Annual Report
2023
Dear Fellow Shareholders:
As we reflect on 2023, I am pleased to share our annual report with insights into our
performance, accomplishments, and vision for the future.
The past year provided one of the most difficult operating environments for banks
since the Great Recession. Amid the backdrop of multiple high-profile bank failures
and questions surrounding regional bank stability, First Reliance enjoyed another
successful year in 2023.
Focused on the ongoing execution of our strategic plan, the balance sheet continued
to be a source of strength with exceptional asset quality metrics and solid liquidity
and capital ratios. While navigating unexpected challenges and fluid economic
conditions, we began to see our net interest margin expand in the fourth quarter of
2023.
During the year, we took action to enhance our future net interest margin by repositioning a portion of our
investment securities portfolio. The bank incurred a non-recurring $1.5 million loss on the sale of securities, with a
very short earn back period. We are also looking forward to our loan portfolio, consisting of predominately fixed
rate loans, to continue to reprice to current market rates as our deposit cost increases begin to slow. Taken together
this should help usher in net interest margin expansion at some point in 2024 and beyond. In the meantime, we
remain committed to disciplined cost management practices while delivering exception service to our clients.
The bank continued to see organic growth in 2023, including loan growth of approximately $44 million and deposit
growth of approximately $60 million. Loan growth included the absorption of approximately $14 million of runoff in
the bank’s legacy indirect automobile loan portfolio.
While the mortgage environment remained challenging, we made several key production hires during the year and
onboarded several new mortgage partners through our correspondent/wholesale channel. We also implemented
technology enhancements in our mortgage business creating operational efficiencies and an improved customer
experience. Improving these internal fundamentals within our mortgage division has been a key objective while we
await the stabilization of mortgage rates and an improvement in the mortgage landscape.
We are proud of our continued progress despite numerous headwinds in 2023 and are excited about what we can
accomplish in 2024.
®
i
Performance
Asset Growth
Total assets grew by $37.0 million during 2023, or 4.0%, from $937.1 million at
December 31, 2022 to $974.2 million at December 31, 2023. This growth was
mainly driven by an increase in loans and investment securities, offset by a
decrease in cash.
Total Assets
($ in millions)
$910.8
$937.1
$974.2
$710.2
Loan Growth and Asset Quality
During 2023, we grew loans by $44.4 million, or 6.7%, from $661.3 million at
December 31, 2022 to $705.7 million at December 31, 2023.
Our asset quality remained strong during the year, with the ratio of
nonperforming assets to total assets decreasing to 0.04% at December 31, 2023
from 0.05% at December 31, 2022.
2020
2021
2022
2023
Total Loans
($ in millions)
$586.4
$661.3
$705.7
$478.0
2020
2021
2022
2023
Deposit Growth
For the full year 2023, total deposits increased $60.4 million, or 7.6%; from
$798.2 million at December 31, 2022 to $858.6 million at December 31, 2023.
Transaction deposits to total deposits decreased from 51.05% at December
31, 2022, to 41.30% at December 31, 2023.
Total Deposits
($ in millions)
$780.8
$798.2
$858.6
$594.0
Tangible Book Value
During the year, tangible book value per share rose by 13.2% to $8.68 at
December 31, 2023, from $7.67 at December 31, 2022.
2020
2021
2022
2023
Tangible Book Value
Per Share
$8.46
$8.12
$7.67
$8.68
2020
2021
2022
2023
®
ii
Our customers remain at the heart of everything we do. Throughout the year, we have continued to invest in
technology and innovation to enhance their banking experience. From digital banking solutions to personalized
services, we are dedicated to meeting the evolving needs of our customers and providing them with best-in-class
financial products and services. We are very proud that our mobile app is 4.9 stars in the Apple store as rated by our
clients. We have continued to invest in robust security measures and fraud detection technologies to protect our
customers’ assets and ensure the safety and security of their financial transactions.
We continue to recognize that our employees are our greatest asset. These team members are a driving force
behind our success, and their enthusiasm and dedication are essential to providing exceptional service to our clients.
Our employees understand that having long-term relationships with clients and deep ties to our community are
extremely important.
Looking ahead, we remain cautiously optimistic about the future. While uncertainties persist, we are confident in our
ability to adapt and thrive in a rapidly changing environment. By remaining committed to the core banking principles
of safety and soundness, profitability, and growth, we believe that First Reliance Bank is well-positioned for long-
term success. Staying true to our core values and putting our customers first will continue to be a key to reaching our
goals.
In closing, I would like to express my gratitude to our shareholders, customers, employees, and partners for their
continued support and dedication. Together, we will continue to build a brighter future for First Reliance.
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, 2023 and 2022
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 ................................................................................................. 9-59
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 Subsidiary (the
“Company”), which comprise the consolidated balance sheets as of December 31, 2023 and 2022, the related
consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows
for the years then ended, and the related notes to the consolidated financial statements (collectively, the
“financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2023 and 2022, 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
in the Auditor’s
America (GAAS). Our responsibilities under those standards are further described
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.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit
losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board Accounting
Standards Codification No. 326, Financial Instruments – Credit Losses (ASC 326). The Company adopted the new
credit loss standard using the modified retrospective method such that prior period amounts are not adjusted
and continue to be reported in accordance with previously applicable generally accepted accounting principles.
Our opinion is not modified with respect to this matter.
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 or available to be 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 26, 2024
2
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2023 and 2022
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 credit losses
Loans, net
Premises, furniture and equipment, net
Accrued interest receivable
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
Reserve for unfunded commitments
Other liabilities
Total liabilities
Shareholders’ Equity
2023
2022
$
$
$
4,353,883 $
17,590,169
21,944,052
-
128,517
171,399,573
949,800
172,477,890
7,155,912
705,672,390
(8,393,493)
697,278,897
22,298,348
3,453,458
18,190,892
7,775,295
11,638,174
74,316
690,917
5,342,365
5,836,677
974,157,193 $
210,603,869 $
144,039,452
334,715,713
40,806,186
128,431,287
858,596,507
307,517
5,000,000
15,412,697
10,310,000
1,076,368
5,592,934
407,487
6,057,759
902,761,269
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
Series D non-cumulative preferred stock, $0.01 par value; 70,000 shares authorized; 52,332 and 53,732
shares issued and outstanding at December 31, 2023 and 2022, respectively
523
537
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,772,329 and 8,730,262 shares issued;
and 8,139,077 and 8,140,311 shares outstanding at December 31, 2023 and 2022, respectively
Capital surplus
Treasury stock, at cost, 633,252 and 589,951 shares at December 31, 2023 and 2022, respectively
Nonvested restricted stock
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
87,723
55,471,379
(4,821,348)
(2,517,557)
33,748,274
(10,573,070)
71,395,924
974,157,193 $
$
87,303
53,967,630
(4,502,374)
(2,121,128)
29,916,355
(14,052,459)
63,295,864
937,113,146
See Notes to Consolidated Financial Statements
3
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended December 31, 2023 and 2022
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 credit losses on loans
Provision for (release of) credit losses on unfunded commitments
Net interest income after provision for credit losses
Noninterest income:
Mortgage banking income
Service charges on deposit accounts
Other service charges, commissions, and fees
Income from bank owned life insurance
Loss on sale of investment securities
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
2023
2022
$
36,170,561 $
28,564,688
6,078,622
63,193
2,076,368
44,388,744
12,546,015
1,388,896
1,429,229
51,688
15,415,828
3,639,528
115,481
885,851
33,205,548
1,964,637
109,983
1,072,846
17,213
3,164,679
28,972,916
30,040,869
847,398
(478,551)
480,000
-
28,604,069
29,560,869
3,821,146
1,373,920
2,160,491
528,462
(1,525,631)
29,719
-
531,448
6,919,555
18,273,828
3,428,830
3,613,544
420,445
687,261
3,286,247
29,710,155
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
5,813,469
7,571,292
1,210,053
1,640,280
$
4,603,416 $
5,931,012
7,822,882
8,163,934
7,779,396
8,127,148
$
0.59 $
0.56
0.76
0.73
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2023 and 2022
Net income
Other comprehensive gain (loss), net of tax:
Unrealized holding gains (losses) on securities available-for-sale
Reclassification adjustment for realized losses included in earnings
Income tax (expense) benefit
Other comprehensive gain (loss), net of tax
2023
2022
$
4,603,416 $
5,931,012
3,082,832
1,525,631
(1,129,074)
3,479,389
(18,429,822)
-
4,514,391
(13,915,431)
Comprehensive income (loss)
$
8,082,805 $
(7,984,419)
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, 2023 and 2022
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, 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
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
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
Adoption of new accounting
standard
Net income
Other comprehensive income,
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
-
(179,878)
-
-
-
-
-
-
-
-
-
-
-
-
(1,400)
(14)
1,400
14
-
-
-
-
51,312
513
130,876
(10,645)
(107)
(73,892)
-
-
-
-
-
-
-
1,446,765
-
(318,974)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
547,110
-
-
5,931,012
-
5,931,012
-
-
-
-
-
-
-
(13,915,431)
(13,915,431)
-
-
-
-
-
-
-
554,415
(815,440)
547,110
372,423
(179,878)
-
-
-
-
-
-
(396,429)
-
-
(771,497)
4,603,416
-
-
(771,497)
4,603,416
-
-
-
-
-
-
-
3,479,389
3,479,389
-
-
-
-
-
-
-
131,389
(73,999)
(396,429)
1,446,765
(318,974)
Balance, December 31, 2023
52,332
$ 523
8,772,329 $87,723 $
55,471,379
$
(4,821,348) $
(2,517,557) $
33,748,274 $
(10,573,070)
$
71,395,924
See Notes to Consolidated Financial Statements
6
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
December 31, 2023 and 2022
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses loans held for investment
Provision for (release of) credit losses – unfunded commitments
Depreciation expense
Loss 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
