First Reliance Bancshares, Inc. and Subsidiary
Report on Consolidated Financial Statements
As of and for the years ended December 31, 2024 and 2023
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
elliottdavis.com
1
Independent Auditor’s Report
The Board of Directors
First Reliance Bancshares, Inc.
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, 2024 and 2023, 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, 2024 and 2023, and the results of their operations and their cash
flows for the years then ended in accordance with accounting principles generally accepted in the United States
of America.
Basis for Opinion
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America (GAAS). Our responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our report. We are required to be
independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant
ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our audit opinion.
Responsibilities of Management for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with accounting principles generally accepted in the United States of America, and for the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is required to evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a
going concern within one year after the date that the financial statements are issued or available to be issued.
2
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.
Charleston, South Carolina
March 26, 2025
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2024 and 2023
3
2024
2023
Assets
Cash and cash equivalents:
Cash and due from banks
$
4,603,658
$
4,353,883
Interest-bearing deposits with other banks
42,623,441
17,590,169
Total cash and cash equivalents
47,227,099
21,944,052
Marketable equity securities
137,172
128,517
Securities available-for-sale
175,845,558
171,399,573
Nonmarketable equity securities
748,500
949,800
Total investment securities
176,731,230
172,477,890
Mortgage loans held for sale
20,973,857
7,155,912
Loans receivable
753,738,418
705,672,390
Less allowance for credit losses
(8,434,000)
(8,393,493)
Loans, net
745,304,418
697,278,897
Premises, furniture and equipment, net
21,352,793
22,298,348
Accrued interest receivable
3,958,321
3,453,458
Cash surrender value life insurance
18,608,410
18,190,892
Net deferred tax assets
7,708,907
7,775,295
Mortgage servicing rights
13,410,262
11,638,174
Core deposit intangibles
26,139
74,316
Goodwill
690,917
690,917
Right of use asset
4,160,392
5,342,365
Other assets
6,951,745
5,836,677
Total assets
$
1,067,104,490
$
974,157,193
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing transaction accounts
$
227,470,632
$
210,603,869
Interest-bearing transaction accounts
140,115,649
144,039,452
Savings
422,229,349
334,715,713
Time deposits $250,000 and over
41,198,267
40,806,186
Other time deposits
120,396,981
128,431,287
Total deposits
951,410,878
858,596,507
Securities sold under agreement to repurchase
-
307,517
Advances from Federal Home Loan Bank
-
5,000,000
Subordinated debentures
15,444,267
15,412.697
Junior subordinated debentures
10,310,000
10,310,000
Accrued interest payable
1,079,127
1,076,368
Lease liability
4,968,426
5,592,934
Reserve for unfunded commitments
428,000
407,487
Other liabilities
5,707,476
6,057,759
Total liabilities
989,348,174
902,761,269
Shareholders’ Equity
Series D non-cumulative preferred stock, $0.01 par value; 70,000 shares authorized; 52,332 and 52,332
shares issued and outstanding at December 31, 2024 and 2023, respectively
523
523
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,763,718 and 8,772,329 shares issued;
and 8,032,701 and 8,139,077 shares outstanding at December 31, 2024 and 2023, respectively
87,637
87,723
Capital surplus
55,789,669
55,471,379
Treasury stock, at cost, 731,017 and 633,252 shares at December 31, 2024 and 2023, respectively
(5,698,816)
(4,821,348)
Nonvested restricted stock
(2,339,968)
(2,517,557)
Retained earnings
39,671,092
33,748,274
Accumulated other comprehensive loss
(9,753,821)
(10,573,070)
Total shareholders’ equity
77,756,316
71,395,924
Total liabilities and shareholders’ equity
$
1,067,104,490
$
974,157,193
See Notes to Consolidated Financial Statements
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Operations
For the years ended December 31, 2024 and 2023
4
2024
2023
Interest income:
Loans, including fees
$
42,813,692 $
36,170,561
Investment securities:
Taxable
7,787,336
6,078,622
Tax exempt
43,620
63,193
Other interest income
1,844,892
2,706,368
Total
52,489,540
44,388,744
Interest expense:
Deposits
18,414,151
12,546,015
Federal Home Loan Bank advances
1,220,065
1,388,896
Subordinated debentures
1,458,098
1,429,229
Other interest expense
16,799
51,688
Total
21,109,113
15,415,828
Net interest income
31,380,427
28,972,916
Provision for credit losses on loans
299,334
847,398
Provision for (release of) credit losses on unfunded commitments
20,513
(478,551)
Net interest income after provision for credit losses
31,060,580
28,604,069
Noninterest income:
Mortgage banking income
4,803,131
3,821,146
Service charges on deposit accounts
1,296,841
1,373,920
Other service charges, commissions, and fees
2,165,491
2,160,491
Income from bank owned life insurance
417,519
528,462
Loss on sale of investment securities
(308,098)
(1,525,631)
(Loss) gain on disposal of fixed assets
(818,262)
29,719
Other
642,458
531,448
Total
8,199,080
6,919,555
Noninterest expenses:
Salaries and benefits
19,281,119
18,273,828
Occupancy and equipment
3,416,266
3,428,830
Data processing, technology, and communications
4,336,172
3,613,544
Professional fees
738,802
420,445
Marketing
431,159
687,261
Other
3,396,185
3,286,247
Total
31,599,703
29,710,155
Income before income taxes
7,659,957
5,813,469
Income tax expense
1,737,139
1,210,053
Net income
$
5,922,818 $
4,603,416
Average common shares outstanding, basic
7,846,631
7,822,882
Average common shares outstanding, diluted
8,294,109
8,163,934
Income per common share:
Basic income per common share
$
0.75 $
0.59
Diluted income per common share
0.71
0.56
See Notes to Consolidated Financial Statements
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2024 and 2023
5
2024
2023
Net income
$
5,922,818 $
4,603,416
Other comprehensive gain, net of tax:
Unrealized holding gains on securities available-for-sale
777,000
3,082,832
Reclassification adjustment for realized losses included in earnings
308,098
1,525,631
Income tax expense
(265,849)
(1,129,074)
Other comprehensive gain, net of tax
819,249
3,479,389
Comprehensive income
$
6,742,067 $
8,802,805
See Notes to Consolidated Financial Statements
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2024 and 2023
6
Accumulated
Nonvested
Other
Preferred Stock
Common Stock
Capital
Treasury
Restricted
Retained Comprehensive
Shares Amount
Shares Amount
Surplus
Stock
Stock
Earnings Income (Loss)
Total
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
Adoption of new accounting
standard
-
-
-
-
-
-
-
(771,497)
-
(771,497)
Net income
-
-
-
-
-
-
-
4,603,416
-
4,603,416
Other comprehensive income,
net of tax
-
-
-
-
-
-
-
-
3,479,389
3,479,389
Conversion of Preferred Stock -
Series D to Common Stock
(1,400)
(14)
1,400
14
-
-
-
-
-
-
Net issuance of Common Stock
-
-
51,312
513
130,876
-
-
-
-
131,389
Restricted stock forfeitures
-
-
(10,645)
(107)
(73,892)
-
-
-
-
(73,999)
Net change in restricted stock
-
-
-
-
-
-
(396,429)
-
-
(396,429)
Stock based compensation
-
-
-
-
1,446,765
-
-
-
-
1,446,765
Purchase of treasury stock
-
-
-
-
-
(318,974)
-
-
-
(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
Net income
-
-
-
-
-
-
-
5,922,818
-
5,922,818
Other comprehensive income,
net of tax
-
-
-
-
-
-
-
-
819,249
819,249
Net issuance of Common Stock
-
-
28,389
284
102,525
-
-
-
-
102,809
Restricted stock forfeitures
-
-
(37,000)
(370)
(597,855)
-
-
-
-
(598,225)
Net change in restricted stock
-
-
-
-
-
-
177,589
-
-
177,589
Stock based compensation
-
-
-
-
813,620
-
-
-
-
813,620
Purchase of treasury stock
-
-
-
-
-
(877,468)
-
-
-
(877,468)
Balance, December 31, 2024
52,332
$ 523
8,763,718 $87,637 $
55,789,669
$
(5,698,816)
$
(2,339,968)
$
39,671,092 $
(9,753,821)
$
77,756,316
See Notes to Consolidated Financial Statements
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
December 31, 2024 and 2023
7
2024
2023
Cash flows from operating activities:
Net income
$
5,922,818 $
4,603,416
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for credit losses on loans
299,334
847,398
Provision for (release of) credit losses on unfunded commitments
20,513
(478,551)
Depreciation expense
1,166,807
1,126,296
(Gain) loss on change in fair value of marketable equity securities
(8,655)
5,198
Discount accretion and premium amortization on investment securities
(26,719)
141,659
Discount accretion on purchased loans
(163,932)
(245,842)
Gain on disposal of fixed assets
(20,012)
(29,719)
Write down of land
300,000
-
Loss on sale of investment securities
308,098
1,525,631
Originations of mortgages held for sale
(280,554,791) (202,205,102)
Proceeds from sales of mortgages held for sale
271,539,977
206,810,392
Mortgage banking income
(4,803,131)
(3,821,146)
Write down of right of use assets
538,274
-
Core deposit intangible amortization
48,177
72,778
Amortization of debt issuance costs
31,570
31,746
Deferred income taxes, net of valuation allowance
(199,461)
(70,382)
Decrease (increase) in cash surrender value of life insurance
(417,518)
(528,462)
Stock based compensation expense
813,620
1,446,765
Decrease in ROU asset
643,699
635,383
Increase in mortgage servicing rights, net
(1,772,088)
(1,196,752)
Increase in accrued interest receivable
(504,863)
(688,352)
(Increase) decrease in other assets
(1,115,068)
1,373,490
Increase in accrued interest payable
2,759
744,690
Decrease in lease liabilities
(624,508) (604,686)
(Decrease) increase in other liabilities
(350,283)
12,431
Net cash (used) provided by operating activities
(8,925,383)
9,508,279
