock is reflected in net income as part of “salaries
and benefits” on the consolidated statements of operations.
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 market
price of the shares. Dividends on shares held by the ESOP are charged to retained earnings. At December 31, 2020
and 2019, the ESOP owned 525,809 and 497,684 shares of the Company’s common stock with an estimated value
of $4,075,020 and $3,891,889, respectively. All of these shares were allocated to participants.
17
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Income per common share:
Basic income per common share represents income 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 21).
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.
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.
Comprehensive income:
The Company reports comprehensive income in accordance with ASC 220, “Comprehensive Income.” The standard
requires that all items that are required to be reported under accounting standards as comprehensive income be
reported in a financial statement that is displayed with the same prominence as other consolidated financial
statements. The disclosure requirements have been included in the Company’s consolidated statements of
comprehensive income.
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 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.”
18
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Business combinations and method of accounting for loans acquired, continued:
Purchased credit‐impaired (“PCI”) loans 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.
Recently issued accounting pronouncements:
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting,
and/or disclosure of financial information by the Company.
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, 2022. Early adoption is permitted for all organizations for periods beginning after
December 15, 2018. The Company will apply the amendments to the Accounting Standards Update (“ASU”)
through a cumulative‐effect adjustment to retained earnings as of the beginning of the year of adoption. The
Company is evaluating the impact of the ASU on the consolidated financial statements. In addition to the
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.
19
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Recently issued accounting pronouncements, continued:
In November 2018, the FASB issued guidance to amend the Financial Instruments—Credit Losses topic of the
Accounting Standards Codification. The guidance aligns the implementation date of the topic for annual financial
statements of nonpublic companies with the implementation date for their interim financial statements. The
guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but
rather, should be accounted for in accordance with the leases topic. The amendments will be effective for the
Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for all
organizations for periods beginning after December 15, 2018. The Company is currently in the process of
evaluating the impact of adoption of this guidance on the financial statements.
In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option,
applied on an instrument‐by‐instrument basis for eligible instruments, upon adoption of ASU 2016‐13,
Measurement of Credit Losses on Financial Instruments. The amendments will be effective for the Company for
reporting periods beginning after December 15, 2020. The Company does not expect these amendments to have
a material effect on its financial statements.
In November 2019, the FASB issued guidance to defer the effective dates for private companies, not‐for‐profit
organizations, and certain smaller reporting companies applying standards on current expected credit losses
(CECL). The new effective dates will be fiscal years beginning after December 15, 2022 including interim periods
within those fiscal years. The Company is currently in the process of evaluating the impact of adoption of this
guidance on its financial statements.
In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the
implementation of ASU 2016‐13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For
entities that have not yet adopted the amendments in ASU 2016‐13, the amendments are effective for fiscal years
beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted
in any interim period as long as an entity has adopted the amendments in ASU 2016‐13. The Company does not
expect these amendments to have a material effect on its financial statements.
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific
technical exceptions that often produce information investors have a hard time understanding. The amendments
also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these
amendments to have a material effect on its financial statements.
In January 2020, the FASB issued guidance to address accounting for the transition into and out of the equity
method and measuring certain purchased options and forward contracts to acquire investments. The
amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those
fiscal years. Early adoption is permitted, including early adoption in an interim period. The Company does not
expect these amendments to have a material effect on its financial statements.
20
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Recently issued accounting pronouncements, continued:
In March 2020, the FASB issued guidance that makes narrow‐scope improvements to various aspects of the
financial instrument guidance, including the CECL guidance issued in 2016. The effective dates and the transition
requirements for these amendments are the same as the effective date and transition requirements in the
financial instrument guidance. The Company does not expect these amendments to have a material effect on its
financial statements.
In March 2020, the FASB issued guidance to provide temporary optional guidance to ease the potential burden in
accounting for reference rate reform. The amendments are effective as of March 12, 2020 through December 31,
2022. The Company does not expect these amendments to have a material effect on its financial statements.
In August 2020, the FASB issued guidance to improve financial reporting associated with accounting for
convertible instruments and contracts in an entity’s own equity. The amendments are effective for fiscal years
beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is
permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years. The Company does not expect these amendments to have a material effect on its financial
statements.
In October 2020, the FASB issued guidance to clarify the FASB’s intent that an entity should reevaluate whether a
callable debt security that has multiple call dates is within the scope of FASB ASC 310‐20‐35‐33 for each reporting
period. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020. 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.
21
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 1. Summary of Significant Accounting Policies, Continued
Risks and uncertainties, continued:
The 2019 novel coronavirus (COVID‐19) has adversely affected, and may continue to adversely affect economic
activity globally, nationally and locally. Following the COVID‐19 outbreak in December 2019 and January 2020,
market interest rates declined significantly. Such events also may adversely affect business and consumer
confidence, generally, and the Company and its customers, and their respective suppliers, vendors and processors
may be adversely affected. The full impact of COVID‐19 is still uncertain and the effects of the COVID‐19 outbreak
may adversely affect the Company’s financial condition and results of operations.
Reclassifications:
Certain captions and amounts in the 2019 consolidated financial statements were reclassified to conform with the
2020 presentation. The reclassifications did not have an impact on net income or shareholders’ equity.
Note 2. Cash and Due From Banks
The Company is periodically required to maintain balances with the Federal Reserve computed as a percentage of
deposits. At December 31, 2020, the Company was not required to maintain a reserve balance. At December 31,
2019, the reserve requirement was $7,158,000, net of vault cash and balances on deposit with the Federal Reserve.
Note 3.
Investment Securities
The amortized cost and estimated fair values of securities available‐for‐sale were:
Amortized
Cost
Gross Unrealized
Gains
Losses
Fair Value
December 31, 2020
U.S. Government sponsored agencies $
Municipal securities
Mortgage‐backed securities
Corporate bonds
Total
9,408,643
3,949,076
15,869,711
2,000,000
$ 31,227,430
$
699,349
265,386
554,839
18,757
$ 1,538,331
$
$
‐
‐
‐
35,867
35,867
$ 10,107,992
4,214,462
16,424,550
1,982,890
$ 32,729,894
Amortized
Cost
Gross Unrealized
Gains
Losses
Fair Value
December 31, 2019
U.S. Government sponsored agencies $ 10,734,597
Municipal securities
1,383,917
19,228,985
Mortgage‐backed securities
3,901,433
Corporate bonds
$ 35,248,932
Total
$ 272,415
80,748
233,536
18,280
$ 604,979
$
$
68,328
‐
85,440
15,997
169,765
$ 10,938,684
1,464,665
19,377,081
3,903,716
$ 35,684,146
22
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 3.
Investment Securities, Continued
At December 31, 2020 and 2019, the Company had marketable equity securities totaling $29,424 and $30,895,
respectively.
