Professional Documents
Culture Documents
Otc FSRL 2019
Otc FSRL 2019
Shareholders
I am pleased to report that our company had an exceptional year,
highlighted by outstanding financial performance, the addition of key team
members and significant progress toward strategic initiatives. Our
achievements are a testament to our vision for the company, our ability to
execute our long-term plan, and our commitment to shareholder value. We
are extremely well-positioned for the future in spite of the recent economic
impact from the coronavirus.
Much of our success can be attributed to the tireless commitment of our associates, who focus their
efforts every day on our core purpose, which is “to make the lives of our customers better.” By putting
our customers first, we continue to set ourselves apart from our competitors, providing intangible
benefits that go beyond dollars and cents. We continue to be recognized for our excellent corporate
culture as evidenced by our being named one of the Best Places to Work in South Carolina for the 14th
consecutive year!
In our 20-year history, 2019 was pivotal. We began to realize the benefits of our Greenville acquisition,
as well as our expansions into Winston-Salem, Myrtle Beach and the Lake Norman area - all of which
helped us grow total assets by 13% to $661.6 million. Although we are excited about our success, we
recognize that we have significant challenges ahead, including economic uncertainty, increased
competition, and an ever-complex regulatory environment. We are well positioned to meet these
challenges and continue to achieve our goals of growth, profitability and efficiency.
Our Markets
The markets we serve are one of our greatest strengths. We now have banking operations in three of
the fastest growing metropolitan statistical areas (MSA) in the United States (Myrtle Beach, Charleston
and Charlotte).
Our Myrtle Beach market grew loans this year by $15 million and deposits by $8 million. We are
finalizing our plans for a new Myrtle Beach branch on Grissom Parkway that will be constructed in
2020.
The investment we made in North Carolina last year continues to pay off as the market grew loans by
$40 million and deposits by $9 million. We will relocate our Winston-Salem branch to a new expanded,
full-service location, which will better position us for growth. We are also looking for branch sites in the
Lake Norman area.
i
Financial Strength
Net Income
Net income for 2019 grew $4.1 million or $0.51 per diluted share compared to $0.31 per diluted
share for the same period a year ago, a 65% increase. That was despite a one-time mortgage
servicing rights (MSR) valuation adjustment totaling $1.1 million, and a declining rate environment
which saw a 75% basis point decline in interest rates by the Federal Reserve in the second part of
the year.
Loan Growth
Deposit Growth
ii
Tangible Book Value
Assets
Mortgage production in 2019 was robust. With a favorable mortgage rate environment, production
totaled $363 million, which exceeded our forecast by $100 million. We expect favorable rates to
continue into 2020 and for the refinance market to heat up, which should bode well for our mortgage
production team.
Our People
Another key indicator of our success and momentum is our ability to attract and recruit talented and
experienced people to our team. This year we welcomed Robert Dozier as our Executive Vice
President and Chief Banking Officer. Robert has over 30 years of financial service experience. He
iii
most recently served as Executive Vice President and Chief Business Officer at the Federal Home
Loan Bank of Atlanta (FHLBA) where he oversaw Sales, Corporate Communications, Community
Investment Services, Government Relations and Financial Operations Management. The FHLBA is a
$135 billion dollar wholesale bank owned by 850 financial service institutions throughout the Southeast.
He will be responsible for the bank's commercial platform, corporate strategy and strategic market
expansion of our footprint.
We are excited about all of the new opportunities these talented and highly experienced bankers add to
our team. As the banking industry continues to evolve, will continue to seek out and recruit the very
best people available and continue to strengthen our team.
Commitment to Technology
Technology continues to be a hot topic in the banking world. As we look to 2020 and beyond, it is clear
that we are undergoing a period of transformative change in the way consumers behave and use
technology. Customer expectations of a bank’s technology platform continue to rise. The big four
continue to invest heavily in consumer-facing technology to win the retail-banking customer. Many
community banks are handcuffed with old technology provided by their core operating systems. Much
of this technology is outdated and inferior to what the larger banks are now offering. Although building
personal relationships in the communities we serve will continue to be our top priority, we have made
the commitment to pursue best-in-class technology solutions for our customers and not be locked into
any one provider. This will allow us the flexibility to offer innovative solutions and an excellent
experience to our customers. We have already begun to vet options and plan to roll out significant
enhancements in 2020.
iv
Our Brand
We understand the important role that community banks play in the communities they serve. With many
of our community bank competitors being acquired by larger banks in 2019, we believe that our brand
has the unique opportunity to fill the voids left in our markets. We are still small enough to properly
serve the community banking needs of individuals and small businesses in our local markets, and yet
big enough to have the resources that will best enable our customers to succeed.
Our customers love our brand and the way we do business. 90%
of our customers indicating that they are satisfied with their level of
service and 81% stating that they are likely to recommend us to
their friends and family. In 2019 we leveraged new digital platforms
to enhance our brand awareness, which significantly helped us to
grow our non-interest bearing transaction accounts. We plan to
continue this effort in 2020.
A New World
As we look ahead to 2020 our world is experiencing unprecedented disruption because of COVID-19.
Americans and people around the world are being asked and/or forced to shelter in place, social
distance themselves and avoid unnecessary travel. Our global economic outlook is uncertain. But what
is certain is that many of our customers and our communities are being negatively impacted. As a
result, we have stepped up to help.
We are proactively calling our business customers to check in on them and invite help. We have
initiated community-wide efforts to support local restaurants, teachers and healthcare workers, and we
stand ready to provide more help where needed. As difficult and uncertain as the road before us might
be, we have never been more prepared to help make the lives of our customers BETTER.
The year ahead will be full of new challenges. However, through strong leadership, our fully engaged
team of associates and our focus on results, we have never been better positioned for success. Thank
you for the support you show our associates, our bank and me.
v
First Reliance Bancshares, Inc. and Subsidiary
Page
We have audited the accompanying consolidated financial statements of First Reliance Bancshares, Inc. and its
Subsidiary which comprise the consolidated balance sheets as of December 31, 2019 and 2018, and the related
consolidated statements of operations, comprehensive income, changes in shareholders’ equity and cash flows
for the years then ended and the related notes to the consolidated financial statements (collectively, “the
financial statements”).
Management is responsible for the preparation and fair presentation of these financial statements in accordance
with accounting principles generally accepted in the United States of America; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of
the risks of material misstatement of the financial statements, whether due to fraud or error. In making those
risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation
of the financial statements in order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly,
we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of significant accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
elliottdavis.com
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial
position of First Reliance Bancshares, Inc. and its Subsidiary as of December 31, 2019 and 2018, and the results
of its operations and its cash flows for the years then ended in accordance with accounting principles generally
accepted in the United States of America.
2
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
As of December 31, 2019 and 2018
2019 2018
Assets
Cash and cash equivalents:
Cash and due from banks $ 12,945,355 $ 4,638,332
Interest-bearing deposits with other banks 27,395,328 29,923,656
Total cash and cash equivalents 40,340,683 34,561,988
Time deposits in other banks 253,911 253,003
Marketable equity securities 30,895 168,151
Securities available-for-sale 35,684,146 33,388,645
Securities held-to-maturity (fair value of $10,746,649,
and $14,250,850 at December 31, 2019 and 2018, respectively) 10,417,168 14,107,252
Nonmarketable equity securities 2,423,200 1,393,500
Total investment securities 48,555,409 49,057,548
Mortgage loans held for sale 27,901,419 12,713,361
Loans receivable 480,185,395 430,795,891
Less allowance for loan losses (3,529,855) (2,788,188)
Loans, net 476,655,540 428,007,703
Premises, furniture and equipment, net 20,420,506 20,310,879
Accrued interest receivable 1,473,581 1,318,104
Other real estate owned 347,552 341,519
Cash surrender value life insurance 17,692,385 17,306,312
Net deferred tax assets 6,579,640 7,923,572
Mortgage servicing rights 11,022,638 9,023,859
Core deposit intangibles 513,035 684,217
Goodwill 690,917 690,917
Right of use asset 5,669,144 -
Other assets 3,496,549 2,796,830
Total assets $ 661,612,909 $ 584,989,812
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing transaction accounts $ 137,312,316 $ 103,201,256
Interest-bearing transaction accounts 89,168,078 83,251,127
Savings 120,472,195 120,801,341
Time deposits $250,000 and over 36,317,110 42,870,456
Other time deposits 121,817,938 126,044,529
Total deposits 505,087,637 476,168,709
Securities sold under agreement to repurchase 14,637,332 16,852,981
Advances from Federal Home Loan Bank 43,300,000 20,000,000
Federal Funds Purchased 16,500,000 -
Subordinated debentures 4,965,214 4,934,877
Junior subordinated debentures 10,310,000 10,310,000
Accrued interest payable 416,302 447,883
Lease liability 5,701,327 -
Other liabilities 3,609,637 4,106,913
Total liabilities 604,527,449 532,821,363
Shareholders’ Equity
Preferred stock
Series D non-cumulative preferred stock, no par value; 572 and 581 shares issued and outstanding
at December 31, 2019 and 2018, respectively 572 581
Common stock, $0.01 par value; 20,000,000 shares authorized,
8,033,579 and 8,002,172 shares issued and outstanding at December 31, 2019 and 2018, respectively 80,336 80,022
Non voting common stock, $0.01 par value; 430,000 shares authorized,
410,499 and 410,499 shares issued and outstanding at December 31, 2019 and 2018, respectively 4,105 4,105
Capital surplus 51,136,879 50,904,763
Treasury stock, at cost, 183,591 and 94,505 shares at December 31, 2019 and 2018, respectively (1,283,469) (624,120)
Nonvested restricted stock (1,253,706) (1,508,630)
Retained earnings 8,092,455 4,003,616
Accumulated other comprehensive income (loss) 308,288 (691,888)
Total shareholders’ equity 57,085,460 52,168,449
Total liabilities and shareholders’ equity $ 661,612,909 $ 584,989,812
2019 2018
Interest income:
Loans, including fees $ 26,189,861 $ 22,010,885
Investment securities:
Taxable 1,197,956 1,039,259
Tax exempt 136,964 147,950
Other interest income 329,038 426,598
Total 27,853,819 23,624,692
Interest expense:
Time deposits 4,071,602 2,191,437
Other deposits 562,913 534,572
Other interest expense 1,322,522 964,475
Total 5,957,037 3,690,484
Net interest income 21,896,782 19,934,208
Provision for loan losses 983,803 510,356
