TO OUR
SHAREHOLDERS:
Three years ago, our leadership updated our strategic plan to serve as a roadmap
for the bank and its associates. In addition to delivering a great customer and
employee experience, we developed strategies to improve efficiency, growth,
profitability, and risk management. This involved maintaining the right balance
between growth and financial health, while establishing guardrails to manage risk.
We are well on our way to reaching these goals, as 2022 saw strong growth across
our markets, significant net interest margin expansion, and an earnings per share
increase of over 12% year-over-year.
Despite some of the recent headlines surrounding banks, I’m excited to report that First Reliance Bank is in a strong
financial position. We have thoughtfully developed robust risk management practices around our liquidity, credit,
and capital management. As we have embarked on our organic growth strategy, we have prioritized safety &
soundness, profitability, and growth, in that order. Our deposit base is relationship based and diverse, as over 75% is
either insured or collateralized. Additionally, our deposit balances have continued to grow during the first quarter, as
detailed in Note 25 of our attached financial statements. Our on and off-balance sheet liquidity together combine for
approximately double the amount of uninsured and uncollateralized deposits within the bank.
I have been heartened to watch our team build deep relationships in our markets through the years. As we move
ahead in 2023, we would first like to look back on 2022 at some of the numerous successes and challenges that
defined the year and will shape the bank as we move forward.
Year in Review
In 2022, the bank continued its path of organic growth, highlighted by loan growth of approximately $75 million, or
roughly 13%, and deposit growth of over $17 million, more than a 2% increase from year-end 2021. This solid loan
growth served to normalize our loan to deposit ratio, which now stands at a very healthy 83%. The markets we serve
are one of our greatest strengths. Our strong presence in the major markets of Charleston, Midlands, and Greenville
has continued to bode well, as we saw significant loan growth in all three of these markets.
Asset quality has continued to improve, with a reduction in nonperforming assets as a percentage of total assets to
0.05% at December 31, 2022 from 0.10% at year-end 2021.
2022 brought about significant economic changes to the banking environment, highlighted by steadily rising interest
rates, and continued inflationary pressures. The bank has stood strong in the face of these challenges and continued
to prioritize safe & sound balance sheet growth, while increasing the profitability of our core banking business. Net
interest margin expanded by 23 basis points year-over-year. Net income for the year was $5.9 million, or $0.73 per
diluted share, compared to $5.3 million, or $0.65 per diluted share, for the year ended December 31, 2021.
Additionally, ROE increased from 7.56% to 9.11% year-over-year, a reflection of the hard work and effort put in by
our team during the year.
i
Our mortgage business faced constant headwinds from rising interest rates throughout 2022. While we were
operating in an extremely tough environment for the mortgage industry, we were resilient and still profitable for the
year. This has been a strong business line for us through the years, and we look forward to better days ahead once
the mortgage landscape improves.
We have remained committed to improving our cost structure and efficiency. This is reflected in our efficiency ratio,
which declined from 82.75% at year-end 2021, to 79.37% at December 31, 2022 despite the challenges in mortgage
banking. We’ve also been significantly increasing our assets per employee. The legacy Indirect auto portfolio
continues its gradual shrink on our balance sheet.
Asset Growth
Total assets grew by $26.3 million during 2022, or 2.9%, from $910.8 million at
December 31, 2021 to $937.1 million at December 31, 2022. This growth was
mainly driven by an increase in loans and investment securities, offset by a
decrease in cash.
Loan Growth and Asset Quality
During 2022, we grew loans by $74.8 million, or 13%, from $586.4 million at
December 31, 2021 to $661.3 million at December 31, 2022.
Our asset quality remained strong during the year, with the ratio of
nonperforming assets to total assets decreasing to 0.05% at December 31,
2022 from 0.10% at December 31, 2021.
Deposit Growth
For the full year 2022, total deposits increased $17.4 million, or 2.2%; from
$780.8 million at December 31, 2021 to $798.2 million at December 31, 2022.
Transaction deposits to total deposits increased from 50.19% at December 31,
2021 to 51.05% at December 31, 2022.
Tangible Book Value
During the year, tangible book value per share declined to $7.67 at December
31, 2022, from $8.46 at December 31, 2021. This was largely in part due to
unrealized losses in AOCI, which totaled $14.1 million at December 31, 2022.
Excluding AOCI, adjusted TBV per share was $9.40 at the end of 2022.
Total Assets
($ in millions)
$910.8
$937.1
$661.6
$710.2
2019
2020
2021
2022
Total Loans
($ in millions)
$480.2
$478.0
$586.4
$661.3
2019
2020
2021
2022
Total Deposits
($ in millions)
$780.8
$798.2
$505.1
$594.0
2019
2020
2021
2022
Tangible Book Value
Per Share
$8.46
$8.12
$7.67
$6.76
2019
2020
2021
2022
ii
Technology
We continue to make our commitment to technology an important part of our future. This includes investments in
technology and security to improve operational efficiencies and automate processes, as well as enhance our products
and services and increase customer satisfaction. We’ve improved our account opening process, which has decreased
opening times by over 50%. Additionally, we’ve adopted a hybrid mortgage closing process that allows many
documents to be executed digitally. As our ability to serve our customers continues to grow, our belief is that we will
be a preferred choice for customers looking for a local financial institution with 21st century banking capabilities.
Competition
We recognize that we operate in a very demanding environment. The banking business is highly competitive. We
experience competition in our market areas from a variety of different challengers; from traditional banks to fintech.
This includes competition for customers as well as personnel. As these competitive pressures intensify, we must
remain proactive in leveraging our strong foundation and customer-focused culture while continuing to execute our
growth strategy.
Our People
Perhaps our most important asset, our people are fundamental to our growth. When our associates succeed, we
succeed. Everything we do begins with our employees and is driven by their commitment to our culture. We
understand that having long-standing relationships with our customers, and deep ties to the community are
important, as our people live and work in the same communities as our customers. As regional banks continue to
grow, our commitment to make the lives of our customers better sets us apart from the competition.
In Closing
As the past year has shown us, banking continues to be an ever-changing and challenging industry. However, we
have remained consistent about prioritizing safety & soundness, growth, and profitability; all while remaining
focused on developing relationships and meeting the financial needs of our customers. Going forward, we will
continue to rely on our people and will embrace new technologies to strengthen our existing relationships and open
doors to a new generation of customers. We look forward to executing our strategic plans as we strive to be a Great
Place to Work, a Great Place to Bank, and a Great Place to Invest.
I am extremely appreciative of all our employee’s hard work and look forward to an exciting 2023.
Our best days are ahead of us.
Sincerely,
F.R. “Rick” Saunders Jr.
Chief Executive Officer
iii
First Reliance Bancshares, Inc. and Subsidiary
Report on Consolidated Financial Statements
As of and for the years ended December 31, 2022 and 2021
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 ................................................................................................. 9-55
Independent Auditor's Report
The Board of Directors
First Reliance Bancshares, Inc. and Subsidiary
Florence, South Carolina
Opinion
We have audited the consolidated financial statements of First Reliance Bancshares, Inc. and its Subsidiary (the
“Company”), which comprise the consolidated balance sheets as of December 31, 2022 and 2021, the related
consolidated statements of operations and 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”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2022 and 2021, 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.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America (GAAS). Our responsibilities under those standards are further described
in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are required to be
independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant
ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with accounting principles generally accepted in the United States of America, and for 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.
In preparing the financial statements, management is required to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a
going concern within one year after the date that the financial statements are issued.
elliottdavis.com
1
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a
guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it
exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override
of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or
in the aggregate, they would influence the judgment made by a reasonable user based on the financial
statements.
In performing an audit in accordance with GAAS, we:
• Exercise professional judgment and maintain professional skepticism throughout the audit.
•
Identify and assess the risks of material misstatement of the financial statements, whether due to
fraud or error, and design and perform audit procedures responsive to those risks. Such procedures
include examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements.
• Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Accordingly, no such opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluate the overall presentation of the
financial statements.
• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that
raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable
period of time.
We are required to communicate with those charged with governance regarding, among other matters, the
planned scope and timing of the audit, significant audit findings, and certain internal control–related matters
that we identified during the audit.
