Table of Contents

---

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

 

---

 

FORM 10-QSB

 

---

 

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2004

 

OR

 

¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from              to             

 

Commission File Number 000-49757

 

---

 

FIRST RELIANCE BANCSHARES, INC.

(Exact name of small business issuer as specified in its charter)

 

---

 

South Carolina		80-0030931
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

2170 West Palmetto Street

Florence, South Carolina 29501

(Address of principal executive

offices, including zip code)

 

(843) 662-8802

(Issuer’s telephone number, including area code)

 

---

 

State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date:

 

2,494,560 shares of common stock, par value $0.01 per share, as of April 30, 2004

 

Transitional Small Business Disclosure Format (Check one):    Yes  ¨    No  x

 

---

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

INDEX

				Page No.
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets - March 31, 2004 and December 31, 2003		3
		Condensed Consolidated Statements of Income - Three months ended March 31, 2004 and 2003		4
		Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income - Three months ended March 31, 2004 and 2003		5
		Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2004 and 2003		6
		Notes to Condensed Consolidated Financial Statements		7-9
Item 2.		Management’s Discussion and Analysis or Plan of Operation		10-16
Item 3.		Controls and Procedures		16
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		17
Item 2.		Changes in Securities and Use of Proceeds		17
Item 3.		Defaults Upon Senior Securities		17
Item 4.		Submission of Matters to a Vote of Securities Holders		17
Item 5.		Other Information		17
Item 6.		Exhibits and Reports on Form 8-K
		(a) Exhibits		18
		(b) Reports on Form 8-K		19

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Condensed Consolidated Balance Sheets

 

		March 31, 2004				December 31, 2003
		(Unaudited)				(Audited)
Assets
Cash and cash equivalents:
Cash and due from banks		$	2,966,418			$	4,693,102
Federal funds sold			1,499,000				100,000
Total cash and cash equivalents			4,465,418				4,793,102
Securities available-for-sale			26,558,428				27,688,992
Nonmarketable equity securities			1,120,000				1,055,000
Total investment securities			27,678,428				28,743,992
Loans held for sale			1,734,244				971,627
Loans receivable			151,165,366				139,389,064
Less allowance for loan losses			(1,781,804	)			(1,752,282	)
Loans, net			149,383,562				137,636,782
Premises and equipment, net			5,805,962				5,796,819
Accrued interest receivable			832,243				949,663
Other real estate owned			366,002				279,393
Other assets			4,342,843				1,192,505
Total assets		$	194,608,702			$	180,363,883
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing transaction accounts		$	20,310,063			$	19,084,520
Interest-bearing transaction accounts			16,150,105				15,866,254
Savings			19,700,954				18,217,378
Time deposits $100,000 and over			64,272,328				54,364,004
Other time deposits			32,047,713				31,882,795
Total deposits			152,481,163				139,414,951
Securities sold under agreement to repurchase			2,244,760				2,363,570
Federal funds purchased			—				1,043,000
Advances from Federal Home Loan Bank			20,400,000				19,100,000
Accrued interest payable			530,820				442,233
Other liabilities			479,931				297,490
Total liabilities			176,136,674				162,661,244
Shareholders’ Equity
Common stock, $0.01 par value; 5,000,000 shares authorized, 2,494,560 shares and 2,466,660 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively			24,946				24,667
Capital Surplus			15,371,677				15,106,070
Retained earnings			2,646,776				2,325,602
Accumulated other comprehensive income			428,629				246,300
Total shareholders’ equity			18,472,028				17,702,639
Total liabilities and shareholders’ equity		$	194,608,702			$	180,363,883

 

See notes to condensed consolidated financial statements.