During the year ended December 31, 2020, the Company transferred all securities classified as held‐to‐maturity to
its available‐for‐sale portfolio. At the date of the transfer, these securities had a book value of $8,723,537.
The Company did not have any securities classified as held‐to‐maturity at December 31, 2020. The amortized
cost and estimated fair values of securities held‐to‐maturity at December 31, 2019 were:
Amortized
Cost
Gross Unrealized
Gains
Losses
Fair Value
U.S. Government sponsored agencies $
Mortgage‐backed securities
Municipals
Total
2,869,656
4,997,336
2,578,386
$ 10,445,378
$
66,033
93,564
144,232
$ 303,829
$
$
‐
2,558
‐
2,558
$
2,935,689
5,088,342
2,722,618
$ 10,746,649
Capitalization of net unrealized gains
on securities transferred from
available‐for‐sale
Total
(28,210)
$ 10,417,168
The following is a summary of maturities of securities available‐for‐sale as of December 31, 2020. 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 as paydowns are expected to occur before contractual maturity
dates.
Debt Securities
Available‐for‐Sale
Amortized
Cost
$
504,827
2,561,443
12,291,449
15,357,719
15,869,711
$ 31,227,430
Fair Value
$
524,864
2,583,708
13,196,772
16,305,344
16,424,550
$ 32,729,894
Due after one year but within five years
Due after five years through ten years
Due after ten years
Mortgage‐backed securities
Total
23
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 3.
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, 2020 and 2019.
Securities Available‐for‐Sale
Less Than 12 Months
Mortgage‐backed securities
Corporate bonds
Total
12 Months or More
U.S. Government sponsored agencies
Mortgage‐backed securities
Corporate Bonds
Total
Total securities available‐for‐sale
Securities Held‐to‐Maturity
Less Than 12 Months
Mortgage‐backed securities
Total
Total securities held‐to‐maturity
December 31, 2020
Fair
Value
Unrealized
Losses
December 31, 2019
Fair
Value
Unrealized
Losses
$
‐ $
‐ $
440,380 $
1,464,133
1,464,133
35,867
35,867
‐
440,380
‐
‐
‐
‐
‐
‐
‐
‐
5,514,542
5,185,486
2,885,436
13,585,464
$
1,464,133 $
35,867 $ 14,025,844 $
5,168
‐
5,168
68,328
80,272
15,997
164,597
169,765
$
$
‐ $
‐
‐ $
‐ $
‐
‐ $
1,239,512 $
1,239,512
1,239,512 $
2,558
2,558
2,558
At December 31, 2020, two securities classified as available‐for‐sale 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 2020, the Company sold securities with proceeds of $2,700,000 and gross losses of $211,018. During 2019,
the Company sold securities with proceeds of $1,638,332 and gross gains of $23,834. During 2020 and 2019, the
Company recognized gains (losses) of $(1,471) and $13,410, respectively, within the consolidated statement of
operations related to the increase in fair value of marketable equity securities.
At December 31, 2020 and 2019, investment securities with a par value of $6,533,893 and $14,832,908 and a fair
market value of $6,886,132 and $15,103,164, respectively, were pledged as collateral for securities under
agreements to repurchase.
24
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. 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
2020
2019
$
$
42,990,804
122,569,568
187,067,588
352,627,960
57,513,324
67,826,350
477,967,634
$
$
41,246,207
129,087,825
171,148,893
341,482,925
58,439,799
80,262,671
480,185,395
The Company has pledged certain loans as collateral to secure its borrowings from the Federal Home Loan Bank
which totaled $188,432,001 and $183,459,356 at December 31, 2020 and 2019, 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 2020 and 2019 totaled $684,164,470 and $353,530,732, 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law, which
established the Paycheck Protection Program (PPP). Under the program, the Small Business Administration (SBA)
will forgive loans, in whole or in part, made by approved lenders to eligible borrowers for paycheck and other
permitted purposes in accordance with the requirements of the program. These loans carry a fixed rate of 1.00%
and a term of two years, if not forgiven, in whole or in part. The loans are 100% guaranteed by the SBA and as long
as the borrower submits its loan forgiveness application within ten months of completion of the covered period,
the borrower is not required to make any payments until the forgiveness amount is remitted to the lender by the
SBA. Institutions participating in the program received a processing fee ranging from 1% to 5% based on the size
of the loan from the SBA.
The Company elected to participate in the PPP in order to provide assistance to customers during the pandemic,
processing 186 loans for a total of $30.2 million and receiving SBA lender fee income of $1.1 million. Recognizing
the operational risk and complexity associated with the PPP portfolio, management made the determination that
it was in the best interests of both the Company and our borrowers to sell the PPP portfolio and allow an
organization with the appropriate servicing infrastructure to service these loans. The loan sale also allowed the
Company to focus on proactively monitoring and addressing credit risk brought on by the pandemic. The Company
completed the sale of the PPP portfolio to The Loan Source Inc., together with its servicing partner, ACAP SME LLC,
on August 28, 2020. At the time of sale, the Company immediately recognized the gross lender fee of $1.1 million
in loan interest income and a loss on sale of $453 thousand in other noninterest expense within the consolidated
statements of operations.
25
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. Loans and Allowance for Loan Losses, Continued
The CARES Act also amended GAAP with respect to the modification of loans to borrowers affected by the COVID‐
19 pandemic. Among other criteria, this guidance provided that short‐term loan modifications made on a good
faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This
includes short‐term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of
repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES
Act, a loan modification must be 1) related to COVID‐19; 2) executed on a loan that was not more than 30 days
past due as of December 31, 2019; and 3) executed between March 1, 2020, and the earlier of a) 60 days after the
date of termination of the national emergency by the President or b) December 31, 2020. On April 7, 2020, the
federal banking regulators issued a revised interagency statement on loan modifications and the reporting for
financial institutions working with customers affected by the COVID‐19 pandemic (Interagency Statement). The
Interagency Statement confirmed that COVID‐19 related short‐term loan modifications (e.g., payment deferrals of
six months or less) provided to borrowers that were current (less than 30 days past due) at the time the relief was
granted are not TDR loans. Borrowers that do not meet the criteria in the CARES Act or the Interagency Statement
are assessed for TDR loan classification in accordance with the Company’s accounting policies. Beginning in March
2020, the Company provided payment accommodations to customers, consisting of payment extensions of up to
60 days to borrowers negatively impacted by COVID‐19. During the year ended December 31, 2020, the Company
processed principal deferments on approximately 800 loans. These loans had an aggregate remaining loan balance
of $73.4 million as of December 31, 2020. These principal deferments represent 15% of the Company’s total loan
portfolio as of December 31, 2020. Borrowers who were current prior to relief and not experiencing financial
difficulty prior to COVID‐19 were determined not to be considered TDRs. Of the loans that received payment
accommodations, four remain in deferral as of December 31, 2020 with a balance of approximately $7.1 million.