Columbia, South Carolina
March 29, 2023
2
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2022 and 2021
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
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
Subordinated debentures
Junior subordinated debentures
Accrued interest payable
Lease liability
Other liabilities
Total liabilities
2022
2021
$
$
$
3,916,889 $
29,880,421
33,797,310
258,718
133,715
162,096,848
1,787,200
164,017,763
7,940,056
661,250,516
(7,659,794)
653,590,722
22,811,450
2,765,106
-
18,835,768
8,628,905
10,441,422
147,094
690,917
5,977,748
7,210,167
937,113,146 $
255,426,725 $
152,012,419
287,043,628
23,152,023
80,549,048
798,183,843
7,367,861
30,000,000
15,380,951
10,310,000
331,678
6,197,620
6,045,329
873,817,282
5,299,431
144,824,529
150,123,960
257,173
137,859
81,779,260
837,000
82,754,119
23,844,303
586,445,473
(7,039,576)
579,405,897
22,805,006
1,703,143
135,000
18,475,896
4,128,214
14,057,097
244,474
690,917
6,634,220
5,537,376
910,796,795
238,018,563
153,888,994
262,998,387
26,868,239
99,059,140
780,833,323
11,372,325
10,000,000
15,349,205
10,310,000
142,732
6,781,650
5,205,909
839,995,144
Shareholders’ Equity
Series D non-cumulative preferred stock, $0.01 par value; 70,000 shares authorized; 53,732 and 54,732
shares issued and outstanding at December 31, 2022 and 2021, respectively
537
547
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,730,262 and 8,793,108 shares issued;
and 8,140,311 and 8,258,410 shares outstanding at December 31, 2022 and 2021, respectively
Capital surplus
Treasury stock, at cost, 589,951 and 534,698 shares at December 31, 2022 and 2021, respectively
Nonvested restricted stock
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
87,303
53,967,630
(4,502,374)
(2,121,128)
29,916,355
(14,052,459)
63,295,864
937,113,146 $
$
87,931
53,855,594
(4,322,496)
(2,668,238)
23,985,343
(137,030)
70,801,651
910,796,795
See Notes to Consolidated Financial Statements
3
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended December 31, 2022 and 2021
Interest income:
Loans, including fees
Investment securities:
Taxable
Tax exempt
Other interest income
Total
Interest expense:
Deposits
Federal Home Loan Bank advances
Subordinated debentures
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
Other service charges, commissions, and fees
Income from bank owned life insurance
Gain on sale of investment securities
Gain on sale of loans
Gain on disposal of fixed assets
Gain on sale of mortgage servicing rights
Other
Total
Noninterest expenses:
Salaries and benefits
Occupancy and equipment
Data processing, technology, and communications
Professional fees
Marketing
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
2022
2021
$
28,564,688 $
25,285,559
3,639,528
115,481
885,851
33,205,548
1,052,207
150,927
234,522
26,723,215
1,964,637
109,983
1,072,846
17,213
3,164,679
1,034,912
164,250
808,249
10,673
2,018,084
30,040,869
24,705,131
480,000
302,700
29,560,869
24,402,431
3,733,991
1,392,412
2,092,696
359,872
-
-
23,259
681,827
696,157
8,980,214
19,006,038
3,589,102
3,268,335
751,377
743,379
3,611,560
30,969,791
9,531,044
1,221,059
2,038,201
374,075
81,176
326,275
68,912
-
562,035
14,202,777
20,742,059
3,221,157
3,546,703
916,302
419,137
3,352,204
32,197,562
7,571,292
6,407,646
1,640,280
1,130,908
$
5,931,012 $
5,276,738
7,779,396
8,127,148
7,749,029
8,142,101
$
0.76 $
0.73
0.68
0.65
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2022 and 2021
Net income
Other comprehensive loss, net of tax:
Unrealized holding losses on securities available-for-sale
Reclassification adjustment for realized gains included in earnings
Income tax benefit
Other comprehensive loss, net of tax
2022
2021
$
5,931,012 $
5,276,738
(18,429,822)
-
4,514,391
(13,915,431)
(1,603,996)
(81,176)
420,281
(1,264,891)
Comprehensive (loss) income
$
(7,984,419) $
4,011,847
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, 2022 and 2021
Preferred Stock
Amount
Shares
Common Stock
Shares Amount
Capital
Surplus
Treasury
Stock
Nonvested
Restricted
Stock
Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings
Total
Balance, December 31, 2020
55,932
559
8,564,056 85,641
51,971,579
(1,679,952)
(1,486,440)
18,708,605
1,127,861
68,727,853
Net income
Other comprehensive loss,
net of tax
Conversion of Preferred Stock -
Series D to Common Stock
Net issuance of Common Stock
Restricted Stock Forfeitures
Net change in restricted stock
Stock based compensation
Purchase of treasury stock
-
-
-
-
-
-
-
-
(1,200)
(12)
1,200
12
-
-
-
-
-
-
-
-
-
-
-
-
-
294,878 2,948
2,188,964
(67,026)
(670)
(388,020)
-
-
-
-
-
-
-
83,071
(2,642,544)
-
-
-
-
-
-
-
-
-
-
-
-
-
(1,181,798)
-
-
5,276,738
-
5,276,738
-
-
-
-
-
-
-
(1,264,891)
(1,264,891)
-
-
-
-
-
-
-
2,192,022
(388,800)
(1,181,798)
83,071
(2,642,544)
Balance, December 31, 2021
54,732
547
8,793,108 87,931
53,855,594
(4,322,496)
(2,668,238)
23,985,343
(137,030)
70,801,651
Net income
Other comprehensive loss,
net of tax
Conversion of Preferred Stock -
Series D to Common Stock
Issuance of Common Stock
Restricted Stock Forfeitures
Net change in restricted stock
Stock based compensation
Purchase of treasury stock
-
-
-
-
-
-
-
-
(1,000)
(10)
1,000
10
-
-
-
-
-
-
-
-
-
-
-
-
-
36,925
369
553,740
(100,771)
(1,007)
(814,127)
-
-
-
-
-
-
-
372,423
-
-
-
-
-
-
-
-
-
-
-
-
-
-
547,110
-
(179,878)
5,931,012
-
5,931,012
-
-
-
-
-
-
-
(13,915,429)
(13,915,429)
-
-
-
-
-
-
-
554,415
(815,440)
547,110
372,423
(179,878)
Balance, December 31, 2022
53,732
$ 537
8,730,262 $87,303 $
53,967,630
$
(4,502,374) $
(2,121,128) $
29,916,355 $
(14,052,459) $
63,295,864
See Notes to Consolidated Financial Statements
6
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2022 and 2021
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
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
Gain on disposal of fixed assets
Loss on sale of other real estate owned
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
Proceeds from sale of mortgage servicing rights
Gain on sale of mortgage servicing rights
Core deposit intangible amortization
Gain 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) decrease in other assets
Increase (decrease) in accrued interest payable
Increase (decrease) in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of securities available-for-sale
Purchases of marketable equity securities
Maturities of securities available-for-sale
Proceeds on sales of securities available-for-sale
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
2022
2021
$
5,931,012 $
5,276,738
480,000
1,112,170
4,144
407,576
(303,103)
(23,259)
15,838
-
-
(221,328,200)
240,966,438
(3,733,991)
-
-
5,621,661
(681,827)
97,380
(5,314)
31,746
13,700
(359,872)
54,623
(1,324,159)
(1,061,963)
(1,016,318)
188,946
260,704
25,347,932
302,700
935,042
(8,435)
177,263
(201,896)
(68,912)
-
(81,176)
29,295
(503,886,940)
525,215,558
(9,531,044)
20,352,492
(326,275)
-
-
121,980
-
20,939
(255,927)
(374,075)
83,071
(2,036,485)
(157,282)
4,598,034
(112,990)
(527,703)
39,543,972
(113,005,110)
-
12,850,125
1,000,000
(950,200)
(1,545)
(74,361,722)
(1,146,305)
50,950
119,162
(175,444,645)
(67,859,431)
(100,000)
9,977,087
7,051,719
239,400
(1,535)
(127,738,261)
(5,180,588)
-
-
(183,611,609)
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2022 and 2021
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 increase in advances from Federal Home Loan Bank
Net (decrease) increase in securities sold under agreements to repurchase
Issuance of subordinated debentures, net of issuance costs
Redemption of subordinated debentures
Issuance of common stock
Decrease (increase) in nonvested restricted stock
Purchase of treasury stock
Net cash provided by financing activities
Net (decrease) 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:
Net change in unrealized gains on investment securities
Initial recognition of right-of-use asset
Initial recognition of lease liability
2022
2021
39,576,828
(22,226,308)
20,000,000
(4,004,464)
-
-
56,775
547,110
(179,878)
33,770,063
200,337,505
(13,504,424)
-
5,849,453
9,841,268
(5,000,000)
1,803,222
(1,181,798)
(2,642,544)
195,502,682
(116,326,650)
51,435,045
150,123,960
98,688,915
$
33,797,310 $ 150,123,960
$
2,246,350 $
2,975,733
1,705,251
2,131,074
$
(13,915,429) $
-
-
(1,264,891)
1,651,405
1,651,405
See Notes to Consolidated Financial Statements
8
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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 the valuation 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, 2022 and 2021, 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, 2022 and 2021
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 a methodology that approximates a
level yield of interest over the estimated remaining period to maturity.