 

-3-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Condensed Consolidated Statements of Income

(Unaudited)

 

		Three Months Ended March 31,
		2004			2003
Interest income
Loans, including fees		$	2,356,597		$	1,601,233
Investment securities
Taxable			190,413			143,374
Nontaxable			101,147			97,016
Federal funds sold and other			1,395			9,197
Total			2,649,552			1,850,820
Interest expense
Time deposits $100,000 and over			336,876			166,325
Other deposits			314,821			346,044
Advances from Federal Home Loan Bank			117,958			39,421
Federal funds purchased and securities sold under agreements to repurchase			5,188			3,202
Total			774,843			554,992
Net interest income			1,874,709			1,295,828
Provision for loan losses			109,928			65,000
Net interest income after provision for loan losses			1,764,781			1,230,828
Noninterest income
Residential mortgage origination fees			99,005			204,878
Service charges on deposit accounts			248,387			216,519
Securities and insurance brokerage commissions			30,297			11,574
Credit life insurance commissions			22,879			15,038
Other charges, commissions and fees			90,374			48,558
Total			490,942			496,567
Noninterest expenses
Salaries and benefits			1,071,596			743,660
Occupancy expense			76,857			43,693
Furniture and equipment expense			143,488			51,547
Other operating expenses			503,361			458,652
Total			1,795,302			1,297,552
Income before taxes			460,421			429,843
Income tax provision			139,247			124,107
Net income		$	321,174		$	305,736
Basic earnings per share		$	.13		$	.21
Diluted earnings per share		$	.13		$	.20

 

See notes to condensed consolidated financial statements.

 

-4-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income

For the Three Months Ended March 31, 2004 and 2003

(Unaudited)

 

		Common Stock					Capital surplus				Retained earnings			Accumulated other comprehensive income				Total
		Shares		Amount
Balance, December 31, 2002		1,448,830		$	11,488		$	7,091,562			$	1,309,803		$	228,325			$	8,644,178
Net income												305,736							305,736
Other comprehensive loss, net of tax benefit of $77,959															(151,333	)			(151,333	)
Comprehensive income																			154,403
Stock issuance costs								(86,653	)										(85,653	)
Exercise of stock options		10,000			100			49,900											50,000
Balance, March 31, 2003		1,458,830		$	14,588		$	7,054,809			$	1,615,539		$	76,992			$	8,761,928
Balance, December 31, 2002		2,466,660			24,667			15,106,070				2,325,602			246,300				17,702,639
Net income												321,174							321,174
Other comprehensive income, net of tax expense of $93,926															182,329				182,329
Comprehensive income																			503,503
Issuance of stock		27,900			279			265,607											265,886
Balance, March 31, 2004		2,494,560		$	24,946		$	15,371,677			$	2,646,776		$	428,629			$	18,472,028

 

See notes to condensed consolidated financial statements

 

-5-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Three Months Ended March 31,
		2004				2003
Cash flows from operating activities:
Net income		$	321,174			$	305,736
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			(49,908	)			65,000
Depreciation and amortization expense			130,460				59,726
Discount accretion and premium amortization			27,314				42,547
Deferred income tax provision			(205,772	)			3,058
Decrease in interest receivable			117,420				68,438
Increase in interest payable			88,587				57,016
Disbursements for loans held for sale			(5,076,584	)			(7,093,646	)
Proceeds from loans held for sale			4,313,967				7,085,997
Decrease (increase) in other assets			(2,961,810	)			116,937
Increase (decrease in other liabilities			88,515				(91,821	)
Net cash provided by operating activities			(3,206,637	)			618,988
Cash flows from investing activities:
Net increase in loans made to customers			(11,783,481	)			(7,367,492	)
Maturities of securities available-for-sale			1,379,505				1,273,460
Purchase of Federal Home Loan Bank stock			(65,000	)			(120,200	)
Purchases of premises and equipment			(122,359	)			(1,253,014	)
Net cash used by investing activities			(10,591,335	)			(7,467,246	)
Cash flows from financing activities:
Net increase in demand deposits, interest-bearing transaction accounts and savings accounts			2,992,970				2,399,277
Net increase (decrease) in certificates of deposit and other time deposits			10,073,242				(686,153	)
Net increase (decrease) in securities sold under agreements to repurchase			(118,810	)			1,443,852
Advances from the Federal Home Loan Bank			1,300,000				—
Federal funds purchased			(1,043,000	)			—
Proceeds from the exercise of stock options			—				(36,652	)
Proceeds from issuance of stock			265,886				—
Net cash provided by financing activities			13,470,288				3,120,324
Net increase (decrease) in cash and cash equivalents			(327,684	)			(3,727,934	)
Cash and cash equivalents, beginning			4,793,102				6,645,927
Cash and cash equivalents, end		$	4,465,418			$	2,917,993
Cash paid during the period for:
Income taxes		$	90,136			$	—
Interest		$	686,256			$	497,976