The following is an analysis of the allowance for loan losses by class of loans for the years ended December 31,
2020 and 2019:
December 31, 2020
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 $ 6,172,977 $
$ 3,529,855 $
2,908,000
473,426
(738,304)
180,858 $
199,707
110,500
‐
696,519 $ 1,246,014 $ 2,123,391 $
805,839
75,200
1,010,600
94,499
‐
535,448 $
345,067
2,016,146
280,199
142,343
(29,924) (327,708)
871,016
546,787
50,884
(380,672)
695,150 $ 1,088,015
(29,924)
491,065 $ 1,547,634 $ 2,351,113 $ 4,389,812 $
December 31, 2019
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 $ 3,529,855 $
$ 2,788,188 $
983,803
321,714
(563,850)
83,200 $ 1,049,913 $
(20,826)
118,484
‐
(413,291)
114,281
(54,384)
676,598 $ 1,809,711 $
569,416
‐
‐
618,558
680,963
62,441
(54,384) (18,520) (490,946)
871,016
359,919 $
167,541
26,508
135,299
232,765
535,448 $
180,858 $
696,519 $ 1,246,014 $ 2,123,391 $
26
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. 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, 2020 and 2019:
December 31, 2020
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
$
96,485 $
‐ $
‐ $
‐ $
‐ $
66,676 $
6,076,492
491,065
1,547,634
2,351,113
4,389,812
628,474
29,809
1,058,206
$ 6,172,977 $
491,065 $ 1,547,634 $ 2,351,113 $ 4,389,812 $
695,150 $
1,088,015
$ 15,442,289 $ 2,958,255 $ 1,193,719 $ 1,406,832 $ 5,558,806 $ 9,566,582 $
462,525,345
40,032,549
47,946,742
347,069,154
185,660,756
121,375,849
316,901
67,509,449
$ 477,967,634 $ 42,990,804 $ 122,569,568 $ 187,067,588 $ 352,627,960 $ 57,513,324 $ 67,826,350
December 31, 2019
Real Estate Loans
Total
Construction
Residential
Non‐
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
$
27,273 $
‐ $
‐ $
24,375 $
24,375 $
2,837 $
3,502,582
180,858
696,519
1,221,639
2,099,016
532,611
61
870,955
$ 3,529,855 $
180,858 $
696,519 $ 1,246,014 $ 2,123,391 $
535,448 $
871,016
$ 4,370,202 $
475,815,193
41,246,207
‐ $ 2,478,331 $ 1,652,395 $ 4,130,726 $
169,496,498
337,352,199
126,609,494
115,524 $
58,324,275
123,952
80,138,719
$ 480,185,395 $ 41,246,207 $ 129,087,825 $ 171,148,893 $ 341,482,925 $ 58,439,799 $ 80,262,671
27
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. Loans and Allowance for Loan Losses, Continued
The following summarizes the Company’s impaired loans as of December 31, 2020:
With no related allowance recorded:
Real estate loans
Construction
Residential
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 loans
Construction
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Recorded
Investment
Unpaid
Principal
Related
Allowance
Average
Balance
Interest
Income
Recognized
$ 2,958,255 $ 2,958,255 $
1,193,719
1,406,832
5,558,806
5,654,707
196,441
1,440,907
1,426,983
5,826,145
5,654,707
232,577
$ 11,409,954 $ 11,713,429 $
‐ $ 2,969,253 $
‐
‐
‐
‐
‐
‐ $ 11,380,176 $
1,226,973
1,437,667
5,633,893
5,494,786
251,497
155,098
82,092
91,690
328,880
142,007
19,461
490,348
$ 3,911,875 $ 3,911,875 $
120,460
159,893
$ 4,032,335 $ 4,071,768 $
66,676 $ 2,977,750 $
29,809
96,485 $ 3,119,518 $
141,768
55,358
11,105
66,463
$ 2,958,255 $ 2,958,255 $
1,193,719
1,406,832
5,558,806
9,566,582
316,901
1,440,907
1,426,983
5,826,145
9,566,582
392,470
$ 15,442,289 $ 15,785,197 $
‐ $ 2,969,253 $
‐
‐
‐
66,676
29,809
96,485 $ 14,499,694 $
1,226,973
1,437,667
5,633,893
8,472,536
393,265
155,098
82,092
91,690
328,880
197,365
30,566
556,811
28
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. Loans and Allowance for Loan Losses, Continued
The following summarizes the Company’s impaired loans as of December 31, 2019:
With no related allowance recorded:
Real estate loans
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
With an allowance recorded:
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Total
Real estate loans
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Recorded
Investment
Unpaid
Principal
Related
Allowance
Average
Balance
Interest
Income
Recognized
$ 2,478,331 $ 2,478,331 $
1,559,820
4,038,151
91,407
98,047
1,559,821
4,038,152
168,849
128,458
$ 4,227,605 $ 4,335,459 $
$ 2,561,287 $
1,881,542
‐
4,442,829
‐
137,562
‐
‐
133,031
‐ $ 4,713,422 $
152,256
130,091
282,347
9,396
11,062
302,805
$
$
92,575 $
92,575
24,117
25,905
142,597 $
92,575 $
92,575
24,117
25,905
142,597 $
24,375 $
24,375
2,837
61
27,273 $
96,008 $
96,008
25,042
28,164
149,214 $
6,848
6,848
1,840
1,427
10,115
$ 2,478,331 $ 2,478,331 $
‐ $ 2,561,287 $
1,652,395
4,130,726
115,524
123,952
1,652,396
4,130,727
192,966
154,363
24,375
24,375
2,837
61
1,977,550
4,538,837
162,604
161,195
$ 4,370,202 $ 4,478,056 $
27,273 $ 4,862,636 $
152,256
136,939
289,195
11,236
12,489
312,920
The following is an aging analysis of the Company’s loan portfolio at December 31, 2020:
30 ‐ 59 Days 60 ‐ 89 Days
Past Due
Past Due
Greater
Than
90 Days
Total
Past Due
Current
Total Loans
Receivable
Past Due >
90 Days
and Accruing
Real estate loans
Construction
Residential
Nonresidential
Total real estate loans
Consumer and industrial
Consumer and other
Total
$
$
‐ $
‐
‐
‐
1,310
64,675
65,985 $
‐ $
‐ $42,990,804 $
‐ $
‐
‐
‐
‐
35,070
35,070 $ 452,012 $ 553,067 $477,414,567 $
452,012 122,117,556
‐ 187,067,588
452,012 352,175,948
57,512,014
67,726,605
452,012
‐
452,012
‐
‐
1,310
99,745
42,990,804 $
122,569,568
187,067,588
352,627,960
57,513,324
67,826,350
477,967,634 $
‐
‐
‐
‐
‐
‐
‐
29
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. Loans and Allowance for Loan Losses, Continued
The following is an aging analysis of the Company’s loan portfolio at December 31, 2019:
30 ‐ 59 Days 60 ‐ 89 Days
Past Due
Past Due
Greater
Than
90 Days
Total
Past Due
Current
Total Loans
Receivable
Past Due >
90 Days
and Accruing
Real estate loans
Construction
Residential
Nonresidential
Total real estate loans
Consumer and industrial
Consumer and other
Total
$
‐ $
‐
156,322
156,322
‐
148,559
$ 304,881 $
‐ $
‐ $
‐
‐
‐
‐
12,171
12,171 $ 522,300 $ 839,352 $479,346,043 $
‐ $ 41,246,207 $
128,688,079
170,992,571
340,926,857
58,427,555
79,991,631
399,746
‐
399,746
12,244
110,310
399,746
156,322
556,068
12,244
271,040
41,246,207 $
129,087,825
171,148,893
341,482,925
58,439,799
80,262,671
480,185,395 $
‐
‐
‐
‐
6,294
49,672
55,966
The following is an analysis of the Company’s nonaccrual loan portfolio recorded at December 31, 2020 and 2019:
2020
2019
Real estate loans
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Troubled Debt Restructurings
$
604,028 $
478,311
1,082,339
‐
284,474
590,561
517,639
1,108,200
39,438
328,183
$ 1,366,813 $ 1,475,821
The following table summarizes the carrying balance of troubled debt restructurings (“TDRs”) as of December 31,
2020 and 2019:
Performing TDRs
Nonperforming TDRs
Total TDRs
2020
2019
$ 1,584,364 $ 2,469,036
1,462,960
$ 1,854,116 $ 3,931,996
269,752
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.