10
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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 within other noninterest
income in 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, 2022 and 2021, nonmarketable equity securities consist of the following:
Federal Home Loan Bank stock
Community Bankers Bank stock
Total
2022
2021
$ 1,729,100 $
58,100
$ 1,787,200 $
778,900
58,100
837,000
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 amortized cost basis, net of any charge-offs. Interest income is recognized in
the period earned and is computed based upon the unpaid principal balance.
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, 2022 and 2021
Note 1. Summary of Significant Accounting Policies, Continued
Allowance for loan losses:
The allowance for loan losses is management’s estimate of losses inherent in the loan portfolio. It is established
through a provision for loan losses charged to earnings. Charged-off loans are charged against the allowance when
the uncollectability 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, 2022 and 2021
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 recorded 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, 2022 and 2021
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 in
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 in 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.
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, 2022 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, 2022 and 2021
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, the Company had a reserve of $25,000 at December, 31, 2022.
The Company did not have a reserve at December 31, 2021.
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, 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 deposit 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, 2022 and 2021
Note 1. Summary of Significant Accounting Policies, Continued
Revenue recognition, continued:
Check Card Fee Income: Included within other service charges, commissions and fees, 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 Mastercard 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 expense 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
$662,468 and $291,769 for 2022 and 2021, respectively, and are recorded within marketing 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.
16
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 1. Summary of Significant Accounting Policies, Continued
Retirement benefits, continued:
The 404(c) plan changes investment alternatives to include the Company's stock. Under the plan and present
policies, participants are permitted to make contributions up to 15% of their annual compensation. At its
discretion, the Company can make matching contributions up to 6% of the participants’ compensation.
The Company charged $460,803 and $393,702 to salaries and benefits expense for the retirement savings plan in
2022 and 2021, respectively. In addition, the Company made elective contributions to the employee stock
ownership plan during 2022 and 2021 totaling $150,021 and $103,507, 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 2022 and 2021, the
supplemental retirement expense was $202,087 and $193,241. The current accrued but unfunded amount is
$2,588,144 and $2,401,001 at December 31, 2022 and 2021, 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 $18,835,768 and
$18,475,896 at December 31, 2022 and 2021, respectively.
The Company has split-dollar life insurance arrangements with certain of its officers. At December 31, 2022 and
2021, the split-dollar liability relating to these arrangements totaled $438,042 and $412,277 respectively. For 2022
and 2021, the Company recognized net expenses of $25,765 and $24,251, respectively, related to these
arrangements, which are recorded within salaries and benefits expense.
Stock-based compensation:
The Company can issue stock options, restricted stock, restricted stock units, and other stock-based awards 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-based awards is reflected in net income as part of salaries and benefit
expense in 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, 2022
and 2021, the ESOP owned 472,962 and 474,708 shares of the Company’s common stock with an estimated value
of $4,124,228 and $4,842,026, respectively. All of these shares were allocated to participants.
17
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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 20).
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, 2022 and 2021
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 standard (”ASU 2016-13”) will replace the current incurred loss approach
with an expected loss model, referred to as the current expected credit loss (“CECL”) model. The new standard
will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance-sheet
credit exposures, which include, but are not limited to, loans, leases, held-to-maturity securities, loan
commitments and financial guarantees. ASU 2016-13 simplifies the accounting for purchased credit-impaired
debt securities and loans and expands the disclosure requirements regarding an entity’s assumptions, models and
methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the
amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of
origination. The amendments will be effective for the Company for interim and annual reporting periods beginning
after December 15, 2022. Early adoption is permitted for interim and annual reporting periods beginning after
December 15, 2018. Upon adoption, ASU 2016-13 provides for a modified retrospective transition by means of a
cumulative effect adjustment to equity as of the beginning of the period in which the guidance is effective.
19
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 1. Summary of Significant Accounting Policies, Continued
Recently issued accounting pronouncements, continued:
The Company is finalizing its evaluation of the adoption of this ASU. The Company to date has selected the
software vendor of choice for implementation, sourced and tested required data from the Company’s loan
systems, tested data feeds to the model, finalized its assessment of current and forecasted macroeconomic factors
and assumptions, determined appropriate segmentations of its portfolio, selected a preliminary forecast period
for reasonable and supportable forecasts and reversion methodology, and has performed parallel runs of the
model. The Company is currently finalizing its contract for independent third parties of model validation and
internal audit of the CECL model, and process, testing and finalization of internal controls. The Company currently
estimates the allowance for loan losses will increase to approximately $8 million and is inclusive of the gross up
of the allowance for expected credit losses on purchased credit deteriorated assets. In addition, the Company
expects to recognize a liability for unfunded commitments of approximately $1 million upon adoption. The
Company will finalize the adoption during the first quarter of 2023.
In March 2022, the FASB issued amendments which are intended to improve the decision usefulness of
information provided to investors about certain loan re-financings, restructurings, and write-offs. The
amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within
those fiscal years. Early adoptions is permitted. The Company does not expect these amendments to have a
material effect on its financials statements.
In December 2022, the FASB issued amendments to extend the period of time preparers can use the reference
rate reform relief guidance under Accounting Standards Codification (ASC) Topic 848 from December 31, 2022 to
December 31, 2024, to address the fact that all London Interbank Offered Rate (LIBOR) tenors were not
discontinued as of December 31, 2021, and some tenors will be published until June 2023. The amendments are
effective immediately for all entities and applied prospectively. 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 bases, 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.
20
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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, 2022 and 2021, the Company was not required to maintain a reserve balance.
Note 3.
Investment Securities
The amortized cost and estimated fair values of securities available-for-sale were:
Amortized
Gross Unrealized
Cost
Gains
Losses
Fair Value
December 31, 2022
U.S. Treasury securities
U.S. agency securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Collateralized loan obligations
Total
$
32,718,585
5,805,577
37,994,173
76,923,586
7,905,067
19,362,390
$ 180,709,378
$
$
-
-
4,891
-
-
-
4,891
$
1,910,616
430,391
5,819,703
9,710,832
480,369
265,510
$ 18,617,421
$
$
30,807,969
5,375,186
32,179,361
67,212,754
7,424,698
19,096,880
162,096,848
December 31, 2021
U.S. Treasury securities
U.S. agency securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Total
Amortized
Cost
$
6,848,607
7,630,674
19,202,487
45,780,200
2,500,000
$ 81,961,968
Gross Unrealized
Gains
Losses
Fair Value
$
$
-
391,861
242,380
221,794
54,960
910,995
$
$
13,152
-
155,592
922,289
2,670
1,093,703
$
$
6,835,455
8,022,535
19,289,275
45,079,705
2,552,290
81,779,260
At December 31, 2022 and 2021, the Company had marketable equity securities totaling $133,715 and $137,859,
respectively.
The Company did not have any securities classified as held-to-maturity at December 31, 2022 and 2021.
