First Reliance Bancshares : Annual Report - 2023

Published: 2024-04-23 17:33:14 ET FSRL

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.

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

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

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

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

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

Sincerely,

F.R. "Rick" Saunders Jr.

Chief Executive Officer

iii

First Reliance Bancshares, Inc. and Subsidiary

Report on Consolidated Financial Statements

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

First Reliance Bancshares, Inc. and Subsidiary

Contents

Page

Independent Auditor's Report

1-2

Consolidated Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Shareholders' Equity

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

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:

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

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

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

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

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

Disclaimer

First Reliance Bancshares Inc. published this content on 23 April 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 23 April 2024 21:32:53 UTC.