Cash flows from investing activities:
Purchases of securities available-for-sale
(47,608,326)
(55,030,945)
Maturities of securities available-for-sale
35,738,970
10,484,793
Proceeds on sales of securities available-for-sale
8,227,090
38,184,599
Net decrease (increase) in nonmarketable equity securities
201,300
837,400
Net decrease in time deposits in other banks
-
258,718
Net increase in loans receivable
(48,160,923)
(44,380,272)
Purchases of premises, furniture and equipment
(564,385)
(628,895)
Proceeds from death benefits received on BOLI
-
1,173,338
Proceeds from disposal of premises, furniture and equipment
63,145
45,420
Net cash used in investing activities
(52,103,129)
(49,055,844)
See Notes to Consolidated Financial Statements
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
December 31, 2024 and 2023
8
2024
2023
Cash flows from financing activities:
Net increase (decrease) in demand deposits, interest-bearing transaction
accounts and savings accounts
100,456,596
(5,123,738)
Net (decrease) increase in certificates of deposit and other time deposits
(7,642,225)
65,536,402
Net decrease in advances from Federal Home Loan Bank
(5,000,000)
(25,000,000)
Net decrease in securities sold under agreements to repurchase
(307,517)
(7,060,344)
Issuance of common stock
102,809
131,389
Forfeitures of restricted stock
(598,225)
(73,999)
Decrease (Increase) in nonvested restricted stock
177,589
(396,429)
Purchase of treasury stock
(877,468)
(318,974)
Net cash provided by financing activities
86,311,559
27,694,307
Net increase (decrease) cash and cash equivalents
25,283,047
(11,853,258)
Cash and cash equivalents, beginning of year
21,944,052
33,797,310
Cash and cash equivalents, end of year
$
47,227,099 $
21,944,052
Cash paid during the year for:
Income taxes
$
1,948,000 $
610,065
Interest
21,106,354
14,671,138
Supplemental noncash investing and financing activities:
Net change in unrealized gains on investment securities
$
819,249 $
3,479,389
Adoption of ASU 2016-13
-
771,497
See Notes to Consolidated Financial Statements
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
9
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, 2024 and 2023, 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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
10
Note 1.
Summary of Significant Accounting Policies, Continued
Concentrations of credit risk, 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 2024
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable
Segment Disclosures. The update requires enhanced disclosures, primarily about significant segment expenses, and
requires that a public entity that has a single reportable segment provide all required disclosures. The Company
adopted this update in 2024 and required disclosures are included in Note 1 of this Report.
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 or 2024.
In January 2023, the Company adopted Accounting Standards Update, (“ASU”), 2022-01, “Derivatives and Hedging
(Topic 815): Fair Value Hedging – Portfolio Layer Method”, which intended to better align hedge accounting with
an organization’s risk management strategies. The ASU became applicable to the Company in the fourth quarter
of 2023 when we entered into a fair value hedge using the portfolio layer method.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
11
Note 1.
Summary of Significant Accounting Policies, Continued
Accounting Standards Adopted in 2023, continued:
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”).
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
December 31, 2022
As Reported Under
Pre-ASC 326
Impact of ASC
ASC 326
Adoption
326 Adoption
Assets:
Loans, at amortized cost
$
661,274,197 $
661,250,516 $
23,681
Allowance for credit losses on loans:
Construction
$
(522,313) $
(516,545) $
(5,768)
Residential
(2,083,881)
($2,048,171)
(35,710)
Non-Residential
(3,669,567)
(3,612,062)
(57,505)
Commercial and industrial
(800,070)
(790,172)
(9,898)
Consumer and other
(698,184)
(692,844)
(5,340)
Total allowance for credit losses
$
(7,774,015) $
(7,659,794) $
(114,221)
Liabilities:
Allowance for credit losses unfunded
Commitments
$
886,038 $
- $
(886,038)
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
12
Note 1.
Summary of Significant Accounting Policies, Continued
Accounting Standards Adopted in 2023, continued:
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.
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, not yet effective or adopted:
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.
In November 2024, the FASB issued ASU No. 2024-03, Income Statement - Reporting Comprehensive Income - Expense
Disaggregation Disclosures (Subtopic 220-40), further clarified by ASU No. 2025-01. The update requires disclosure
of specified information about certain expenses, including: employee compensation, depreciation and intangible
asset amortization included in each relevant expense caption. The update also requires disclosure of certain other
expenses, gains and losses that are already required to be disclosed in the same disclosure as other disaggregation
requirements. This guidance is effective for annual periods beginning after December 15, 2026 and interim reporting
periods beginning after December 15, 2027. The Company does not expect the new guidance to have a material
impact on its consolidated 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 is 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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
13
Note 1. Summary of Significant Accounting Policies, Continued
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
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, 2024 and 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 $1,323,911 and $1,221,459 at December
31, 2024 and 2023, respectively, 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, 2024 and 2023, nonmarketable equity securities consist of the following:
2024
2023
Federal Home Loan Bank stock
$
690,400 $
891,700
Community Bankers Bank stock
58,100
58,100
Total
$
748,500 $
949,800
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
14
Note 1. Summary of Significant Accounting Policies, Continued
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 $2,634,410 and 2,231,999 at December 31, 2024 and 2023, respectively, was reported in
accrued interest receivable on the consolidated balance sheets, and excluded from estimated credit losses.
Interest income is recognized in the period earned and is computed based upon the unpaid principal balance.
When serious doubt exists as to the collectability of a loan or when a loan becomes contractually 90 days past due
as to principal or interest, interest income is discontinued unless the estimated net realizable value of collateral
exceeds the principal balance and accrued interest. When interest accruals are discontinued, income earned but
not collected is reversed. Loans are removed from nonaccrual status when they become current as to both
principal and interest, when concern no longer exists as to the collectability of the principal and interest, and after
a sufficient history of satisfactory payment performance has been established. 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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
15
Note 1. Summary of Significant Accounting Policies, Continued
Allowance for credit losses- Loans, continued:
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).
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 nonowner-occupied loans are typically repaid with the funds
received from the sale or refinancing of the property or rental income from such property.
Commercial and industrial loans. Commercial and industrial loans are typically made to small-sized
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.
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
16
Note 1.
Summary of Significant Accounting Policies, Continued
Allowance for credit losses- Loans, continued:
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
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.
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 2024 and 2023. 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 credit 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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
17
Note 1.
Summary of Significant Accounting Policies, Continued
Cash surrender value of life insurance:
Cash surrender value of life insurance represents the cash value of policies on certain current and former officers
and directors of the Company.
Residential mortgage loans held for sale:
Loans held for sale represent loans originated or acquired by the Company with the intent to sell. The Company
has elected the lower of cost or market in accounting for residential mortgage loans held for sale. These loans are
initially recorded and carried at lower of cost or market value, with any subsequent decreases in fair value
recognized in mortgage banking income. Loan origination fees are recorded when earned.
The Company issues rate lock commitments to borrowers on prices quoted by secondary market investors.
Derivatives related to these commitments are recorded as either assets or liabilities in the balance sheet and are
measured at fair value. Changes in the fair value of the derivatives are recorded in mortgage banking income in
the consolidated statements of operations.
Mortgage servicing rights:
Mortgage servicing rights (“MSRs”) represent the present value of the future net servicing fees from servicing
mortgage loans. Servicing assets and servicing liabilities must be initially measured at fair value, if practicable.
The Company’s servicing assets are initially measured at fair value and are subsequently measured using either
the fair value method or the amortization method, depending on the asset class, which has been determined to
be vintage (or loan origination) year.
