First Reliance Bancshares, Inc.
Annual Report 2024

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Plain-text annual report

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.

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