 

See notes to condensed consolidated financial statements

 

-6-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Note 1 - Basis of Presentation

 

The accompanying financial statements have been prepared in accordance with the requirements for interim financial statements and, accordingly, they are condensed and omit certain disclosures, which would appear in audited annual financial statements. The financial statements as of March 31, 2004 and for the interim periods ended March 31, 2004 and 2003 are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The financial information as of December 31, 2003 has been derived from the audited financial statements as of that date. For further information, refer to the financial statements and the notes included in First Reliance Bancshares, Inc.’s 2003 audited financial statements in Form 10-KSB.

 

Note 2 - Recently Issued Accounting Pronouncements

 

No recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by us have occurred during the quarter ending March 31, 2004.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.

 

Note 3 - Stock-Based Compensation

 

The Company has a stock-based employee compensation plan which is accounted for under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

 

		Three Months Ended March 31,
		2004			2003
Net income, as reported		$	321,174		$	305,736
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			48,263			13,690
Pro forma net income		$	272,911		$	292,046
Earnings per share:
Basic - as reported		$	0.13		$	0.21
Basic - pro forma		$	0.10		$	0.20
Diluted - as reported		$	0.13		$	0.20
Diluted - pro forma		$	0.10		$	0.19

 

-7-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Note 4 - Earnings Per Share

 

A reconciliation of the numerators and denominators used to calculate basic and diluted earnings per share for the three month periods ended March 31, 2004 and 2003 are as follows:

 

		Three Months Ended March 31, 2004
		Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic earnings per share
Income available to common shareholders		$	321,174		2,470,646		$	0.13
Effect of dilutive securities
Stock options			—		33,370
Diluted earnings per share
Income available to common shareholders plus assumed conversions		$	321,174		2,504,016		$	0.13
		Three Months Ended March 31, 2003
		Income (Numerator)			Shares (Denominator)		Per Share Amount
Basic earnings per share
Income available to common shareholders		$	305,736		1,458,830		$	0.21
Effect of dilutive securities
Stock options			—		67,533
Diluted earnings per share
Income available to common shareholders plus assumed conversions		$	305,736		1,526,363		$	0.20

 

-8-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Notes to Condensed Consolidated Financial Statements

 

Note 5 - Comprehensive Income

 

Comprehensive income includes net income and other comprehensive income, which is defined as nonowner related transactions in equity. The following table sets forth the amounts of other comprehensive income included in equity along with the related tax effect.

 

		Pre-tax Amount				Income Tax Expense				Net-of-tax Amount
For the Three Months Ended March 31, 2004:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		$	276,255			$	(93,926	)		$	182,329
Plus: reclassification adjustment for (gains) losses realized in net income			—				—				—
Net unrealized gains (losses) on securities			276,255				(93,926	)			182,329
Other comprehensive income (loss)		$	276,255			$	(93,926	)		$	182,329
		Pre-tax Amount				Income Tax Benefit				Net-of-tax Amount
For the Three Months Ended March 31, 2003:
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during the period		$	(229,292	)		$	77,959			$	(151,333	)
Plus: reclassification adjustment for (gains) losses realized in net income			—				—				—
Net unrealized gains (losses) on securities			(229,292	)			77,959				(151,333	)
Other comprehensive income (loss)		$	(229,292	)		$	77,959			$	(151,333	)

 

Accumulated other comprehensive income (loss) consists solely of the unrealized gain (loss) on securities available-for-sale, net of the deferred tax effects.