30
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. Loans and Allowance for Loan Losses, Continued
The following is an analysis of TDRs identified during 2020:
Troubled Debt Restructurings
Real estate loans
Residential
Consumer and other
For the year ended December 31, 2020
Pre‐Modification
Outstanding
Recorded
Investment
Post‐Modification
Outstanding
Recorded
Investment
Number
of Contracts
1
3
4
$
$
45,998
25,322
71,320
$
$
45,998
25,322
71,320
During the year ended December 31, 2020, the Company modified four loans that were considered to be TDRs.
One loan was designated as a TDR due to a rate concession while two loans were designated as TDRs due to
reduced monthly payments. The fourth loan was restructured due to borrower’s inability to obtain financing
elsewhere. During the year ended December 31, 2020, no loans that had been restructured during the previous
twelve months subsequently defaulted during the year.
The following is an analysis of TDRs identified during 2019:
Troubled Debt Restructurings
Real estate loans
Residential
Nonresidential
Commercial and industrial
Consumer and other
For the year ended December 31, 2019
Pre‐Modification
Outstanding
Recorded
Investment
Post‐Modification
Outstanding
Recorded
Investment
Number
of Contracts
1
1
1
4
7
$
$
24,151
494,423
24,117
48,102
590,793
$
$
24,151
494,423
24,117
48,102
590,793
During the year ended December 31, 2019, the Company modified seven loans that were considered to be
troubled debt restructurings. The Company provided rate and term concessions for four of these loans due to
bankruptcies and the other three loans were restructured due to borrower’s inability to obtain financing
elsewhere. During the year ended December 31, 2019, no loans that had been restructured during the previous
twelve months subsequently defaulted during the year.
31
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. Loans and Allowance for Loan Losses, Continued
Credit Quality 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 managements 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, 2020:
Real Estate Loans
Total
Construction
Residential
Non‐
Residential
Total
Real Estate
Loans
Commercial
Consumer
and Other
Pass
Special mention
Substandard
Doubtful
Total
$ 457,040,770 $ 40,032,549 $ 120,977,789 $ 182,497,975 $ 343,508,313 $ 46,423,452 $ 67,109,005
452,168
265,177
‐
$ 477,967,634 $ 42,990,804 $ 122,569,568 $ 187,067,588 $ 352,627,960 $ 57,513,324 $ 67,826,350
16,636,289
4,290,575
‐
10,619,298
470,574
‐
5,564,823
3,554,824
‐
2,285,824
2,283,789
‐
2,371,296
586,959
‐
907,703
684,076
‐
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each
category at December 31, 2019:
Real Estate Loans
Total
Construction
Residential
Non‐
Residential
Total
Real Estate
Loans
Commercial
Consumer
and Other
Pass
Special mention
Substandard
Doubtful
Total
$ 464,643,034 $ 40,308,707 $ 125,951,550 $ 162,804,795 $ 329,065,052 $ 56,150,250 $ 79,427,732
496,093
338,846
‐
$ 480,185,395 $ 41,246,207 $ 129,087,825 $ 171,148,893 $ 341,482,925 $ 58,439,799 $ 80,262,671
11,998,802
3,543,559
‐
9,641,982
2,775,891
‐
6,537,595
1,806,503
‐
1,860,727
428,822
‐
2,166,887
969,388
‐
937,500
‐
‐
32
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. 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:
2020
2019
$ 77,324,283 $ 92,921,655
589,196
163,321
Loans acquired through acquisitions are recorded at estimated fair value on their purchase date with no carryover
of the related allowance for loan losses. Discounts on loans that are not considered impaired at acquisition are
recorded as an accretable discount and are accreted into interest income over the terms of the related loans. The
remaining balance of acquired non‐PCI loans was $9.7 million and $14.8 million with remaining accretable yield
of $163 thousand and $231 thousand at December 31, 2020 and 2019, respectively. For acquired loans that are
considered impaired at the time of acquisition (PCI), the difference between the contractually required payments
and expected cash flows is recorded as a nonaccretable discount.
The following table presents changes in the carrying value of PCI loans for the years ended December 31, 2020
and 2019:
Balance at beginning of period
Change due to payments received and accretion
Advances
Balance at end of period
$
$
9,113,965
(3,837,432)
31,039
5,307,572
$
$
14,666,715
(5,646,148)
93,398
9,113,965
2020
2019
33
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 4. 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,
2020 and 2019:
Balance at beginning of period
Reclassification to accretable yield
Change due to recoveries (charge‐offs)
Balance at end of period
2020
2019
$
$
491,373
(29,039)
14,613
476,947
$
$
1,048,796
(95,494)
(461,929)
491,373
The following table presents changes in the accretable yield for PCI loans for the year ended December 31, 2020
and 2019:
2020
2019
Balance at beginning of period
Reclassification from nonaccretable yield
Accretion, net cash basis interest collections
Balance at end of period
$
$
561,088
29,039
(217,834)
372,293
$
$
618,281
95,494
(152,687)
561,088
The Company did not include acquired loans within the calculation of allowance for loan losses as of December
31, 2020 and 2019, as the remaining discount was in excess of calculated allowance on those loans.