Loss on sale of investment securities
Originations of mortgages held for sale
Proceeds from sales of mortgages held for sale
Mortgage banking income
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
Decrease (increase) in cash surrender value of life insurance
Stock based compensation expense
Decrease in ROU asset
Increase in mortgage servicing rights, net
Increase in accrued interest receivable
Decrease (increase) in other assets
Increase in accrued interest payable
Decrease in lease liabilities
Increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of securities available-for-sale
Maturities of securities available-for-sale
Proceeds on sales of securities available-for-sale
Net decrease (increase) in nonmarketable equity securities
Net decrease (increase) in time deposits in other banks
Net increase in loans receivable
Purchases of premises, furniture and equipment
Proceeds from death benefits received on BOLI
Proceeds from disposal of premises, furniture and equipment
Proceeds from sale of other real estate owned
Net cash used in investing activities
7
2023
2022
$
4,603,416 $
5,931,012
847,398
(478,551)
1,126,296
5,198
141,659
(245,842)
(29,719)
-
1,525,631
(202,205,102)
206,810,392
(3,821,146)
-
-
72,778
-
31,746
(70,382)
(528,462)
1,446,765
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
656,472
635,383
(1,324,159)
(1,196,752)
(1,061,963)
(688,352)
(1,672,790)
1,373,490
188,946
744,690
(604,686) (584,030)
844,734
25,347,932
12,431
9,029,728
(55,030,945)
10,484,793
38,184,599
837,400
258,718
(43,901,721)
(628,895)
1,173,338
45,420
-
(48,577,293)
(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)
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
December 31, 2023 and 2022
See Notes to Consolidated Financial Statements
Cash flows from financing activities:
Net (decrease) increase in demand deposits, interest-bearing transaction
accounts and savings accounts
Net increase (decrease) in certificates of deposit and other time deposits
Net (decrease) increase in advances from Federal Home Loan Bank
Net (decrease) increase in securities sold under agreements to repurchase
Issuance of common stock
(Increase) decrease 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
Adoption of ASU 2016-13
2023
2022
(5,123,738)
65,536,402
(25,000,000)
(7,060,344)
57,390
(396,429)
(318,974)
27,694,307
39,576,828
(22,226,308)
20,000,000
(4,004,464)
56,775
547,110
(179,878)
33,770,063
(11,853,258)
(116,326,650)
33,797,310
150,123,960
$
21,944,052 $
33,797,310
$
610,065 $
14,671,138
2,246,350
2,975,733
$
3,479,389 $
771,497
(13,915,431)
-
See Notes to Consolidated Financial Statements
8
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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 credit losses (“ACL”) on loans, including valuation allowances of specifically reviewed 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 ACL 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 ACL 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 ACL on loans and
reserves on foreclosed real estate. Such agencies may require the Company to recognize additions to the ACL
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 ACL on loans, unfunded commitments, and evaluation of reserves on
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, 2023 and 2022, the majority of the total
loan portfolio was to borrowers from within these areas.
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.
9
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
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 or its corporations, obligations of state and local
governments, collateralized loan obligations, and corporate securities. In the opinion of management, there is
minimal 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.
Accounting Standards Adopted in 2023:
On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss
methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”)
methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset
using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to
financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and
some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets
measured at amortized cost will be presented at the net amount expected to be collected by using an allowance
for credit losses. Purchased credit deteriorated (“PCD”) loans will receive an initial allowance at the acquisition
date that represents an adjustment to the amortized cost basis of the loan, with no impact to earnings.
In addition, CECL made changes to the accounting for available-for-sale (“AFS”) debt securities. One such change
is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt
securities if management does not intend to sell and does not believe that it is more likely than not they will be
required to sell. There was no allowance for credit losses recorded on AFS securities in 2023.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023, using
the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet
credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for
credit losses on loans of $114,221, which is presented as a reduction to net loans outstanding, and an increase in
the allowance for credit losses on unfunded loan commitments of $886,038, which is presented on the balance
sheet. The Company recorded a net decrease to retained earnings of $771,497 as of January 1, 2023, for the
cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable
deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023, are presented under
CECL while prior period amounts continue to be reported in accordance with previously applicable accounting
standards (“Incurred Loss”).
10
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
Accounting Standards Adopted in 2023, continued:
The Company adopted ASC 326 using the prospective transition approach for PCD assets that were previously
classified as purchased credit impaired (“PCI”) under ASC 310-30. In accordance with the standard, management
did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023,
the amortized cost basis of PCD assets were adjusted to reflect the addition of $23,681 to establish the allowance
for credit losses. The remaining interest-related discount of approximately $441,936 will be accreted into interest
income at the effective interest rate as of January 1, 2023.
Regarding PCD assets, the Company elected to disaggregate the former PCI pools and no longer considers these
pools to be the unit of account; contractually delinquent PCD loans will be reported as nonaccrual loans using the
same criteria as other loans.
The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-
temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did
not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the
Company determined that there was no allowance for credit losses on available-for-sale securities.
The following table illustrates the impact on the allowance for credit losses from the adoption of ASC 326:
January 1, 2023
As Reported Under
ASC 326
December 31, 2022
Pre-ASC 326
Adoption
Impact of ASC
326 Adoption
Assets:
Loans, at amortized cost
Allowance for credit losses on loans:
Construction
Residential
Non-Residential
Commercial and industrial
Consumer and other
Total allowance for credit losses
Liabilities:
Allowance for credit losses unfunded
Commitments
$
$
$
$
661,274,197 $
661,250,516 $
23,681
(522,313) $
(2,083,881)
(3,669,567)
(800,070)
(698,184)
(7,774,015) $
(516,545) $
($2,048,171)
(3,612,062)
(790,172)
(692,844)
(7,659,794) $
(5,768)
(35,710)
(57,505)
(9,898)
(5,340)
(114,221)
886,038 $
- $
(886,038)
On January 1, 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326):
Troubled Debt Restructurings and Vintage Disclosures,” which are intended to improve the decision usefulness of
information provided to investors about certain loan re-financings, restructurings, and write-offs. There was no
material effect on the Company’s financial statements with this adoption.
11
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
Accounting Standards Adopted in 2023, continued:
In December 2022, the FASB issued ASU 2022-06, which provided 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. This change impacted the
interest rate paid on some loans and on Trust Preferred Securities (debt) (see note 12) and the new rates were
effective July 1, 2023. This change did not have a material impact on the Company’s financial statements.
Recently issued accounting pronouncements:
In December 2023, the FASB amended the Income Tax topic in the Accounting Standards codification to improve
the transparency of income tax disclosures. The amendments are effective for annual periods beginning after
December 15, 2024 (for public entities) and for annual periods beginning after December 15, 2025 (for all other
entities). Early adoption is permitted for annual financial statements that have not yet been issued or made
available for issuance. The Company does not expect these amendments to have a material effect of 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.
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 credit related are recorded in an ACL account and
reported as provision for credit losses in the income statement. 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 are recognized to the first call date 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.
Allowance for credit losses – AFS securities
For available-for-sale securities, management evaluates all investments in an unrealized loss position on a
quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the
Company has the intent to sell the security, or it is more likely than not that the Company will be required to sell
the security, the security is written down to fair value, and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of
credit losses or other factors. In making the assessment, the Company may consider various factors including the
extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in
the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal
12
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss
exists, the present value of cash flows expected to be collected is compared to the amortized cost basis of the
security and any excess is recorded as an allowance for credit loss, limited to the amount that the fair value is less
than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance
for credit loss is recognized in other comprehensive income.
Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses
are charged against the allowance for credit loss when management believes an available-for-sale security is
confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At
December 31, 2023, there was no allowance for credit loss related to the available-for-sale portfolio.
Accrued interest receivable on available-for-sale debt securities totaled $1,221,459 at December 31, 2023 and was
excluded from the estimate of credit losses.
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, 2023 and 2022, nonmarketable equity securities consist of the following:
Federal Home Loan Bank stock
Community Bankers Bank stock
Total
2023
2022
$
$
891,700 $ 1,729,100
58,100
949,800 $ 1,787,200
58,100
Nonmarketable equity securities are carried at cost since there is no quoted market value and no ready market
exists. Investment in the Federal Home Loan Bank of Atlanta (“FHLB”) is a condition to borrowing from that bank,
and the stock is pledged to collateralize such borrowings. Dividends received on nonmarketable equity securities
are included as a separate component of interest income.