 

Note 6 - Advances from the Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank of Atlanta were $20,400,000 as of March 31, 2004. Of this amount, the following have scheduled maturities greater than one year:

 

Maturing on		Interest Rate		Principal
04/08/05		2.040%		$	1,000,000
07/01/05		4.120			500,000
04/10/06		2.600			1,000,000
10/12/06		0.640			3,500,000
12/19/06		2.870			1,500,000
04/09/07		3.130			1,000,000
12/19/07		3.440			1,500,000
04/08/08		3.400			1,000,000
03/19/09		2.480			3,000,000
01/17/12		3.825			1,000,000
07/05/12		4.080			1,000,000
				$	16,000,000

 

-9-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Item 2. Management’s Discussion and Analysis or Plan of Operation

 

The following discussion of financial condition as of March 31, 2004 compared to December 31, 2003, and the results of operations for the three months ended March 31, 2004 compared to the three months ended March 31, 2003 should be read in conjunction with the condensed financial statements and accompanying footnotes appearing in this report.

 

Advisory Note Regarding Forward-Looking Statements

 

The statements contained in this report on Form 10-QSB that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. We caution readers of this report that such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of us to be materially different from those expressed or implied by such forward-looking statements. Although we believe that our expectations of future performance is based on reasonable assumptions within the bounds of our knowledge of our business and operations, there can be no assurance that actual results will not differ materially from our expectations.

 

Factors which could cause actual results to differ from expectations include, among other things:

 

•

the challenges, costs and complications associated with the continued development of our branches;

 

•

the potential that loan charge-offs may exceed the allowance for loan losses or that such allowance will be increased as a result of factors beyond the control of us;

 

•

our dependence on senior management;

 

•

competition from existing financial institutions operating in our market areas as well as the entry into such areas of new competitors with greater resources, broader branch networks and more comprehensive services;

 

•

adverse conditions in the stock market, the public debt market, and other capital markets (including changes in interest rate conditions);

 

•

changes in deposit rates, the net interest margin, and funding sources;

 

•

inflation, interest rate, market, and monetary fluctuations;

 

•

risks inherent in making loans including repayment risks and value of collateral;

 

•

the strength of the United States economy in general and the strength of the local economies in which we conduct operations may be different than expected resulting in, among other things, a deterioration in credit quality or a reduced demand for credit, including the resultant effect on our loan portfolio and allowance for loan losses;

 

•

fluctuations in consumer spending and saving habits;

 

•

the demand for our products and services;

 

•

technological changes;

 

•

the challenges and uncertainties in the implementation of our expansion and development strategies;

 

•

the ability to increase market share;

 

•

the adequacy of expense projections and estimates of impairment loss;

 

•

the impact of changes in accounting policies by the Securities and Exchange Commission;

 

•

unanticipated regulatory or judicial proceedings;

 

•

the potential negative effects of future legislation affecting financial institutions (including without limitation laws concerning taxes, banking, securities, and insurance);

 

•

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

 

•

the timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet;

 

•

the impact on our business, as well as on the risks set forth above, of various domestic or international military or terrorist activities or conflicts;

 

•

other factors described in this report and in other reports we have filed with the Securities and Exchange Commission; and

 

•

our success at managing the risks involved in the foregoing.

 

Forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made to reflect the occurrence of unanticipated events.

 

-10-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Critical Accounting Policies

 

We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the notes to the consolidated financial statements at December 31, 2003 as filed on our annual report on Form 10-KSB. Certain accounting policies involve significant judgments and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on the historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a major impact on our carrying values of assets and liabilities and our results of operations.

 

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for loan losses for description of our processes and methodology for determining our allowance for loan losses.

 

Regulatory Matters

 

We are not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources or operations.