The methodology used to determine the fair value of MSRs is subjective and requires the development of a
number of assumptions, including anticipated prepayments of loan principal. Fair value is determined by
estimating the present value of the asset’s future cash flows utilizing market-based prepayment rates, discount
rates and other assumptions validated through comparison to trade information, industry surveys and with the
use of independent third-party appraisals. Risks inherent in the MSRs’ valuation include higher than expected
prepayment rates and/or delayed receipt of cash flows. The value of MSRs is significantly affected by mortgage
interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during
periods of declining interest rates, the value of mortgage servicing rights declines due to increasing prepayments
attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value
of servicing rights generally increases due to reduced refinance activity.
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
18
Note 1.
Summary of Significant Accounting Policies, Continued
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 it’s 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, 2024 and
concluded no impairment exists.
Liabilities for representations and warranties:
The Company is exposed to certain liabilities under representations and warranties made to purchasers of
mortgage loans and servicing rights that require indemnification or repurchase of loans. At the time it issues a
guarantee, the Company assesses the need to recognize an initial liability for the fair value of obligations assumed
under the guarantee.
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 $0 and $11,736 at December
31, 2024 and December 31, 2023, respectively.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
19
Note 1.
Summary of Significant Accounting Policies, Continued
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
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
20
Note 1.
Summary of Significant Accounting Policies, Continued
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.
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
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
21
Note 1.
Summary of Significant Accounting Policies, Continued
Income taxes, continued:
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
$403,828 and $663,603 for 2024 and 2023, 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.
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 $360,023 and $601,534 to salaries and benefits expense for the retirement savings plan in
2024 and 2023, respectively. In addition, the Company made elective contributions to the employee stock
ownership plan during 2024 and 2023 totaling $52,000 and $0, 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 2024 and 2023,
the supplemental retirement expense was $202,781 and $208,864. The current accrued but unfunded amount is
$2,903,674 and $2,770,812 at December 31, 2024 and 2023, 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 $18,608,410 and
$18,190,892 at December 31, 2024 and 2023, respectively.
The Company has split-dollar life insurance arrangements with certain of its officers. At December 31, 2024 and
2023, the split-dollar liability relating to these arrangements totaled $494,509 and $465,420 respectively. For 2024
and 2023, the Company recognized net expenses of $29,089 and $27,378, respectively, related to these
arrangements, which are recorded within salaries and benefits expense.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
22
Note 1.
Summary of Significant Accounting Policies, Continued
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,
2024 and 2023, the ESOP owned 430,025 and 474,671 shares of the Company’s common stock with an estimated
value of $4,123,936 and $4,067,930, respectively. All of these shares were allocated to participants.
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
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
23
Note 1. Summary of Significant Accounting Policies, Continued
Off-balance sheet financial instruments and unfunded commitments, continued:
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.
Segment Reporting:
The Company adopted Accounting Standards Update 2023-07 “Segment Reporting (Topic 280) - Improvement to
Reportable Segment Disclosures” on January 1, 2024. The Company has determined that all of its banking
divisions and subsidiaries meet the aggregation criteria of ASC 280, Segment Reporting, as its current operating
model is structured whereby banking divisions and subsidiaries serve a similar base of primarily commercial clients
utilizing a company-wide offering of similar products and services managed through similar processes and
platforms that are collectively reviewed by the Company’s Chief Operating Decision Maker (“CODM”), the Senior
Leadership Committee, which is comprised of the Chief Executive Officer, President, Chief Financial Officer, Chief
Credit Officer, and other executive leadership and has been identified as the chief operating decision maker
(“CODM”).
The CODM regularly assesses performance of the aggregated single operating and reporting segment and decides
how to allocate resources based on net income calculated on the same basis as is net income reported in the
Company’s consolidated statements of income and other comprehensive income. The CODM is also regularly
provided with expense information at a level consistent with that disclosed in the Company’s consolidated
statements of income and other comprehensive income.
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
24
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, 2024
U.S. Treasury securities
$
-
$
-
$
-
$
-
U.S. Agency securities
18,716,485
14,563
598,283
18,132,765
Municipal securities
31,643,280
-
3,449,178
28,194,102
Mortgage-backed securities
93,994,118
379,351
9,109,137
85,264,332
Corporate bonds
18,898,035
698,700
895,176
18,701,559
Collateralized loan obligations
25,512,609
40,191
-
25,552,800
Total
$ 188,764,527
$
1,132,805
$ 14,051,774
$
175,845,558
Amortized
Gross Unrealized
Cost
Gains
Losses
Fair Value
December 31, 2023
U.S. Treasury securities
$
-
$
-
$
-
$
-
U.S. Agency securities
7,325,867
31,009
366,871
6,990,005
Municipal securities
35,290,138
-
4,182,595
31,107,543
Mortgage-backed securities
101,484,996
268,159
8,689,940
93,063,215
Corporate bonds
15,979,202
174,054
1,290,795
14,862,461
Collateralized loan obligations
25,323,438
53,912
1,000
25,376,350
Total
$ 185,403,641
$
527,134
$ 14,531,201
$
171,399,574
At December 31, 2024 and 2023, the Company had marketable equity securities totaling $137,172 and $128,517,
respectively. The Company did not have any securities classified as held-to-maturity at December 31, 2024 and
2023.
The following is a summary of maturities of securities available-for-sale as of December 31, 2024. The amortized
cost and fair values are based on the contractual maturity dates. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-
backed securities are presented as a separate line as paydowns are expected to occur before contractual maturity
dates.
Debt Securities
Available-for-Sale
Amortized
Cost
Fair Value
Due after one year but within five years
$ 11,049,112
$ 10,555,689
Due after five years through ten years
50,108,863
47,036,359
Due after ten years
33,612,434
32,989,178
94,770,409
90,581,226
Mortgage-backed securities
93,994,118
85,264,332
Total
$188,764,527
$175,845,558
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
25
Note 2. Investment Securities, Continued
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, 2024 and 2023.
December 31, 2024
December 31, 2023
Fair
Unrealized
Fair
Unrealized
Securities Available-for-Sale
Value
Losses
Value
Losses
Less Than 12 Months
U.S. Treasury securities
$
- $
- $
- $
-
U.S. Agency securities
12,872,226
231,401
-
-
Municipal securities
1,658,156
115,228
-
-
Mortgage-backed securities
2,129,346
239,949
11,734,826
105,404
Corporate bonds
1,573,188
36,222
4,875,345
290,436
Collateralized loan obligations
-
-
-
-
Total
$ 18,232,916 $
622,800 $ 16,610,171 $
395,840
December 31, 2024
December 31, 2023
Fair
Unrealized
Fair
Unrealized
Securities Available-for-Sale
Value
Losses
Value
Losses
Greater Than 12 Months
U.S. Treasury securities
$
- $
- $
- $
-
U.S. Agency securities
3,982,834
366,882
4,661,522
366,871
Municipal securities
26,535,946
3,333,950
31,107,543
4,182,595
Mortgage-backed securities
59,994,333
8,869,188
62,432,359
8,584,536
Corporate bonds
7,957,316
858,954
5,930,953
1,000,359
Collateralized loan obligations
-
-
4,999,000
1,000
Total
$ 98,470,429 $ 13,428,974 $ 109,131,377 $ 14,135,361
At December 31, 2024 and 2023, the Company had eighty-four and eighty-one, 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 2024, the Company sold three securities. One U.S. Agency security and two municipal securities with
proceeds totaling $8,227,090. The U.S. Agency security had a realized gain of $92,540 and was more than offset
by total realized losses on the two municipal securities of $400,638. During 2023, the Company sold all U.S.
Treasury securities and two U.S. 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 2024, the Company recognized a
gain of $8,655, and in 2023, a loss of $5,198, within the consolidated statement of operations. This gain or loss
was related to the increase or decrease in the fair value of marketable equity securities.
At December 31, 2024 and 2023, investment securities with a par value of $44,574,784 and $39,011,850 and a fair
market value of $39,540,891 and $34,527,077, respectively, were pledged as collateral for securities under
agreements to repurchase and to secure public deposits.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
26
Note 3.
Loans and Allowance for Credit Losses
Major classifications of loans receivable are summarized as follows at December 31:
2024
2023
Real estate loans:
Construction
$
23,957,165
$
35,634,919
Residential
259,387,434
220,618,838
Nonresidential
384,268,452
355,271,860
Total real estate loans
667,613,051
611,525,617
Commercial and industrial
64,065,374
61,152,820
Consumer and other
22,059,993
32,993,953
Total loans
$
753,738,418
$
705,672,390
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 2024 and 2023 totaled $271,539,977 and $206,810,392, 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.
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:
Watch – Loans classified as watch exhibit above average credit risk due to minor weaknesses and warrants closer
scrutiny by management.