The following is a summary of maturities of securities available-for-sale as of December 31, 2022. 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.
21
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 3.
Investment Securities, Continued
Due after one year but within five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total
Debt Securities
Available-for-Sale
Amortized
Cost
$ 32,836,053
49,890,567
21,059,172
103,785,792
76,923,586
$180,709,378
Fair Value
$ 30,919,762
44,309,357
19,654,975
94,884,094
67,212,754
$162,096,848
The following tables show gross unrealized losses and fair value of securities available-for-sale, aggregated by
investment category, and length of time that individual securities have been in a continuous realized loss position
at December 31, 2022 and 2021.
Securities Available-for-Sale
Less Than 12 Months
U.S. Treasury securities
U.S. agency securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Collateralized loan obligations
Total
Securities Available-for-Sale
Greater Than 12 Months
U.S. Treasury securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Total
December 31, 2022
Fair
Value
Unrealized
Losses
December 31, 2021
Fair
Value
Unrealized
Losses
$ 21,910,468 $
5,375,186
18,086,471
38,317,573
5,225,203
14,700,000
103,614,901
1,020,843 $
430,391
2,756,674
3,765,035
429,864
265,510
8,668,317
6,835,455 $
-
12,347,761
36,339,369
497,330
-
56,019,915
13,152
-
155,592
922,289
2,670
-
1,093,703
December 31, 2022
Fair
Value
Unrealized
Losses
December 31, 2021
Fair
Value
Unrealized
Losses
$
8,897,501 $
889,773 $
12,184,339
28,895,181
449,495
50,426,516
3,063,029
5,945,797
50,505
9,949,104
- $
-
-
-
-
-
-
-
-
-
At December 31, 2022 and 2021, the Company had eighty-three and twenty-three, respectively, individual
investments available-for-sale that were in an unrealized loss position. 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
22
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 3.
Investment Securities, Continued
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 2022, the Company sold securities with proceeds of $1,000,000 and had no gains or losses on these sales.
During 2021, the Company sold securities with proceeds of $7,051,719 and gross gains of $81,176. During 2022
and 2021, the Company recognized (losses) gains of $(4,144) and $8,435, respectively, within the consolidated
statement of operations related to the decrease in fair value of marketable equity securities.
At December 31, 2022 and 2021, investment securities with a par value of $10,392,607 and $32,667,980 and a fair
market value of $8,880,434 and $33,347,071, respectively, were pledged as collateral for securities under
agreements to repurchase and to secure public deposits.
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
2022
2021
$
$
45,458,457
181,006,315
317,559,308
544,024,080
65,479,589
51,746,847
661,250,516
$
$
51,224,463
146,762,207
255,046,402
453,033,072
60,290,755
73,121,646
586,445,473
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 2022 and 2021 totaled $240,966,438 and $525,215,558, 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)
would 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 were 100% guaranteed by the SBA and as
long as the borrower submitted its loan forgiveness application within ten months of completion of the covered
period, the borrower was not required to make any payments until the forgiveness amount was remitted to the
lender by the SBA. Institutions that participated in the program received a processing fee ranging from 1% to 5%
based on the size of the loan from the SBA.
23
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
The Company participated in both the first and second rounds of PPP in order to provide assistance to customers
during the pandemic. During 2020, the Company processed 186 loans for a total of $30.2 million and received 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 interest of both the Company and its
borrowers to sell the PPP portfolio and allow an organization with the appropriate servicing infrastructure to
service these loans. 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. During 2021, the Company participated in the second
round of PPP, processing 262 loans for a total of $20.5 million and receiving SBA lender fee income of $1.1 million.
The Company again elected to sell the PPP portfolio to The Loan Source Inc., which was completed on June 28,
2021. At the time of the sale, the Company recognized a gain on sale of $326 thousand and recognized all
additional unamortized lender fees as an adjustment to loan interest income.
The following is an analysis of the allowance for loan losses by class of loans for the years ended December 31,
2022 and 2021:
December 31, 2022
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 $ 7,659,794 $
$ 7,039,576 $
480,000
346,173
(205,955)
545,727 $ 1,654,957 $ 2,797,228 $ 4,997,912 $
(249,752)
220,570
-
875,114
303,752
-
814,834
-
-
310,032
83,182
-
516,545 $ 2,048,171 $ 3,612,062 $ 6,176,778 $
998,690 $ 1,042,974
(282,688)
(112,426)
37,529
4,892
(100,984) (104,971)
692,844
790,172 $
December 31, 2021
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 $ 7,039,576 $
$ 6,172,977 $
302,700
702,054
(138,155)
695,150 $ 1,088,015
(1,290)
281,312
71,583
45,049
(22,821) (115,334)
998,690 $ 1,042,974
491,065 $ 1,547,634 $ 2,351,113 $ 4,389,812 $
(524,526)
579,188
-
446,115
-
-
101,089
6,234
-
22,678
585,422
-
545,727 $ 1,654,957 $ 2,797,228 $ 4,997,912 $
24
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
The population of loans individually reviewed for potential impairment included all troubled debt restructures
(“TDR”) and all non-accrual loans greater than $100,000. All TDR’s and non-accrual loans of $100,000 or less are
placed in a pool where a general loan pool is based on historical losses. The following is a summary of loans
evaluated for impairment individually and collectively, by class, for the years ended December 31, 2022 and 2021:
December 31, 2022
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
$
- $
- $
- $
- $
- $
- $
7,659,794
516,545
2,048,171
3,612,062
6,176,778
790,172
-
692,844
$ 7,659,794 $
516,545 $ 2,048,171 $ 3,612,062 $ 6,176,778 $
790,172 $
692,844
$ 1,028,657 $
660,221,859
- $
490,123 $
538,534 $ 1,028,657 $
- $
45,458,457
180,516,192
317,020,774
542,995,423
65,479,589
-
51,746,847
$ 661,250,516 $ 45,458,457 $ 181,006,315 $317,559,308 $ 544,024,080 $ 65,479,589 $ 51,746,847
December 31, 2021
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
$
375,992 $
- $
13,506 $
- $
13,506 $
6,663,584
545,727
1,641,451
2,797,228
4,984,406
362,456 $
636,234
30
1,042,944
$ 7,039,576 $
545,727 $ 1,654,957 $ 2,797,228 $ 4,997,912 $
998,690 $
1,042,974
$ 12,743,295 $ 2,848,774 $ 1,109,570 $ 2,529,373 $ 6,487,717 $ 6,137,270 $
573,702,178
48,375,689
54,153,485
145,652,637
252,517,029
446,545,355
118,308
73,003,338
$ 586,445,473 $ 51,224,463 $ 146,762,207 $ 255,046,402 $ 453,033,072 $ 60,290,755 $ 73,121,646
25
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4.