 

Results of Operations

 

Net Interest Income

 

For the three months ended March 31, 2004, net interest income was $1,874,709, which is an increase of $578,881, or 44.67%, over the same period in 2003. Interest income from loans, including fees, increased $755,364, or 47.17%, from the three months ended March 31, 2003 to the comparable period in 2004 and is primarily due to an increase in our loan portfolio. Interest expense for the three months ended March 31, 2004 was $774,843 compared to $554,992 compared for the same period in 2003. The increase is primarily attributable to an increase in interest-bearing deposits. The net interest margin realized on earning assets was 4.13% for the three months ended March 31, 2004, as compared to 4.79% for the three months ended March 31, 2003. The interest rate spread was 3.71% for the three months ended March 31, 2004 as compared to 4.37% for the three months ended March 31, 2003. This decrease is primarily attributable to competitive market conditions in our area.

 

Provision and Allowance for Loan Losses

 

The provision for loan losses is the charge to operating earnings that we feel is necessary to maintain the allowance for loan losses at an adequate level. For the three months ended March 31, 2004, the provision for loan losses was $109,928. For the three months ended March 31, 2003, the provision for loan losses was $65,000. Based on present information, we believe the allowance for loan losses was adequate at March 31, 2004 to meet presently known and inherent risks in the loan portfolio. The allowance for loan losses was 1.31% and 1.18% of total loans at March 31, 2003 and 2004, respectively. There are risks inherent in making all loans, including risks with respect to the period of time over which loans may be repaid, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers, and, in the case of a collateralized loan, risks resulting from uncertainties about the future value of the collateral. We maintain an allowance for loan losses based on, among other things, historical experience, an evaluation of economic conditions, and regular reviews of delinquencies and loan portfolio quality. The allowance is based upon a number of assumptions about future events, which management believes to be reasonable, but which may not prove to be accurate. Thus, there is a risk that charge-offs in future periods could exceed the allowance for loan losses or that substantial additional increases in the allowance for loan losses could be required. Additions to the allowance for loan losses would result in a decrease in net income and, possibly, in capital.

 

-11-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Noninterest Income

 

Noninterest income during the three months ended March 31, 2004 was $490,942, a decrease of $5,625, or 1.13%, from the comparable period in 2003. The decrease is primarily a result of a decrease in residential mortgage origination fees from $204,878 for the three months ended March 31, 2003 to $99,005 for the three months ended March 31, 2004. Record low interest rates in early 2003 led to a significant number of home mortgage refinancings. Refinancings leveled off during the fourth quarter of 2003 and remained that way during the first quarter of 2004. Service charges on deposit accounts increased $31,868, or 14.72%, to $248,387 for the three months ended March 31, 2004, as compared to the same period in 2003. This was the result of increased deposits between the two periods.

 

Noninterest Expense

 

Total noninterest expense for the three months ended March 31, 2004 was $1,795,302, or 38.36%, higher than the three months ended March 31, 2003. The primary reason was the $327,936 increase in salaries and employee benefits over the two periods as we continued to hire employees as we expand into the Lexington, South Carolina market. In addition, furniture and equipment expense increased $91,941, or 178.36%, for the three months ending March 31, 2004 as compared to the three months ending March 31, 2003. This increase is also primarily a result of additional expenses associated with the growth of the Bank through its expansion into the Lexington market.

 

Income Taxes

 

The income tax provision for the three months ended March 31, 2004 and for the three months ended March 31, 2003 was $136,246 and $124,107, respectively. The provision was based on an effective tax rate of 29% and 30% for the three months ended March 31, 2004 and for the three months ended March 31, 2003, respectively.

 

Net Income

 

The combination of the above factors resulted in net income, after income taxes provisions, for the three months ended March 31, 2004 and for the three months ended March 31, 2003 of $321,175 and $305,736, respectively. Net income before taxes for the two periods was $460,421 and $429,843, respectively. The net income results for both periods is primarily due to significant increases in loan volume and decreases in rates paid on deposit accounts during each respective period.