Loans receivable:
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity
or payoff are reported at their amortized cost basis, net of any charge-offs. Amortized cost is the principal balance
outstanding, net of purchase premiums or discounts and deferred fees and costs. Accrued interest receivable
related to loans totaled $2,231,999 at December 31, 2023 and was reported in accrued interest receivable on the
consolidated balance sheets. Interest income is recognized in the period earned and is computed based upon the
unpaid principal balance.
Loans receivable, continued:
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
13
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
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. Past due status is based on
contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been
received 30 days after the contractual due date.
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 using a straight-line method.
Allowance for credit losses- Loans:
The allowance for credit losses represents the portion of the loan's amortized cost basis that the Company does
not expect to collect due to credit losses over the loan's life, considering past events, current conditions, and
reasonable and supportable forecasts of future economic conditions. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries,
if any, are credited to the allowance. The allowance for credit losses is based on the loan's amortized cost basis,
excluding accrued interest receivable, as the Company promptly charges off uncollectible accrued interest
receivable. Management’s determination of the appropriateness of the allowance is based on periodic evaluation
of the loan portfolio, lending-related commitments and other relevant factors, including macroeconomic forecasts
and historical loss rates. In the future, the Company may update information and forecasts that may cause
significant changes in the estimate in those future quarters.
The Company calculates its expected credit loss using a non-discounted cash flow methodology that calculates
the lifetime loss rate. Loss estimates within the collectively assessed population, used for non-impaired loans that
share common risk characteristics, are based on a combination of pooled assumptions and loan-level
characteristics. Expected losses for the Bank’s collectively assessed loan segments are estimated using a loan-
level probability of default ("PD") / loss given default ("LGD") cash flow method with an exposure at default
("EAD") model. Our third-party provider, Abrigo, supports the model and the Valuant Index used by the Company.
For each segment, the Company generates cash flow projections at the instrument level wherein payment
expectations are adjusted for estimated prepayment speeds, probability of default rates, and loss given default
rates. Due to limited historical losses, the modeling of quantitative loss inputs such as PD and LGD utilize the
Valuant Index. In order to estimate the life of a loan, the contractual term of the loan is adjusted for estimated
prepayments based on market information and the Company’s prepayment history.
The Company also considers the need to adjust historical information to reflect the extent to which management
expects losses through a reasonable and supportable forecast. The Bank has elected to utilize the regression
model built off the Valuant Index to reasonably forecast expected PDs based on expected changes in the National
Unemployment Rate.
For loss estimation purposes, the Company disaggregates the loan portfolio into five loan segments: 1)
Construction real estate; 2) Residential real estate; 3) Non-residential real estate; 4) Commercial and industrial;
and 5) Consumer and other. Each of these loan segments receives the application of qualitative inputs for loss
estimation purposes (see paragraph on page 15 for more detail on qualitative factors).
14
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
Allowance for credit losses- Loans, continued:
These loan segments include:
Construction real estate loans. Includes commercial construction, land acquisition and development loans, single-
family construction to small businesses and individuals. These loans are generally secured by the land or the real
property being built and are made based on the Company’s assessment of the value of the property on an as-
completed basis and repayment depends upon project completion and sale, refinancing, or operation of the real
estate.
Residential real estate loans. Includes 1-4 family mortgage loans, residential line of credit loans, and residential
construction loans. All of these loan types are primarily made with respect to and secured by single family homes,
which are both owner-occupied and investor owned. Repayment depends primarily upon the cash flow of the
borrower as well as the value of the real estate collateral.
Non-residential real estate loans. Includes commercial real estate non-owner occupied and owner-
occupied loans to finance commercial real estate investment properties for various purposes including
use as offices, warehouses, production facilities, health care facilities, hotels, mixed-use residential/commercial,
manufacturing housing communities, assisted living facilities, retail centers, restaurants, churches and agricultural
based facilities. Commercial real estate owner-occupied loans are typically repaid through the ongoing business
operations of the borrower. Commercial real estate non-owner occupied loans are typically repaid with the funds
received from the sale or refinancing of the property or rental income from such property.
industrial
loans. Commercial and
loans are typically made to small-sized
Commercial and
manufacturing, wholesale, retail and service businesses, and farmers for working capital and operating needs
and business expansions. Commercial and industrial loans generally include lines of credit and loans with
maturities of five years or less. Commercial and industrial loans are generally made with operating cash flows as
the primary source of repayment, but may also include collateralization by inventory, accounts receivable,
equipment and personal guarantees.
industrial
Consumer and other loans. Includes loans to individuals for personal, family and household purposes, including
car, boat and other recreational vehicle loans, manufactured homes (without real estate) and personal lines of
credit. Consumer loans are generally secured by vehicles and other household goods, with repayment depending
primarily on the cash flow of the borrower.
The Company's loss rate models estimate the lifetime loss rate for the pools of loan segments by combining the
calculated loss rate based on each variable within the model, including the macroeconomic variables. The lifetime
loss rate for the pool is then multiplied by the loan balances to determine the expected credit losses on the pool.
The quantitative models require loan data and macroeconomic variables based on the inherent credit risks in each
portfolio to more accurately measure the credit risks associated with each. The quantitative models pool loans
with similar risk characteristics and collectively assesses the lifetime loss rate for each pool to estimate its
expected credit loss.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors
that are likely to cause estimated credit losses to differ from historical experience. These qualitative factor
adjustments may increase or decrease the Company’s estimate of expected credit losses, and includes those that
15
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
are relevant to the institution as of the reporting date, which may include, but are not limited to: levels of and
trends in delinquencies and performance of loans; levels of and trends in write-offs and recoveries collected;
trends in volume and terms of loans; effects of any changes in reasonable and supportable economic forecasts;
effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures,
and practices; experience, ability, and depth of lending management and expertise; available relevant information
sources that contradict the Company’s own forecast; effects of changes in prepayment expectations or other
factors affecting assessments of loan contractual terms; industry conditions; and effects of changes in credit
concentrations.
When loans no longer share similar risk characteristics with other loans in any given pool, the loan is evaluated on
an individual basis. When the borrower is experiencing financial difficulty and repayment is expected to be
provided through operations or sale of collateral, the expected credit losses are based on the fair value of collateral
at the reporting date, adjusted for selling costs as appropriate.
Allowance for loan losses – Prior to the adoption of ASC 326
The allowance for loan losses is management’s estimate of losses inherent in the loan portfolio. It is established
through the 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.
16
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
Allowance for loan losses – Prior to the adoption of ASC 326, continued:
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 loan
modification in 2023 or as troubled debt restructuring for calendar years 2022 and prior. Loan modifications or
restructurings 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.
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.
17
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
Mortgage servicing rights, continued:
The methodology used to determine the fair value of MSRs is subjective and requires the development of a
number of assumptions, including anticipated prepayments of loan principal. Fair value is determined by
estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount
rates and other assumptions validated through comparison to trade information, industry surveys and with the
use of independent third-party appraisals. Risks inherent in the MSRs’ valuation include higher than expected
prepayment rates and/or delayed receipt of cash flows. The value of MSRs is significantly affected by mortgage
interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during
periods of declining interest rates, the value of mortgage servicing rights declines due to increasing prepayments
attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value
of servicing rights generally increases due to reduced refinance activity.
MSRs 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, 2023 and
concluded no impairment exists.
18
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
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.
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 $11,736 and $25,000 at
December 31, 2023 and December 31, 2022, respectively.
Derivatives and hedging:
At the inception of a derivative contract, the Company designates the derivative as one of the three types based
on the Company’s intentions and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of
the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a
hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized
asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“non-designated
derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the
hedged item attributable to he hedged risk, are recognized in current earnings as the fair values change. For a
cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified
into earnings in the same periods during which the hedged transaction affects earnings. Changes in fair value of
derivatives not designated are reported currently in earnings, as non-interest income.
Accrued settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest
expense, based on the item being hedged. Accrued settlements on derivatives not designated are reported in
non-interest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows
of the items being hedged.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-
management objective and the strategy for undertaking hedge transactions at the inception of the hedging
relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities
on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally
assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are
designated are highly effective in offsetting changes in fair value s or cash flows of the hedged items. The Company
discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes
19
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
Derivatives and hedging, continued:
in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted
transaction in no longer probable, a hedged firm commitment in no longer firm, or treatment of the derivative as
a hedge is no longer appropriate or intended.
When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-
interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for
changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset
or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still
expected to occur, the gains or losses that were accumulated in other comprehensive income are amortized into
earnings over the same periods which the hedged transactions will affect earnings.