Loans and Allowance for Loan Losses, Continued
The following summarizes the Company’s impaired loans as of December 31, 2022:
Recorded
Investment
Unpaid
Principal
Related
Allowance
Average
Balance
Interest
Income
Recognized
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:
Real estate loans
Construction
Residential
Nonresidential
Total real estate loans
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
-
34,413
38,574
72,987
-
-
72,987
-
-
-
-
-
-
-
-
34,413
38,574
72,987
-
-
72,987
$
- $
- $
490,123
538,534
1,028,657
-
-
490,123
553,402
1,043,525
-
-
$ 1,028,657 $ 1,043,525 $
- $
- $
-
-
-
-
-
- $ 1,083,776 $
519,676
564,100
1,083,776
-
-
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
$
$
$
- $
- $
-
-
-
-
-
- $ 1,083,776 $
519,676
564,100
1,083,776
-
-
- $
- $
490,123
538,534
1,028,657
-
-
490,123
553,402
1,043,525
-
-
$ 1,028,657 $ 1,043,525 $
26
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
The following summarizes the Company’s impaired loans as of December 31, 2021:
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:
Real estate loans
Construction
Residential
Nonresidential
Total real estate loans
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
$ 2,848,774 $ 2,848,774 $
1,072,583
2,529,373
6,450,730
71,175
115,745
1,349,113
2,564,596
6,762,483
71,175
147,700
$ 6,637,650 $ 6,981,358 $
- $ 2,837,382 $
-
-
-
-
-
- $ 6,808,559 $
1,113,917
2,624,785
6,576,084
80,885
151,590
$
- $
- $
- $
- $
36,987
-
36,987
6,066,095
2,563
36,987
-
36,987
6,066,095
5,625
13,506
-
13,506
362,456
30
36,987
-
36,987
6,473,467
4,176
$ 6,105,645 $ 6,108,707 $
375,992 $ 6,514,630 $
$ 2,848,774 $ 2,848,774 $
- $ 2,837,382 $
1,109,570
2,529,373
6,487,717
6,137,270
118,308
1,386,100
2,564,596
6,799,470
6,137,270
153,325
13,506
-
13,506
362,456
30
1,150,904
2,624,785
6,613,071
6,554,352
155,766
$ 12,743,295 $ 13,090,065 $
375,992 $ 13,323,189 $
150,005
71,638
158,797
380,440
5,875
12,543
398,858
-
2,813
-
2,813
545,256
392
548,461
150,005
74,451
158,797
383,253
551,131
12,935
947,319
The following is an aging analysis of the Company’s loan portfolio at December 31, 2022:
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
Commercial and industrial
Consumer and other
Total
$
- $
-
-
-
-
58,808
58,808 $
- $
-
-
-
54,172
-
- $
-
-
-
75,730
35,047
- $45,458,457 $
- 181,006,315
- 317,559,308
- 544,024,080
65,349,688
51,652,992
129,901
93,855
54,172 $ 110,777 $ 223,756 $661,026,760 $
45,458,457 $
181,006,315
317,559,308
544,024,080
65,479,589
51,746,847
661,250,516 $
-
-
-
-
-
-
-
27
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
The following is an aging analysis of the Company’s loan portfolio at December 31, 2021:
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
Commercial and industrial
Consumer and other
Total
$
- $
-
-
-
90,268
29,272
$ 119,540 $
- $
- $51,224,463 $
- $
-
-
-
-
-
- $ 491,351 $ 610,891 $585,834,582 $
491,351 146,270,856
- 255,046,402
491,351 452,541,721
60,200,487
73,092,374
491,351
-
491,351
-
-
90,268
29,272
51,224,463 $
146,762,207
255,046,402
453,033,072
60,290,755
73,121,646
586,445,473 $
-
-
-
-
-
-
-
The following is an analysis of the Company’s nonaccrual loan portfolio recorded at December 31, 2022 and 2021:
Real estate loans
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
Troubled Debt Restructurings
2022
2021
$
$
68,602 $
199,406
268,008
75,730
129,456
473,194 $
599,250
225,993
825,243
-
106,000
931,243
The following table summarizes the carrying balance of troubled debt restructurings (“TDRs”) as of December 31,
2022 and 2021:
Performing TDRs
Nonperforming TDRs
Total
2022
2021
$ 1,296,235 $ 1,405,232
205,343
$ 1,438,915 $ 1,610,575
142,680
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.
28
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
The following is an analysis of TDRs identified during 2022:
Troubled Debt Restructurings
Real estate loans
Residential
For the year ended December 31, 2022
Pre-Modification
Outstanding
Recorded
Investment
Post-Modification
Outstanding
Recorded
Investment
Number
of Contracts
1
1
$
$
145,152
145,152
$
$
145,152
145,152
During the year ended December 31, 2022, the Company modified one loan that was designated as a TDR due to
an extension of the term and a reduction in the monthly payment amount. There were no TDRs identified during
the year ended December 31, 2021. None of the loans previously identified as TDRs went into default (as defined
by nonaccrual classification) during the years ended December 31, 2022 or December 31, 2021.
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.
29
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each
category at December 31, 2022:
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
Consumer
and Industrial and Other
Pass
Special mention
Substandard
Doubtful
Total
$ 652,585,645 $ 43,936,751 $ 180,272,587 $ 313,044,651 $ 537,253,989 $ 64,171,086 $ 51,160,570
428,383
157,894
-
$ 661,250,516 $ 45,458,457 $ 181,006,315 $ 317,559,308 $ 544,024,080 $ 65,479,589 $ 51,746,847
3,993,505
521,152
-
7,751,948
912,923
-
6,180,336
589,755
-
1,521,706
-
-
1,143,229
165,274
-
665,125
68,603
-
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each
category at December 31, 2021:
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commecial
Consumer
and Industrial and Other
Pass
Special mention
Substandard
Doubtful
Total
$ 570,834,629 $ 48,375,689 $ 145,335,932 $ 251,238,347 $ 444,949,968 $ 53,119,585 $ 72,765,076
253,634
102,936
-
$ 586,445,473 $ 51,224,463 $ 146,762,207 $ 255,046,402 $ 453,033,072 $ 60,290,755 $ 73,121,646
13,188,805
2,422,039
-
2,746,306
1,061,749
-
5,834,795
2,248,309
-
2,222,622
626,152
-
7,100,376
70,794
-
865,867
560,408
-
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.
30
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
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:
2022
2021
$ 134,683,093 $ 100,340,929
2,224,976
2,639,724
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 $3.2 million and $5.4 million with remaining accretable yield of
$62 thousand and $101 thousand at December 31, 2022 and 2021, 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, 2022
and 2021:
Balance at beginning of period
Change due to payments received and accretion
Advances
Balance at end of period
$
$
2,094,575
(719,334)
175,729
1,550,970
$
$
5,307,572
(3,226,477)
13,480
2,094,575
2022
2021
The following table presents changes in the nonaccretable yield for PCI loans for the year ended December 31,
2022 and 2021:
Balance at beginning of period
Reclassification to accretable yield
Change due to recoveries (charge-offs)
Balance at end of period
2022
2021
$
$
278,362
(107,011)
-
171,351
$
$
476,947
(199,365)
780
278,362
The following table presents changes in the accretable yield for PCI loans for the year ended December 31, 2022
and 2021:
Balance at beginning of period
Reclassification from nonaccretable yield
Accretion, net cash basis interest collections
Balance at end of period
2022
2021
431,412
107,011
(264,388)
274,035
$
$
372,293
199,365
(140,246)
431,412
$
$
31
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 4. Loans and Allowance for Loan Losses, Continued
The Company did not include acquired loans within the calculation of allowance for loan losses as of December
31, 2022 and 2021, 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
2022
2021
$ 8,632,700 $ 8,632,700
16,658,305
16,895,393
2,249,098
2,195,783
10,440,335
11,146,395
828,763
831,950
38,759,073
39,752,349
(15,954,067)
$ 22,811,450 $ 22,805,006
(16,940,899)
Depreciation expense for the years ended December 31, 2022 and 2021 amounted to $1,112,170 and $935,042,
respectively.
At December 31, 2022 and 2021, construction in progress consists mainly of architect fees and site work for
potential new branches. As of December 31, 2022, there were no material commitments outstanding for the
construction or purchase of premises, furniture and equipment.
Note 6. Other Real Estate Owned
Transactions in other real estate owned for the years ended December 31, 2022 and 2021 are summarized below:
Beginning balance
Additions
Sales
Write downs
Ending balance
2022
2021
$
135,000 $
-
(135,000)
-
- $
$
164,295
-
-
(29,295)
135,000
The Company recognized a loss on the sale of other real estate owned of $15,838 for the year ended December
31, 2022. The Company did not sell any other real estate owned during the year ended December 31, 2021.
32
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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 subsequent vintage year classes are 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. 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 years
ended December 31, 2022 and 2021:
Balances, beginning of year
Amount capitalized
Sales proceeds, net
Amount amortized
Balances, end of year
2022
2021
$ 9,681,076 $ 6,357,700
5,210,500
2,370,641
(4,939,834)
-
(1,312,916) (1,887,124)
$ 5,798,967 $ 9,681,076
The following table presents the activity for MSRs accounted for using the fair value method for the years ended
December 31, 2022 and 2021:
Balances, beginning of year
Changes in fair value (1)
Changes in unpaid principal balance (2)
Balances, end of year
2022
2021
$ 4,376,021 $ 5,662,912
1,251,171
996,049
(984,737) (2,282,940)
$ 4,642,455 $ 4,376,021
(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
33
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 7. Mortgage Servicing Rights, Continued
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, 2022 and 2021, the aggregate amount of loans serviced by the Company for the benefit of others
totaled $0.9 billion and $1.4 billion respectively.