Net interest income after provision for loan losses 20,912,979 19,423,852
Noninterest income:
Service charges on deposit accounts 1,681,812 1,597,211
Income from mortgage operations 6,900,740 4,813,820
Income from bank owned life insurance 386,073 390,557
Gain on sale of investment securities 37,245 800,000
Mortgage servicing rights fair value adjustment (1,307,299) 324,840
Other service charges, commissions, and fees 1,548,202 1,510,405
Other 456,192 487,529
Total 9,702,965 9,924,362
Noninterest expenses:
Salaries and benefits 15,369,271 15,373,131
Occupancy 2,376,794 2,227,135
Furniture and equipment related expenses 1,821,523 2,021,351
Acquisition-related costs - 1,005,195
Other 5,706,284 5,549,562
Total 25,273,872 26,176,374
Income before income taxes 5,342,072 3,171,840
Income tax expense 1,253,233 741,606
Net income $ 4,088,839 $ 2,430,234
Average common shares outstanding, basic 7,937,617 7,738,547
Average common shares outstanding, diluted 8,062,486 7,867,586
4
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2019 and 2018
2019 2018
Securities held-to-maturity
Amortization of net unrealized gains
capitalized on securities transferred from available-for-sale (49,616) (14,987)
Income tax benefit 13,157 3,680
Net of income taxes (36,459) (11,307)
5
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2019 and 2018
Accumulated
Other
Nonvested Comprehensive
Preferred Common Capital Treasury Restricted Retained Income
Stock Stock Surplus Stock Stock Earnings (Loss) Total
Balance, December 31, 2017 $ 2,956,192 $ 78,875 $ 46,941,229 $ (229,844) $ (868,399) $ 1,573,382 $ (298,110) $ 50,153,325
Net issuance of
Common Stock - 1,129 954,314 - - - - 955,443
Balance, December 31, 2018 581 84,127 50,904,763 (624,120) (1,508,630) 4,003,616 (691,888) 52,168,449
Net issuance of
Common Stock - 305 173,432 - - - - 173,737
Balance, December 31, 2019 $ 572 $ 84,441 $ 51,136,879 $ (1,283,469) $ (1,253,706) $ 8,092,455 $ 308,288 $ 57,085,460
6
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2019 and 2018
2019 2018
7
First Reliance Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the years ended December 31, 2019 and 2018
2019 2018
8
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Organization:
First Reliance Bancshares, Inc. (the “Company”) was incorporated under the laws of the State of South Carolina on
April 12, 2001 to serve as a bank holding company for its subsidiary, First Reliance Bank (the “Bank”), and acquired
all of the shares of the Bank on April 1, 2002 in a statutory share exchange. First Reliance Bank was incorporated
on August 9, 1999 and commenced business on August 16, 1999. The principal business activity of the Bank is to
provide banking services to domestic markets throughout South Carolina and North Carolina. The Bank is a South
Carolina chartered commercial bank, and its deposits are insured by the Federal Deposit Insurance Corporation
(“FDIC”). The consolidated financial statements include the accounts of the parent company and its wholly-owned
subsidiary after elimination of all significant intercompany balances and transactions. In 2005, the Company formed
First Reliance Capital Trust I (the "Trust") for the purpose of issuing trust preferred securities. In accordance with
current accounting guidance, the Trust is not consolidated in these financial statements.
Management’s Estimates:
The preparation of consolidated financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for losses on loans, including valuation allowances for impaired loans, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans and evaluating other-than-temporary-
impairment of investment securities. In connection with the determination of the allowances for losses on loans
and valuation of foreclosed real estate, management obtains independent appraisals in accordance with regulatory
policy. Management must also make estimates in determining the estimated useful lives and methods for
depreciating premises and equipment.
While management uses available information to recognize losses on loans and foreclosed real estate, future
additions to the allowances may be necessary, based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowances
for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to
the allowances based on their judgments about information available to them at the time of their examinations.
Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate
may change materially in the near term.
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, 2019 and 2018, the majority of the total
loan portfolio was to borrowers from within these areas.
9
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
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.
There are industry practices that could subject the Company to increased credit risk should economic conditions
change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-
amortizing loans with maturities prior to the loan being fully paid (i.e., balloon payment loans). These loans are
underwritten and monitored to manage the associated risks and management believes that these particular
practices do not subject the Company to unusual credit risk. The Company’s investment portfolio consists principally
of obligations of the United States and its agencies or its corporations and obligations of state and local
governments. In the opinion of management, there is no concentration of credit risk in its investment portfolio.
The Company places its deposits and correspondent accounts with and sells its federal funds to high quality
institutions. Management believes credit risk associated with correspondent accounts is not significant.
Debt securities available-for-sale are carried at amortized cost and adjusted to fair value by recognizing the
aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded
as part of accumulated other comprehensive income in shareholders’ equity, net of deferred income taxes.
Reductions in market value considered by management to be other than temporary are reported as a realized loss
and a reduction in the cost basis of the security. The adjusted cost basis of investments available-for-sale is
determined by specific identification and is used in computing the gain or loss upon sale.
Investment securities held-to-maturity are stated at cost, adjusted for amortization of premium and accretion of
discount computed by the straight-line method. The Company has the ability and management has the intent to
hold designated investment securities to maturity. Reductions in market value considered by management to be
other than temporary are reported as a realized loss and a reduction in the cost basis of the security.
Marketable equity securities are carried at fair value, with changes in fair value recorded through the consolidated
statements of operations. Dividends received on marketable equity securities are included as a separate component
of interest income.
10
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
At December 31, 2019 and 2018, nonmarketable equity securities consist of the following:
2019 2018
Federal Home Loan Bank stock $ 2,365,100 $ 1,335,400
Community Bankers Bank stock 58,100 58,100
Total $ 2,423,200 $ 1,393,500
Nonmarketable equity securities are carried at cost since no quoted market value and no ready market exists.
Investment in the Federal Home Loan Bank of Atlanta (“FHLB”) is a condition to borrowing from that bank, and the
stock is pledged to collateralize such borrowings. Dividends received on nonmarketable equity securities are
included as a separate component of interest income.
Loans Receivable:
Loans receivable are stated at their unpaid principal balance, net of charge offs. Interest income is computed using
the simple interest method and is recorded in the period earned.
When serious doubt exists as to the collectability of a loan or when a loan becomes contractually 90 days past due
as to principal or interest, interest income is discontinued unless the estimated net realizable value of collateral
exceeds the principal balance and accrued interest. When interest accruals are discontinued, income earned but
not collected is reversed. Loans are removed from nonaccrual status when they become current as to both principal
and interest, when concern no longer exists as to the collectability of the principal and interest, and after a
sufficient history of satisfactory payment performance has been established.
Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized as an
adjustment of the related loan yields. Generally, these amounts are amortized over the contractual life of the
related loans or commitments.
The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s
problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining
whether all outstanding principal and interest are expected to be collected. Loans are not considered impaired if
a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate
for the period of delay, are expected to be collected.
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against the allowance when management believes the
collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
11
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's
periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are
classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows or collateral value or observable market price of the
impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and
is based on historical loss experience adjusted for qualitative factors. A loan is considered impaired when, based on
current information and events, it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay,
the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral
if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement.
In situations where, for economic or legal reasons related to a borrower’s financial difficulties, a concession to the
borrower is granted that the Company would not otherwise consider, the related loan is classified as a troubled
debt restructuring. The restructuring of a loan may include the transfer from the borrower to the Company of real
estate, receivables from third parties, other assets, or an equity interest in the borrower in full or partial satisfaction
of the loan, modification of the loan terms, or a combination of the above.
Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation
is computed by the straight-line method, based on the estimated useful lives for buildings of 40 years and for
furniture and equipment of 5 to 10 years. Leasehold improvements are amortized over the term of the lease. The
cost of assets sold or otherwise disposed of and the related allowance for depreciation is eliminated from the
accounts and the resulting gains or losses are reflected in the consolidated statements of operations when incurred.
Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are
capitalized based upon the Company's policy.
12
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is carried at
the lower of cost or the fair market value minus estimated costs to sell. Any write-downs at the date of foreclosure
are charged to the allowance for loan losses. Expenses to maintain such assets and subsequent changes in the
valuation allowance are included in other noninterest expense along with gains and losses on disposal.
Cash surrender value of life insurance represents the cash value of policies on certain current and former officers
of the Company.
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 of market value, with changes in fair value recognized in income from
mortgage operations. Loan origination fees are recorded when earned.
The Company issues rate lock commitments to borrowers on prices quoted by secondary market investors.
Derivatives related to these commitments are recorded as either assets or liabilities in the balance sheet and are
measured at fair value. Changes in the fair value of the derivatives are reported in current income or other
comprehensive income depending on the purpose for which the derivative is held. The Company does not currently
engage in any activities that qualify for hedge accounting. Accordingly, changes in fair value of these derivative
instruments are included in noninterest income in the consolidated statements of operations.