The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the
Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully
satisfy their obligations under the agreements. All of the contracts to which the Company is a party settle monthly
or quarterly. In addition, the Company obtains collateral above certain thresholds of the fair value of its
derivatives for each dealer counterparty based upon their credit standing and the Company has netting
agreements with the dealers with which it does business.
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.
20
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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
$663,603 and $662,468 for 2023 and 2022, 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.
21
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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 $601,534 and $460,803 to salaries and benefits expense for the retirement savings plan in
2023 and 2022, respectively. In addition, the Company made elective contributions to the employee stock
ownership plan during 2023 and 2022 totaling $0 and $150,021, 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 2023 and 2022,
the supplemental retirement expense was $208,864 and $202,087. The current accrued but unfunded amount is
$2,770,812 and $2,588,144 at December 31, 2023 and 2022, 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 $18,190,892 and
$18,835,768 at December 31, 2023 and 2022, respectively.
The Company has split-dollar life insurance arrangements with certain of its officers. At December 31, 2023 and
2022, the split-dollar liability relating to these arrangements totaled $465,420 and $438,042 respectively. For 2023
and 2022, the Company recognized net expenses of $27,378 and $25,765, 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,
2023 and 2022, the ESOP owned 474,671 and 472,962 shares of the Company’s common stock with an estimated
value of $4,067,930 and $4,124,228, respectively. All of these shares were allocated to participants.
22
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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 and unfunded commitments:
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and
commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in
the event of nonperformance by the other party to the financial instrument for off-balance sheet loan
commitments is represented by the contractual amount of those instruments. Such financial instruments are
recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the
commitments to extend credit are unconditionally cancelable, through a charge to provision for credit losses in
the Company’s income statements. The allowance for credit losses on off-balance sheet credit exposures is
estimated by loan segment at each balance sheet date under the current expected credit loss model using the
same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as
any third-party guarantees. The allowance for credit losses on unfunded commitments is included as a separate
line item on the Company’s consolidated balance sheets.
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.
23
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1. Summary of Significant Accounting Policies, Continued
Business combinations and Purchased Credit Deteriorated Loans:
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.
Upon adoption of ASC 326, loans that were designated as PCI loans under the previous accounting guidance
were classified as PCD loans without reassessment.
In future acquisitions, the Company may purchase loans, some of which have experienced more than insignificant
credit deterioration since origination. In those cases, the Company will consider internal loan grades, delinquency
status and other relevant factors in assessing whether purchased loans are PCD. PCD loans are recorded at the
amount paid. An initial allowance for credit loss is determined using the same methodology as other loans held
for investment, but with no impact to earnings. The initial allowance for credit loss determined on a collective
basis is allocated to individual loans. The sum of the loan's purchase price and allowance for credit loss becomes
its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the
loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan.
Subsequent to initial recognition, PCD loans are subject to the same interest income recognition and impairment
model as non-PCD loans, with changes to the allowance for credit loss recorded through provision expense.
Business combinations and method of accounting for loans acquired, prior to ASC 326:
Prior to the adoption of ASC 326, Purchased credit-impaired (“PCI”) loans were 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.
24
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 1.Summary of Significant Accounting Policies, Continued
Segment Reporting:
The Company’s operations are managed and financial performance is evaluated on an organization-wide basis.
Accordingly, management has deemed the banking and finance operations as one reportable operating segment.
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.
Note 2.
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, 2023
U.S. Treasury securities
U.S. agency securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Collateralized loan obligations
Total
$
-
7,325,867
35,290,138
101,484,996
15,979,202
25,323,438
185,403,641
$
$
$
-
31,009
-
268,159
174,054
53,912
527,134
$
-
366,871
4,182,595
8,689,940
1,290,795
1,000
$ 14,531,201
$
$
-
6,990,005
31,107,543
93,063,215
14,862,461
25,376,350
171,399,573
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
$
$
25
-
-
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
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 2. Investment Securities, Continued
At December 31, 2023 and 2022, the Company had marketable equity securities totaling $128,517 and $133,715,
respectively. The Company did not have any securities classified as held-to-maturity at December 31, 2023 and
2022.
The following is a summary of maturities of securities available-for-sale as of December 31, 2023. 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.
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
$ 4,553,854
53,740,424
25,624,366
83,918,644
101,484,996
$185,403,641
Fair Value
$ 4,487,074
49,066,812
24,782,472
78,336,358
93,063,215
$171,399,573
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, 2023 and 2022.
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
U.S Agency securities
Municipal securities
Mortgage-backed securities
Corporate bonds
Collateralized loan obligations
Total
December 31, 2023
Fair
Value
Unrealized
Losses
December 31, 2022
Fair
Value
Unrealized
Losses
$
- $
-
-
11,734,826
4,875,345
-
$ 16,610,171 $
- $ 21,910,468 $
-
-
105,404
290,436
-
5,375,186
18,086,471
38,317,573
5,225,203
14,700,000
429,864
265,510
395,840 $ 103,614,901 $ 8,668,317
1,020,843
430,391
2,756,674
3,765,035
December 31, 2023
Fair
Value
Unrealized
Losses
December 31, 2022
Fair
Value
Unrealized
Losses
$
- $
- $
8,897,501 $
889,773
-
3,063,029
5,945,797
50,505
-
$ 109,131,377 $ 14,135,361 $ 50,426,516 $ 9,949,104
-
12,184,339
28,895,181
449,495
-
4,661,522
31,107,543
62,432,359
5,930,953
4,999,000
366,871
4,182,595
8,584,536
1,000,359
1,000
26
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 2. Investment Securities, Continued
At December 31, 2023 and 2022, the Company had eighty-one and eighty-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
and credit ratings, the unrealized losses were attributable to changes in market interest rates and were not
attributable to deterioration in credit quality.
During 2023, the Company sold all US Treasury securities and two US Agency securities with proceeds totaling
$38,184,599. There was one gain recognized of $6,846 and eight losses recognized totaling $1,532,477. During
2022, the Company sold securities with proceeds of $1,000,000 and had no gains or losses on these sales. During
2023 and 2022, the Company recognized losses of $5,198 and $4,144, respectively, within the consolidated
statement of operations related to the decrease in fair value of marketable equity securities.
At December 31, 2023 and 2022, investment securities with a par value of $39,011,850 and $10,392,607 and a fair
market value of $34,527,077 and $8,880,434, respectively, were pledged as collateral for securities under
agreements to repurchase and to secure public deposits.
Note 3. Loans and Allowance for Credit 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
2023
2022
$
$
35,634,919
220,618,838
355,271,860
611,525,617
61,152,820
32,993,953
705,672,390
$
$
45,458,457
181,006,315
317,559,308
544,024,080
65,479,589
51,746,847
661,250,516
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 2023 and 2022 totaled $206,810,392 and $240,966,438, 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.
27
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Credit Losses, continued
Credit Quality Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service
their debt, including, among other factors: current financial information, historical payment experience, credit
documentation, public information, and current economic trends. The following definitions are utilized for risk
ratings, which are consistent with the definitions used in supervisory guidance:
Special Mention - Loans classified as special mention have a potential weakness that deserves managements close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects
for the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with
the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Risk ratings are updated on an ongoing basis and are subject to change by continuous loan monitoring processes.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are
considered to be pass rated loans.
28
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Credit Losses, continued
Effective January 1, 2023, the Company adopted the accounting guidance in ASU 2022-02 which requires the
presentation of gross charge-offs by year of origination. The Company prospectively adopted ASU 2022-02;
therefore, prior period activity of gross charge-offs by year of origination are not included in the below tables.