The characteristics and sensitivity analysis of the MSRs are included in the following table as of December 31, 2022
and 2021.
Composition of residential loans serviced for others
Fixed-rate mortgage loans
Weighted average expected life
Constant prepayment rate (“CPR”)
Weighted average discount rate
Note 8. Derivatives
2022
2021
100.00%
100.00%
7.7 years
7.65%
8.53%
7.1 years
8.80%
8.53%
The derivative positions of the Company for the years ended December 31, 2022 and 2021 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
2022
2021
Fair value
Notional value
Fair value
Notional value
$
56,402
$
7,320,976
$
824,481
$ 41,946,942
35,000
8,000,000
(7,695)
33,250,000
-
-
21,914
5,500,000
The Company uses derivatives primarily to minimize interest rate risk related to its pipeline of loan interest rate lock
commitments issued on residential mortgage loans in the process of origination for sale or loans held for sale. The
Company’s derivative positions are classified as trading assets and liabilities, and as such, the changes in the fair
market value of the derivative positions are recognized in the consolidated statements of operations within
mortgage banking income. During 2022, the Company unwound all outstanding U.S. Treasury futures contracts,
which were previously used to hedge against changes in the value of the mortgage servicing rights measured under
the fair value method.
34
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 9. Core Deposit Intangible
The following table presents information about our intangible assets as of December 31:
2022
2021
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangibles
$
880,000 $
732,906
$
880,000 $
635,526
Based on the core deposit intangibles as of December 31, 2022, the following table presents the aggregate
amortization expense for each of the succeeding years ending December 31:
2023
2024
2025
2026
Total
Amount
72,777
48,177
23,576
2,564
147,094
$
$
Amortization expense of $97,380 and $121,980 related to the core deposit intangibles was recognized in 2022
and 2021, respectively, and was recorded within other noninterest expense.
Note 10. Deposits
At December 31, 2022, the scheduled maturities of time deposits were as follows:
Maturing In:
2023
2024
2025
2026
2027
Total
Amount
$
72,025,313
13,954,583
5,902,224
11,157,237
661,714
$ 103,701,071
Included in total time deposits at December 31, 2022 and 2021, respectively, were brokered time deposits of
$25,483,000 and $15,398,000. Interest expense on time deposits that meet or exceed the FDIC insurance limit of
$250,000 was $204,579 and $277,507 for the years ended December 31, 2022 and 2021, respectively.
35
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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
2022
2021
$ 7,367,861 $ 11,372,325
11,372,325
13,805,033
7,738,616
10,128,626
0.14%
0.15%
0.14%
0.17%
At December 31, 2022 and 2021, investment securities with a par value of $10,392,607 and $12,353,259 and a fair
market value of $8,880,434 and $12,873,989, respectively, were pledged as collateral for the underlying
agreements.
Note 12. Federal Home Loan Bank Advances
Federal Home Loan Bank advances consisted of the following at December 31:
Fixed rate
January 25, 2023
January 27, 2023
September 20, 2029
Interest
Rate
4.23%
4.23%
1.62%
2022
2021
$ 20,000,000
10,000,000
-
$ 30,000,000
$
-
-
10,000,000
$ 10,000,000
At December 31, 2022 and 2021, the Company has pledged certain loans totaling $240,843,061 and $192,090,005,
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 three-month LIBOR (“London Interbank Offered 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, 2022 and 2021, the Company had accrued and
unpaid interest totaling $72,870 and $22,300, respectively.
36
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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 bore interest at a fixed rate of 7.00% per annum until August 5, 2021 and
then variable at three-month LIBOR plus 5.86%, payable quarterly with principal and unpaid interest due at
maturity, August 5, 2026. On August 5, 2021, the Company redeemed all $5,000,000 of these subordinated notes,
including any accrued but unpaid interest.
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 (“Secured Overnight Financing Rate”) plus 5.51%, payable quarterly with
principal and unpaid interest due at maturity, June 1, 2030.
On September 22, 2021, the Company entered into subordinated debt agreements with eleven financial
institutions totaling $10,000,000. The debt initially bears interest at a fixed rate of 3.375% per annum until October
1, 2026 and then variable at three-month SOFR plus 2.45%, payable quarterly with principal and unpaid interest
due at maturity, October 1, 2031. The Company recorded $158,732 in debt issuance costs associated with the
subordinated debt, which is recorded net within subordinated debentures and will be amortized over five years.
At December 31, 2022, remaining debt issuance costs to be amortized totaled $119,049.
Note 15. Shareholders’ Equity
Common Stock - The following is a summary of the changes in common stock outstanding for the years ended
December 31, 2022 and 2021.
Common shares outstanding at beginning of the period
Conversion of Series D preferred stock to common stock
Purchase of treasury stock
Restricted stock issued
Additional shares granted
Forfeiture of restricted shares
Common shares outstanding at end of the period
2022
2021
8,258,410
1,000
(55,253)
46,033
7,918
(117,797)
8,140,311
8,329,732
1,200
(300,374)
260,401
34,477
(67,026)
8,258,410
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.
The Company’s 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 Stockholders 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.
37
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 15. Shareholders’ Equity, Continued
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 Company’s 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. During
2021, the 410,499 shares of non-voting common stock were converted into voting shares of 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, 2022, the Bank had undivided profits of $39,852,072. 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. Income Taxes
Income tax provision for the years ended December 31, 2022 and 2021 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
2022
2021
$ 1,516,652 $ 1,316,786
70,049
1,386,835
109,928
1,626,580
13,700
(54,328)
(40,628)
(255,927)
(84,003)
(339,930)
54,328
84,003
$ 1,640,280 $ 1,130,908
38
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 16. Income Taxes, Continued
The components of deferred tax assets and deferred tax liabilities as of December 31, are as follows:
2022
2021
Deferred tax assets:
Allowance for loan losses
Net operating losses
Non-accrual interest
Deferred compensation
Purchase accounting on acquisition
Leases
Unrealized losses on securities available-for-sale
Other
Gross deferred tax assets
Less, valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Accumulated depreciation
Mark to market adjustments
Deferred loan origination costs
Total gross deferred tax liabilities
Net deferred tax assets recognized
3,920,899
3,092
754,245
77,332
46,173
4,560,070
146,244
10,990,282
$ 1,482,227 $ 1,334,083
3,905,592
17,783
708,005
112,122
30,960
45,679
139,232
6,293,456
(781,483)
5,511,973
10,154,471
(835,811)
19,552
148,520
994,110
363,384
1,525,566
19,552
21,379
1,095,721
247,107
1,383,759
$ 8,628,905 $ 4,128,214
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, 2022, 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 2022, the balance in the valuation
allowance changed by $54,328. 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 $14,767,644 and $14,980,339 for the years ended December 31,
2022 and 2021, respectively. Net operating losses of $3,768,740 expire at various times from 2029-2037, with the
remainder having no expiration date. The Company’s ability to benefit from the use of net operating loss
carryforwards of $14,767,644 is limited annually under Section 382 of the Internal Revenue Code. The Company
has state net operating losses of $20,751,748 and $19,233,440 for the years ended December 31, 2022 and 2021,
respectively. State net operating losses of $9,501,898 expire at various times from 2023-2037, with the remainder
having no expiration date.
39
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 16. Income Taxes, Continued
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, 2022 and 2021 follows:
Tax expense at statutory rate
State income tax expense (benefit), net of federal income tax benefit
Tax-exempt interest income
Disallowed interest expense
Life insurance surrender value
Excess tax benefit of stock-based compensation
Change in valuation allowance
Other, net
Total
2022
2021
$ 1,589,971 $ 1,345,606
(11,024)
(28,559)
597
(78,556)
(239,865)
84,003
58,706
$ 1,640,280 $ 1,130,908
43,924
(23,991)
725
(75,573)
(44,859)
54,328
95,755
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 2019 and subsequent years are subject to review by
taxing authorities.