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
27
Note 3.
Loans and Allowance for Credit Losses, continued
Effective January 1, 2023, the Company prospectively adopted the accounting guidance in ASU 2022-02 which
requires the presentation of gross charge-offs by year of origination. The following table presents loan balances
classified by credit quality indicators by year of origination and gross charge-offs as of December 31, 2024.
Term Loans by Year of Origination
2024
2023
2022
2021
2020
Prior
Revolving
Total
Commercial and
Industrial:
Pass
$ 25,666,162 $ 5,151,066 $ 10,693,415 $ 3,600,538 $
888,175 $ 3,968,578 $
12,445,287 $ 62,413,221
Watch
60,695
173,677
51,981
37,098
337,527
292,489
953,467
Special Mention
-
4,847
-
-
-
-
197,623
202,470
Substandard
26,910
72,516
70,336
44,066
-
-
282,388
496,216
Total
25,693,072 5,289,124 10,937,428
3,696,585
925,273
4,306,105
13,217,787 64,065,374
Current-period
gross charge-offs
-
69,605
182,368
-
791
-
-
252,764
Construction:
Pass
10,046,300 3,853,405
4,143,704
2,697,367
115,293
2,037,111
406,577 23,299,757
Watch
-
-
-
-
-
-
-
-
Special Mention
-
-
-
-
-
591,159
-
591,159
Substandard
-
-
-
-
-
66,249
-
66,249
Total
10,046,300 3,853,405
4,143,704
2,697,367
115,293
2,694,519
406,577 23,957,165
Current-period
gross charge-offs
-
-
-
-
-
-
-
-
Consumer and
Other:
Pass
3,453,647 2,635,873
3,926,898
7,642,947
2,252,888
976,064
699,089 21,587,406
Watch
20,802
64,358
792
247,905
38,923
-
10,895
383,675
Special Mention
5,617
-
-
-
-
4,641
-
10,258
Substandard
-
-
-
72,970
-
5,552
132
78,654
Total
3,480,066 2,700,231
3,927,690
7,963,822
2,291,811
986,257
710,116 22,059,993
Current-period
gross charge-offs
-
8,652
21,697
70,544
5,382
14,837
8,429
129,541
Nonresidential
Real Estate:
Pass
51,465,519 46,270,849 95,213,468 88,836,487
26,754,765 49,522,700
6,918,556 364,982,343
Watch
286,792
899,892
177,730
6,423,679
7,397,436
2,955,869
963,465 19,104,863
Special Mention
-
-
-
-
-
126,149
-
126,149
Substandard
-
-
-
-
-
55,097
-
55,097
Total
51,752,311 47,170,741 95,391,198 95,260,166
34,152,201 52,659,815
7,882,021 384,268,452
Current-period
gross charge-offs
-
-
-
-
-
-
-
-
Residential
Real Estate:
Pass
57,226,266 52,920,547 48,447,106 29,244,284
16,021,754 15,976,333
37,955,715 257,792,004
Watch
51,702
123,251
-
39,906
-
131,735
387,945
734,539
Special Mention
-
143,388
-
-
-
-
-
143,388
Substandard
-
-
-
-
-
646,424
71,079
717,503
Total
57,277,968 53,187,186 48,447,106 29,284,190
16,021,754 16,754,492
38,414,739 259,387,434
Current-period
gross charge-offs
-
-
-
-
-
5,000
-
5,000
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
28
Note 3.
Loans and Allowance for Credit Losses, Continued
The following table presents loan balances classified by credit quality indicators by year of origination and gross
charge-offs as of December 31, 2023.
Term Loans by Year of Origination
2023
2022
2021
2020
2019
Prior
Revolving
Total
Commercial and
Industrial:
Pass
$ 10,836,164 $16,560,384 $ 6,305,177 $ 3,650,115 $
5,478,561 $ 2,081,635 $
15,084,685 $ 59,996,719
Watch
81,246 93,979
69,364
40,664
401,976
105,421
25,959
818,609
Special Mention
-
-
-
-
-
-
-
-
Substandard
91,067
126,990
63,663
15,693
-
-
40,080
337,492
Total
11,008,477 16,781,353
6,438,203
3,706,472
5,880,536
2,187,056
15,150,723 61,152,820
Current-period
gross charge-offs
-
147,144
-
43,347
-
-
-
190,491
Construction:
Pass
5,393,944 22,275,803
3,906,834
515,555
1,694,826
563,884
- 34,350,845
Watch
-
-
-
-
629,272
653,959
-
1,283,230
Special Mention
-
-
-
-
-
843
-
843
Substandard
-
-
-
-
-
-
-
-
Total
5,393,944 22,275,803
3,906,834
515,555
2,324,098
1,218,686
- 35,634,919
Current-period
gross charge-offs
-
-
-
-
-
-
-
-
Consumer and
Other:
Pass
4,483,471 4,942,558 14,083,657
4,419,155
2,181,234
1,074,145
1,179,199 32,363,418
Watch
-
4,000
275,857
34,171
225,683
28,518
2,965
571,194
Special Mention
-
-
-
-
-
697
-
697
Substandard
-
-
47,825
-
905
9,735
180
58,644
Total
4,483,471 4,946,558 14,407,338
4,453,326
2,407,821
1,113,095
1,182,344 32,993,953
Current-period
gross charge-offs
50,279
16,326
134,712
12,255
1,917
6,317
6,932
228,738
Nonresidential
Real Estate:
Pass
40,048,570 99,471,905 103,062,042 33,053,132
22,132,405 38,205,818
7,809,301 343,783,174
Watch
880,160
212,574
2,146,168
5,159,354
1,222,112
1,560,317
- 11,180,687
Special Mention
-
-
-
-
-
136,778
5
136,783
Substandard
-
-
-
-
-
171,217
-
171,217
Total
40,928,730 99,684,479 105,208,210 38,212,487
23,354,518 40,074,130
7,809,307 355,271,860
Current-period
gross charge-offs
-
-
-
-
-
-
-
-
Residential
Real Estate:
Pass
65,619,634 49,323,968 35,748,640 16,276,194
6,432,800 14,476,616
31,481,583 219,359,435
Watch
625,267
-
42,686
-
-
416,922
-
1,084,874
Special Mention
145,492
-
-
-
-
(85)
-
145,407
Substandard
-
-
-
-
-
-
29,122
29,122
Total
66,390,393 49,323,968 35,791,326 16,276,194
6,432,800 14,893,452
31,510,705 220,618,838
Current-period
gross charge-offs
-
-
-
-
-
-
-
-
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
29
Note 3.
Loans and Allowance for Credit Losses, Continued
The following is an analysis of the allowance for credit losses by class of loans for the years ended December 31,
2024 and 2023:
December 31, 2024
Real Estate Loans
Total
Commercial
Non-
Real Estate
and
Consumer
Total
Construction Residential Residential
Loans
Industrial and Other
Beginning
balance
$
8,393,493 $
428,232 $
2,858,732 $
3,913,917 $
7,200,881 $
786,734 $
405,879
Provisions
299,334
(94,341)
238,549
(206,010)
(61,802)
418,477
(57,341)
Recoveries
128,478
6,000
73,332
-
79,232
20,906
28,340
Charge-offs
(387,305)
-
(5,000)
-
(5,000)
(252,764)
(129,541)
Ending balance
$
8,434,000 $
339,891 $
3,165,512 $
3,707,907 $
7,213,310 $
973,353 $
247,337
December 31, 2023
Real Estate Loans
Total
Commercial
Non-
Real Estate
and
Consumer
Total
Construction Residential Residential
Loans
Industrial and Other
Beginning
balance
$
7,659,794 $
516,545 $
2,048,171 $
3,612,062 $
6,176,778 $
790,172 $
692,844
Adjustment to
allowance for
adoption of
ASU 2016-13
114,221
5,768
35,710
57,505
98,983
9,898
5,340
Provisions
847,398
(99,581)
706,366
175,984
782,769
171,890
(107,261)
Recoveries
191,309
5,500
68,485
68,366
142,351
5,265
43,693
Charge-offs
(419,229)
-
-
-
-
(190,491)
(228,738)
Ending balance
$
8,393,493 $
428,232 $
2,858,732 $
3,913,917 $
7,200,881 $
786,734 $
405,878
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
30
Note 3.