2023
2022
2021
2020
2019
Prior
Revolving
Total
Term Loans by Year of Origination
Commercial and
Industrial:
Pass
Special Mention
Substandard
Watch
Total
$ 10,836,164 $16,560,384 $ 6,305,177 $ 3,650,115 $
-
15,693
40,664
3,706,472
-
126,990
93,979
11,008,477 16,781,353
-
63,663
69,364
6,438,203
-
91,067
81,246
5,478,561 $ 2,081,635 $
-
-
401,976
5,880,536
-
-
105,421
2,187,056
15,084,685 $ 59,996,719
-
337,492
818,609
15,150,723 61,152,820
-
40,080
25,959
Current-period
gross charge-offs
Construction:
Pass
Special Mention
Substandard
Watch
Total
Current-period
gross charge-offs
Consumer and
Other:
Pass
Special Mention
Substandard
Watch
Total
Current-period
gross charge-offs
-
147,144
-
43,347
-
-
-
190,491
5,393,944 22,275,803
-
-
-
5,393,944 22,275,803
-
-
-
3,906,834
-
-
-
3,906,834
515,555
-
-
-
515,555
1,694,826
-
-
629,272
2,324,098
563,884
843
-
653,959
1,218,686
- 34,350,845
843
-
-
-
-
1,283,230
- 35,634,919
-
-
-
-
-
-
-
-
4,483,471
-
-
-
4,483,471
4,942,558 14,083,657
-
47,825
275,857
4,946,558 14,407,338
-
-
4,000
4,419,155
-
-
34,171
4,453,326
2,181,234
-
905
225,683
2,407,821
1,074,145
697
9,735
28,518
1,113,095
1,179,199 32,363,418
697
58,644
571,194
1,182,344 32,993,953
-
180
2,965
50,279
16,326
134,712
12,255
1,917
6,317
6,932
228,738
Nonresidential
Real Estate:
Pass
Special Mention
Substandard
Watch
Total
Current-period
gross charge-offs
Residential
Real Estate:
Pass
Special Mention
Substandard
Watch
Total
Current-period
gross charge-offs
40,048,570 99,471,905 103,062,042 33,053,132
-
-
5,159,354
40,928,730 99,684,479 105,208,210 38,212,487
-
-
212,574
-
-
2,146,168
-
-
880,160
22,132,405 38,205,818
136,778
171,217
1,560,317
23,354,518 40,074,130
-
-
1,222,112
7,809,301 343,783,174
136,783
5
-
171,217
- 11,180,687
7,809,307 355,271,860
-
-
-
-
-
-
-
-
65,619,634 49,323,968 35,748,640 16,276,194
-
-
-
66,390,393 49,323,968 35,791,326 16,276,194
145,492
-
625,267
-
-
42,686
-
-
-
6,432,800 14,476,616
(85)
-
416,922
6,432,800 14,893,452
-
-
-
31,481,583 219,359,435
145,407
29,122
1,084,874
31,510,705 220,618,838
-
29,122
-
-
-
-
-
-
-
-
-
29
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Credit Losses, Continued
The following table is a summary of the Company’s recorded investment in loans by credit quality indicators as of
December 31, 2022, prior to the adoption of ASC 326:
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
1,143,229
165,274
-
1,521,706
-
-
6,180,336
589,755
-
7,751,948
912,923
-
3,993,505
521,152
-
665,125
68,603
-
The following is an analysis of the allowance for credit or loan losses by class of loans for the years ended December
31, 2023 and 2022:
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
December 31, 2023
Beginning
balance
Adjustment to
allowance for
adoption of
ASU 2016-13
Provisions
Recoveries
Charge-offs
Ending balance
$
7,659,794 $
516,545 $
2,048,171 $
3,612,062 $
6,176,778 $
790,172 $
692,844
114,221
847,398
191,309
(419,229)
8,393,493 $
$
5,768
(99,581)
5,500
-
35,710
706,366
68,485
-
57,505
175,984
68,366
-
98,983
782,769
142,351
-
9,898
171,890
5,265
(190,491)
428,232 $
2,858,732 $
3,913,917 $
7,200,881 $
786,734 $
5,340
(107,261)
43,693
(228,738)
405,878
There were no loans individually evaluated as of December 31, 2023 under ASU 2016-13.
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under
the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in
prior periods.
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
December 31, 2022
Beginning
balance
Provisions
Recoveries
Charge-offs
Ending balance
$
7,039,576 $
480,000
346,173
(205,955)
$
7,659,794 $
545,727 $
(249,752)
220,570
-
1,654,957 $
310,032
83,182
-
2,797,228 $
814,834
-
-
4,997,912 $
875,114
303,752
-
516,545 $
2,048,171 $
3,612,062 $
6,176,778 $
998,690 $
(112,426)
4,892
(100,984)
790,172 $
1,042,974
(282,688)
37,529
(104,971)
692,844
30
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Loan Losses, Continued
December 31, 2022
Real Estate Loans
Total
Construction
Residential
Non-
Residential
Total
Real Estate
Loans
Commercial
and
Industrial
Consumer
and Other
$
- $
- $
- $
- $
- $
- $
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
Allowance
Evaluated for
impairment
Individually
Collectively
Allowance
for loan losses
Total Loans
Evaluated for
impairment
Individually
Collectively
Loans
receivable
Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and
events, it was probable the company would be unable to collect all amounts due in accordance with the original
contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing
troubled debt restructurings. When determining if the Company would be unable to collect all principal and
interest payments due in accordance with the contractual terms of the loan agreement, the Company considered
the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an
analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of
repayment, such as guarantor support and collateral value. The Company individually assessed for impairment all
nonaccrual loans greater than $100,000. The tables below include all loans deemed impaired, whether or not
individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated,
if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s
existing rate or at the fair value of collateral if repayment was expected solely from the collateral. Interest
payments on impaired loans were typically applied to principal unless collectability of the principal amount was
reasonably assured, in which case interest was recognized on a cash basis.
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
$
- $
- $
490,123
538,534
1,028,657
-
-
490,123
553,402
1,043,525
-
-
$ 1,028,657 $ 1,043,525 $
31
- $
- $
-
-
-
-
-
- $ 1,083,776 $
519,676
564,100
1,083,776
-
-
-
34,413
38,574
72,987
-
-
72,987
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Credit Losses, Continued
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
$
$
$
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
- $
-
-
-
-
-
- $
- $
- $
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
-
-
-
-
-
-
-
-
-
-
34,413
38,574
72,987
-
-
72,987
The following is an aging analysis of the Company’s loan portfolio at December 31, 2023:
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
- $
196,010
-
-
13,512
732
$ 210,254 $
- $35,634,919 $
- $
-
-
-
-
6,090
6,090 $ 185,168 $ 401,512 $705,270,878 $
196,010 220,442,828
85,684 355,186,176
281,694 611,243,923
61,053,841
32,973,114
- $
-
85,684
85,684
85,467
14,017
98,979
20,839
35,634,919 $
220,618,838
355,271,860
611,525,617
61,152,820
32,993,953
705,672,390 $
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 $
32
-
-
-
-
-
-
-
-
-
-
-
-
-
-
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Credit Losses, Continued
The following is an analysis of the Company’s nonaccrual loan portfolio recorded at December 31, 2023 and 2022:
CECL
December 31, 2023
Nonaccrual Loans with
No Allowance
Nonaccrual Loans
with an Allowance
Incurred Loss
December 31, 2022
Nonaccrual
Loans
Total Nonaccrual
Loans
Real estate loans
Residential
Nonresidential
Total real estate loans
Commercial and industrial
Consumer and other
Total
$
- $
140,661
140,661
98,979
56,100
295,740 $
- $
-
-
-
-
- $
-
$
140,661
140,661
98,979
56,100
295,740 $
68,602
199,406
268,008
75,730
129,456
473,194
The Company recognized $48,187 of interest income on nonaccrual loans during the year ended December 31,
2023.
Modifications Made to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each
asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses
is historical loss information, which includes losses from modifications of receivables to borrowers experiencing
financial difficulty. The Company uses a probability of default/loss given default model to determine the
allowance for credit losses. An assessment of whether a borrower is experiencing financial difficulty is made on
the date of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included
in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a
change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company
modifies loans by providing principal forgiveness, extension of maturity date, or interest rate reduction. When
principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for
credit losses, since it is deemed uncollectible.
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one
type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial
difficulty, another concession, such as principal forgiveness or rate reduction, may be granted.
As of December 31, 2023, the Company has a total of 10 loans with modifications. 9 loans with term extensions
and 1 loan with a rate reduction. The outstanding balance of these loans totals $915,585, or 0.13% of total loans
outstanding. The composition includes: (1) 3 nonresidential real estate loans with an outstanding balance of
$477,686 or 0.07% of total loans outstanding; (2) 4 residential real estate loans with an outstanding balance of
$344,941 or 0.05% of total loans outstanding, and (3) 3 commercial and industrial loans with an outstanding
balance of $92,958 or 0.01% of total loans outstanding. All 10 loans were current (not past due) as of December
31, 2023.
33
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Credit Losses, Continued
Unfunded Commitments and related allowance for credit losses
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. 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 and equipment, and income-producing commercial properties.
The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for
existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of
credit when there is a contractual obligation to extend credit and when this extension of credit is not
unconditionally cancellable (i.e., the commitment cannot be canceled at any time). The allowance for off-balance
sheet credit exposures is adjusted as a provision for credit loss expense or (release). The estimate includes
consideration of the likelihood that funding will occur, which is based on a historical funding study derived from
internal information, and an estimate of expected credit losses on commitments expected to be funded over its
estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans
and are discussed in Note 1. The allowance for credit losses for unfunded loan commitments of $407,487 at
December 31, 2023, is separately classified on the balance sheet within Other Liabilities.
The total unfunded commitments (loans) at December 31, 2023 was $109,525,058. The following table presents
the balance and activity in the allowance for credit losses for unfunded loan commitments for the year ended
December 31, 2023.
Balance, December 31, 2022
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13
Provision for credit losses (release) – unfunded commitments for
Balance, December 31, 2023
$
$
-
886,038
(478,551)
407,487
Total Allowance for Credit
Losses – Unfunded
Commitments
34
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 3. Loans and Allowance for Credit Losses, Continued
Acquired loans:
Upon adoption of ASC 326, loans that were designated as PCI loans under the previous accounting guidance were
classified as PCD loans without reassessment. The information below relates to years ended December 31, 2022.