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. For
subsequent measurements, an entity can choose to measure servicing assets and liabilities based on fair value.
The Company uses the fair value measurement option for MSRs.
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 are carried at fair value with changes in fair
value and servicing fees (cost) recorded on the consolidated statements of operations.
13
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
As a result of an acquisition, the Company may recognize an intangible asset representing the estimated value of core
deposits assumed. The Company amortizes the intangible assets over their estimated useful lives. Core deposit
intangibles are periodically reviewed for reasonableness and are evaluated for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may not be recoverable.
Goodwill:
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business
combination. Goodwill is not amortized but tested for impairment on an annual basis, or more often, if events or
circumstances indicate there may be impairment. Goodwill impairment exists when a reporting unit’s carrying value
of goodwill exceeds its implied fair value. Authoritative guidance governing the testing of indefinite lived intangible
assets for impairment allows the option to first assess Goodwill by utilizing qualitative factors in determining if it is
more likely than not that carrying value exceeds fair value. If, through this analysis, it is determined that it is more
likely than not that carrying value exceeds fair value, then the next step requires estimation of the fair value of the
reporting unit by quantitative assessment. If the fair value of the reporting unit exceeds its carrying value, no further
testing is required. If the carrying value exceeds the fair value, further analysis is required to determine whether an
impairment charge must be recorded based upon the implied fair value of goodwill and, if so, the amount of such
charge. The Company has performed the annual impairment analysis as of December 31, 2019 and concluded no
impairment exists.
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 is required to recognize an initial liability for the fair value of obligations assumed under
the guarantee.
The Company establishes 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 adequately 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 the 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
additional increases in the reserve will not be required. The Company may from time-to-time be required to
repurchase mortgage loans previously sold to investors due to loan nonperformance. At December 31, 2019, the
Company had $0, recorded for potential indemnifications to other third-party purchasers based on management’s
analysis.
14
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Income Taxes:
Provisions for income taxes are based on taxes payable or refundable for the current year and deferred taxes on
temporary differences between the amount of taxable income and pretax financial income and between the tax
bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and
liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates
are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. In addition,
deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized. Interest and penalties related to income
tax matters are recognized in income tax expense.
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 of
$200,187 and $306,278 were included in the Company's results of operations for 2019 and 2018, respectively.
Retirement Benefits:
A trusteed 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 $242,670 and $273,094 to earnings for the retirement savings plan in 2019 and 2018,
respectively. In addition, the Company made an elective contribution to the retirement savings plan during 2019
and 2018 totaling $154,384 and $142,952, respectively, 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 2019 and 2018, the
supplemental retirement expense was $169,881 and $157,905. The current accrued but unfunded amount is
$2,054,855 and $1,899,641 at December 31, 2019 and 2018, 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 $17,692,385 and
$17,306,312 at December 31, 2019 and 2018, respectively.
The Company has split-dollar life insurance arrangements with certain of its officers. At December 31, 2019 and
2018, the split-dollar liability relating to these arrangements totaled $365,200 and $343,718, respectively. For 2019
and 2018, the Company recognized net expenses of $21,482 and $20,221, respectively, related to these
arrangements and recorded within salaries and benefits expense.
15
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
On January 19, 2006, the Company approved the 2006 Equity Incentive Plan (the "2006 Plan") which expired
January 19, 2016. The Company approved on April 20, 2017, the 2017 Equity Incentive Plan (the "2017 Plan"). These
plans provide for the granting of dividend equivalent rights, options, performance unit awards, phantom shares,
stock appreciation rights and stock awards, each of which shall be subject to such conditions based upon continued
employment, passage of time or satisfaction of performance criteria or other criteria as permitted by the plan. The
2006 Plan allowed granting up to 950,000 shares of stock to officers, employees, and directors, consultants and
service providers of the Company or its affiliates. Awards may be granted for a term of up to ten years from the
effective date of grant. The 2017 Plan allows granting up to 500,000 shares. The maximum aggregate shares subject
to options is restricted to 80,000 in any calendar year to any one participant. The aggregate number of restricted
stock shares available to be granted during any calendar to any one participant is limited to 50,000 shares. Awards
may be granted for a term of up to five years from the effective date of the grant. Under these Plans, the Board of
Directors has sole discretion as to the exercise date of any awards granted. The per-share exercise price of incentive
stock options may not be less than the market value of a share of common stock on the date the option is granted.
The related compensation cost for all stock-based awards is recognized over the service period for awards expected
to vest. Any options that expire unexercised or are canceled become available for re-issuance. The Company's equity
incentive plans are further described in Note 21.
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
independent valuations. Dividends on shares held by the ESOP are charged to retained earnings. At December 31,
2019 and 2018, the ESOP owned 497,684 and 487,820 shares of the Company’s common stock with an estimated
value of $3,153,877 and $2,169,854, respectively. All of these shares were allocated to participants.
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 22).
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.
16
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of
commitments to extend credit and letters of credit. These financial instruments are recorded in the consolidated
financial statements when they become payable by the customer.
The Company accounts for its acquisitions under Financial Accounting Standards Board (“FASB”) ASC Topic 805,
“Business Combinations,” which requires the use of the acquisition method of accounting. All identifiable assets
acquired, including loans, are recorded at fair value. No allowance for loan losses related to acquired loans is
recorded on the acquisition date because the fair value of the loans acquired incorporates assumptions regarding
credit risk. Loans acquired are recorded at fair value in accordance with the fair value methodology prescribed in
FASB ASC Topic 820, “Fair Value Measurements and Disclosures.”
Purchased credit-impaired loans (“PCI”) are accounted for under the accounting guidance for loans and debt
securities acquired with deteriorated credit quality, found in FASB Accounting Standards Codification Topic 310-
30, “Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality,” formerly American Institute
of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 03-3, “Accounting for Certain Loans or Debt
Securities Acquired in a Transfer,” and initially measured at fair value, which includes estimated future credit losses
expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit
deterioration since origination and for which it is probable that all contractually required payments will not be
collected are considered to be PCI loans. Evidence of credit quality deterioration as of purchase dates may include
information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages.
The Company considers expected prepayments and estimates the amount and timing of expected principal,
interest and other cash flows for each loan or pool of loans meeting the criteria above, and determines the excess
of the loan’s scheduled contractual principal and contractual interest payments over all cash flows expected to be
collected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining
amount, representing the excess of the loan’s or pool’s cash flows expected to be collected over the fair value for
the loan or pool of loans, is accreted into interest income over the remaining life of the loan or pool (accretable
difference). Subsequent to the acquisition date, increases in cash flows expected to be received in excess of the
Company’s initial estimates are reclassified from nonaccretable difference to accretable difference and are
accreted into interest income on a level-yield basis over the remaining life of the loan. Decreases in cash flows
expected to be collected are recognized as impairment through the provision for loan losses.
Acquired non-PCI loans are recorded at their initial fair value and adjusted for subsequent advances, pay downs,
amortization or accretion of any premium or discount on purchase, charge-offs and additional provisioning that
may be required.
17
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting,
and/or disclosure of financial information by the Company.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment
model for certain debt securities. The amendments will be effective for the Company for reporting periods
beginning after December 15, 2022. Early adoption is permitted for all organizations for periods beginning after
December 15, 2018. The Company will apply the amendments to the ASU through a cumulative-effect adjustment
to retained earnings as of the beginning of the year of adoption. The Company is evaluating the impact of the ASU
on the consolidated financial statements. The Company expects the ASU will have no material impact on the
recorded allowance for loan losses given the change to estimated losses over the contractual life of the loans
adjusted for expected prepayments. In addition to the allowance for loan losses, the Company will also record an
allowance for credit losses on debt securities instead of applying the impairment model currently utilized. The
amount of the adjustments will be impacted by each portfolio’s composition and credit quality at the adoption
date as well as economic conditions and forecasts at that time.
In January 2017, the FASB amended the Goodwill and Other Topic of the Accounting Standards Codification to
simplify the accounting for goodwill impairment for public business entities and other entities that have goodwill
reported in their financial statements and have not elected the private company alternative for the subsequent
measurement of goodwill. The amendment removes Step 2 of the goodwill impairment test. A goodwill impairment
will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
amount of goodwill. The effective date and transition requirements for the technical corrections will be effective
for the Company for reporting periods beginning after December 15, 2020. Early adoption is permitted for interim
or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company did not
experience a material effect on its financial statements.
In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification.
The amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the
FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial
Statements. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any
removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until
their effective date. The Company does not expect these amendments to have a material effect on its financial
statements.
In November 2018, the FASB issued guidance to amend the Financial Instruments—Credit Losses topic of the
Accounting Standards Codification. The guidance aligns the implementation date of the topic for annual financial
statements of nonpublic companies with the implementation date for their interim financial statements. The
guidance also clarifies that receivables arising from operating leases are not within the scope of the topic, but
rather, should be accounted for in accordance with the leases topic. The amendments will be effective for the
Company for reporting periods beginning after December 15, 2022. Early adoption is permitted for all organizations
for periods beginning after December 15, 2018. The Company is currently in the process of evaluating the impact
of adoption of this guidance on the financial statements.
18
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
In May 2019, the FASB issued guidance to provide entities with an option to irrevocably elect the fair value option,
applied on an instrument-by-instrument basis for eligible instruments, upon adoption of ASU 2016-13,
Measurement of Credit Losses on Financial Instruments. The amendments will be effective for the Company for
reporting periods beginning after December 15, 2020. The Company does not expect these amendments to have
a material effect on its financial statements.