 

Assets and Liabilities

 

During the first three months of 2004, total assets increased $14,244,819, or 7.90%, when compared to December 31, 2003. The primary source of growth in assets was the increase in loans receivable. Net loans increased by $11,746,780, or 8.53%, during the first three months of 2004, from $137,636,782 at December 31, 2003 to $149,383,562 at March 31, 2004. Total deposits increased $13,066,212, or 9.37%, over total deposits at December 31, 2003 to $152,481,163 at March 31, 2004. The largest increase in deposits was in interest-bearing transaction accounts, which increased $11,840,669, or 9.84%, to $132,171,100 at March 31, 2004. The primary reasons for increases in our net loans and deposits are provided below.

 

Investment Securities

 

Investment securities classified as available for sale totaled $26,558,428 at March 31, 2004. This total represents a decrease of $1,130,564, or 4.08%, since December 31, 2003. We also purchased an additional $65,000 of Federal Home Loan Bank stock during the quarter that brought the balance of nonmarketable equity securities to $1,120,000 at March 31, 2004.

 

-12-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Loans

 

Net loans increased $11,746,780, or 8.53%, during the three months ended March 31, 2004. The primary reason for the significant growth is a result of our ability to compete favorably with other financial institutions in the area. Balances within the major loans receivable categories as of March 31, 2004 and December 31, 2003 are as follows:

 

		March 31, 2004				December 31, 2003
Mortgage loans on real estate
Residential 1-4 family		$	33,313,227			$	31,343,019
Commercial			34,521,402				32,826,091
Construction			22,317,040				18,343,137
Second mortgages			5,391,928				5,124,025
Equity lines of credit			6,316,678				5,799,778
Total mortgage loans			101,860,275				93,436,050
Commercial and industrial			30,662,888				27,893,370
Consumer			13,793,227				13,199,988
Other, net			4,848,976				4,859,656
Total gross loans		$	151,165,366			$	139,389,064
Risk Elements in the Loan Portfolio
The following is a summary of risk elements in the loan portfolio:
		March 31, 2004				December 31, 2003
Loans
Nonaccrual loans		$	554,867			$	357,438
Accruing loans more than 90 days past due			295,744				214,000
Loans identified by the internal review mechanism:
Criticized			2,428,440				1,142,976
Classified			1,472,945				898,457
Activity in the Allowance for Loan Losses is as follows:
		March 31,
		2004				2003
Balance, January 1,		$	1,752,282			$	1,137,337
Provision for loan losses for the period			109,928				65,000
Net loans (charged-off) recovered for the period			(80,406	)			(35,389	)
Balance, end of period		$	1,781,804			$	1,166,948
Gross loans outstanding, end of period		$	151,165,366			$	88,880,309
Allowance for loan losses to loans outstanding			1.18	%			1.31	%

 

-13-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Deposits

 

Total deposits increased $13,066,212, or 9.37%, from December 31, 2003. Time deposits $100,000 and over comprised the largest category of deposits, totaling $64,272,328 at March 31, 2004. Expressed in percentages, noninterest-bearing deposits increased 6.42% and all other interest-bearing deposits increased 9.84%.

 

Balances within the major deposit categories as of March 31, 2004 and December 31, 2003 are as follows:

 

		March 31, 2004			December 31, 2003
Noninterest-bearing transaction accounts		$	20,310,063		$	19,084,520
Interest-bearing demand deposits			16,150,105			15,866,254
Savings deposits			19,700,954			18,217,378
Time deposits $100,000 and over			64,272,328			54,364,004
Other time deposits			32,047,713			31,882,795
Total deposits		$	152,481,163		$	139,414,951

 

Included in total time deposits at March 31, 3004 and December 31, 2003 were brokered time deposits of $27,717,000 and $22,772,000, respectively.