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 with remaining accretable yield of $62 thousand at
December 31, 2022. 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:
Balance at beginning of period
Change due to payments received and accretion
Advances
Balance at end of period
2022
$
$
2,094,575
(719,334)
175,729
1,550,970
The following table presents changes in the nonaccretable yield for PCI loans for the year ended December 31,
2022:
Balance at beginning of period
Reclassification to accretable yield
Change due to recoveries (charge-offs)
Balance at end of period
2022
$
$
278,362
(107,011)
-
171,351
The following table presents changes in the accretable yield for PCI loans for the year ended December 31, 2022:
Balance at beginning of period
Reclassification from nonaccretable yield
Accretion, net cash basis interest collections
Balance at end of period
2022
431,412
107,011
(264,388)
274,035
$
$
The Company did not include acquired loans within the calculation of allowance for loan losses as of December
31, 2022, as the remaining discount was in excess of calculated allowance on those loans.
35
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 4. 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
2023
2022
$ 8,632,700 $ 8,632,700
16,895,393
16,952,575
2,249,098
2,249,098
11,146,395
11,542,204
941,716
828,763
39,752,349
40,318,293
(16,940,899)
$ 22,298,348 $ 22,811,450
(18,019,945)
Depreciation expense for the years ended December 31, 2023 and 2022 amounted to $1,126,296 and $1,112,170,
respectively.
At December 31, 2023 and 2022, construction in progress consists mainly of architect fees and site work for
potential new branches. As of December 31, 2023, there were no material commitments outstanding for the
construction or purchase of premises, furniture and equipment.
Note 5. Other Real Estate Owned
Transactions in other real estate owned for the years ended December 31, 2023 and 2022 are summarized below:
Beginning balance
Additions
Sales
Write downs
Ending balance
2023
2022
$
$
- $
-
-
-
- $
135,000
-
(135,000)
-
-
The Company did not sell any other real estate owned during 2023 nor foreclose on any real property during 2023.
The Company recognized a loss on the sale of other real estate owned of $15,838 for the year ended December
31, 2022.
Note 6. 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.
36
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 6. Mortgage Servicing Rights, continued
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, 2023 and 2022:
2023
2022
Balances, beginning of year
Amount capitalized
Sales proceeds, net
Amount amortized
Balances, end of year
2,287,337
-
$ 5,798,967 $ 9,681,076
2,370,641
(4,939,834)
(1,312,916)
$ 7,272,550 $ 5,798,967
(813,754)
The following table presents the activity for MSRs accounted for using the fair value method for the years ended
December 31, 2023 and 2022:
Balances, beginning of year
Changes in fair value (1)
Changes in unpaid principal balance (2)
Balances, end of year
2023
2022
$ 4,642,455 $ 4,376,021
281,434
1,251,171
(558,265) (984,737)
$ 4,365,624 $ 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.
The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the
present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other
assumptions validated through comparison to trade information, industry surveys, and with the use of
independent third-party appraisals. Changes in prepayment speed assumptions have the most significant impact
on the fair value of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to
increased refinance activity, which results in a decrease in the fair value of the MSRs. Conversely, as interest rates
increase, generally, the MSRs fair value will increase. Measurement of fair value is limited to the conditions that
exist 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, 2023 and 2022, the aggregate amount of loans serviced by the Company for the benefit of others
totaled $1.0 billion and $0.9 billion respectively.
37
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 6. Mortgage Servicing Rights, continued
The characteristics and sensitivity analysis of the MSRs are included in the following table as of December 31, 2023
and 2022.
Composition of residential loans serviced for others
Fixed-rate mortgage loans
Weighted average expected life
Constant prepayment rate (“CPR”)
Weighted average discount rate
Note 7. Derivative Financial Instruments
2023
98%
7.4 years
7.73%
8.53%
2022
100%
7.7 years
7.65%
8.53%
The non-designated derivative positions of the Company for the years ended December 31, 2023 and 2022 are
reported as other assets or other liabilities, net, and are as follows:
Derivative assets (liabilities):
Mortgage loan interest rate
lock commitments
Mortgage loan forward
sales commitments
2023
2022
Fair value
Notional value
Fair value
Notional value
$
282,781
$ 16,996,582
$
56,402
$
7,320,976
(141,797)
18,000,000
35,000
8,000,000
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 or liabilities, net, 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.
The Company had one fair value hedge and the following table presents the gross notional amount and estimated
fair value of the derivative instruments as of December 31, 2023:
December 31, 2023
Fair Value Hedge:
Interest rate contracts:
Pay fixed, receive variable – loans
Total derivatives
Notional Amount
Assets
Liabilities
Fair Value
$
$
50,000,000 $
50,000,000 $
115,056 $
115,056 $
136,061
136,061
The above derivative is under a master netting arrangement. However, as of December 31, 2023, there were no
other outstanding derivative contracts. The fair value of the hedged item is recorded in loans and the derivative
item is recorded in other liabilities in the statement of financial condition. There were no outstanding derivative
contracts as of December 31, 2022.
38
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 7. Derivative Financial Instruments, continued
The following represents the carrying value of the hedged item (loans) in fair hedging relationship:
December 31, 2023
Fair Value Hedge:
Interest rate contracts:
Commercial real estate loans
Total
Hedged Asset
Basis
Designated
Discontinued
Hedge Basis Adjustment
$
$
256,115,000 $
256,115,000 $
115,056 $
115,056 $
-
-
During the year ended December 31, 2023, there was no income recorded on interest settlements. Changes in
the fair value of the hedged item of $115,056 was offset by changes in the fair value of the swap derivative of
$136,061. The residual was a result of the hedge ineffectiveness and recorded as an offset to interest income on
the consolidated statements of operations.
No portion of the change in fair value of derivatives designated as hedges was excluded from the
effectiveness testing. No hedges were terminated during the year ended December 31, 2023.
Note 8. Core Deposit Intangible
The following table presents information about our intangible assets as of December 31:
2023
2022
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangibles
$
880,000 $
805,684
$
880,000 $
732,906
Based on the core deposit intangibles as of December 31, 2023, the following table presents the aggregate
amortization expense for each of the succeeding years ending December 31:
2024
2025
2026
Total
Amount
48,177
23,576
2,563
74,316
$
$
Amortization expense of $72,778 and $97,380 related to the core deposit intangibles was recognized in 2023 and
2022, respectively, and was recorded within other noninterest expense.
39
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 9. Deposits
At December 31, 2023, the scheduled maturities of time deposits were as follows:
Maturing In:
2024
2025
2026
2027
2028
Total
$
Amount
144,529,823
12,917,927
10,919,314
564,332
306,077
$ 169,237,473
Included in total time deposits at December 31, 2023 and 2022, respectively, were brokered time deposits of
$44,608,000 and $25,483,000. Interest expense on time deposits that meet or exceed the FDIC insurance limit of
$250,000 was $2,250,298 and $204,579 for the years ended December 31, 2023 and 2022, respectively.
Note 10. 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
Note 11. Federal Home Loan Bank Advances
Federal Home Loan Bank advances consisted of the following at December 31:
2023
2022
$
13,468,150
5,734,357
0.10%
1.18%
307,517 $ 7,367,861
13,805,033
10,128,626
0.15%
0.17%
Fixed rate
January 25, 2023
January 27, 2023
December 30, 2024
Interest
Rate
4.23%
4.23%
5.57%
2023
2022
$
-
-
5,000,000
$ 5,000,000
$20,000,000
10,000,000
-
$ 30,000,000
At December 31, 2023 and 2022, the Company has pledged certain loans totaling $202,760,138 and $240,843,061,
respectively, as collateral to secure its borrowings from the FHLB. Additionally, the Company’s FHLB stock is
pledged to secure the borrowings.
40
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 12. 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 Chicago Mercantile Exchange (CME) Term SOFR plus a spread adjustment 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, 2023
and 2022, the Company had accrued and unpaid interest totaling $72,069 and $72,870, respectively.
Note 13. Borrowings
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, 2023, remaining debt issuance costs to be amortized totaled $87,303.
At December 31, 2023 and 2022, the Company had accrued and unpaid interest totaling $72,473 and $67,985,
respectively, on its subordinated debt.
Note 14. Shareholders’ Equity
Common Stock - The following is a summary of the changes in common stock outstanding for the years ended
December 31, 2023 and 2022.
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
2023
2022
8,140,311
1,400
(43,301)
28,859
22,453
(10,645)
8,139,077
8,258,410
1,000
(55,253)
46,033
7,918
(117,797)
8,140,311
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
41
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 14. Shareholders’ Equity, Continued
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.
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, 2023, the Bank had undivided profits of $45,174,451. 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. In addition, under Federal Reserve regulations, the amounts of loans or
advances from the Bank to the parent company are restricted.