In November 2019, the FASB issued guidance to defer the effective dates for private companies, not-for-profit
organizations, and certain smaller reporting companies applying standards on current expected credit losses
(CECL). The new effective dates will be fiscal years beginning after December 15, 2022 including interim periods
within those fiscal years. The Company is currently in the process of evaluating the impact of adoption of this
guidance on its financial statements.
In November 2019, the FASB issued guidance that addresses issues raised by stakeholders during the
implementation of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. The amendments affect a variety of Topics in the Accounting Standards Codification. For
entities that have not yet adopted the amendments in ASU 2016-13, the amendments are effective for fiscal years
beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted
in any interim period as long as an entity has adopted the amendments in ASU 2016-13. The Company does not
expect these amendments to have a material effect on its financial statements.
In December 2019, the FASB issued guidance to simplify accounting for income taxes by removing specific technical
exceptions that often produce information investors have a hard time understanding. The amendments also
improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. The amendments are effective for fiscal years beginning after December 15, 2020, including
interim periods within those fiscal years. Early adoption is permitted. The Company does not expect these
amendments to have a material effect on its financial statements.
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.
In the normal course of its business, the Company encounters two significant types of risks: economic and
regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The
Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at
different speeds, or on different basis, than its interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from borrower's inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of
real estate held by the Company.
The Company is subject to the regulations of various governmental agencies (regulatory risk). These regulations
can and do change significantly from period to period. The Company also undergoes periodic examinations by the
regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required
loss allowances and operating restrictions from the regulators' judgments based on information available to them
at the time of their examination.
19
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Reclassifications:
Certain captions and amounts in the 2018 consolidated financial statements were reclassified to conform with the
2019 presentation. The reclassifications did not have an impact on net income or shareholders’ equity.
On January 22, 2018, the Company acquired the outstanding common stock of Independence Bancshares, Inc. and
its subsidiary, Independence Bank (collectively "INB") which are headquartered in Greenville, South Carolina. In
connection with the acquisition, the Company acquired $82.3 million of assets and assumed $80.4 million of
liabilities. The total purchase price was $2.5 million consisting of cash.
The INB transaction was accounted for using the acquisition method of accounting, and accordingly, assets
acquired, liabilities assumed, and consideration exchanged were recorded at fair value on the acquisition date. Fair
values are subject to refinement for up to a year.
The following table presents the assets acquired and liabilities assumed as of January 22, 2018, as recorded by the
Company on the acquisition date and initial fair value adjustments:
Liabilities
Deposits $ 80,336,319 $ (98,290) $ 80,238,029
Other Liabilities 173,602 - 173,602
Total liabilities 80,509,921 (98,290) 80,411,631
Net assets acquired over liabilities assumed $ 1,871,928
Consideration:
Cash exchanged $ 2,562,845
Goodwill $ 690,917
20
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The merger included the acquisition of $54.9 million in loans and $80.3 million in deposits. The loan portfolio was
purchased at a $2.5 million discount. The deposits were purchased for a premium, including an $880,000 core
deposit intangible. The amortization of the core deposit intangible is based on the cash flows used to value the
asset over approximately nine years utilizing sum of years’ digits methodology
The consideration paid exceeded the fair value of the identifiable assets and liabilities acquired and resulted in the
establishment of goodwill in the amount of $690,917, representing the intangible value of INB’s business within
the markets it served.
Merger-related charges related to the INB acquisition during 2018 totaled $1,005,195, and were recorded in the
consolidated statements of operations. These merger-related expenses include legal, accounting, auditing,
investment banker, travel, and other costs associated with closing the acquisition.
The Company is required to maintain balances with the Federal Reserve computed as a percentage of deposits. At
December 31, 2019 and 2018, this requirement was $7,158,000 and $5,395,000, respectively, net of vault cash and
balances on deposit with the Federal Reserve.
The amortized cost and estimated fair values of securities available-for-sale were:
At December 31, 2019 and 2018, the Company had marketable equity securities totaling $30,895 and $168,151,
respectively.
21
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The amortized cost and estimated fair values of securities held-to-maturity were:
The following is a summary of maturities of securities available-for-sale and held-to-maturity as of December 31,
2019. 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, maturities of which are based on expected
maturities since paydowns are expected to occur before contractual maturity dates.
Debt Securities Debt Securities
Available-for-Sale Held-to-Maturity
Amortized Amortized
Cost Fair Value Cost Fair Value
Due within one year $ 2,500,000 $ 2,498,005 $ - $ -
Due after one year but within five years 3,552,020 3,538,405 - -
Due after five years through ten years 1,000,000 1,018,280 565,422 604,091
Due after ten years 8,967,928 9,252,375 4,882,620 5,054,216
16,019,948 16,307,065 5,448,042 5,658,307
Mortgage-backed securities 19,228,985 19,377,081 4,997,336 5,088,342
Total $ 35,248,933 $ 35,684,146 $ 10,445,378 $ 10,746,649
22
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following tables show gross unrealized losses and fair value of securities available-for-sale and securities held-
to-maturity, aggregated by investment category, and length of time that individual securities have been in a
continuous realized loss position at December 31, 2019 and 2018.
Securities Held-to-Maturity
Less Than 12 Months
Mortgage-backed securities $ 1,239,512 $ 2,558 $ 478,186 $ 1,134
Total 1,239,512 2,558 478,186 1,134
12 Months or More
Mortgage-backed securities - - 3,485,073 84,568
Total - - 3,485,073 84,568
Total securities held-to-maturity $ 1,239,512 $ 2,558 $ 3,963,259 $ 85,702
At December 31, 2019, eight securities classified as available-for-sale and one security classified as held-to-maturity
were in a loss position as detailed in the preceding tables. The Company does not intend to sell these securities in
the near future and it is more likely than not that the Company will not be required to sell these securities before
recovery of their amortized cost. The Company believes that, based on industry analyst reports and credit ratings,
the deterioration in value is attributable to changes in market interest rates and, therefore, these losses are not
considered other-than-temporary.
During 2019, the Company sold securities with proceeds of $1,638,332 and gross gains of $23,834. During 2018, the
Company sold securities with proceeds of $3,100,000 and gross gains of $800,000. During 2018, the Company
recognized gain of $38,151 within the consolidated statement of operations related to the increase in fair value of
marketable equity securities as a result of the adoption of ASU 2016-01. During 2019, the Company recognized a
gain of $13,410 within the consolidated statement of operations related to the increase in fair value of marketable
equity securities.
At December 31, 2019 and 2018, investment securities with a par value of $14,832,908 and $18,122,712 and a fair
market value of $15,103,164 and $17,342,165, respectively, were pledged as collateral for securities under
agreements to repurchase.
23
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
2019 2018
Real estate loans:
Construction $ 41,246,207 $ 30,404,245
Residential 129,087,825 124,789,754
Nonresidential 171,148,893 144,103,065
Total real estate loans 341,482,925 299,297,064
Commercial and industrial 58,439,799 48,522,654
Consumer and other 80,262,671 82,976,173
Total loans $ 480,185,395 $ 430,795,891
The Company has pledged certain loans as collateral to secure its borrowings from the Federal Home Loan Bank
which totaled $183,459,356 and $137,040,574 at December 31, 2019 and 2018, respectively.
Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various
other financial institutions. These loans are sold with the agreement that a loan may be returned to the Company
within 90 days of purchase, at any time in the event the Company fails to provide necessary documents related to
the mortgages to the buyers, or if the Company makes false representations or warranties to the buyers. Loans sold
under these agreements in 2019 and 2018 totaled $353,530,732 and $263,027,079, 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.
The following is an analysis of the allowance for loan losses by class of loans for the years ended December 31, 2019
and 2018.
December 31, 2019
Real Estate Loans Total Commercial
Non- Real Estate and Consumer
Total Construction Residential Residential Loans Industrial and Other
Beginning
balance $ 2,788,188 $ 83,200 $ 1,049,913 $ 676,598 $ 1,809,711 $ 359,919 $ 618,558
Provisions 983,803 (20,826) (413,291) 569,416 135,299 167,541 680,963
Recoveries 321,714 118,484 114,281 - 232,765 26,508 62,441
Charge-offs (563,850) - (54,384) - (54,384) (18,520) (490,946)
Ending balance $ 3,529,855 $ 180,858 $ 696,519 $ 1,246,014 $ 2,123,391 $ 535,448 $ 871,016
24
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following is a summary of loans evaluated for impairment individually and collectively, by class, for the years
ended December 31, 2019 and 2018.
25
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following summarizes the Company’s impaired loans as of December 31, 2019.
Interest
Recorded Unpaid Related Average Income
Investment Principal Allowance Balance Recognized
With no related allowance recorded:
Real estate
Residential $ 2,478,331 $ 2,478,331 $ $ 2,561,287 $ 152,256
Nonresidential 1,559,820 1,559,821 - 1,881,542 130,091
Total real estate loans 4,038,151 4,038,152 - 4,442,829 282,347
Commercial and industrial 91,407 168,849 - 137,562 9,396
Consumer and other 98,047 128,458 - 133,031 11,062
Total $ 4,227,606 $ 4,335,459 $ - $ 4,713,422 $ 302,805
With an allowance recorded:
Nonresidential $ 92,575 $ 92,575 $ 24,375 $ 96,008 $ 6,848
Total real estate loans 92,575 92,575 24,375 96,008 6,848
Commercial and industrial 24,117 24,117 2,837 25,042 1,840
Consumer and other 25,905 25,905 61 28,164 1,427
Total $ 142,597 $ 142,597 $ 27,273 $ 149,214 $ 10,115
Total
Real estate
Residential $ 2,478,331 $ 2,478,331 $ - $ 2,561,287 $ 152,256
Nonresidential 1,652,395 1,652,396 24,375 1,977,550 136,939
Total real estate loans 4,130,726 4,130,727 24,375 4,537,837 289,195
Commercial and industrial 115,524 192,966 2,837 162,604 11,236
Consumer and other 123,952 154,363 61 161,195 12,489
Total $ 4,370,202 $ 4,478,056 $ 27,273 $ 4,861,636 $ 312,920
26
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following summarizes the Company’s impaired loans as of December 31, 2018.