Note 5. Premises, Furniture and Equipment
Premises, furniture and equipment consisted of the following for the years ended December 31:
Land
Buildings
Leasehold improvements
Furniture and equipment
Construction in progress
Total
Less, accumulated depreciation
Premises and equipment, net
2020
2019
$ 6,732,700 $ 7,951,239
14,822,259
14,892,869
1,630,762
1,359,978
9,464,291
9,732,384
863,228
1,062,491
34,931,042
33,581,159
(14,510,536)
$ 18,490,548 $ 20,420,506
(15,090,611)
Depreciation expense for the years ended December 31, 2020 and 2019 amounted to $811,654 and $814,612,
respectively.
At December 31, 2020 and 2019, construction in progress consists mainly of architect fees and site work for
potential new branches. As of December 31, 2020, there were no material commitments outstanding for the
construction or purchase of premises, furniture and equipment.
34
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 6. Other Real Estate Owned
Transactions in other real estate owned for the years ended December 31, 2020 and 2019 are summarized below:
2020
2019
Beginning balance
Additions
Sales
Write downs
Ending balance
$
$
347,552 $
44,722
341,519
183,257
(227,979) (176,724)
(500)
347,552
164,295 $
‐
The Company recognized net gains of $62,027 and $27,676 on the sale of other real estate owned for the years
ended December 31, 2020 and 2019, respectively, which are recorded within other noninterest expense.
Note 7. Mortgage Servicing Rights
The Company retains the right to service the residential mortgage loans that it sells to the Federal National
Mortgage Association (“FNMA”) and Freddie Mac (“FHLMC”) and recognizes those rights as an asset on the
consolidated balance sheets.
The Company’s servicing assets are initially measured at fair value and are subsequently measured using either
the fair value method or the amortization method, depending on the asset class, which has been determined to
be vintage (or loan origination) year. Vintage year classes prior to 2020 are measured using the fair value method
while the 2020 vintage year class is measured using the amortization method. MSRs accounted for under the
amortization method are subsequently accounted for at lower of cost or fair value, net of accumulated
amortization, which is recorded in proportion to, and over the period of, net servicing income. The Company has
entered into a derivative contract to manage the risk associated with changes in the value of the MSR portfolio
accounted for under the fair value method (see Note 8). Any changes in fair value during the period for MSRs
carried under the fair value method, as well as amortization and impairment of MSRs under the amortization
method, are recorded in mortgage banking income in the consolidated statements of operations.
The following table presents the activity for MSRs accounted for using the amortization method for the year ended
December 31, 2020:
Balances, beginning of year
Amount capitalized
Amount amortized
Balances, end of year
$
$
2020
‐
7,024,346
(666,646)
6,357,700
35
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 7. Mortgage Servicing Rights, Continued
The following table presents the activity for MSRs accounted for using the fair value method for the year ended
December 31, 2020:
Balances, beginning of year
Changes in fair value (1)
Changes in unpaid principal balance (2)
Balances, end of year
$
$
2020
11,022,638
(2,754,902)
(2,604,824)
5,662,912
(1) Represents changes in value primarily due to market driven changes in interest rates and prepayment speeds.
(2) Represents changes in value of the MSRs due to i) passage of time, including the impact from both regularly scheduled loan principal payments and
partial paydowns, and ii) loans that paid off fully during the period.
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, 2020, the aggregate amount of loans serviced by the Company for the benefit of others totaled
$1.2 billion.
The characteristics and sensitivity analysis of the MSRs are included in the following table as of December 31, 2020
and 2019.
Composition of residential loans serviced for others
Fixed‐rate mortgage loans
Weighted average expected life
Constant prepayment rate (“CPR”)
Weighted average discount rate
2020
2019
100.00%
100.00%
6.5 years
10.30%
8.54%
7.4 years
9.00%
8.56%
36
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 8. Derivatives
The derivative positions of the Company for the years ended December 31, 2020 and 2019 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
U.S. Treasury futures
contracts
2020
2019
Fair value
Notional value
Fair value
Notional value
$
2,998,327
$ 75,722,217
$
713,496
$ 19,895,637
(391,563)
62,000,000
(49,453)
18,000,000
10,406
9,647,875
‐
‐
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 also uses derivatives to minimize interest rate risk associated with mortgage servicing
rights. 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
mortgage banking income.
Note 9. Core Deposit Intangible
The following table presents information about our intangible assets as of December 31:
2020
2019
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangibles
$
880,000 $
513,546
$
880,000 $
366,965
Based on the core deposit intangibles as of December 31, 2020, the following table presents the aggregate
amortization expense for each of the succeeding years ending December 31:
2021
2022
2023
2024
2025 and thereafter
Total
37
Amount
121,980
97,379
72,778
48,177
26,140
366,454
$
$
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 9. Core Deposit Intangible, Continued
Amortization expense of $146,581 and $171,182 related to the core deposit intangibles was recognized in 2020
and 2019, respectively, and recorded within other noninterest expense.
Note 10. Deposits
At December 31, 2020, the scheduled maturities of time deposits were as follows:
Maturing In:
2021
2022
2023
2024
2025
Total
Amount
129,026,905
7,457,950
995,938
1,476,514
474,496
139,431,803
$
$
Included in total time deposits at December 31, 2020 were brokered time deposits of $10,021,000. There were no
brokered time deposits outstanding at December 31, 2019. Interest expense on time deposits that meet or exceed
the FDIC insurance limit of $250,000 was $741,136 and $1,430,128 for the years ended December 31, 2020 and
2019, respectively.
Note 11. 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
2020
2019
$ 5,522,872 $ 14,637,332
15,778,316
15,104,284
13,301,943
6,262,461
0.51%
0.15%
0.56%
0.19%
At December 31, 2020 and 2019, investment securities with a par value of $6,533,893 and $14,832,908 and a fair
market value of $6,886,132 and $15,103,164, respectively, were pledged as collateral for the underlying
agreements.
38
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 12. Federal Home Loan Bank Advances
Federal Home Loan Bank advances consisted of the following at December 31:
Fixed rate
February 7, 2020
October 25, 2020
January 27, 2020
September 20, 2029
Daily rate
January 17, 2020
Interest
Rate
2.76%
1.34%
1.80%
1.62%
1.78%
2020
2019
‐
‐
‐
10,000,000
3,300,000
5,000,000
5,000,000
10,000,000
‐
$ 10,000,000
20,000,000
$ 43,300,000
At December 31, 2020 and 2019, the Company has pledged certain loans totaling $188,432,001 and $183,459,356,
respectively, as collateral to secure its borrowings from the FHLB. Additionally, the Company’s FHLB stock is
pledged to secure the borrowings.
Note 13. 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 1.83%. 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, 2020 and 2019, the Company had accrued and unpaid interest totaling
$22,806 and $40,237, respectively.