Note 15. Income Taxes
Income tax provision for the years ended December 31, 2023 and 2022 is summarized as follows:
Provision
Current income tax expense (benefit)
Federal
State
Total current
Deferred income tax expense (benefit)
Federal
State
Total deferred
Change in valuation allowance
Total income tax expense
2023
2022
$ 1,212,421 $ 1,516,652
109,928
1,626,580
68,014
1,280,435
(70,382)
(73,637)
(144,019)
13,700
(54,328)
(40,628)
73,637
54,328
$ 1,210,053 $ 1,640,280
42
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 15. Income Taxes, Continued
The components of deferred tax assets and deferred tax liabilities as of December 31, are as follows:
2023
2022
Deferred tax assets:
Allowance for credit 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
3,949,184
3,665
887,150
15,281
52,620
3,430,996
259,031
10,296,931
$ 1,699,004 $ 1,482,227
3,920,899
3,092
754,245
77,332
46,173
4,560,070
146,244
10,990,282
(835,811)
10,154,471
(909,448)
9,387,483
19,552
254,869
946,388
391,379
1,612,188
19,552
148,520
994,110
363,384
1,525,566
$ 7,775,295 $ 8,628,905
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, 2023, 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 2023, the balance in the valuation
allowance changed by $73,637. 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 $14,554,949 and $14,767,644 for the years ended December 31,
2023 and 2022, respectively. Net operating losses of $3,556,045 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 $14,554,949 is limited annually under Section 382 of the Internal Revenue Code. The Company
has state net operating losses of $22,598,617 and $20,751,748 for the years ended December 31, 2023 and 2022,
respectively. State net operating loss carry forwards of $9,431,034 expire at various times from 2024-2037, with
the remainder having no expiration date.
43
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 15. 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, 2023 and 2022 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
2023
2022
$ 1,220,828 $ 1,589,971
43,924
(23,991)
725
(75,573)
(44,859)
54,328
95,755
$ 1,210,053 $ 1,640,280
(4,442)
(13,002)
2,724
(110,977)
(13,594)
73,637
54,879
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 2020 and subsequent years are subject to review by
taxing authorities.
Note 16. 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, 2023 and 2022, the Company had related
party loans totaling $150,716 and $560,195, respectively. Below is a table reflecting the loan activity during 2023
and 2022:
Beginning balance
Paid off loans
New loans originated
Paid down loans
Ending balance
2023
2022
$
$
560,195 $ 1,030,108
(752,877)
(451,559)
296,112
49,374
(13,148)
(7,294)
560,195
150,716 $
Deposits from directors and executive officers and their related interests totaled $4,232,085 and $6,873,006 at
December 31, 2023 and 2022, respectively.
Note 17. 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, 2023, 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.
44
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 18. Leases, right of use assets and lease liabilities
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 $5,342,365 and $5,977,748 as of December 31, 2023 and 2022, respectively.
The Company had lease liabilities of $5,592,934 and $6,197,620 as of December 31, 2023 and 2022, respectively.
Rental expense under the leases for the years ended December 31, 2023 and 2022 was $972,378 and $1,025,162,
respectively, and was recorded within occupancy and equipment expense in the consolidated statements of
operations.
The weighted average remaining lease term as of December 31, 2023 was 9.8 years and the weighted average
discount rate used was 2.86%. The following table shows future undiscounted lease payments for operating leases
with initial terms of one year or more as of December 31, 2023:
2024
2025
2026
2027
2028
Thereafter
Total undiscounted lease payments
Less effect of discounting
Present value of estimate lease payments (lease liability)
Note 19. Equity Incentive Plan
$
787,965
747,704
674,042
679,104
580,125
2,661,817
6,130,756
(537,823)
$ 5,592,934
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, 2023, there were
306,395 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 generally between two 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
45
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 19. Equity Incentive Plan, Continued
of restricted stock that are forfeited will again become available for issuance under the Plans. An employee or
director has the right to vote the shares of restricted stock after grant until they are forfeited. Compensation cost
for restricted stock is equal to the market value of the shares at the date of the award and is amortized to
compensation expense over the vesting period. Dividends, if any, will be paid on awarded but unvested stock.
Nonvested restricted stock for the years ended December 31, 2023 and 2022 is summarized in the following table.
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
2023
2022
Weighted-
Average
Grant-Date
Fair Value
Shares
Weighted-
Average
Grant-Date
Fair Value
Shares
340,388 $
44,912
(68,370)
(10,645)
306,285 $
7.80
8.25
7.93
6.95
7.86
453,719 $
46,033
(58,593)
(100,771)
340,388 $
7.36
9.64
6.87
7.19
7.80
The vesting schedule for these shares as of December 31, 2023 is as follows:
2024
2025
2026
2027
2028 and thereafter
Total
Shares
82,040
40,778
96,767
16,700
70,000
306,285
The Company recognized stock-based compensation costs related to restricted stock of $524,479 and $493,519
for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, there was $1,482,193
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, 2023 and 2022. Activity related to stock
options is summarized in the following table.
Weighted-
Average
Remaining
Life (Years)
Weighted-
Average
Exercise
Price
$
1.80
-
-
-
.80
.80
7.27
-
-
-
7.27
7.27
Options
169,440
-
-
-
169,440
164,200
Outstanding at December 31, 2022
Granted
Exercised
Forfeited
Outstanding at December 31, 2023
Options exercisable as of December 31, 2023
46
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 19. Equity Incentive Plan, Continued
The Company recognized stock-based compensation costs related to stock options of $43,302 and $54,623 for the
years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, there was no more
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, 2023 and 2022 is summarized in the following table.
2023
2022
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
Weighted-
Average
Grant-Date
Fair Value
Shares
35,000 $
149,153
(7,000)
-
177,153 $
9.08
7.94
9.08
-
8.12
The vesting schedule for these shares as of December 31, 2023 is as follows:
2024
2025
2026
2027
2028 and thereafter
Total
Weighted
Average
Grant-Date
Fair Value
Shares
-
35,000
-
-
35,000 $
-
9.08
-
-
9.08
Shares
14,817
80,970
27,816
14,150
39,400
177,153
The Company recognized stock-based compensation costs related to restricted stock units of $408,836 and $15,925 for
the year ended December 31, 2023 and December 31, 2022, respectively. As of December 31, 2023, there was
$1,071,369 of total unrecognized compensation cost related to nonvested RSUs that will be recognized over a total
weighted-average period of 8 years.
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.
47
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 20. Income Per Common Share, continued
The following is a summary of the income per common share calculations for the years ended December 31, 2023
and 2022.
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
2023
2022
$ 4,603,416 $ 5,931,012
-
$ 4,603,416 $ 5,931,012
-
$ 4,603,416 $ 5,931,012
7,779,396
0.76
7,822,882
0.59 $
$
$ 4,603,416 $ 5,931,012
7,779,396
347,752
8,127,148
0.73
7,822,882
341,052
8,163,934
0.56 $
$
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the
Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The
Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain
minimum ratios (set forth in the table below) of Tier 1, Common Equity Tier 1 (“CET1”), and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 150%. Tier 1
capital of the Bank consists of common shareholders’ equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets, while CET1 is comprised of Tier 1 capital, adjusted for certain
regulatory deductions and limitations. Tier 2 capital consists of the allowance for loan losses subject to certain
limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the
leverage ratio. The Bank is required to maintain a required minimum leverage ratio of 4%.
Effective March 31, 2015, quantitative measures established by applicable regulatory standards, including the
newly implemented Basel III revised capital adequacy standards and relevant provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd Frank Act”), require the Bank to maintain (i) a minimum ratio
of Tier 1 capital to average total assets, after certain adjustments, of 4.00%, (ii) a minimum ratio of Tier 1 capital
48
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 21. Regulatory Matters, continued
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 in 2016 and was fully phased in by 2019, and now consist of an additional amount of Tier 1 capital
equal to 2.5% of risk-weighted assets.
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum
requirements at December 31, 2023 and 2022.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 110,003
101,201
101,201
101,201
13.86% $ 63,500
47,625
12.75%
39,229
10.32%
35,719
12.75%
8.00% $ 79,375
63,500
6.00%
49,036
4.00%
51,594
4.50%
10.00%
8.00%
5.00%
6.50%
$ 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%
(Dollars in Thousands)
December 31, 2023
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, 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)
Note 22. Unused Lines of Credit
The Company had available at December 31, 2023 one unsecured line of credit, which was unused, to purchase up
to $10,000,000 of federal funds. Also, as of December 31, 2023, the Company had the ability to borrow funds from
the FHLB of up to $202,760,138. At that date, $5,000,000 had been advanced.
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.
49
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 23. Fair Value Measurements, continued
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.
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, 2023 and 2022.
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.
50
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 23. Fair Value Measurements, Continued
Derivative Financial Instruments, Non-designated – The fair value of the Company’s interest rate swap
agreements to facilitate customer transactions are based upon fair values provided from entities that engage in
interest rate swap activity and is based upon projected future cash flows and interest rates. The fair value of
interest rate lock commitments associated with the mortgage pipeline is based on fees currently charged to enter
into similar agreements, and for mortgage loan forward sales commitments, the difference between current levels
of interest rates and the committed rates is also considered. These financial instruments are classified as Level 2.
Examples of derivatives classified as Level 2 include interest rate lock commitments written for the residential
mortgage loans that the Company intends to sell.