Total
Real estate
Residential $ 2,684,974 $ 2,892,407 $ 49,382 $ 3,259,902 $ 172,149
Nonresidential 5,977,695 5,983,596 15,742 7,424,421 417,291
Total real estate loans 8,662,669 8,876,003 65,124 10,684,323 589,440
Commercial and industrial 762,731 814,075 103,665 841,293 45,255
Consumer and other 199,452 262,240 9,276 393,426 16,477
Total $ 9,624,852 $ 9,952,318 $ 178,065 $ 11,919,042 $ 651,172
The following is an aging analysis of the Company’s loan portfolio at December 31, 2019:
Recorded
Greater Investment>
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
Construction $ - $ - $ - $ - $ 41,246,207 $ 41,246,207 $ -
Residential - - 399,746 399,746 128,688,079 129,087,825 -
Nonresidential 156,322 - - 156,322 170,992,571 171,148,893 -
Total real estate loans 156,322 - 399,746 556,068 340,926,857 341,482,925 -
Consumer and industrial - - 12,244 12,244 58,427,555 58,439,799 6,294
Consumer and other 148,559 12,171 110,310 271,040 79,991,631 80,262,671 49,672
Total $ 304,881 $ 12,171 $ 522,300 $ 839,352 $479,346,043 $ 480,185,395 $ 55,966
27
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following is an aging analysis of the Company’s loan portfolio at December 31, 2018:
Recorded
Greater Investment>
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
Construction $ - $ - $ - $ - $ 30,404,245 $ 30,404,245 $ -
Residential 46,967 694,960 117,606 859,533 123,930,221 124,789,754 114,301
Nonresidential - 99,442 106,146 205,588 143,897,477 144,103,065 -
Total real estate loans 46,967 794,402 223,752 1,065,121 298,231,943 299,297,064 114,301
Consumer and industrial - 4,314 18,973 23,287 48,499,367 48,522,654 -
Consumer and other 131,068 143,699 119,509 394,276 82,581,897 82,976,173 31,961
Total $ 178,035 $ 942,415 $ 362,234 $ 1,482,684 $429,313,207 $ 430,795,891 $ 146,262
The following is an analysis of the Company’s nonaccrual loan portfolio recorded at December 31, 2019 and 2018:
2019 2018
Real Estate
Residential $ 590,561 $ 664,667
Nonresidential 517,639 205,588
Total real estate loans 1,108,200 870,255
Commercial and industrial 39,438 673,698
Consumer and other 328,183 321,807
$ 1,475,821 $ 1,865,760
Loans classified as TDRs may be removed from this status for disclosure purposes after a specified period of time
if the TDR is subsequently restructured, and the newly restructured agreement specifies an interest rate equal to
or greater than the rate that the lender was willing to accept at the time of the restructuring for a new loan with
comparable risk, the loan is performing in accordance with the terms specified by the restructured agreement, and
certain other criteria are met. The Company has not removed any loans from TDR status through subsequent
restructurings during 2019 or 2018.
28
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
During the year ended December 31, 2019, we modified seven loans that were considered to be troubled debt
restructurings. The Company provided rate and term concessions for four of these loans due to bankruptcies and
the other three loans were restructured due to borrower’s inability to obtain financing elsewhere. During the year
ended December 31, 2019, no loans that had previously been restructured during the year subsequently defaulted
during the year.
During the year ended December 31, 2018, we modified nineteen loans that were considered to be troubled debt
restructurings. The Company provided rate concessions for five of these loans and extensions for nineteen of the
loans. During the year ended December 31, 2018, three loans with an unpaid principal balance of $143,979 as of
December 31, 2018 that had previously been restructured during the year subsequently defaulted during the year.
All loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of
impairment of TDRs, including those which have experienced a subsequent default, are considered in determining
an appropriate level of allowance for credit losses.
29
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Credit Indicators
Loans are categorized into risk categories based on relevant information about the ability of borrowers to service
their debt, including, among other factors: current financial information, historical payment experience, credit
documentation, public information, and current economic trends. The following definitions are utilized for risk
ratings, which are consistent with the definitions used in supervisory guidance:
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close
attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects
for the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the
institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the
added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are
considered to be pass rated loans.
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each
category at December 31, 2019:
Real Estate Loans Total
Non- Real Estate Consumer
Total Construction Residential Residential Loans Commercial and Other
Pass $ 464,643,034 $ 40,308,707 $ 125,951,550 $ 162,804,795 $ 329,065,052 $ 56,150,250 $ 79,427,732
Special mention 11,998,802 937,500 2,166,887 6,537,595 9,641,982 1,860,727 496,093
Substandard 3,543,559 - 969,388 1,806,503 2,775,891 428,822 338,846
Doubtful - - - - - - -
Totals $ 480,185,395 $ 41,246,207 $ 129,087,825 $ 171,148,893 $ 341,482,925 $ 58,439,799 $ 80,262,671
The following table lists the loan guides used by the Bank as credit quality indicators and the balance in each
category at December 31, 2018:
30
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The Company enters into financial instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments consist of commitments to extend credit and
standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure
to credit loss in the event of nonperformance by the other parties to the instrument is represented by the
contractual notional amount of the instrument. Since certain commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company
uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments.
Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and
have essentially the same credit risk as other lending facilities.
Collateral held for commitments to extend credit and standby letters of credit varies but may include accounts
receivable, inventory, property, plant, equipment, and income-producing commercial properties.
The following table summarizes the Company’s off-balance sheet financial instruments whose contract amounts
represent credit risk for the years ended December 31:
2019 2018
Commitments to extend credit $ 92,921,655 $ 71,885,360
Standby letters of credit 589,196 158,765
Acquired Loans:
On January 22, 2018, the Company acquired INB (see Note 2 for more information). PCI loans acquired totaled
$17.3 million, and acquired performing loans totaled $35.2 million, both net of purchase discounts. The gross
contractual amount receivable for PCI loans and acquired performing loans was approximately $19 million and $36
million, respectively, as of the acquisition date. The fair value of the total loan portfolio was estimated to be $52.5
million, which represents a $2.5 million discount.
The following table presents changes in the carrying value of PCI loans for the year ended December 31, 2019 and
2018:
2019 2018
Balance at beginning of period $ 14,666,715 $ -
Additions due to acquisition of INB - 17,313,626
Change due to payments received and accretion (5,646,148) (3,042,422)
Advances 93,398 395,511
Balance at end of period $ 9,113,965 $ 14,666,715
31
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The following table presents changes in the nonaccretable yield for PCI loans for the year ended December 31,
2019 and 2018:
2019 2018
Balance at beginning of period $ 1,048,796 $ -
Additions due to acquisition of INB - 1,423,522
Reclassification to accretable yield (95,494) (158,064)
Change due to charge-offs (461,929) (216,662)
Balance at end of period $ 491,373 $ 1,048,796
The following table presents changes in the accretable yield for PCI loans for the year ended December 31, 2019
and 2018
2019 2018
Balance at beginning of period $ 618,281 $ -
Additions due to acquisition of INB - 421,179
Reclassification for nonaccretable yield 95,494 158,064
Accretion, net cash basis interest collections (152,687) 39,038
Balance at end of period $ 561,088 $ 618,281
Premises, furniture and equipment consisted of the following for the years ended December 31:
2019 2018
Land $ 7,951,239 $ 7,497,839
Buildings 14,822,259 14,766,184
Leasehold improvements 1,630,762 1,021,789
Furniture and equipment 9,464,291 9,322,077
Construction in progress 1,062,491 1,308,421
Total 34,931,042 33,916,310
Less, accumulated depreciation (14,510,536) (13,605,431)
Premises and equipment, net $ 20,420,506 $ 20,310,879
Depreciation expense for the years ended December 31, 2019 and 2018 amounted to $814,612 and $900,631,
respectively.
At December 31, 2019 and 2018, construction in progress consists mainly of architect fees and site work for
potential new branches. As of December 31, 2019, there were no material commitments outstanding for the
construction/or purchase of premises, furniture and equipment.
32
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Transactions in other real estate owned for the years ended December 31, 2019 and 2018 are summarized below:
2019 2018
Beginning balance $ 341,519 $ 1,706,765
Additions 183,257 1,050,015
Sales (176,724) (2,415,261)
Write downs (500) -
Ending balance $ 347,552 $ 341,519
The Company recognized net gains of $27,676 and $203,685 on the sale of other real estate owned for the years
ended December 31, 2019 and 2018, respectively.
The Company retains right to service the residential mortgage loans that it sells to the Federal National Mortgage
Association (“FNMA”) and Freddie Mac (“FHLMC”). The Company accounts for MSRs at fair value. The changes in
fair value are recorded in income from mortgage operations.