Note 17. 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, 2022 and 2021, the Company had related
party loans totaling $560,195 and $1,030,108, respectively.
Deposits from directors and executive officers and their related interests totaled $6,873,006 and $7,289,077 at
December 31, 2022 and 2021, respectively.
Note 18. 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, 2022, management and legal counsel are not aware of any pending or threatened
litigation or unasserted claims or assessments that could result in losses, if any, that would be material to the
consolidated financial statements.
The Company has operating leases on eight of its facilities that are accounted for under ASC 842. The Company
had operating right-of-use assets of $5,977,748 and $6,634,220 as of December 31, 2022 and 2021, respectively.
The Company had lease liabilities of $6,197,620 and $6,781,650 as of December 31, 2022 and 2021, respectively.
Rental expense under the leases for the years ended December 31, 2022 and 2021 was $1,025,162 and
$1,018,203, respectively, and was recorded within occupancy and equipment expense in the consolidated
statements of operations.
40
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 18. Commitments and Contingencies, Continued
The weighted average remaining lease term as of December 31, 2022 is 10.5 years and the weighted average
discount rate used is 2.85%. The following table shows future undiscounted lease payments for operating leases
with initial terms of one year or more as of December 31, 2022:
2023
2024
2025
2026
2027
Thereafter
Total undiscounted lease payments
Less effect of discounting
Present value of estimate lease payments (lease liability)
Note 19. Equity Incentive Plan
$
797,739
787,965
747,704
674,042
679,104
3,241,941
6,928,495
(730,875)
$ 6,197,620
During 2021, shareholders of the Company approved the 2021 Equity Incentive Plan (the “2021 Plan") under which
an aggregate of 600,000 shares of common stock have been reserved for issuance as stock-based awards,
including stock options, restricted stock, restricted stock units, and other stock-based awards. 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 and other stock-based awards is restricted to 50,000 in any calendar year to
any one participant. At the time of adoption of the 2021 Plan, the Company sunset two equity incentive pools,
the 2017 Equity Incentive Plan (the “2017 Plan”) and a Restricted Stock Reserve. The 2021 Plan, the 2017 Plan,
and the Restricted Stock Reserve are referred to collectively as the “Plans.” At December 31, 2022, there were
500,460 shares available for grant under the 2021 Plan and no shares available for grant under the 2017 Plan or
Restricted Stock Reserve.
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.
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.
41
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 19. Equity Incentive Plan, Continued
Nonvested restricted stock for the years ended December 31, 2022 and 2021 is summarized in the following table.
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
2022
2021
Weighted-
Average
Grant-Date
Fair Value
Shares
Weighted-
Average
Grant-Date
Fair Value
Shares
453,719 $
46,033
(58,593)
(100,771)
340,388 $
7.36
9.64
6.87
7.19
7.80
423,014 $
260,401
(162,670)
(67,026)
453,719
5.24
7.88
2.77
7.16
7.36
The vesting schedule for these shares as of December 31, 2022 is as follows:
2023
2024
2025
2026
2027 and thereafter
Total
Shares
52,531
72,849
41,159
87,150
86,700
340,388
$
$
The Company recognized stock-based compensation costs related to restricted stock of $493,519 and $483,835
for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, there was $2,133,754
of total unrecognized compensation cost related to the nonvested restricted stock that will be recognized over
the remainder of their vesting schedule.
No stock options were granted during the years ended December 31, 2022 and 2021. Activity related to stock
options is summarized in the following table.
Outstanding at December 31, 2021
Granted
Exercised
Forfeited
Outstanding at December 31, 2022
Options exercisable as of December 31, 2022
Weighted-
Average
Remaining
Life (Years)
Weighted-
Average
Exercise
Price
$
1.80
-
-
-
1.80
1.80
7.27
-
-
-
7.27
7.27
Options
169,440
-
-
-
169,440
150,308
The Company recognized stock-based compensation costs related to stock options of $54,623 and $83,071 for the
years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, there was $23,946 of total
42
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 19. Equity Incentive Plan, Continued
unrecognized compensation cost related to the outstanding stock options that will be recognized over the
remainder of their vesting schedule.
The company from time-to-time also grants performance and/or time restricted stock units (“RSUs”) to key
employees. These awards help align the interests of these employees with the interests of the shareholders of
the Company by providing economic value directly related to the performance of the Company. Dividends are
not paid in respect to the awards and the holder does not have the right to vote the shares during the vesting
period. The value of the RSUs awarded is established as the fair market value of the stock at the time of the grant.
The Company recognizes expenses on a straight-line basis typically over the vesting period the performance
and/or time target is to be achieved.
Nonvested RSUs for the year December 31, 2022 is summarized in the following table.
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
2022
Weighted-
Average
Grant-Date
Fair Value
Shares
- $
35,000
-
-
35,000 $
-
9.08
-
-
9.08
The vesting schedule for these shares as of December 31, 2022 is as follows:
2023
2024
2025
2026
2027
Total
$
$
Shares
7,000
7,000
7,000
7,000
7,000
35,000
There was no RSU activity during 2021. The Company recognized stock-based compensation costs related to restricted
stock units of $15,925 for the year ended December 31, 2022. As of December 31, 2022, there was $301,875 of total
unrecognized compensation cost related to nonvested RSUs that will be recognized over a weighted-average period of
5 years.
43
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 20. 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, 2022
and 2021.
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
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 21. Regulatory Matters
2022
2021
$ 5,931,012 $ 5,276,738
-
$ 5,931,012 $ 5,276,738
-
$ 5,931,012 $ 5,276,738
7,749,029
0.68
7,779,396
0.76 $
$
$ 5,931,012 $ 5,276,738
7,749,029
393,072
8,142,101
0.65
7,779,396
347,752
8,127,148
0.73 $
$
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.
44
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 21. Regulatory Matters, Continued
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the
leverage ratio. 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.
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum
requirements at December 31, 2022 and 2021.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 102,986
95,319
95,319
95,319
13.43% $ 61,356
46,017
12.43%
36,770
10.37%
34,513
12.43%
8.00% $ 76,696
61,356
6.00%
45,963
4.00%
49,852
4.50%
10.00%
8.00%
5.00%
6.50%
$ 95,219
88,168
88,168
88,168
14.05% $ 54,209
40,657
13.01%
36,519
9.66%
30,492
13.01%
8.00% $ 67,761
54,209
6.00%
45,648
4.00%
44,045
4.50%
10.00%
8.00%
5.00%
6.50%
(Dollars in Thousands)
December 31, 2022
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, 2021
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 22. Unused Lines of Credit
The Company had available at December 31, 2022 one unsecured line of credit, which was unused, to purchase up
to $10,000,000 of federal funds. Also, as of December 31, 2022, the Company had the ability to borrow funds from
the FHLB of up to $189,601,817. At that date, $30,000,000 had been advanced.
45
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 23. Fair Value Measurements
Generally accepted accounting principles (“GAAP”) provide a framework for measuring and disclosing fair value
that requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the
measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a
nonrecurring basis (for example, impaired loans).
Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. GAAP also establishes a fair value hierarchy that requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine
fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from
time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as
loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments
typically involve application of the lower of cost or market accounting or the writing down of individual assets.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market.
Level 3 Valuation is generated from model-based techniques that use at least one significant assumption
not observable in the market. These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or liability. Valuation techniques include the
use of option pricing models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Securities Available-for-Sale and Marketable Equity Securities - Securities available-for-sale 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.
46
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 23. Fair Value Measurements, Continued
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.
There were no loans held for sale requiring fair value adjustments at December 31, 2022 and 2021.
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.
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 the residential mortgage
loans that the Company intends 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, 2022 and 2021.