 

Advances from Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank of Atlanta totaled $20,400,000 as of March 31, 2004. Of this amount, the following have scheduled maturities greater than one year:

 

Maturing on		Interest Rate		Principal
04/08/05		2.040%		$	1,000,000
07/01/05		4.120			500,000
04/10/06		2.600			1,000,000
10/12/06		0.640			3,500,000
12/19/06		2.870			1,500,000
04/09/07		3.130			1,000,000
12/19/07		3.440			1,500,000
04/08/08		3.400			1,000,000
03/19/09		2.480			3,000,000
01/17/12		3.825			1,000,000
07/05/12		4.080			1,000,000
				$	16,000,000

 

Liquidity

 

Liquidity needs are met through scheduled maturities of loans and investments on the asset side and through pricing policies on the liability side for interest-bearing deposit accounts and advances from the Federal Home Loan Bank. The level of liquidity is measured by the loan-to-total funds ratio, which was at 86.32% at March 31, 2004 and 86.64% at December 31, 2003.

 

Securities available-for-sale, which totaled $26,558,428 at March 31, 2004, serve as a ready source of liquidity. We also have lines of credit available with correspondent banks to purchase federal funds for periods from one to fourteen days. At March 31, 2004, unused lines of credit totaled $23,597,229. Based on qualifying collateral reports filed on a quarterly basis with the Federal Home Loan Bank, we also have a line of credit to borrow funds from the Federal Home Loan Bank up to $29,526,000 as of March 31, 2004. As of March 31, 2004, we had borrowed $20,400,000 on this line.

 

-14-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Capital Resources

 

Total shareholders’ equity increased $769,389 from December 31, 2003 to $18,472,028 at March 31, 2004. The main reason for this increase was net income generated by the Bank’s operations, which totaled $321,175 for the three months ended March 31, 2004. In addition, we issued 27,900 shares of stock through our Employee Stock Ownership Plan which resulted in proceeds of $265,886. Also, the change in accumulated other comprehensive income resulted in a positive impact on equity of $182,329.

 

We are subject to various regulatory capital requirements administered by the federal banking agencies. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Our Tier 1 capital consists of common stockholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Our Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

 

We are also required to maintain capital at a minimum level based on adjusted quarterly average assets, which is known as the leverage ratio. Only the strongest banks are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

 

The following summarizes the Bank’s risk-based capital at March 31, 2004:

 

Shareholders’ equity		$	18,472,028
Less: unrealized gain on available-for-sale securities			428,629
Tier 1 capital			18,043,399
Plus: allowance for loan losses (1)			1,781,804
Total capital		$	19,825,203
Risk-weighted assets		$	152,613,000
Average total assets		$	185,791,000
Risk-based capital ratios
Tier 1 capital (to risk-weighted assets)			11.80	%
Total capital (to risk-weighted assets)			12.97	%
Leverage or Tier 1 capital (to total average assets)			9.71	%

---

(1)	Limited to 1.25% of gross risk-weighted assets

 

-15-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Off-Balance Sheet Risk

 

Through its operations, the Bank has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to the Bank’s customers at predetermined interest rates for a specified period of time. At March 31, 2004 the Bank had issued commitments to extend credit of $20,271,350 and standby letters of credit of $202,660 through various types of commercial lending arrangements. Approximately $16,461,451 of these commitments to extend credit had variable rates.

 

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at March 31, 2004.

 

		Within One Month			After One Through Three Months			After Three Through Twelve Months			Within One Year			Greater Than One Year			Total
(Dollars in thousands)
Unused commitments to extend credit		$	2,727		$	1,222		$	9,238		$	13,187		$	7,084		$	20,271
Standby letters of credit			—			58			145			203			—			203
Totals		$	2,727		$	1,280		$	9,383		$	13,390		$	7,084		$	20,474

 

The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on its credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

 

Item 3. Controls and Procedures

 

As of the end of the period covered by this report, our management, including our Chief Executive Officer and Chief Financial Officer, reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) that is required to be included in our periodic filings with the Securities and Exchange Commission. There have been no significant changes in our internal controls or, to management’s knowledge, in other factors that could significantly affect those internal controls subsequent to the date we carried out our evaluation, and there has been no corrective actions with respect to significant deficiencies or material weaknesses.

 

-16-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Part II - Other Information

 

Item 1. Legal Proceedings

 

There are no material, pending legal proceedings to which the Company or its subsidiary is a party or of which any of their property is the subject.