Loans and Allowance for Credit Losses, Continued
The following is an aging analysis (Days Past Due) of the Company’s loan portfolio at December 31, 2024:
Greater
Past Due >
30 - 59 Days 60 - 89 Days
Than
Total
Total Loans
90 Days
Past Due Past Due 90 Days Past Due Current
Receivable
and Accruing
Real estate loans
Construction
$
- $
- $
66,261 $
66,261 $23,890,904 $
23,957,165 $
-
Residential
-
-
646,424
646,424 258,741,010
259,387,434
-
Nonresidential
-
-
-
- 384,268,452
384,268,452
-
Total real estate loans
-
-
712,685
712,685 666,900,366
667,613,051
-
Commercial and industrial
37,852
249,992
-
287,844 63,777,530
64,065,374
-
Consumer and other
19,088
10,520
-
29,608 22,030,385
22,059,993
-
Total
$
56,940 $
260,512 $
712,685 $ 1,030,137 $752,708,281 $
753,738,418 $
-
The following is an aging analysis (Days Past Due) of the Company’s loan portfolio at December 31, 2023:
Greater
Past Due >
30 - 59 Days 60 - 89 Days
Than
Total
Total Loans
90 Days
Past Due Past Due 90 Days Past Due Current
Receivable
and Accruing
Real estate loans
Construction
$
- $
- $
- $
- $35,634,919 $
35,634,919 $
-
Residential
196,010
-
-
196,010 220,442,828
220,618,838
-
Nonresidential
-
-
85,684
85,684 355,186,176
355,271,860
-
Total real estate loans
196,010
-
85,684
281,694 611,243,923
611,525,617
-
Commercial and industrial
13,512
-
85,467
98,979 61,053,841
61,152,820
-
Consumer and other
732
6,090
14,017
20,839 32,973,114
32,993,953
-
Total
$
210,254 $
6,090 $
185,168 $
401,512 $705,270,878 $
705,672,390 $
-
The following is an analysis of the Company’s nonaccrual loan portfolio recorded at December 31, 2024 and 2023:
December 31, 2024
Nonaccrual Loans with Nonaccrual Loans
Total Nonaccrual
No Allowance
with an Allowance
Loans
Real estate loans
Residential
$
754,971 $
- $ 754,971
Nonresidential
43,577
-
43,577
Total real estate loans
798,548
-
798,548
Commercial and industrial
77,533
249,992
327,525
Consumer and other
63,953
-
63,953
Total
$
940,034 $
249,992 $
1,190,026
December 31, 2023
Nonaccrual Loans with Nonaccrual Loans
Total Nonaccrual
No Allowance
with an Allowance
Loans
Real estate loans
Residential
$
- $
- $
-
Nonresidential
140,661
-
140,661
Total real estate loans
140,661
-
140,661
Commercial and industrial
98,979
-
98,979
Consumer and other
56,100
-
56,100
Total
$
295,740 $
- $
295,740
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
31
Note 3. Loans and Allowance for Credit Losses, Continued
The Company recognized $44,399 and $48,187 of interest income on nonaccrual loans during the years ended
December 31, 2024 and 2023, respectively.
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.
The Company had a total of 3 loans with modifications made to the borrower during the 12 months ended
December 31, 2024. Two loans had term extensions and 1 loan with principal forgiveness. The outstanding
balance of these loan modifications totaled $162,379, or 0.02% of total loans outstanding. The composition
includes: (1) 1 residential real estate loan with an outstanding balance of $51,711 or 0.01% of total loans
outstanding; (2) 1 consumer loans with an outstanding balance of $18,945 or 0.00% of total loans outstanding,
and (3) 1 commercial and industrial loans with an outstanding balance of $91,723 or 0.01% of total loans
outstanding.
As of December 31, 2023, the Company had 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 totaled $915,585, or 0.13% of total loans
outstanding. The composition includes: (1) 1 nonresidential real estate loans with an outstanding balance of
$477,686 or 0.07% of total loans outstanding; (2) 3 residential real estate loans with an outstanding balance of
$344,941 or 0.05% of total loans outstanding, (3) and (4) 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.
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
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
32
Note 3. Loans and Allowance for Credit Losses, Continued
Unfunded Commitments and related allowance for credit losses, continued
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 $428,000 and
$407,487 at December 31, 2024 and 2023, is separately classified on the balance sheet within Other Liabilities.
The total unfunded commitments (loans) at December 31, 2024 and 2023 were $120,835,123 and $109,525,058,
respectively. The following table presents the balance and activity in the allowance for credit losses for unfunded
loan commitments for the year ended December 31, 2024 and 2023.
Total Allowance for Credit
Losses – Unfunded
Commitments
Balance, December 31, 2022
$
-
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13
886,038
Provision for credit losses (release) – unfunded commitments for
(478,551)
Balance, December 31, 2023
$
407,487
Balance, December 31, 2023
$
407,487
Provision for credit losses (release) – unfunded commitments for
20,513
Balance, December 31, 2024
$
428,000
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
33
Note 4.
Premises, Furniture and Equipment
Premises, furniture and equipment consisted of the following for the years ended December 31:
2024
2023
Land
$
8,332,700 $
8,632,700
Buildings
17,113,065
16,952,575
Leasehold improvements
2,249,098
2,249,098
Furniture and equipment
11,967,760
11,542,204
Construction in progress
833,991
941,716
Total
40,496,614
40,318,293
Less, accumulated depreciation
(19,143,821) (18,019,945)
Premises and equipment, net
$ 21,352,793 $ 22,298,348
Depreciation expense for the years ended December 31, 2024 and 2023 amounted to $1,166,807 and $1,126,296,
respectively. In addition, in 2024, the Company wrote down a parcel of land by $300,000 to the appraised value
less cost to sell.
At December 31, 2024 and 2023, construction in progress consists primarily of architect fees and site work for
potential new branches. As of December 31, 2024, the Company has committed to building a new branch location
in Mrytle Beach, South Carolina. These architectural plans have been approved, and construction began in the
first quarter of 2025. Completion and opening of this location is anticipated to occur in late 2025 or early 2026.
Note 5.
Other Real Estate Owned
The Company did not sell any other real estate owned during 2024 or 2023 nor foreclose on any real property
during either year.
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.
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
34
Note 6.
Mortgage Servicing Rights, continued
The following table presents the activity for MSRs accounted for using the amortization method for the years
ended December 31, 2024 and 2023:
2024
2023
Balances, beginning of year
$
7,272,550 $
5,798,967
Amount capitalized
3,035,909
2,287,337
Amount amortized
(1,088,199)
(813,754)
Balances, end of year
$
9,220,260 $
7,272,550
The following table presents the activity for MSRs accounted for using the fair value method for the years ended
December 31, 2024 and 2023:
2024
2023
Balances, beginning of year
$
4,365,624 $
4,642,455
Changes in fair value (1)
241,398
281,434
Changes in unpaid principal balance (2)
(417,020) (558,265)
Balances, end of year
$
4,190,002 $
4,365,624
(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.
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, 2024 and 2023, the aggregate amount of loans serviced by the Company for the benefit of others
totaled $1.1 billion and $1.0 billion respectively.
The characteristics and sensitivity analysis of the MSRs are included in the following table as of December 31, 2024
and 2023.
2024
2023
Composition of residential loans serviced for others
Fixed-rate mortgage loans
98%
98%
Weighted average expected life
7.9 years
7.4 years
Constant prepayment rate (“CPR”)
7.83%
7.73%
Weighted average discount rate
8.52%
8.53%
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
35
Note 7.
Derivative Financial Instruments
The non-designated derivative positions of the Company for the years ended December 31, 2024 and 2023 are
reported as other assets or other liabilities, net, and are as follows:
2024
2023
Derivative assets (liabilities):
Fair value
Notional value
Fair value
Notional value
Mortgage loan interest rate
lock commitments
$
169,636
$ 21,456,768
$
282,781
$ 16,996,582
Mortgage loan forward
sales commitments
82,656
11,000,000
(141,797)
18,000,000
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 does not currently have any fair value hedges outstanding at December 31, 2024, and had one fair
value hedge at December 31, 2023. The following table presents the gross notional amount and estimated fair value
of the one fair value hedge and related derivative instruments as of December 31, 2023:
Fair Value
December 31, 2023
Notional Amount
Assets
Liabilities
Fair Value Hedge:
Interest rate contracts:
Pay fixed, receive variable – loans
$
50,000,000 $
115,056 $
136,061
Total derivatives
$
50,000,000 $
115,056 $
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.
The following represents the carrying value of the hedged item (loans) in fair value hedging relationship:
Hedge Basis Adjustment
Hedged Asset
December 31, 2023
Basis
Designated
Discontinued
Fair Value Hedge:
Interest rate contracts:
Commercial real estate loans
$
256,115,000 $
115,056 $
-
Total
$
256,115,000 $
115,056 $
-
The one fair value hedge from 2023 was terminated in April 2024, resulting in a $592,000 discount which is being
amortized into loan interest income over three years (the estimated remaining term of the loans). The remaining
discount at December 31, 2024 was $370,000, and is recorded as an adjustment to the loan carrying value.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
36
Note 7. Derivative Financial Instruments, continued
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:
2024
2023
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Core deposit intangibles
$
880,000 $
853,861
$
880,000 $
805,684
Based on the core deposit intangibles as of December 31, 2024, the following table presents the aggregate
amortization expense for each of the succeeding years ending December 31:
Amount
2025
$
23,576
2026
2,563
Total
$
26,139
Amortization expense of $48,177 and $72,778 related to the core deposit intangibles was recognized in 2024 and
2023, respectively, and was recorded within other noninterest expense.