Total
Level 1
Level 2
Level 3
December 31, 2022
Available-for-sale securities:
U.S. Treasury securities
U.S. agency securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Collateralized loan obligations
Total available-for-sale securities
Marketable equity securities
Mortgage servicing rights
Derivative assets:
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
- $
-
-
-
-
-
-
-
-
30,807,969 $
5,375,186
32,179,361
67,212,754
7,424,698
19,096,880
162,096,848
133,715
-
-
-
-
-
-
-
-
-
4,642,455
-
-
- $ 162,321,965 $
56,402
35,000
-
-
4,642,455
$
30,807,969 $
5,375,186
32,179,361
67,212,754
7,424,698
19,096,880
162,096,848
133,715
4,642,455
56,402
35,000
$ 166,964,420 $
47
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 23. Fair Value Measurements, Continued
Total
Level 1
Level 2
Level 3
December 31, 2021
Available-for-sale securities:
U.S. Treasury securities
U.S. agency securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Total available-for-sale securities
Marketable equity securities
Mortgage servicing rights
Derivative assets (liabilities):
Mortgage loan interest rate lock commitments
Mortgage loan forward sales commitments
U.S. Treasury futures contracts
$
6,835,455 $
8,022,535
19,289,275
45,079,705
2,552,290
81,779,260
137,859
4,376,021
824,481
(7,695)
21,914
87,131,840 $
$
- $
-
-
-
-
-
-
-
-
-
-
- $
6,835,455 $
8,022,535
19,289,275
45,079,705
2,552,290
81,779,260
137,859
-
824,481
(7,695)
21,914
82,755,819 $
-
-
-
-
-
-
4,376,021
-
-
-
4,376,021
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Balance, December 31, 2020
Changes in fair value recognized in earnings (1)
Settlements (2)
Balance, December 31, 2021
Changes in fair value recognized in earnings (1)
Settlements (2)
Balance, December 31, 2022
Mortgage
Servicing
Rights
$ 5,662,912
996,049
(2,282,940)
4,376,021
1,251,171
(984,737)
$ 4,642,455
(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.
48
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 23. Fair Value Measurements, Continued
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, 2022 and December 31, 2021, aggregated by level in the fair
value hierarchy within which those measurements fall.
December 31, 2022
Impaired loans
Mortgage servicing rights
Total
December 31, 2021
Impaired loans
Other real estate owned
Mortgage servicing rights
Total
Total
Level 1
Level 2
Level 3
1,028,657 $
5,798,967
6,827,624 $
- $
-
- $
- $
-
- $
1,028,657
5,798,967
6,827,624
Total
Level 1
Level 2
Level 3
12,367,303 $
135,000
9,681,076
22,183,379 $
- $
-
-
- $
- $
-
-
- $
12,367,303
135,000
9,681,076
22,183,379
$
$
$
$
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.
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.
49
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 23. Fair Value Measurements, Continued
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,
2022 and December 31, 2021, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair Value as of
December 31,
2022
Impaired loans
$
1,028,657
Valuation Technique
Significant
Observable Inputs
Significant Unobservable
Inputs
Appraisal
Value/Comparison
Sales
Appraisals and/or
sales of comparable
properties
Appraisals discounted 5%
to 20% for sales
commissions and other
holding cost
Mortgage servicing
$
5,798,967
Discounted cash flows
Comparable sales
rights
Weighted average
discount rate – 9%
Constant prepayment
rate – 6.5%
Fair Value as of
December 31,
2021
Valuation Technique
Significant
Observable Inputs
Significant Unobservable
Inputs
Impaired loans
$
12,367,303
Appraisal
Value/Comparison
Sales
Appraisals and/or
sales of comparable
properties
Other real estate
$
135,000
owned
Appraisal
Value/Comparison
Sales
Appraisals and/or
sales of comparable
properties
Mortgage servicing
$
9,681,076
rights
Discounted cash
flows
Comparable sales
Appraisals discounted 5%
to 20% for sales
commissions and other
holding cost
Appraisals discounted 10%
to 20% for sales
commissions and other
holding cost
Weighted average
discount rate – 9%
Constant prepayment
rate – 10%
50
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 23. Fair Value Measurements, Continued
Fair Value of Financial Instruments
The following table includes the estimated fair value of the Company’s financial assets and financial liabilities. The
methodologies for estimating the fair value of financial assets and financial liabilities measured on a recurring and
nonrecurring basis are discussed above. The methodologies for estimating the fair value for other financial assets
and financial liabilities are discussed below. The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation methodologies. However, considerable
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, 2022 and 2021.
December 31,
2022
2021
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Cash and cash equivalents
Mortgage loans held for sale
Loans held for investment, net
Nonmarketable equity securities
Deposits
Securities sold under agreement to repurchase
Federal Home Loan Bank advances
Subordinated debentures
$ 33,797,310 $ 33,797,310 $ 150,123,960 $ 150,123,960
23,844,303
572,938,680
837,000
780,115,119
11,372,325
9,799,455
25,783,835
7,940,056
623,018,294
1,787,200
796,890,613
7,367,861
30,000,000
22,827,166
23,844,303
579,405,897
837,000
780,833,323
11,372,325
10,000,000
25,659,205
7,940,056
653,590,722
1,787,200
798,183,843
7,367,861
30,000,000
25,690,951
Cash and cash equivalents
The carrying amount approximates fair value for these instruments.
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.
51
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 23. Fair Value Measurements, Continued
Fair value for significant non-performing loans is generally based upon recent external appraisals. If appraisals
are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with
the estimated cash flows. Assumptions regarding credit risk, cash flows and discounted rates are judgmentally
determined using available market information and specific borrower information.
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.
52
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 24. 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
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,
2022
2021
$ 3,867,380 $ 4,496,727
89,763,094
82,867,930
137,859
133,715
58,100
58,100
310,000
310,000
2,023,124
2,001,469
$ 89,238,594 $ 96,788,904
$ 10,310,000 $ 10,310,000
15,349,205
15,380,951
233,814
110,924
140,855
94,234
25,987,253
25,942,730
63,295,864
70,801,651
$ 89,238,594 $ 96,788,904
For the years ended
December 31,
2022
2021
Income
Interest income
(Loss) gain on change in fair value of marketable equity securities
Total income
$
9,808 $
(4,144)
5,664
6,277
8,435
14,712
Expenses
Interest expense
Salaries and employee benefits
Equipment expense
Other expenses
Total expenses
Loss 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
53
1,072,846
252,642
-
43,356
1,368,844
808,249
356,286
8,719
69,483
1,242,737
(1,363,180)
7,020,265
(1,228,025)
6,059,573
5,657,085
273,927
4,831,548
445,190
$ 5,931,012 $ 5,276,738
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
Note 24. 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 taxes, net of allowance
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 in other assets
Increase (decrease) in accrued interest payable
(Decrease) increase in accrued salary benefits
Net cash used in operating activities
Cash flows from by investing activities
Purchase of marketable equity securities
Investment in subsidiary
Net cash used in investing activities
Cash flows from financing activities
Issuance of subordinated debentures, net of issuance costs
Redemption of subordinated debentures
Issuance of common stock
Decrease (increase) in nonvested restricted stock
Purchase of treasury stock
Net cash provided by financing activities
Net decrease in cash
For the years ended
December 31,
2022
2021
$ 5,931,012 $ 5,276,738
21,655
(7,020,265)
31,746
4,144
54,623
-
46,621
(122,890)
(1,053,354)
39,726
(6,059,573)
20,939
(8,435)
83,071
28,069
(85,342)
119,332
(585,475)
-
-
-
(100,000)
(3,000,000)
(3,100,000)
-
-
56,775
547,110
(179,878)
424,007
9,841,268
(5,000,000)
1,803,222
(1,181,798)
(2,642,544)
2,820,148
(629,347)
(865,327)
Cash and cash equivalents, beginning of year
Cash and cash equivalents, ending of year
4,496,727
5,362,054
$ 3,867,380 $ 4,496,727
54
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2022 and 2021
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.
In relation to current economic conditions, management has monitored deposit concentrations through the date
the financial statements were issued noting no significant changes to concentrations. Net deposit balances have
grown by $27.7 million from December 31, 2022. In addition, there has been no significant deposit deterioration
through March 29, 2023.
The Company has disclosed its investment portfolio position in Note 3. There has been no significant deterioration
in the investment portfolio through the date the consolidated financial statements were issued. In addition the
Company has not transferred or sold any of its investment portfolio since December 31, 2022.
Management has reviewed the events occurring through March 29, 2023 and no additional subsequent events
occurred requiring accrual or disclosure.
55
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