 

Item 2. Changes in Securities

 

(a)	Not applicable

(b)	Not applicable

(c)	Not applicable

 

The information required for limitations upon payment of dividends is incorporated herein by reference to the Company’s annual report on Form 10-KSB, filed with the Securities and Exchange Commission for the year ended December 31, 2003.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Submission of Matters to a Vote of Securities

 

None.

 

Item 5. Other Information

 

None.

 

-17-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Item 6. Exhibits and Reports on Form 8-K

 

(a)

Exhibits

 

Exhibit Number		Exhibit
2.1		Plan of Reorganization and Exchange between First Reliance Bancshares, Inc. and First Reliance Bank (incorporated by reference to the Registrant’s current report on Form 8-K dated April 1, 2002).
3.1		Articles of Incorporation (incorporated by reference to the Registrant’s current report on Form 8-K dated April 1, 2002).
3.2		Bylaws (incorporated by reference to the Registrant’s current report on Form 8-K dated April 1, 2002).
4.1		See Articles of Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto.
10.1(a)		Executive Employment Agreement dated August 21, 2001 - F. R. Saunders, Jr. (incorporated by reference to Exhibit 10.4 to the Registrant’s quarterly report on Form 10-QSB for the quarter ended March 31, 2002).
10.1(b)		Amendment 1 to Executive Employment Agreement dated June 1, 2002 - F. R. Saunders, Jr. (incorporated by reference to Exhibit 10.5(b) to the Registrant’s quarterly report On Form 10-QSB for the quarter ended June 30, 2002).
10.2(a)		Executive Employment Agreement dated August 21, 2001 - A. Dale Porter (incorporated by reference to Exhibit 10.5 to the Registrant’s quarterly report on Form 10-QSB for the quarter ended March 31, 2002).
10.2(b)		Amendment 1 to Executive Employment Agreement dated June 1, 2002 - A. Dale Porter (incorporated by reference to Exhibit 10.6(b) to the Registrant’s quarterly report On Form 10-QSB for the quarter ended June 30, 2002).
10.3(a)		Executive Employment Agreement dated August 21, 2001 - Paul C. Saunders (incorporated by reference to Exhibit 10.6 to the Registrant’s quarterly report on Form 10-QSB for the quarter ended March 31, 2002).
10.3(b)		Amendment 1 to Executive Employment Agreement dated June 1, 2002 - Paul C. Saunders (incorporated by reference to Exhibit 10.7(b) to the Registrant’s quarterly report On Form 10-QSB for the quarter ended June 30, 2002).
10.4(a)		1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s quarterly report on Form 10-QSB for the quarter ended March 31, 2002).
10.4(b)		Amendment No. 1 to 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s quarterly report on Form 10-QSB for the quarter ended March 31, 2002).
10.4(c)		Amendment No. 2 to 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s quarterly report on Form 10-QSB for the quarter ended June 30, 2002).
10.5		Employment Agreement dated September 27, 2002 - Jeffrey A. Paolucci (incorporated by reference to Exhibit 10.5 to the Registrant’s quarterly report on Form 10-KSB for the year ended December 31, 2002).
31.1		Certification pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended.
31.2		Certification pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

-18-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

Item 6. Exhibits and Reports on Form 8-K - continued

 

(b) Reports on Form 8-K. The following reports were filed on Form 8-K during the quarter ended March 31, 2004.

 

The Company filed a report on Form 8-K on January 10, 2004 to announce earnings for the year ended December 31, 2003.

 

-19-

---

Table of Contents

FIRST RELIANCE BANCSHARES, INC.

 

SIGNATURE

 

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		FIRST RELIANCE BANCSHARES, INC.
		By:		/s/ F.R. SAUNDERS, JR.
				F. R. Saunders, Jr.
				President & Chief Executive Officer
Date: May 13, 2004		By:		/s/ JEFFERY A. PAOLUCCI
				Jeffery A. Paolucci
				Senior Vice President and Chief Financial Officer

 

-20-