Note 9.
Deposits
At December 31, 2024, the scheduled maturities of time deposits were as follows:
Maturing In:
Amount
2025
$
139,606,510
2026
20,158,659
2027
619,438
2028
589,429
2029
621,212
Total
$ 161,595,248
Included in total time deposits at December 31, 2024 and 2023, respectively, were brokered time deposits of
$44,784,993 and $44,608,000. Interest expense on time deposits that meet or exceed the FDIC insurance limit of
$250,000 was $3,930,242 and $2,250,298 for the years ended December 31, 2024 and 2023, respectively.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
37
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:
2024
2023
Balance at December 31
$
- $
307,517
Maximum month-end balance during the year
285,992
13,468,150
Average balance during the year
31,270
5,734,357
Average interest rate at the end of the year
0.00%
0.10%
Average interest rate during the year
0.10%
1.18%
Note 11. Federal Home Loan Bank Advances
Federal Home Loan Bank advances consisted of the following at December 31:
Interest
Rate
2024
2023
Fixed rate
December 31
5.57%
-
$ 5,000,000
$
-
$ 5,000,000
At December 31, 2024 and 2023, the Company has pledged certain loans totaling $210,949,990 and $202,760,138,
respectively, as collateral to secure its borrowings from the FHLB. Additionally, the Company’s FHLB stock is
pledged to secure the borrowings.
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, 2024
and 2023, the Company had accrued and unpaid interest totaling $57,655 and $72,069, 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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
38
Note 13. Borrowings, continued
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, 2024, remaining debt issuance costs to be amortized totaled $55,733.
At December 31, 2024 and 2023, the Company had accrued and unpaid interest totaling $77,859 and $72,473,
respectively, on its subordinated debt. See Note 25 – Subsequent Events.
Note 14. Shareholders’ Equity
Common Stock - The following is a summary of the changes in common stock outstanding for the years ended
December 31, 2024 and 2023.
2024
2023
Common shares outstanding at beginning of the period
8,139,077
8,140,311
Conversion of Series D preferred stock to common stock
-
1,400
Purchase of treasury stock
(97,765)
(43,301)
Restricted stock issued
26,189
28,859
Additional shares granted
2,200
22,453
Forfeiture of restricted shares
(37,000)
(10,645)
Common shares outstanding at end of the period
8,032,701
8,139,077
Preferred Stock - The Company’s Articles of Incorporation authorizes the issuance of a class of 10,000,000 shares
of preferred stock, having no par value. Subject to certain conditions, the Company’s Board of Directors is
authorized to issue preferred stock without shareholder approval. Under the Articles of Incorporation, the Board
of Directors is authorized to determine the terms of one or more series of preferred stock, including the
preferences, rights, and limitations of each series.
The Company’s Series D Preferred Stock ("Series D Shares") is a fixed rate non-cumulative perpetual preferred
stock, created July 16, 2015, with the authorized issuance of 70,000 shares. The Series D shares were created for
the purpose of converting Common Stockholders with 200 shares or less to Series D Shares. The Series D Shares
have no voting rights, and in the event dividends are declared on Common Stock, will be entitled to 4% more than
those paid on the Common Stock. Series D Shares will, with respect to ranking to include but not limited to
dividends and rights upon liquidation, be senior to all Common Stock.
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, 2024, the Bank had undivided profits of $49,538,504. 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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
39
Note 15. Income Taxes
Income tax provision for the years ended December 31, 2024 and 2023 is summarized as follows:
2024
2023
Provision
Current income tax expense (benefit)
Federal
$
1,611,705 $
1,212,421
State
324,895
68,014
Total current
1,936,600
1,280,435
Deferred income tax expense (benefit)
Federal
(199,461)
(70,382)
State
(73,307)
(73,637)
Total deferred
(272,768)
(144,019)
Change in valuation allowance
73,307
73,637
Total income tax expense
$
1,737,139 $
1,210,053
The components of deferred tax assets and deferred tax liabilities as of December 31, are as follows:
2024
2023
Deferred tax assets:
Allowance for credit losses
$
1,711,819 $
1,699,004
Net operating losses
3,974,670
3,949,184
Non-accrual interest
11,277
3,665
Deferred compensation
955,554
887,150
Purchase accounting on acquisition
32,973
15,281
Leases
169,687
52,620
Unrealized losses on securities available-for-sale
3,165,148
3,430,996
Other
322,521
259,031
Gross deferred tax assets
10,343,649
10,296,931
Less, valuation allowance
(982,755)
(909,448)
Net deferred tax assets
9,360,894
9,387,483
Deferred tax liabilities:
Prepaid expenses
63,940
19,552
Accumulated depreciation
221,865
254,869
Mark to market adjustments
932,881
946,388
Deferred loan origination costs
433,301
391,379
Total gross deferred tax liabilities
1,651,987
1,612,188
Net deferred tax assets recognized
$
7,708,907 $
7,775,295
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, 2024, 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 2024, the balance in the valuation
allowance changed by $73,307. The remaining valuation allowance relates to the parent company’s state
operating loss carryforwards for which realizability is uncertain.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
40
Note 15. Income Taxes, Continued
The Company has federal net operating loss carryforwards of $14,342,254 and $14,554,949 for the years ended
December 31, 2024 and 2023, respectively. Net operating losses of $3,343,350 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 $14,342,254 is limited annually under Section 382 of the Internal Revenue Code. The
Company has state net operating losses of $24,374,619 and $22,598,617 for the years ended December 31, 2024
and 2023, respectively. State net operating loss carryforwards of $9,363,353 expire at various times from 2025-
2038, with the remainder having no expiration date.
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, 2024 and 2023 follows:
2024
2023
Tax expense at statutory rate
$
1,608,591 $
1,220,828
State income tax expense (benefit), net of federal income tax benefit
198,755
(4,442)
Tax-exempt interest income
(8,883)
(13,002)
Disallowed interest expense
2,562
2,724
Life insurance surrender value
(87,679)
(110,977)
Excess tax benefit of stock-based compensation
(7,228)
(13,594)
Change in valuation allowance
73,307
73,637
Other, net
(42,286)
54,879
Total
$
1,737,139 $
1,210,053
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 2021 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, 2024 and 2023, the Company had related
party loans totaling $251,868 and $150,716, respectively. Below is a table reflecting the loan activity during 2024
and 2023:
2024
2023
Beginning balance
$
150,716 $
560,195
Paid off loans
(96,683)
(451,559)
New loans originated
200,679
49,374
Paid down loans
(2,844)
(7,294)
Ending balance
$
251,868 $
150,716
Deposits from directors and executive officers and their related interests totaled $5,824,574 and $4,232,085 at
December 31, 2024 and 2023, respectively.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
41
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, 2024, 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.
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 $4,160,392 and $5,342,365 as of December 31, 2024 and 2023, respectively.
The Company had lease liabilities of $4,968,426 and $5,592,934 as of December 31, 2024 and 2023, respectively.
Rental expense under the leases for the years ended December 31, 2024 and 2023 was $982,555 and $972,378,
respectively, and was recorded within occupancy and equipment expense in the consolidated statements of
operations. In addition, the Company wrote off the “right of use” asset associated with two leases in 2024 which
totaled $538,274.
The weighted average remaining lease term as of December 31, 2024 was 9.4 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, 2024:
2025
$
747,704
2026
679,042
2027
679,104
2028
580,125
2029
371,597
Thereafter
2,290,220
Total undiscounted lease payments
5,342,792
Less effect of discounting
(374,366)
Present value of estimate lease payments (lease liability)
$
4,968,426
Note 19. Equity Incentive Plan
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, 2024 and 2023,
there were 239,283 shares and 306,395 shares, respectively, 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
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
42
Note 19. Equity Incentive Plan, Continued
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
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, 2024 and 2023 is summarized in the following table.
2024
2023
Weighted-
Weighted-
Average
Average
Grant-Date
Grant-Date
Shares
Fair Value
Shares
Fair Value
Nonvested at January 1
306,285 $
7.86
340,388 $
7.80
Granted
15,473
8.79
44,912
8.25
Vested
(69,003)
6.93
(68,370)
7.93
Forfeited
(37,000)
8.00
(10,645)
6.95
Nonvested at December 31
215,755 $
7.90
306,285 $
7.86
The vesting schedule for these shares as of December 31, 2024 is as follows:
Shares
2025
44,081
2026
83,374
2027
17,500
2028
13,300
2029 and thereafter
57,500
Total
215,755
The Company recognized stock-based compensation costs related to restricted stock of $107,897 and $524,479
for the years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, there was $1,231,191
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, 2024 and 2023.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
43
Note 19. Equity Incentive Plan, Continued
Activity related to stock options is summarized in the following table.