Note 14. Borrowings
On August 5, 2016, the Company entered into subordinated debt agreements with eight financial institutions
totaling $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, 2020, remaining issuance costs to be amortized totaled $13,003.
On June 2, 2020, the Company entered into subordinated debt agreements with eight financial institutions
totaling $5,500,000. The debt initially bears interest at a fixed rate of 5.875% per annum until June 1, 2025 and
then variable at three‐month SOFR plus 5.51%, payable quarterly with principal and unpaid interest due at
maturity, June 1, 2030.
39
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 15. Shareholders’ Equity
Common Stock ‐ The following is a summary of the changes in common stock outstanding for the years ended
December 31, 2020 and 2019.
Common shares outstanding at beginning of the period
Conversion of Series D preferred stock to common stock
Restricted stock issued
Additional shares granted
Forfeiture of restricted shares
Common shares outstanding at end of the period
2020
2019
8,444,078
1,300
148,000
42,178
(71,500)
8,564,056
8,412,671
850
90,000
40,557
(100,000)
8,444,078
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.
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 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.
40
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 15. Shareholders’ Equity, Continued
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 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.
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, 2020, the Bank had undivided profits of $29,772,235. 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 16. Other Operating Expense
Other operating expenses are summarized below for the years ended December 31:
2020
2019
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
Directors’ fees
Other
Total
41
$
245,155 $
357,998
383,821
1,329,688
386,748
866,432
221,830
2,582
146,581
364,508
2,313,328
200,187
322,021
313,198
1,339,913
164,890
925,883
215,072
11,549
171,182
385,507
1,656,882
$ 6,618,671 $ 5,706,284
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 17. Income Taxes
Income tax provision for the years ended December 31, 2020 and 2019 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
2020
2019
$
‐ $
426,940
426,940
‐
232,536
232,536
2,851,747
(70,525)
2,781,222
1,005,350
(56,175)
949,175
70,525
71,522
$ 3,278,687 $ 1,253,233
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
Deferred compensation
Purchase accounting on acquisition
Leases
Other
Gross deferred tax assets
Less, valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Accumulated depreciation
Prepaid expenses
Unrealized gains on securities available for sale
Mark to market adjustments
Other
Total gross deferred tax liabilities
Net deferred tax assets recognized
42
2020
2019
$ 1,151,938 $
15,373
5,456,175
14,183
714,532
130,976
15,336
185,633
7,684,146
(697,480)
6,986,666
596,882
‐
8,292,928
12,893
589,609
163,668
6,758
129,225
9,791,963
(626,955)
9,165,008
‐
19,552
374,603
3,071,748
68,758
3,534,661
14,779
21,547
98,715
2,387,453
62,874
2,585,368
$ 3,452,005 $ 6,579,640
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 17. 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, 2020, 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 2020, the balance in the valuation
allowance changed by $70,525. 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 $22,855,995 and $36,630,028 for the years ended December 31,
2020 and 2019, respectively. Net operating losses of $10,799,997 expire at various times from 2025‐2037, with
the remainder having no expiration date. The Company’s ability to benefit from the use of net operating loss
carryforwards of $15,190,367 is limited annually under Section 382 of the Internal Revenue Code. The Company
has state net operating losses of $16,618,136 and $15,205,628 for the years ended December 31, 2020 and 2019,
respectively. These net operating losses expire at various times from 2022‐2037.
A reconciliation between the income tax expense and the amount computed by applying the federal statutory rate
of 21% to income before income taxes for the years ended December 31, 2020 and 2019 follows:
Tax expense at statutory rate
State income tax expense, net of federal income tax benefit
Tax‐exempt interest income
Disallowed interest expense
Life insurance surrender value
Change in valuation allowance
Other, net
Total
2020
2019
$ 2,917,916 $ 1,121,835
139,325
(28,525)
1,393
(81,075)
71,522
28,758
$ 3,278,687 $ 1,253,233
281,568
(28,420)
1,831
(85,982)
70,525
121,249
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 2017 and subsequent years are subject to review by
taxing authorities.
Note 18. 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, 2020 and 2019, the Company had related
party loans totaling $1,643,783 and $1,318,435, respectively.
Deposits from directors and executive officers and their related interests totaled $2,778,595 and $2,599,318 at
December 31, 2020 and 2019, respectively.
43
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 19. 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, 2020, 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.
Effective January 1, 2019, the Company adopted ASC 842 “Leases”. Currently, the Company has operating leases
on ten of its facilities that are accounted for under this standard. At December 31, 2020 the Company had
operating lease right of use asset of $5,360,111, and operating lease liability of $5,433,137.
Rental expense recorded under the leases for the years ended December 31, 2020 and 2019 was $1,038,459 and
$1,028,736, respectively.
The weighted average remaining lease term as of December 31, 2020 is 9.76 years and the weighted average
discount rate used is 3.08%. The following table shows future undiscounted lease payments for operating leases
with initial terms of one year or more as of December 31, 2020:
2021
2022
2023
2024
2025
Thereafter
Total undiscounted lease payments
Less effect of discounting
Present value of estimate lease payments (lease liability)
Note 20. Equity Incentive Plan
$
$
822,256
724,518
658,502
672,153
646,270
2,727,897
6,251,596
(818,459)
5,433,137
The Company has adopted a 2017 Equity Incentive Plan (the “2017 Plan") under which an aggregate of 500,000
shares of common stock have been reserved for issuance. The maximum aggregate shares subject to options is
restricted to 80,000 in any calendar year to any one participant. Options may be granted for a term of up to ten
years from the effective date of the grant. The aggregate number of shares subject to awards of restricted stock
is restricted to 50,000 in any calendar year to any one participant. The Company also has a Restricted Stock
Reserve under which 540,000 shares of common stock have been reserved for issuance as restricted stock. The
2017 Plan and the Restricted Stock Reserve are referred to collectively as the “Plans.” At December 31, 2020,
there were 433,379 stock awards available for grant under the Plans.
The Company can issue 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.
44
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 20. Equity Incentive Plan, Continued
Restricted shares may be subject to one or more employment, performance, or other conditions established at
the time of grant. Under the terms of the Plans, the restricted shares will vest completely based on the individual
grant’s vesting period, which is between three and ten years. The shares are forfeited entirely if the participant
terminates employment for any reason other than changes in control or death or disability. Any shares of restricted
stock that are forfeited will again become available for issuance under the Plans. 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.
Nonvested restricted stock for the years ended December 31, 2020 and 2019 is summarized in the following table.