The following table presents the activity for residential MSRs for the years ended December 31, 2019 and 2018:
2019 2018
Balances, beginning of year $ 9,023,859 $ 6,357,666
Additions 3,306,078 2,991,033
Change in MSR fair value (1,307,299) (324,840)
Balances, end of year $ 11,022,638 $ 9,023,859
The fair value of MSRs is highly sensitive to changes in assumptions and fair value is determined by estimating the
present value of the asset’s future cash flows utilizing market-based prepayment rates, discount rates and other
assumptions validated through comparison to trade information, industry surveys and with the use of independent
third party appraisals. Changes in prepayment speed assumptions have the most significant impact on the fair value
of MSRs. Generally, as interest rates decline, mortgage loan prepayments accelerate due to increased refinance
activity, which results in a decrease in the fair value of the MSRs. Measurement of fair value is limited to the
conditions existing and the assumptions utilized as of a particular point in time, and those assumptions may not be
appropriate if they are applied at a different time.
At December 31, 2019, the aggregate amount of loans serviced by the Company for the benefit of others totaled
$982,517,259.
33
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Note 9. Derivatives
The derivative positions of the Company for the years ended December 31, 2019 and 2018 are reported as other
assets and liabilities and are as follows:
2019 2018
Derivative assets (liabilities): Fair value Notional value Fair value Notional value
Mortgage loan interest rate
lock commitments $ 713,496 $ 19,895,637 $ 416,076 $ 22,415,124
Mortgage loan forward
sales commitments (49,453) 18,000,000 (186,133) 22,250,000
The Company uses derivatives to reduce interest rate risk incurred as a result of market movements. These derivatives
primarily consist of mortgage loan interest rate lock commitments. A derivative is a financial instrument that derives
its cash flows, and therefore its value, by reference to an underlying instrument, index or reference interest rate. The
Company uses derivatives primarily to minimize interest rate risk related to its pipeline of loan interest rate lock
commitments issued on residential mortgage loans in the process of origination for sale or loans held for sale. The
Company’s derivative positions are classified as trading assets and liabilities, and as such, the changes in the fair
market value of the derivative positions are recognized in the consolidated statements of operations within income
from mortgage operations.
The following table presents information about our intangible assets related to acquisition of INB on January 22, 2018
as of December 31:
2019 2018
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
34
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Based on the core deposit intangibles as of December 31, 2019, the following table presents the aggregate
amortization expense for each of the succeeding years ending December 31:
Amount
2020 $ 146,582
2021 121,980
2022 97,379
2023 72,778
2024 and thereafter 74,316
Total $ 513,035
Amortization expense of $171,182 and $195,783 related to the core deposit intangibles was recognized in 2019
and 2018, respectively.
At December 31, 2019, the scheduled maturities of time deposits were as follows:
Included in total time deposits at December 31, 2019 and 2018 were brokered time deposits of $13,459,783 and
$4,966,726.
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:
2019 2018
Balance at December 31 $ 14,637,332 $ 16,852,981
Maximum month-end balance during the year 15,778,316 18,649,225
Average balance during the year 13,301,943 16,591,130
Average interest rate at the end of the year 0.51% 0.15%
Average interest rate during the year 0.56% 0.15%
35
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
At December 31, 2019 and 2018, investment securities with a par value of $14,832,908 and $18,122,712 and a fair
market value of $15,103,164 and $17,342,165, respectively, were pledged as collateral for the underlying
agreements.
Federal Home Loan Bank advances consisted of the following at December 31:
Interest
Rate 2019 2018
Fixed rate
February 8, 2019 2.36% - 3,400,000
August 8, 2019 2.64% - 3,300,000
February 7, 2020 2.76% 3,300,000 3,300,000
September 20, 2029 1.62% 10,000,000 -
October 25, 2020 1.34% 5,000,000 -
January 27, 2020 1.80% 5,000,000 -
Daily rate
January 17, 2020 1.78% 20,000,000 10,000,000
$ 43,300,000 $ 20,000,000
At December 31, 2019 and 2018, the Company has pledged certain loans totaling $183,459,356 and $137,040,574,
respectively, as collateral to secure its borrowings from the FHLB. Additionally, the Company’s FHLB stock is pledged
to secure the borrowings.
On June 30, 2005, the Trust (a non-consolidated subsidiary) issued $10,000,000 in trust preferred securities (callable
without penalty) with a maturity of November 23, 2035. Interest on these securities is payable quarterly at the
three-month LIBOR rate plus 2.75%. 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, 2019 and 2018, the Company had accrued and unpaid interest totaling
$40,237 and $50,073, respectively.
36
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
On August 5, 2016, the Company entered into subordinated debt agreements with eight lenders which totaled
$5,000,000. The debt initially bears interest at a fixed rate of 7.00% per annum until August 1, 2021 and then
variable at three-month LIBOR plus 5.86%, payable quarterly with principal and unpaid interest due at maturity,
August 5, 2026. The Company recorded $111,450 in issuance costs associated with the subordinated debt, which
is recorded net within subordinated debentures and to be amortized over five years. As of December 31, 2019,
remaining issuance costs to be amortized totaled $34,786.
On July 8, 2016, the Company obtained a note with CresCom Bank in the amount of $7,000,000. The debt bore
interest at a fixed rate of 4.95% per annum with principal and interest due quarterly based on a nine year
amortization of the principal amount outstanding and any outstanding principal and unpaid interest due at
maturity, July 8, 2021. The Company recorded $115,284 in issuance costs associated with the note payable, which
was recorded net within the note payable and to be amortized over five years. The debt was securitized by the
assignment of Company common stock. The note was paid in full during 2017.
Proceeds from the subordinated debt and note payable were used to repay the Series A and Series B Preferred
Stock as described in Note 16.
Common Stock - The following is a summary of the changes in common stock outstanding for the years ended
December 31, 2019 and 2018.
2019 2018
Common shares outstanding at beginning of the period 8,412,671 7,887,486
Conversion of Series D preferred stock to common stock 850 1,800
Conversion of Series E preferred stock to non-voting common stock - 410,499
Restricted stock issuance 130,557 132,886
Forfeiture of restricted shares (100,000) (20,000)
Common shares outstanding at end of the period 8,444,078 8,412,671
During 2018, the Company authorized 430,000 shares of non-voting common stock, for which the 410,499 shares
of Series E Preferred Stock issued during 2017 were converted to non-voting common stock during 2018.
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.
37
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
On March 6, 2009, the Company completed a transaction with the United States Treasury (the “Treasury”) under
the Troubled Asset Relief Program Capital Purchase Program, whereby the Company sold 15,349 shares of its Series
A Cumulative Perpetual Preferred Stock (the “Series A Shares”) to the Treasury. In addition, the Treasury received
a warrant to purchase 767 shares of the Company’s Series B Cumulative Perpetual Preferred Stock (the “Series B
Shares”), which was immediately exercised for a nominal exercise price. The preferred shares issued to the Treasury
qualify as Tier 1 capital for regulatory purposes. On March 1, 2013, the Treasury auctioned the subject securities in
a private transaction with unaffiliated third-party investors.
The Series A Preferred Stock was a senior cumulative perpetual preferred stock that had a liquidation preference
of $1,000 per share, paid cumulative dividends at a rate of 5% per year (approximately $767,000 annually) for the
first five years and beginning May 15, 2014, at a rate of 9% per year (approximately $1,381,000 annually). Dividends
were payable quarterly. At any time, the Company could, at its option and with regulatory approval, redeem the
Series A Preferred Stock at par value plus accrued and unpaid dividends. The Series A Preferred Stock was generally
non-voting.
The Series B Preferred Stock was a cumulative perpetual preferred stock that had the same rights, preferences,
privileges, voting rights and other terms as the Series A Preferred Stock, except that dividends were to be paid at
the rate of 9% per year so long as the Series A Preferred Stock was outstanding and could not be redeemed until
all the Series A Preferred Stock had been redeemed. The Series A and Series B Preferred Shares would received
preferential treatment in the event of liquidation, dissolution or winding up of the Company.
The net amount of the accretion and amortization was treated as a deemed dividend to preferred shareholders in
the computation of income (loss) per share.
During 2016, the Company redeemed both Series A and Series B Preferred Stock outstanding totaling $15,179,709
and $767,000, respectively. The preferred stock was repaid through borrowings obtained as described in Note 15.
The Series D Preferred Stock ("Series D Shares") is a fixed rate non-cumulative perpetual preferred stock, created
July 16, 2015, with the authorized issuance of 70,000 shares. The Series D shares were created for the purpose of
converting Common Stock holders with 200 shares or less to Series D Shares. The Series D Shares have no voting
rights, and in the event dividends are declared on Common Stock, will be entitled to 4% more than those paid on
the Common Stock. Series D Shares will, with respect to ranking to include but not limited to dividends and rights
upon liquidation, be junior to the Series A Preferred Stock and the Series B Preferred Stock, and will rank senior to
all Common Stock.
On September 22, 2017, the Company issued 410,499 shares of Series E Preferred Stock ("Series E Shares"). The
Series E Shares were created in conjunction with the 2017 common stock issuance. The Series E Shares have no
voting rights, and are entitled to receive dividends as declared in the same per share amount as common stock.
During 2018, the Series E Shares were converted to 410,499 shares of non-voting common stock.
38
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
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, 2019, the Bank had undivided profits of $ 17,670,183. The Bank is authorized to dividend
100% of net income in any calendar year without obtaining the prior approval of the South Carolina Commissioner
of Banks provided that the Bank received a composite CAMELS rating of one or two at the last Federal or State
regulatory examination. Under Federal Reserve regulations, the amounts of loans or advances from the Bank to
the parent company are also restricted.