Derivative Financial Instruments, Fair Value Hedge – Pay fixed swaps used to hedge interest rate risk related to
the commercial real estate loan portfolio are reported at fair value utilizing Level 2 inputs. The fair values of the
interest rate swap are based on derivative market data as of the valuation date.
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, 2023 and 2022.
Total
Level 1
Level 2
Level 3
December 31, 2023
Available-for-sale securities:
U.S. Treasury securities
U.S. agency securities
Municipal securities
Mortgage-backed securities
Collateralized loan obligations
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
Derivative assets
Derivative liabilities
$
- $
6,990,005
31,107,543
93,063,215
25,376,350
14,862,460
171,399,573
128,516
4,356,624
282,781
(141,797)
115,056
(136,061)
$ 176,004,692 $
- $
-
-
-
-
-
-
-
-
- $
6,990,005
31,107,543
93,063,215
25,376,350
14,862,460
171,399,573
128,516
-
-
-
-
-
- $ 171,648,068 $
282,781
(141,797)
115,056
(136,061)
-
-
-
-
-
-
-
-
4,356,624
-
-
-
-
4,356,624
51
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 23. Fair Value Measurements, Continued
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
Collateralized loan obligations
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
$
30,807,969 $
5,375,186
32,179,361
67,212,784
19,096,880
7,424,698
162,096,848
133,715
4,642,455
56,402
35,000
-
$ 166,964,420 $
- $
-
-
-
-
-
-
-
-
30,807,969 $
5,375,186
32,179,361
67,212,754
19,096,880
7,424,698
162,096,848
133,715
-
-
-
-
- $ 162,321,965 $
56,402
35,000
-
-
-
-
-
-
-
-
4,642,455
-
-
-
4,642,455
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Balance, December 31, 2021
Changes in fair value recognized in earnings (1)
Changes in unpaid principal balance (2)
Balance, December 31, 2022
Changes in fair value recognized in earnings (1)
Changes in unpaid principal balance (2)
Balance, December 31, 2023
Mortgage
Servicing
Rights
$ 4,376,021
1,251,171
(984,737)
4,642,455
281,434
(558,265)
$ 4,356,624
(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.
52
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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, 2023 and December 31, 2022, aggregated by level in the fair
value hierarchy within which those measurements fall.
Total
Level 1
Level 2
Level 3
December 31, 2023
Mortgage servicing rights
Total
December 31, 2022
Impaired loans (PreCECL adoption)
Mortgage servicing rights
Total
$
$
$
$
7,272,550 $
7,272,550 $
- $
- $
- $
- $
7,272,550
7,272,550
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
Collateral-dependent loans held for investment – Collateral-dependent loans are loans for which, based on
current information and events, the Company has determined foreclosure of the collateral is probable, or where
the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided
substantially through the operation or sale of the collateral and it is probable that the creditor will be unable to
collect all amounts due according to the contractual terms of the loan agreement. Collateral-dependent loans are
classified as Level 3. There were no collateral dependent loans at December 31, 2023.
Impaired Loans (Pre ASC 326) - 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. There was no OREO at December 31,
2023.
53
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 23. Fair Value Measurements, Continued
Mortgage Servicing Rights – Amortization Method - Mortgage servicing rights do not trade in an active market
with readily observable market data. As a result, the Company estimates the fair value of mortgage servicing
rights by using a discounted cash flow model to calculate the present value of estimated future net servicing
income. The assumptions used in the discounted cash flow model are those that market participants would use
in estimating future net servicing income. Assumptions in the valuation of mortgage servicing rights may include
estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other
factors. The Company measures mortgage servicing rights accounted for using the amortization method as
nonrecurring Level 3.
The Company had no liabilities measured at fair value on a non-recurring basis.
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31,
2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair Value as of
December 31,
2023
Asset
Valuation Technique
Significant
Observable Inputs
Significant Unobservable
Inputs
Mortgage servicing
$
7,272,550
Discounted cash flows
Comparable sales
rights
Weighted average
discount rate – 9%
Constant prepayment
rate – 6.5%
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
rights
Discounted cash
flows
Comparable sales
Weighted average
discount rate – 9%
Constant prepayment
rate – 6.5%
54
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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, 2023 and 2022.
December 31, 2023
Carrying Value
Fair Value
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
Mortgage loan held for sale
Loans held for investments, net
Nonmarketable equity securities
Financial Liabilities:
Deposits without stated maturities
Deposits with stated maturities
Securities sold under agreements to
Repurchase
FHLB Advances
Subordinated debentures
$
21,944,052
7,155,912
697,278,897
949,800
$
21,944,052 $ 21,944,052 $
7,155,912
660,550,181
949,800
-
-
-
7,155,912
949,800
- $
-
-
- 660,550,181
-
689,359,034
169,237,473
689,359,034
167,687,049
- 689,359,034
- 167,687,049
-
-
307,517
5,000,000
25,772,697
307,517
5,000,000
22,679,342
-
-
-
307,517
5,000,000
-
-
-
22,679,342
December 31, 2022
Carrying Value
Fair Value
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
Mortgage loan held for sale
Loans held for investments, net
Nonmarketable equity securities
Financial Liabilities:
Deposits without stated maturities
Deposits with stated maturities
Securities sold under agreements to
Repurchase
FHLB Advances
Subordinated debentures
$
33,797,310
7,940,056
653,590,722
1,787,200
$
33,979,310 $ 33,979,310 $
7,940,056
623,018,294
1,787,200
-
-
-
7,940,056
1,787,200
- $
-
-
- 623,018,294
-
694,482,772
103,701,071
694,482,772
102,407,841
- 694,482,772
- 102,407,841
-
-
7,367,861
30,000,000
25,690,951
7,367,861
30,000,000
22,827,166
-
-
-
7,367,861
30,000,000
-
-
-
22,827,166
55
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 23. Fair Value Measurements, Continued
Cash and cash equivalents
The carrying amount approximates fair value for these instruments.
Mortgage 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, net
Fair values are estimated for portfolios of loans with similar financial characteristics, if collateral-dependent.
Loans are segregated by type. The fair value of performing loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that reflect observable market information
incorporating the credit, liquidity, yield and other risks inherent in the loan. The estimate of maturity is based
upon the Company’s historical experience with repayments for each loan classification, modified, as required, by
an estimate of the effect of the current economic and lending conditions.
Fair value for significant non-performing loans is generally based upon recent external appraisals. If appraisals
are not available, estimated cash flows are discounted using a rate commensurate with the risk associated with
the estimated cash flows. Assumptions regarding credit risk, cash flows and discounted rates are judgmentally
determined using available market information and specific borrower information.
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.
Securities sold under agreements to repurchase
The fair value of securities sold under agreements to repurchase generally mature within 31 days and the stated
balance approximates their fair value.
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.
56
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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
Income
Interest income
Loss on change in fair value of marketable equity securities
Total income
Expenses
Interest expense
Salaries and employee benefits
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
57
December 31,
2023
2022
$ 3,240,882 $ 3,867,380
82,867,930
91,669,697
133,715
128,516
58,100
58,100
310,000
310,000
2,001,469
1,923,969
$ 97,331,164 $ 89,238,594
$ 10,310,000 $ 10,310,000
15,380,951
15,412,697
110,924
68,001
144,542
140,855
25,942,730
25,935,240
71,395,924
63,295,864
$ 97,331,164 $ 89,238,594
For the years ended
December 31,
2023
2022
$
181,159 $
(5,198)
175,961
9,808
(4,144)
5,664
1,429,229
566,836
55,044
2,051,109
1,072,846
252,642
43,356
1,368,844
(1,875,148)
6,093,876
(1,363,180)
7,020,265
4,218,728
384,688
5,657,085
273,927
$ 4,603,416 $ 5,931,012
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
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 on change in fair value of marketable equity securities
Stock based compensation expense
Decrease in other assets
Increase in accrued interest payable
Decrease in accrued salary benefits
Net cash provided (used) in operating activities
Cash flows from financing activities
Issuance of common stock
Decrease (increase) in nonvested restricted stock
Purchase of treasury stock
Net cash provided (used in) by financing activities
Net decrease in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, ending of year
For the years ended
December 31,
2023
2022
$ 4,603,416 $ 5,931,012
77,500
(6,093,876)
31,746
5,199
1,446,765
-
3,687
(42,923)
31,514
21,655
(7,020,265)
31,746
4,144
54,623
-
46,621
(122,890)
(1,053,354)3
57,391
(396,429)
(318,974)
(658,012)
56,775
547,110
(179,878)
424,007
(626,498)
(629,347)
3,867,380
4,496,727
$ 3,240,882 $ 3,867,380
58
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2023 and 2022
Note 25. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions that provide additional evidence
about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of
preparing financial statements. Nonrecognized subsequent events are events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after that date. Management performed
an evaluation to determine whether there have been any subsequent events since the balance sheet date and
determined that no subsequent events occurred requiring accrual or disclosure.
59
(888) 543-5510
www.firstreliance.com