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
2020
2019
Weighted‐
Average
Grant‐Date
Fair Value
Weighted‐
Average
Grant‐Date
Fair Value
Shares
Shares
358,176 $
148,000
(11,662)
(71,500)
423,014 $
5.06
6.15
6.60
6.01
5.24
379,838 $
90,000
(11,662)
(100,000)
358,176
5.14
7.64
6.60
7.50
5.06
The vesting schedule for these shares as of December 31, 2020 is as follows:
2021
2022
2023
2024
2025 and thereafter
Total
Shares
153,666
19,667
41,681
72,000
136,000
423,014
$
$
The Company recognized stock‐based compensation costs related to restricted stock of $353,396 and $225,165
for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was $1,505,331
of total unrecognized compensation cost related to the nonvested restricted stock that will be recognized over
the remainder of their vesting schedule.
45
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 20. Equity Incentive Plan, Continued
No stock options were granted during the years ended December 31, 2020 and 2019. Activity related to stock
options is summarized in the following table.
Outstanding at December 31, 2019
Granted
Exercised
Forfeited
Outstanding at December 31, 2020
Options exercisable as of December 31, 2020
Weighted‐
Average
Remaining
Life (Years)
Weighted‐
Average
Exercise
Price
$
3.80
‐
‐
‐
2.80
2.78
7.27
‐
‐
‐
7.27
7.25
Options
200,000
‐
‐
‐
200,000
105,808
The Company recognized stock‐based compensation costs related to stock options of $58,845 and $58,684 for the
years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was $190,139 of total
unrecognized compensation cost related to the outstanding stock options that will be recognized over the
remainder of their vesting schedule.
Note 21. Income Per Common Share
Net income available to common shareholders represents net income 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 per common share calculations for the years ended December 31, 2020
and 2019.
Income available to common shareholders
Net income
Preferred stock dividends
Net income available to common shareholders
Basic income per common share:
Net income available to common shareholders
Average common shares outstanding ‐ basic
Basic income per common share
46
2020
2019
$ 10,616,150 $ 4,088,839
‐
$ 10,616,150 $ 4,088,839
‐
$ 10,616,150 $ 4,088,839
7,937,617
0.52
7,919,406
1.34 $
$
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 21. Income Per Common Share, Continued
Diluted income per common share:
Net income available to common shareholders
Average common shares outstanding ‐ basic
Dilutive potential common shares
Average common shares outstanding ‐ diluted
Diluted income per common share
Note 22. Regulatory Matters
$ 10,616,150 $ 4,088,839
7,937,617
124,869
8,062,486
0.51
7,919,406
118,195
8,037,601
1.32 $
$
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.
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the
leverage ratio. The Bank is required to maintain a required minimum leverage ratio of 4%.
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 is
required to maintain a “capital conservation buffer” in addition to its minimum risk‐based capital requirements.
This buffer is required to consist solely of CET1, but the buffer applies 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 was fully effective on January 1, 2019, consisting of an additional amount of Tier 1
capital equal to 2.5% of risk‐weighted assets.
47
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 22. Regulatory Matters, Continued
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum
requirements at December 31, 2020 and 2019.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 84,859
78,672
78,672
78,672
15.67% $ 43,336
32,502
14.52%
30,518
10.31%
24,376
14.52%
8.00% $ 54,170
43,336
6.00%
38,148
4.00%
35,210
4.50%
10.00%
8.00%
5.00%
6.50%
$ 62,299
58,752
58,752
58,752
11.54% $ 43,183
32,387
10.88%
24,290
9.23%
25,473
10.88%
8.00% $ 53,978
43,183
6.00%
35,086
4.00%
31,841
4.50%
10.00%
8.00%
5.00%
6.50%
(Dollars in Thousands)
December 31, 2020
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, 2019
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 23. Unused Lines of Credit
The Company had available at December 31, 2020 several unsecured lines of credit, which were unused, to
purchase up to $39,000,000 of federal funds. Also, as of December 31, 2020, the Company had the ability to borrow
funds from the FHLB of up to $151,800,337. At that date, $10,000,000 had been advanced.
Note 24. 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.
48
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 24. Fair Value Measurements, Continued
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 and marketable
equity securities 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.
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.
Mortgage Servicing Rights – Fair Value Method ‐ 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
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 accounted for using the fair value method as recurring Level 3.
49
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 24. 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, 2020 and 2019.
Total
Level 1
Level 2
Level 3
December 31, 2020
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
U.S. Treasury futures contracts
$ 10,107,992 $
4,214,462
16,424,550
1,982,890
32,729,894
29,424
35,641,877
5,662,912
2,998,327
(391,563)
10,406
$ 76,681,277 $
‐ $ 10,107,992 $
‐
‐
‐
‐
‐
‐
‐
4,214,462
16,424,550
1,982,890
32,729,894
29,424
35,641,877
‐
2,998,327
(391,563)
10,406
‐
‐
‐
‐ $ 71,018,365 $
‐
‐
‐
‐
‐
‐
‐
5,662,912
‐
‐
‐
5,662,912
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
Total
Level 1
Level 2
Level 3
December 31, 2019
$ 10,938,684 $
1,464,665
19,377,081
3,903,716
35,684,146
30,895
27,901,419
11,022,638
713,496
(49,453)
$ 75,303,141 $
50
‐ $ 10,938,684 $
‐
‐
‐
‐
‐
‐
‐
1,464,665
19,377,081
3,903,716
35,684,146
30,895
27,901,419
‐
‐
‐
‐
‐
‐
‐
‐
11,022,638
‐
‐
‐
‐
‐ $ 64,280,503 $ 11,022,638
713,496
(49,453)
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 24. 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, 2018
Transfers into (out of) Level 3
Additions
Changes in fair value recognized in earnings (1)
Balance, December 31, 2019
Transfers into (out of) of Level 3
Changes in fair value recognized in earnings (1)
Settlements (2)
Balance, December 31, 2020
Mortgage
Servicing
Rights
9,023,859
‐
3,306,078
(1,307,299)
11,022,638
‐
(2,754,902)
(2,604,824)
$ 5,662,912
(1) Represents changes in value primarily due to market driven changes in interest rates and prepayment speeds.
(2) Represents changes in value of the MSRs due to i) passage of time, including the impact from both regularly scheduled loan principal payments and
partial paydowns, and ii) loans that paid off fully during the period.
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, 2020 and December 31, 2019, aggregated by level in the fair
value hierarchy within which those measurements fall.
December 31, 2020
Impaired loans
Other real estate owned
Mortgage servicing rights
Total assets at fair value
December 31, 2019
Impaired loans
Other real estate owned
Total assets at fair value
Total
Level 1
Level 2
Level 3
$ 15,345,804 $
164,295
6,412,477
$ 21,922,576 $
‐ $
‐
‐
‐ $
‐ $ 15,345,804
164,295
‐
6,412,477
‐
‐ $ 21,922,576
Total
Level 1
Level 2
Level 3
$
$
4,342,929 $
347,552
4,690,481 $
‐ $
‐
‐ $
‐ $
‐
‐ $
4,342,929
347,552
4,690,481
Impaired Loans ‐ Loans that are considered impaired are recorded at fair value on a nonrecurring basis. Once a
loan is considered impaired, the fair value is measured using one of several methods, including collateral
liquidation value, market value of similar debt or discounted cash flows. Those impaired loans not requiring a
specific charge against the allowance represent loans for which the fair value of the expected repayments or
collateral meet or exceed the recorded investment in the loan. Loans which are deemed to be impaired are
primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values
are obtained using independent appraisals, which the Company considers to be Level 3 inputs.