Other operating expenses are summarized below for the years ended December 31:
2019 2018
Advertising $ 200,187 $ 306,279
Office supplies, postage and printing 322,021 364,275
Telephone 313,198 312,631
Professional fees and services 1,339,913 730,057
Supervisory fees and assessments 164,890 343,855
Debit and credit card expenses 925,883 959,931
Insurance expenses 215,072 230,268
Net cost of other real estate owned 11,549 21,874
Core deposit amortization 171,182 195,783
Other 2,042,389 2,084,609
Total $ 5,706,284 $ 5,549,562
Income tax provision for the years ended December 31, 2019 and 2018 is summarized as follows:
2019 2018
Provision
Current income tax expense
Federal $ - $ -
State 232,536 70,794
Total current 232,536 70,794
Deferred income tax expense (benefit)
Federal 1,005,350 589,897
State (56,175) 19,579
Total deferred 949,175 609,476
Change in valuation allowance 71,522 61,336
Total income tax expense $ 1,253,233 $ 741,606
39
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The components of deferred tax assets and deferred tax liabilities as of December 31, are as follows:
2019 2018
Deferred tax assets:
Allowance for loan losses $ 596,882 $ 585,519
Accumulated depreciation - 2,945
Net operating losses 8,292,928 8,670,310
Non-accrual interest 12,893 10,829
Unrealized loss on securities available for sale - 224,520
Deferred compensation 589,609 507,915
Federal and state credits - 15,493
Other real estate owned - 24,636
Purchase accounting on acquisition 163,668 309,455
Leases 6,758 -
Other 129,225 135,056
Gross deferred tax assets 9,791,963 10,486,678
Less, valuation allowance (626,955) (555,433)
Net deferred tax assets 9,165,008 9,931,245
Deferred tax liabilities:
Accumulated depreciation 14,779 -
Prepaid expenses 21,547 22,645
Unrealized gains on securities available for sale 98,715
Market to market adjustments 2,387,453 1,943,298
Other 62,874 41,730
Total gross deferred tax liabilities 2,585,368 2,007,673
Net deferred tax assets recognized $ 6,579,640 $ 7,923,572
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, 2019, 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 2019, the balance in the valuation
allowance changed by $71,522. The remaining valuation allowance relates to the parent company’s state operating
loss carryforwards for which realizability is uncertain.
The Company has federal net operating losses of $36,630,028 and $38,719,915 for the years ended December 31,
2019 and 2018, respectively. The Company has state net operating losses of $15,205,628 and $13,648,822 for the
years ended December 31, 2019 and 2018, respectively. In addition, the Company has Alternative Minimum Tax
("AMT") credit carryforwards which have been reclassified to taxes receivable to reflect the refundable nature of
the credits under the Tax Cuts and Jobs Act.
40
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
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, 2019 and 2018 follows:
2019 2018
Tax expense at statutory rate $ 1,121,835 $ 666,086
State income tax expense (benefit), net of federal income tax benefit 139,325 71,395
Tax-exempt interest income (28,525) (30,839)
Disallowed interest expense 1,393 949
Life insurance surrender value (81,075) (82,017)
Change in valuation allowance 71,522 61,336
Other, net 28,758 54,696
Total $ 1,253,233 $ 741,606
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 2016 and subsequent years are subject to review by
taxing authorities.
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, 2019 and 2018, the Company had related party
loans totaling $1,318,435 and $1,422,497, respectively.
Deposits from directors and executive officers and their related interests totaled $2,546,515 and $1,610,022 at
December 31, 2019 and 2018, respectively.
In the ordinary course of business, the Company may, from time to time, become a party to legal claims and
disputes. At December 31, 2019, management and legal counsel are not aware of any pending or threatened
litigation or unasserted claims or assessments that could result in losses, if any, that would be material to the
consolidated financial statements.
Effective January 1, 2019, the Company adopted ASC 842 “Leases”. Currently, the Company has operating leases
on eleven of its facilities that are accounted for under this standard. At December 31, 2019 the Company had
operating lease right of use asset of $5,669,144, and operating lease liability of $5,701,327.
Rental expense recorded under the leases for the years ended December 31, 2019 and 2018 was $1,028,736 and
$937,904, respectively.
41
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The weighted average remaining lease term as of December 31, 2019 is 10.32 years and the weighted average
discount rate used is 3.12%. The following table shows future undiscounted lease payments for operating leases
with initial terms of one year or more as of December 31, 2019 are as follow:
2020 $ 815,341
2021 628,880
2022 651,205
2023 583,722
2024 595,877
Thereafter 3,316,203
Total undiscounted lease payments 6,591,228
Less effect of discounting (889,901)
Present value of estimate lease payments (lease liability) $ 5,701,327
On April 20, 2017, the Company approved the 2017 Plan (collectively "the Plan"). The 2017 Plan allows granting up
to 500,000 shares. The maximum aggregate shares subject to options is restricted to 80,000 in any calendar year
to any one participant. The aggregate number of shares subject to awards of restricted stock is restricted to 50,000
in any calendar year to any one participant. Awards may be granted for a term of up to five years from the effective
date of the grant.
The Company can issue the restricted shares as of the grant date either by the issuance of share certificate(s)
evidencing restricted shares or by documenting the issuance in uncertificated or book entry form on the Company's
stock records. Except as provided by the Plans, the employee does not have the right to make or permit to exist any
transfer or hypothecation of any restricted shares. When restricted shares vest, the employee must either pay the
Company within two business days the amount of all tax withholding obligations imposed on the Company or make
an election pursuant to Section 83(b) of the Internal Revenue Code to pay taxes at grant date.
Restricted shares may be subject to one or more objective employment, performance or other forfeiture conditions
established by the Plan Committee at the time of grant. Under the terms of the Plans, the restricted shares will vest
completely based on the individual grants vesting period, which is between four and seven years. The shares are
forfeited entirely if the participant terminates employment for any reason other than changes in control. Any shares
of restricted stock that are forfeited will again become available for issuance under the Plan. 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.
42
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
During 2019 and 2018, the Company issued 130,557 and 132,886 shares, respectively, of restricted stock pursuant
to the 2017 Equity Incentive Plan, as amended. As of December 31, 2019 and 2018, 558,176 and 579,838 shares,
respectively, issued under the Plans vest between the fourth and seventh anniversary of the date of grant,
depending on the individual restricted stock grant and thus will be fully vested in 2024, subject to meeting the
performance criteria of the Plan. During 2019 and 2018, 8,496 and 26,618 shares, respectively, were issued which
vested during each of the respective years. The weighted-average fair value of restricted stock issued during 2019
and 2018 was $7.07 and $7.39 per share, respectively. During 2019 and 2018, 100,000 and 27,930 shares,
respectively, were either forfeited or cancelled having a weighted average price of $7.50. Also, during 2019 and
2018, 53,552 and 26,618 shares were exercised, respectively. The weighted-average fair value of restricted stock
Exercised during 2019 and 2018 was $5.84 and $3.82, respectively. Deferred compensation expense of $354,714
and $294,069 during 2019 and 2018, respectively, was recorded in salaries and employee benefits expense.
During 2019 no stock options were issued. During 2018, the Company issued 40,000 stock options pursuant to the
2017 Equity Incentive Plan.
The fair value of 2018 options granted was estimated on the date of the grant using the Black-Scholes option
pricing, resulting in a total expense of $92,958. The Black-Scholes model with assumptions is presented below:
Weighted- Weighted-
Average Average
Remaining Exercise
Options Life (Years) Price
Outstanding at December 31, 2018 200,000 $ 7.26
Granted - -
Exercised - -
Forfeited - -
Outstanding at December 31, 2019 200,000 3.80 7.26
Options exercisable as of December 31, 2019 82,944 3.77 7.26
The Company recognized stock-based compensation costs related to stock options of $58,684 and $57,532 for the
years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, there was $248,984 of total unrecognized compensation cost related to the outstanding
stock options that will be recognized over the remainder of their vesting schedule.
At December 31, 2019, there were 300,000 stock awards available for grant under the 2017 Equity Incentive Plan.
43
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
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, 2019
and 2018.
2019 2018
Income available to common shareholders
Net income $ 4,088,839 $ 2,430,234
Preferred stock dividends - -
Net income available to common shareholders $ 4,088,839 $ 2,430,234
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct adverse material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts
and classifications are also subject to qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum
ratios (set forth in the table below) of Tier 1, Common Equity Tier 1 (“CET1”), and total capital as a percentage of
assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 150%. Tier 1 capital of the
Bank consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-
sale, minus certain intangible assets, while CET1 is comprised of Tier 1 capital, adjusted for certain regulatory
deductions and limitations. Tier 2 capital consists of the allowance for loan losses subject to certain limitations.
Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.
44
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The Bank is also required to maintain capital at a minimum level based on total assets, which is known as the
leverage ratio. The Bank is required to maintain a required minimum leverage ratio of 4%.
Effective March 31, 2015, quantitative measures established by applicable regulatory standards, including the
newly implemented Basel III revised capital adequacy standards and relevant provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act (“Dodd Frank Act”), require the Bank to maintain (i) a minimum ratio
of Tier 1 capital to average total assets, after certain adjustments, of 4.00%, (ii) a minimum ratio of Tier 1 capital to
risk-weighted assets of 6.00%, (iii) a minimum ratio of total-capital to risk-weighted assets of 8.00% and (iv) a
minimum ratio of CET1 to risk-weighted assets of 4.50%. A “well-capitalized” institution must generally maintain
capital ratios 2% higher than the minimum guidelines.
In order to avoid restrictions on capital distributions or discretionary bonus payments to executives, the Bank is
required to maintain a “capital conservation buffer” in addition to its minimum risk-based capital requirements.
This buffer is required to consist solely of CET1, but the buffer applies to all three risk-based measurements (CET1,
Tier 1 and total capital). The capital conservation buffer began to be phased in incrementally over time, beginning
January 1, 2016 at 0.625% and was fully effective on January 1, 2019, consisting of an additional amount of Tier 1
capital equal to 2.5% of risk-weighted assets.