Weighted-
Weighted-
Average
Average
Remaining
Exercise
Options
Life (Years)
Price
Outstanding at December 31, 2023
169,440
0.80
$
7.27
Granted
-
-
-
Exercised
69,440
-
-
Forfeited
-
-
-
Outstanding at December 31, 2024
100,000
0.80
7.27
Options exercisable as of December 31, 2024
100,000
0.80
7.27
The Company recognized stock-based compensation costs related to stock options of $579 and $43,302 for the
years ended December 31, 2024 and 2023, respectively. As of December 31, 2024, 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, 2024 and 2023 is summarized in the following table.
2024
2023
Weighted-
Weighted
Average
Average
Grant-Date
Grant-Date
Shares
Fair Value
Shares
Fair Value
Nonvested at January 1
177,153 $
8.12
35,000
9.08
Granted
123,272
8.64
149,153 7.94
Vested
(13,149)
8.20
(7,000)
9.08
Forfeited
(68,800)
8.48
-
-
Nonvested at December 31
218,476 $
8.30
177,153 $
8.12
The vesting schedule for these shares as of December 31, 2024 is as follows:
Shares
2025
76,287
2026
46,671
2027
50,202
2028
32,066
2029 and thereafter
13,250
Total
218,476
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
44
Note 19. Equity Incentive Plan, Continued
The Company recognized stock-based compensation costs related to restricted stock units of $325,625 and $408,836
for the year ended December 31, 2024 and December 31, 2023, respectively. As of December 31, 2024, there was
$1,318,040 of total unrecognized compensation cost related to nonvested RSUs that will be recognized over a total
weighted-average period of 7 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.
The following is a summary of the income per common share calculations for the years ended December 31, 2024
and 2023.
2024
2023
Income available to common shareholders
Net income
$ 5,922,818 $ 4,603,416
Net income available to common shareholders
$
5,922,818 $
4,603,416
Basic income per common share:
Net income available to common shareholders
$
5,922,818 $
4,603,416
Average common shares outstanding - basic
7,846,631
7,822,882
Basic income per common share
$
0.75 $
0.59
Diluted income per common share:
Net income available to common shareholders
$
5,922,818 $
4,603,416
Average common shares outstanding - basic
7,846,631
7,822,882
Dilutive potential common shares
447,478
341,052
Average common shares outstanding - diluted
8,294,109
8,163,934
Diluted income per common share
$
0.71 $
0.56
Note 21. Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the
Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s
assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The
Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain
minimum ratios (set forth in the table below) of Tier 1, Common Equity Tier 1 (“CET1”), and total capital as a
percentage of assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 150%. Tier 1
capital of the Bank consists of common shareholders’ equity, excluding the unrealized gain or loss on securities
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
45
Note 21. Regulatory Matters, continued
available-for-sale, minus certain intangible assets, while CET1 is comprised of Tier 1 capital, adjusted for certain
regulatory deductions and limitations. Tier 2 capital consists of the allowance for loan losses subject to certain
limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the
leverage ratio. The Bank is required to maintain a required minimum leverage ratio of 4%.
Effective March 31, 2015, quantitative measures established by applicable regulatory standards, including the
newly implemented Basel III revised capital adequacy standards and relevant provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd Frank Act”), require the Bank to maintain (i) a minimum ratio
of Tier 1 capital to average total assets, after certain adjustments, of 4.00%, (ii) a minimum ratio of Tier 1 capital
to risk-weighted assets of 6.00%, (iii) a minimum ratio of total-capital to risk-weighted assets of 8.00% and (iv) a
minimum ratio of CET1 to risk-weighted assets of 4.50%. A “well-capitalized” institution must generally maintain
capital ratios 2% higher than the minimum guidelines. In order to avoid restrictions on capital distributions or
discretionary bonus payments to executives, the Bank is required to maintain a “capital conservation buffer” in
addition to its minimum risk-based capital requirements. This buffer is required to consist solely of CET1, but the
buffer applies to all three risk-based measurements (CET1, Tier 1 and total capital). The capital conservation
buffer began 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, 2024 and 2023.
To Be Well
Capitalized Under
For Capital
Prompt Corrective
(Dollars in Thousands)
Actual
Adequacy Purposes
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2024
The Bank
Total capital (to risk-weighted assets)
$ 114,021
13.47% $
67,714
8.00% $
84,642
10.00%
Tier 1 capital (to risk-weighted assets)
105,158
12.42%
50,785
6.00%
67,714
8.00%
Tier 1 capital (to average assets)
105,158
9.96%
42,222
4.00%
52,777
5.00%
Common Equity Tier 1 Capital
105,158
12.42%
38,089
4.50%
55,017
6.50%
(to risk-weighted assets)
December 31, 2023
The Bank
Total capital (to risk-weighted assets)
$ 110,003
13.86% $
63,500
8.00% $
79,375
10.00%
Tier 1 capital (to risk-weighted assets)
101,201
12.75%
47,625
6.00%
63,500
8.00%
Tier 1 capital (to average assets)
101,201
10.32%
39,229
4.00%
49,036
5.00%
Common Equity Tier 1 Capital
101,201
12.75%
35,719
4.50%
51,594
6.50%
(to risk-weighted assets)
Note 22. Unused Lines of Credit
The Company had available, at December 31, 2024, one unsecured line of credit, which was unused, to borrow
from another financial institution up to $10,000,000 in Fed Funds. Also, as of December 31, 2024, the Company
had the ability to borrow funds from the FHLB of up to $210,949,991. At that date, there were no advances from
the FHLB.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
46
Note 23. Fair Value Measurements
Generally accepted accounting principles (“GAAP”) provide a framework for measuring and disclosing fair value
that requires disclosures about the fair value of assets and liabilities recognized in the balance sheet, whether the
measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a
nonrecurring basis (for example, impaired loans).
Fair value is defined as the exchange in price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. GAAP also establishes a fair value hierarchy that requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine
fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from
time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as
loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments
typically involve application of the lower of cost or market accounting or the writing down of individual assets.
The following methods and assumptions were used to estimate the fair value of significant financial instruments:
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets
and liabilities are traded and the reliability of the assumptions used to determine the fair value. These levels are:
Level 1
Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market.
Level 3
Valuation is generated from model-based techniques that use at least one significant assumption
not observable in the market. These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or liability. Valuation techniques include the
use of option pricing models, discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Securities Available-for-Sale and Marketable Equity Securities - Securities available-for-sale and marketable
equity securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted
prices, if available. If quoted prices are not available, fair values are measured using independent pricing models
or other model-based valuation techniques such as the present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1
securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities
that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2
securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and
corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
47
Note 23. Fair Value Measurements, continued
Mortgage Loans Held for Sale - Mortgage loans held for sale are comprised of loans originated for sale in the
ordinary course of business. The fair value of mortgage loans originated for sale in the secondary market is based
on purchase commitments or quoted prices for the same or similar loans and are classified as recurring Level 2.
There were no loans held for sale requiring fair value adjustments at December 31, 2024 and 2023.
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.
Derivative Financial Instruments, Non-designated – 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, 2024 and 2023.
December 31, 2024
Total
Level 1
Level 2
Level 3
Available-for-sale securities:
U.S. Treasury securities
$
- $
- $
- $
-
U.S. Agency securities
18,132,765
-
18,132,765
-
Municipal securities
28,194,102
-
28,194,102
-
Mortgage-backed securities
85,264,332
-
85,264,332
-
Collateralized loan obligations
25,552,800
-
25,552,800
-
Corporate bonds
18,701,559
-
18,701,559
-
Total available-for-sale securities
175,845,558
-
175,845,558
-
Marketable equity securities
137,172
-
137,172
-
Mortgage servicing rights
4,190,002
-
-
4,190,002
Derivative assets (liabilities):
Mortgage loan interest rate lock commitments
169,636
-
169,636
-
Mortgage loan forward sales commitments
82,656
-
82,656
-
$ 180,425,024 $
- $ 176,235,022 $
4,190,002
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
48
Note 23. Fair Value Measurements, Continued
December 31, 2023
Total
Level 1
Level 2
Level 3
Available-for-sale securities:
U.S. Treasury securities
$
- $
- $
- $
-
U.S. Agency securities
6,990,005
-
6,990,005
-
Municipal securities
31,107,543
-
31,107,543
-
Mortgage-backed securities
93,063,215
-
93,063,215
-
Collateralized loan obligations
25,376,350
-
25,376,350
-
Corporate bonds
14,862,460
-
14,862,460
-
Total available-for-sale securities
171,399,573
-
171,399,573
-
Marketable equity securities
128,516
-
128,516
-
Mortgage servicing rights
4,356,624
-
-
4,356,624
Derivative assets (liabilities):
Mortgage loan interest rate lock commitments
282,781
-
282,781
-
Mortgage loan forward sales commitments
(141,797)
-
(141,797)
-
Derivative assets
115,056
-
115,056
-
Derivative liabilities
(136,061)
-
(136,061)
-
$ 176,004,692 $
- $ 171,648,068 $
4,356,624
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Mortgage
Servicing
Rights
Balance, December 31, 2022
$
4,642,455
Changes in fair value recognized in earnings (1)
281,434
Changes in unpaid principal balance (2)
(558,265)
Balance, December 31, 2023
4,356,624
Changes in fair value recognized in earnings (1)
241,398
Changes in unpaid principal balance (2)
(417,020)
Balance, December 31, 2024
$
4,190,002
(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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
49
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, 2024 and December 31, 2023, aggregated by level in the fair
value hierarchy within which those measurements fall.
