First Reliance Bancshares : Annual Report - 2023

Annual Report

2023

Dear Fellow Shareholders:

As we reflect on 2023, I am pleased to share our annual report with insights into our performance, accomplishments, and vision for the future.

The past year provided one of the most difficult operating environments for banks since the Great Recession. Amid the backdrop of multiple high-profile bank failures and questions surrounding regional bank stability, First Reliance enjoyed another successful year in 2023.

Focused on the ongoing execution of our strategic plan, the balance sheet continued to be a source of strength with exceptional asset quality metrics and solid liquidity and capital ratios. While navigating unexpected challenges and fluid economic conditions, we began to see our net interest margin expand in the fourth quarter of 2023.

During the year, we took action to enhance our future net interest margin by repositioning a portion of our investment securities portfolio. The bank incurred a non-recurring $1.5 million loss on the sale of securities, with a very short earn back period. We are also looking forward to our loan portfolio, consisting of predominately fixed rate loans, to continue to reprice to current market rates as our deposit cost increases begin to slow. Taken together this should help usher in net interest margin expansion at some point in 2024 and beyond. In the meantime, we remain committed to disciplined cost management practices while delivering exception service to our clients.

The bank continued to see organic growth in 2023, including loan growth of approximately $44 million and deposit growth of approximately $60 million. Loan growth included the absorption of approximately $14 million of runoff in the bank's legacy indirect automobile loan portfolio.

While the mortgage environment remained challenging, we made several key production hires during the year and onboarded several new mortgage partners through our correspondent/wholesale channel. We also implemented technology enhancements in our mortgage business creating operational efficiencies and an improved customer experience. Improving these internal fundamentals within our mortgage division has been a key objective while we await the stabilization of mortgage rates and an improvement in the mortgage landscape.

We are proud of our continued progress despite numerous headwinds in 2023 and are excited about what we can accomplish in 2024.

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Performance

Asset Growth

Total assets grew by $37.0 million during 2023, or 4.0%, from $937.1 million at December 31, 2022 to $974.2 million at December 31, 2023. This growth was mainly driven by an increase in loans and investment securities, offset by a decrease in cash.

$710.2

Total Assets

($ in millions)

$910.8 $937.1 $974.2

2020 2021 2022 2023

Loan Growth and Asset Quality

During 2023, we grew loans by $44.4 million, or 6.7%, from $661.3 million at December 31, 2022 to $705.7 million at December 31, 2023.

$478.0

Total Loans

($ in millions)

$586.4 $661.3 $705.7

Our asset quality remained strong during the year, with the ratio of nonperforming assets to total assets decreasing to 0.04% at December 31, 2023 from 0.05% at December 31, 2022.

2020 2021 2022 2023

Deposit Growth

For the full year 2023, total deposits increased $60.4 million, or 7.6%; from $798.2 million at December 31, 2022 to $858.6 million at December 31, 2023. Transaction deposits to total deposits decreased from 51.05% at December 31, 2022, to 41.30% at December 31, 2023.

Total Deposits

($ in millions)

$780.8 $798.2 $858.6

$594.0

2020

2021

2022

2023

Tangible Book Value

During the year, tangible book value per share rose by 13.2% to $8.68 at

Tangible Book Value

December 31, 2023, from $7.67 at December 31, 2022.

$8.12

Per Share

$8.46$8.68

$7.67

2020

2021

2022

2023

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Our customers remain at the heart of everything we do. Throughout the year, we have continued to invest in technology and innovation to enhance their banking experience. From digital banking solutions to personalized services, we are dedicated to meeting the evolving needs of our customers and providing them with best-in-class financial products and services. We are very proud that our mobile app is 4.9 stars in the Apple store as rated by our clients. We have continued to invest in robust security measures and fraud detection technologies to protect our customers' assets and ensure the safety and security of their financial transactions.

We continue to recognize that our employees are our greatest asset. These team members are a driving force behind our success, and their enthusiasm and dedication are essential to providing exceptional service to our clients. Our employees understand that having long-term relationships with clients and deep ties to our community are extremely important.

Looking ahead, we remain cautiously optimistic about the future. While uncertainties persist, we are confident in our ability to adapt and thrive in a rapidly changing environment. By remaining committed to the core banking principles of safety and soundness, profitability, and growth, we believe that First Reliance Bank is well-positioned for long- term success. Staying true to our core values and putting our customers first will continue to be a key to reaching our goals.

In closing, I would like to express my gratitude to our shareholders, customers, employees, and partners for their continued support and dedication. Together, we will continue to build a brighter future for First Reliance.

Sincerely,

F.R. "Rick" Saunders Jr.

Chief Executive Officer

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First Reliance Bancshares, Inc. and Subsidiary

Report on Consolidated Financial Statements

As of and for the years ended December 31, 2023 and 2022

First Reliance Bancshares, Inc. and Subsidiary

Contents

	Page
Independent Auditor's Report	1-2
Consolidated Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Changes in Shareholders' Equity	6
Consolidated Statements of Cash Flows	7-8
Notes to Consolidated Financial Statements	9-59

Independent Auditor's Report

The Board of Directors

First Reliance Bancshares, Inc. and Subsidiary

Florence, South Carolina

Opinion

We have audited the consolidated financial statements of First Reliance Bancshares, Inc. and Subsidiary (the "Company"), which comprise the consolidated balance sheets as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the "financial statements").

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America (GAAS). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities, in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Our opinion is not modified with respect to this matter.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued.

elliottdavis.com

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Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the financial statements.