51
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 24. Fair Value Measurements, Continued
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 a current appraised value or when a current 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 – Amortization Method ‐ 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 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 accounted for using the amortization method as
nonrecurring Level 3.
The Company had no liabilities measured at fair value on a non‐recurring basis.
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31,
2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair Value as of
December 31,
2020
Valuation Technique
Impaired loans
$
15,345,804
Appraisal Value
Other real estate
$
164,295
owned
Mortgage servicing
$
12,075,389
rights
Appraisal
Value/Comparison
Sales/Other
estimates
Discounted cash
flows
Significant
Observable Inputs
Significant Unobservable
Inputs
Appraisals and/or
sales of comparable
properties
Appraisals and/or
sales of comparable
properties
Appraisals discounted 5%
to 20% for sales
commissions and other
holding cost
Appraisals discounted 10%
to 20% for sales
commissions and other
holding cost
Comparable sales
Weighted average
discount rate – 9%
Constant prepayment
rate – 10%
52
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 24. Fair Value Measurements, Continued
Fair Value as of
December 31,
2019
Valuation Technique
Impaired loans
$
4,342,929
Appraisal Value
Other real estate
$
347,552
owned
Mortgage servicing
$
11,022,638
rights
Appraisal
Value/Comparison
Sales/Other
estimates
Discounted cash
flows
Significant
Observable Inputs
Significant Unobservable
Inputs
Appraisals and/or
sales of comparable
properties
Appraisals and/or
sales of comparable
properties
Appraisals discounted 5%
to 20% for sales
commissions and other
holding cost
Appraisals discounted 10%
to 20% for sales
commissions and other
holding cost
Comparable sales
Weighted average
discount rate – 9%
Constant prepayment
rate – 9%
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
judgment 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, 2020 and 2019.
53
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 24. Fair Value Measurements, Continued
December 31,
2020
2019
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Cash and cash equivalents
Securities available‐for‐sale
Marketable equity securities
Securities held‐to‐maturity
Mortgage loans held for sale
Loans held for investment, net
Nonmarketable equity securities
Deposits
Securities sold under agreement to repurchase
Federal funds purchased
Federal Home Loan Bank advances
Subordinated debentures
$ 98,688,915 $ 98,688,915 $ 40,340,683 $ 40,340,683
35,684,146
30,895
10,746,649
27,901,419
474,301,267
2,423,200
505,307,623
14,637,332
16,500,000
42,997,000
13,813,483
35,684,146
30,895
10,417,168
27,901,419
476,655,540
2,423,200
505,087,637
14,637,332
16,500,000
43,300,000
15,275,214
32,729,894
29,424
‐
35,641,877
468,155,351
1,076,400
594,383,572
5,522,872
‐
9,423,420
18,938,086
32,729,894
29,424
‐
35,641,877
471,794,657
1,076,400
594,000,242
5,522,872
‐
10,000,000
20,796,998
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 one‐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.
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.
54
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 24. Fair Value Measurements, Continued
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 carrying value. 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.
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.
Federal Home Loan Bank advances
Fair value is estimated based on discounted cash flows using current market rates for borrowing with similar terms.
Other borrowings
The fair value of federal funds purchased and securities under agreements to repurchase approximate the carrying
amount because of the short maturity of these borrowings.
Note 25. 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 March 23, 2021, the date the financial statements were available to be issued and no
subsequent events occurred requiring accrual or disclosure.
55
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 26. First Reliance Bancshares, Inc. (Parent Company Only)
Condensed Balance Sheets
Assets
Cash
Investment in banking subsidiary
Marketable equity securities
Nonmarketable equity securities
Investment in trust
Deferred tax asset
Other assets
Total assets
Liabilities
Junior subordinated debentures
Subordinated debentures
Accrued salary benefits
Accrued interest payable
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Operations
December 31,
2020
2019
$ 5,362,054 $ 1,380,350
69,046,787
81,968,412
30,895
29,424
58,100
58,100
310,000
310,000
1,687,908
2,062,850
129,637
28,069
$ 89,818,909 $ 72,643,677
$ 10,310,000 $ 10,310,000
4,965,214
10,486,998
105,196
114,482
179,576
177,807
15,558,217
21,091,056
68,727,853
57,085,460
$ 89,818,909 $ 72,643,677
For the years ended
December 31,
2020
2019
Income
Interest income
(Loss) gain on change in fair value of marketable equity securities
Total income
$
9,238 $
(1,471)
7,767
14,161
16,076
30,237
Expenses
Interest expense
Salaries and employee benefits
Equipment expense
Other expenses
Total expenses
Income before income taxes and equity in
undistributed income of banking subsidiary
Equity in undistributed earnings of banking subsidiary
Net income before income taxes
Income tax benefit
Net income
56
814,143
687,948
94,741
271,779
1,868,611
782,220
666,563
56,154
430,959
1,935,896
(1,860,844)
12,102,052
(1,905,659)
5,625,633
10,241,208
374,942
3,719,974
368,865
$ 10,616,150 $ 4,088,839
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2020 and 2019
Note 26. First Reliance Bancshares, Inc. (Parent Company Only), Continued
Condensed Statements of Cash Flows
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash
used in operating activities:
Deferred income tax expense
Net equity in undistributed earnings of banking subsidiary
Amortization of debt issuance costs
Loss (gain) on change in fair value of marketable equity securities
Stock based compensation expense
Decrease (increase) in other assets
Increase (decrease) in accrued interest payable
Increase in accrued salary benefits
Net cash used in operating activities
Cash flows from by investing activities
Proceeds from sale of marketable equity securities
Net cash provided by investing activities
Cash flows from financing activities
Issuance of subordinated debentures
Net proceeds from issuance of common stock
(Increase) decrease in nonvested restricted stock
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
For the years ended
December 31,
2020
2019
$ 10,616,150 $ 4,088,839
(374,942)
(12,102,052)
21,784
1,471
58,845
101,568
1,769
9,286
(1,666,121)
(349,365)
(5,625,633)
30,337
(13,410)
58,683
(47,739)
(21,901)
105,196
(1,774,993)
‐
‐
150,666
150,666
5,500,000
777,042
(232,734)
(396,483)
5,647,825
‐
173,737
254,924
(659,349)
(230,688)
3,981,704
(1,855,015)
Cash and cash equivalents, beginning of year
Cash and cash equivalents, ending of year
1,380,350
3,235,365
$ 5,362,054 $ 1,380,350
57
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