The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum
requirements at December 31, 2019 and 2018.
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, 2019
The Bank
Total capital (to risk-weighted assets) $ 62,299 11.54% $ 43,183 8.00% $ 53,978 10.00%
Tier 1 capital (to risk-weighted assets) 58,752 10.88 32,387 6.00 43,183 8.00
Tier 1 capital (to average assets) 58,752 9.23 24,290 4.00 35,086 5.00
Common Equity Tier 1 Capital 58,752 10.88 25,473 4.50 31,841 6.50
(to risk-weighted assets)
December 31, 2018
The Bank
Total capital (to risk-weighted assets) $ 56,216 12.05% $ 37,308 8.00% $ 46,635 10.00%
Tier 1 capital (to risk-weighted assets) 53,191 11.41 27,981 6.00 37,308 8.00
Tier 1 capital (to average assets) 53,191 9.51 22,380 4.00 27,975 5.00
Common Equity Tier 1 Capital 53,191 11.41 20,986 4.50 30,313 6.50
(to risk-weighted assets)
45
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The Bank had available at December 31, 2019 several unsecured lines of credit, which were unused, to purchase up
to $22,500,000 of federal funds from one unrelated correspondent institution. Also, as of December 31, 2019, the
Bank had the ability to borrow funds from the FHLB of up to $150,158,851. At that date, $43,300,000, had been
advanced.
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:
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 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
46
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
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.
Loans - The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan
is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment
of interest and principal will not be made in accordance with the contractual terms of the loan are considered
impaired. Once a loan is identified as individually impaired, management measures impairment. The fair value of
impaired loans is estimated using one of several methods, including the collateral value, market value of similar
debt, enterprise value, liquidation value, and discounted cash flows. Those impaired loans not requiring a specific
allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded
investment in such loans. At December 31, 2019 and 2018, a significant portion of impaired loans were evaluated
based upon the fair value of the collateral. Impaired loans where an allowance is established based on the fair
value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on
an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2.
When an 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 loan as
nonrecurring Level 3.
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.
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 an observable market price or a current appraised value, the Company records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no observable market price, the Company
records the foreclosed asset as nonrecurring Level 3.
Mortgage Servicing Rights - 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 Company stratifies
its mortgage servicing portfolio on the basis of loan type. 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 as
recurring Level 3.
47
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Derivatives - The Company’s valuation techniques and inputs to internally-developed models depend on the type
of derivative and nature of the underlying rate, price or index upon which the derivative's value is based. Key inputs
can include yield curves, credit curves, foreign-exchange rates, prepayment rates, volatility measurements and
correlation of such inputs. Where model inputs can be observed in a liquid market and the model does not require
significant judgment, such derivatives are typically classified as Level 2 of the fair value hierarchy. Examples of
derivatives classified as Level 2 include interest rate lock commitments written for our residential mortgage loans
that we intend to sell. When instruments are traded in less liquid markets and significant inputs are unobservable,
such derivatives are classified as Level 3. Additionally, significant judgments are required when classifying financial
instruments within the fair value hierarchy, particularly between Level 2 and 3, as is the case for certain derivatives.
The tables below present the balances of assets and liabilities measured at fair value on a recurring basis by level
within the hierarchy at December 31, 2019 and 2018.
December 31, 2019
Total Level 1 Level 2 Level 3
Available-for-sale securities:
U.S. Government sponsored agencies $ 10,938,684 $ - $ 10,938,684 $ -
Municipal securities 1,464,665 - 1,464,665 -
Mortgage-backed securities 19,377,081 - 19,377,081 -
Corporate bonds 3,903,716 - 3,903,716 -
Total available-for-sale securities 35,684,146 - 35,684,146 -
Marketable equity securities 30,895 - 30,895 -
Mortgage loans held for sale 27,901,419 - 27,901,419 -
Mortgage servicing rights 11,022,638 - - 11,022,638
Derivative assets (liabilities):
Mortgage loan interest rate lock commitments 713,496 - 713,496 -
Mortgage loan forward sales commitments (49,453) - (49,453) -
$ 75,303,141 $ - $ 64,280,503 $ 11,022,638
48
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
The changes in Level 3 assets measured at fair value on a recurring basis are summarized as follows:
Mortgage
Servicing
Rights
Balance, December 31, 2017 $ 6,357,666
Transfers into/out of Level 3 -
Purchases, sales, issuances and settlements, net 2,991,033
Total net gains (losses) included in:
Net income (324,840)
Balance, December 31, 2018 9,023,859
Transfers into/out of Level 3 -
Purchases, sales, issuances and settlements, net 3,306,078
Total net gains (losses) included in:
Net income (1,307,299)
Balance, December 31, 2019 $ 11,022,638
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, 2019 and December 31, 2018, aggregated by level in the fair
value hierarchy within which those measurements fall.
49
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of December 31,
2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as
follows:
Fair Value as of
December 31, Significant Significant Unobservable
2019 Valuation Technique Observable Inputs Inputs
Impaired loans $ 4,342,929 Appraisal Value Appraisals and/or Appraisals discounted 5%
sales of comparable to 30% for sales
properties commissions and other
holding cost
Other real estate $ 347,552 Appraisal Appraisals and/or Appraisals discounted 10%
owned Value/Comparison sales of comparable to 20% for sales
Sales/Other estimates properties commissions and other
holding cost
Fair Value as of
December 31, Significant Significant Unobservable
2018 Valuation Technique Observable Inputs Inputs
Impaired loans $ 9,446,787 Appraisal Value Appraisals and/or Appraisals discounted 5%
sales of comparable to 30% for sales
properties commissions and other
holding cost
Other real estate $ 341,519 Appraisal Appraisals and/or Appraisals discounted 10%
owned Value/Comparison sales of comparable to 20% for sales
Sales/Other estimates properties commissions and other
holding cost
50
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
December 31,
2019 2018
Carrying Fair Carrying Fair
Value Value Value Value
Cash and cash equivalents $ 40,340,683 $ 40,340,683 $ 34,561,988 $ 34,561,988
Securities available-for-sale 35,684,146 35,684,146 33,388,645 33,388,645
Marketable equity securities 30,895 30,895 168,151 168,151
Securities held-to-maturity 10,417,168 10,746,649 14,107,252 14,250,850
Mortgage loans held for sale 27,901,419 27,901,419 12,713,361 12,713,361
Loans held for investment, net 476,655,540 474,301,267 428,007,703 426,199,683
Nonmarketable equity securities 2,423,200 2,423,200 1,393,500 1,393,500
Deposits 505,087,637 505,307,623 476,168,709 477,204,481
Securities sold under agreement to repurchase 14,637,332 14,637,332 16,852,981 16,852,981
Federal funds purchased 16,500,000 16,500,000 - -
Federal Home Loan Bank advances 43,300,000 42,997,000 20,000,000 20,020,000
Subordinated debentures 15,275,214 13,813,483 15,244,877 14,546,533
Investment securities
The fair value of investment securities are generally determined using widely accepted valuation techniques
including market prices, matrix pricing, and broker-quote-based applications.
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.
Loan fair value estimated using exit price notion as of December 31, 2019 based on adoption of ASU 2016-01. The
methods used to estimate fair value of loans do not necessarily represent an exit price as of December 31, 2018.
51
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
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 discounted value of estimated cash flows. 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.
Notes payable
The fair carrying value of notes payable is estimated by using discounted cash flow analyses based on incremental
borrowing rates for similar types of instruments These are classified as Level 2.
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 These are classified as Level 2.
Other borrowings
The fair value of federal funds purchased and securities under agreements to repurchase approximate
the carrying amount because of the short maturity of these borrowings.
52
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred
to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for
those goods or services. To determine revenue recognition for arrangements that an entity determines are within
the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer;
(ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the
Company satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the
consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract
inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods
or services that are promised within each contract and identifies those that contain performance obligations, and
assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount
of the transaction price that is allocated to the respective performance obligation when (or as) the performance
obligation is satisfied.
Deposit Service Charges: The Bank earns fees from its deposit customers for account maintenance,
transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and
analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied
and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on
deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-
sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction
occurs and the fees are recognized at the time each specific service is provided to the customer.
Check Card Fee Income: Check card fee income represents fees earned when a debit card issued by the
Bank is used. The Bank earns interchange fees from debit cardholder transactions through the VISA payment
network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction
value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the
card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income.
This income is recognized within “Other” below.
53
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Gains/Losses on OREO Sales: Gains/losses on the sale of OREO are included in non-interest income and
are generally recognized when the performance obligation is complete. This is typically at delivery of control over
the property to the buyer at the time of each real estate closing.
Subsequent events are events or transactions that occur after the balance sheet date but before financial
statements are issued. Recognized subsequent events are events or transactions that provide additional evidence
about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of
preparing financial statements. Nonrecognized subsequent events are events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed
events occurring through March 31, 2020, the date the financial statements were available to be issued.
The 2019 novel coronavirus (or “COVID-19”) has adversely affected, and may continue to adversely affect economic
activity globally, nationally and locally. Following the COVID-19 outbreak in December 2019 and January 2020,
market interest rates have declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3,
2020 for the first time. Such events also may adversely affect business and consumer confidence, generally, and
the Company and its customers, and their respective suppliers, vendors and processors may be adversely affected.
On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points
to 1.00% to 1.25%. This rate was further reduced to 0% to 0.25% on March 16, 2020. These reductions in interest
rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and
results of operations.
54
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
55
First Reliance Bancshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2019 and 2018
Note 27. First Reliance Bancshares, Inc. (Parent Company Only), Continued
56
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