In performing an audit in accordance with GAAS, we:

• Exercise professional judgment and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, no such opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the financial statements.
• Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit.

Columbia, South Carolina

March 26, 2024

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First Reliance Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

As of December 31, 2023 and 2022

		2023				2022
Assets
Cash and cash equivalents:
Cash and due from banks	$	4,353,883			$	3,916,889
Interest-bearing deposits with other banks		17,590,169				29,880,421
Total cash and cash equivalents		21,944,052				33,797,310
Time deposits in other banks		-				258,718
Marketable equity securities		128,517			133,715
Securities available-for-sale		171,399,573				162,096,848
Nonmarketable equity securities		949,800			1,787,200
Total investment securities		172,477,890				164,017,763
Mortgage loans held for sale		7,155,912				7,940,056
Loans receivable		705,672,390				661,250,516
Less allowance for credit losses		(8,393,493)		(7,659,794)
Loans, net		697,278,897				653,590,722
Premises, furniture and equipment, net		22,298,348				22,811,450
Accrued interest receivable		3,453,458				2,765,106
Cash surrender value life insurance		18,190,892				18,835,768
Net deferred tax assets		7,775,295				8,628,905
Mortgage servicing rights		11,638,174				10,441,422
Core deposit intangibles		74,316			147,094
Goodwill		690,917			690,917
Right of use asset		5,342,365				5,977,748
Other assets		5,836,677				7,210,167
Total assets	$	974,157,193			$	937,113,146
Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest-bearing transaction accounts	$	210,603,869			$	255,426,725
Interest-bearing transaction accounts		144,039,452				152,012,419
Savings		334,715,713				287,043,628
Time deposits $250,000 and over		40,806,186				23,152,023
Other time deposits		128,431,287				80,549,048
Total deposits		858,596,507				798,183,843
Securities sold under agreement to repurchase		307,517			7,367,861
Advances from Federal Home Loan Bank		5,000,000				30,000,000
Subordinated debentures		15,412,697				15,380,951
Junior subordinated debentures		10,310,000				10,310,000
Accrued interest payable		1,076,368				331,678
Lease liability		5,592,934				6,197,620
Reserve for unfunded commitments		407,487			-
Other liabilities		6,057,759				6,045,329
Total liabilities		902,761,269				873,817,282
Shareholders' Equity
Series D non-cumulative preferred stock, $0.01 par value; 70,000 shares authorized; 52,332 and 53,732
shares issued and outstanding at December 31, 2023 and 2022, respectively		523			537
Common stock, $0.01 par value; 20,000,000 shares authorized; 8,772,329 and 8,730,262 shares issued;
and 8,139,077 and 8,140,311 shares outstanding at December 31, 2023 and 2022, respectively		87,723			87,303
Capital surplus		55,471,379				53,967,630
Treasury stock, at cost, 633,252 and 589,951 shares at December 31, 2023 and 2022, respectively		(4,821,348)		(4,502,374)
Nonvested restricted stock		(2,517,557)		(2,121,128)
Retained earnings		33,748,274				29,916,355
Accumulated other comprehensive loss		(10,573,070)		(14,052,459)
Total shareholders' equity		71,395,924				63,295,864
Total liabilities and shareholders' equity	$	974,157,193			$	937,113,146

See Notes to Consolidated Financial Statements

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First Reliance Bancshares, Inc. and Subsidiary

Consolidated Statements of Operations

For the years ended December 31, 2023 and 2022

		2023				2022
Interest income:
Loans, including fees	$	36,170,561			$	28,564,688
Investment securities:
Taxable		6,078,622				3,639,528
Tax exempt		63,193				115,481
Other interest income		2,076,368				885,851
Total		44,388,744				33,205,548
Interest expense:
Deposits		12,546,015				1,964,637
Federal Home Loan Bank advances		1,388,896				109,983
Subordinated debentures		1,429,229				1,072,846
Other interest expense		51,688				17,213
Total		15,415,828				3,164,679
Net interest income		28,972,916				30,040,869
Provision for credit losses on loans		847,398				480,000
Provision for (release of) credit losses on unfunded commitments		(478,551)			-
Net interest income after provision for credit losses		28,604,069				29,560,869
Noninterest income:
Mortgage banking income		3,821,146				3,733,991
Service charges on deposit accounts		1,373,920				1,392,412
Other service charges, commissions, and fees		2,160,491				2,092,696
Income from bank owned life insurance		528,462				359,872
Loss on sale of investment securities		(1,525,631)			-
Gain on disposal of fixed assets		29,719				23,259
Gain on sale of mortgage servicing rights		-				681,827
Other		531,448				696,157
Total		6,919,555				8,980,214
Noninterest expenses:
Salaries and benefits		18,273,828				19,006,038
Occupancy and equipment		3,428,830				3,589,102
Data processing, technology, and communications		3,613,544				3,268,335
Professional fees		420,445				751,377
Marketing		687,261				743,379
Other		3,286,247				3,611,560
Total		29,710,155				30,969,791
Income before income taxes		5,813,469				7,571,292
Income tax expense		1,210,053				1,640,280
Net income	$	4,603,416			$	5,931,012
Average common shares outstanding, basic		7,822,882				7,779,396
Average common shares outstanding, diluted		8,163,934				8,127,148
Income per common share:
Basic income per common share	$	0.59			$	0.76
Diluted income per common share		0.56				0.73

See Notes to Consolidated Financial Statements

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