Total
Level 1
Level 2
Level 3
December 31, 2024
Collateral-dependent loans
$
796,424 $
- $
- $
796,424
Mortgage servicing rights
$
9,220,260 $
- $
- $
9,220,260
Total
$
10,016,684 $
- $
- $
10,016,684
Total
Level 1
Level 2
Level 3
December 31, 2023
Mortgage servicing rights
$
7,272,550 $
- $
- $
7,272,550
Total
$
7,272,550 $
- $
- $
7,272,550
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 two collateral-dependent loans at December 31, 2024 which were individually
evaluated for impairment. One loan required no allowance for credit losses and the other loan required $100,000.
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,
2024 or 2023.
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
50
Note 23. Fair Value Measurements, Continued
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31,
2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as
follows:
Asset
Fair Value as of
December 31,
2024
Valuation Technique
Significant
Observable Inputs
Significant Unobservable
Inputs
Collateral-
dependent loans
$ 796,424
Appraisal Value /
Comparison sales
Appraisals and
comparable sales
Management judgment
Mortgage servicing
rights
$
9,220,260
Discounted cash flows
Comparable sales
Weighted average
discount rate – 8.5%
Constant prepayment
rate – 8.3%
Fair Value as of
December 31,
2023
Valuation Technique
Significant
Observable Inputs
Significant Unobservable
Inputs
Mortgage servicing
rights
$
7,272,550
Discounted cash
flows
Comparable sales
Weighted average
discount rate – 8.5%
Constant prepayment
rate – 9.4%
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, 2024 and 2023.
December 31, 2024
Carrying Value
Fair Value
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
$
47,227,099
$
47,227,099 $ 47,227,099 $
- $
-
Mortgage loan held for sale
20,973,857
20,973,857
-
20,973,857
-
Loans held for investments, net
745,304,418
713,093,921
-
- 713,093,921
Nonmarketable equity securities
748,500
748,500
-
748,500
-
Financial Liabilities:
Deposits without stated maturities
789,815,630
789,815,630
- 789,815,630
-
Deposits with stated maturities
161,595,248
161,199,502
- 161,199,502
-
Subordinated debentures
25,754,267
23,120,807
-
-
23,120,807
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
51
Note 23. Fair Value Measurements, Continued
December 31, 2023
Carrying Value
Fair Value
Level 1
Level 2
Level 3
Financial Assets:
Cash and cash equivalents
$
21,944,052
$
21,944,052 $ 21,944,052 $
- $
-
Mortgage loan held for sale
7,155,912
7,155,912
-
7,155,912
-
Loans held for investments, net
697,278,897
660,550,181
-
- 660,550,181
Nonmarketable equity securities
949,800
949,800
-
949,800
-
Financial Liabilities:
Deposits without stated maturities
689,359,034
689,359,034
- 689,359,034
-
Deposits with stated maturities
169,237,473
167,687,049
- 167,687,049
-
Securities sold under agreements to
Repurchase
307,517
307,517
-
307,517
-
FHLB Advances
5,000,000
5,000,000
-
5,000,000
-
Subordinated debentures
25,772,697
22,679,342
-
-
22,679,342
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
52
Note 23. Fair Value Measurements, Continued
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.
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
53
Note 24. First Reliance Bancshares, Inc. (Parent Company Only)
Condensed Balance Sheets
December 31,
2024
2023
Assets
Cash
$
4,779,126 $
3,240,882
Investment in banking subsidiary
96,852,999
91,669,697
Marketable equity securities
137,172
128,516
Nonmarketable equity securities
58,100
58,100
Investment in trust
310,000
310,000
Deferred tax asset
1,576,701
1,923,969
Total assets
$ 103,714,098 $ 97,331,164
Liabilities
Junior subordinated debentures
$ 10,310,000 $ 10,310,000
Subordinated debentures
15,444,267
15,412,697
Accrued salary benefits
68,001
68,001
Accrued interest payable
135,514
144,542
Total liabilities
25,957,782
25,935,240
Shareholders’ equity
77,756,316
71,395,924
Total liabilities and shareholders’ equity
$ 103,714,098 $ 97,331,164
Condensed Statements of Operations
For the years ended
December 31,
2024
2023
Income
Interest income
$
23,917 $
181,159
Dividend from wholly owned subsidiary
3,000,000
-
Gain (loss) on fair value of equity securities
8,655
(5,198)
Total income
3,032,572
175,961
Expenses
Interest expense
1,458,098
1,429,229
Salaries and employee benefits
373,765
566,836
Other expenses
51,773
55,044
Total expenses
1,883,636
2,051,109
Income (loss) before income taxes and equity in
undistributed income of banking subsidiary
1,148,936
(1,875,148)
Equity in undistributed earnings of banking subsidiary
4,364,053
6,093,876
Net income before income taxes
5,512,989
4,218,728
Income tax benefit
409,829 384,688
Net income
$
5,922,818 $
4,603,416
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
54
Note 24. First Reliance Bancshares, Inc. (Parent Company Only), Continued
Condensed Statements of Cash Flows
For the years ended
December 31,
2024
2023
Cash flows from operating activities
Net income
$
5,922,818 $
4,603,416
Adjustments to reconcile net income to net cash
provided in operating activities:
Deferred income taxes
347,268
77,500
Net equity in undistributed earnings of banking subsidiary
(4,364,053)
(6,093,876)
Amortization of debt issuance costs
31,570
31,746
(Gain) loss on change in fair value of marketable equity securities
(8,655)
5,199
Stock based compensation expense
813,620
1,446,765
Increase (decrease) in accrued interest payable
(9,029)
3,687
Decrease in accrued salary benefits
-
(42,923)
Net cash provided in operating activities
2,733,539
31,514
Cash flows from financing activities
Issuances of common stock
102,809
131,390
Restricted stock forfeitures
(598,225)
(73,999)
Decrease (increase) in nonvested restricted stock
177,589
(396,429)
Purchase of treasury stock
(877,468)
(318,974)
Net cash used in by financing activities
(1,195,295)
(658,012)
Net decrease in cash
1,538,244
(626,498)
Cash and cash equivalents, beginning of year
3,240,882
3,867,380
Cash and cash equivalents, ending of year
$
4,779,126 $
3,240,882
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2024 and 2023
55
Note 25. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions that provide additional evidence
about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of
preparing financial statements. Nonrecognized subsequent events are events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after that date.
In December 2024 and as amended on February 3, 2025, the Company entered into a definitive Purchase and
Assumption Agreement and the Amendment with Carter Bankshares, Inc. and it’s wholly-owned subsidiary Carter
Bank from Martinsville, Virginia, to acquire the deposits and other assets associated with two of First Reliance
Bank branches in Mooresville and Winston-Salem, North Carolina. Carter Bank has agreed to assume certain
deposit liabilities, and acquire cash, personal property and other fixed assets associated with both locations.
Carter Bank will pay 4.6% deposit premium on the average closing balance of the sum of non-interest bearing and
interest-bearing transaction accounts, savings, and money market demand deposits. The other assets will be
acquired at net book value. Carter Bank is not acquiring any loans in this transaction. The transaction is expected
to close in the second quarter of 2025 and is subject to obtaining the necessary regulatory approvals. At December
31, 2024, total deposits were approximately $57.7 million.
In January 2025, the Company retired $0.5 million in junior subordinated debt plus accrued interest from the
outstanding issuances in 2020 and 2021 referenced in Note 13 above. The total retired debt was $1.0 million at a
combined discount of $140,000.
Management performed an evaluation to determine whether there have been any other subsequent events since
the balance sheet date and determined that no other subsequent events occurred requiring accrual or disclosure.