FIRST RELIANCE BANCSHARES INC - Quarter Report: 2010 March (Form 10-Q)
FIRST RELIANCE BANCSHARES,
INC.
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C.
|
(Mark One)
|
FORM
10-Q
|
|
x
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For
the Quarterly Period Ended March 31, 2010
OR
|
o
|
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)
656-5000
(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:
4,048,520 shares of common stock, par value
$0.01 per share, as of April 30, 2010
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
x Yes o No.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such
files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated
filer o Smaller reporting
company x
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
FIRST
RELIANCE BANCSHARES, INC.
INDEX
|
Page No.
|
||
|
PART I. FINANCIAL
INFORMATION
|
||
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
Condensed
Consolidated Balance Sheets - March 31, 2010 and December 31,
2009
|
3
|
|
|
Condensed
Consolidated Statements of Income - Three months ended March 31, 2010 and
2009
|
4
|
|
|
Condensed
Consolidated Statements of Shareholders’ Equity and Comprehensive Income
-
|
||
|
Three
months ended March 31, 2010 and 2009
|
5
|
|
|
Condensed
Consolidated Statements of Cash Flows - Three months ended March 31, 2010
and 2009
|
6
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7-16
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
17-34
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
35
|
|
Item
4.
|
Controls
and Procedures
|
35
|
|
PART II. OTHER INFORMATION
|
||
|
Item
1.
|
Legal
Proceedings
|
35
|
|
Item 1A.
|
Risk
Factors
|
35
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
36
|
|
Item
6.
|
Exhibits
|
37
|
FIRST
RELIANCE BANCSHARES, INC.
Condensed
Consolidated Balance Sheets
|
March
31,
|
December
31,
|
|||||||
|
2010
|
2009
|
|||||||
|
|
(Unaudited)
|
(Audited)
|
||||||
| Assets | ||||||||
|
Cash
and cash equivalents:
|
||||||||
|
Cash
and due from banks
|
$ | 2,029,201 | $ | 2,942,295 | ||||
|
Interest-bearing
deposits with other banks
|
40,658,139 | 50,356,191 | ||||||
|
Total
cash and cash equivalents
|
42,687,340 | 53,298,486 | ||||||
|
Time
deposits in other banks
|
503,107 | 502,089 | ||||||
|
Securities
available-for-sale
|
121,633,494 | 121,948,744 | ||||||
|
Nonmarketable
equity securities
|
4,812,100 | 4,812,100 | ||||||
|
Total
investment securities
|
126,445,594 | 126,760,844 | ||||||
|
Mortgage
loans held for sale
|
583,952 | 5,100,609 | ||||||
|
Loans
receivable
|
392,192,736 | 406,627,401 | ||||||
|
Less
allowance for loan losses
|
(6,725,174 | ) | (9,800,746 | ) | ||||
|
Loans,
net
|
385,467,562 | 396,826,655 | ||||||
|
Premises
and equipment, net
|
26,327,343 | 26,469,436 | ||||||
|
Accrued
interest receivable
|
2,446,595 | 2,661,030 | ||||||
|
Other
real estate owned
|
7,249,401 | 8,954,214 | ||||||
|
Cash
surrender value life insurance
|
11,514,595 | 11,409,937 | ||||||
|
Other
assets
|
12,939,322 | 13,525,073 | ||||||
|
Total
assets
|
$ | 616,164,811 | $ | 645,508,373 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Liabilities
|
||||||||
|
Deposits
|
||||||||
|
Noninterest-bearing
transaction accounts
|
$ | 44,229,115 | $ | 44,298,626 | ||||
|
Interest-bearing
transaction accounts
|
39,366,420 | 47,733,229 | ||||||
|
Savings
|
104,310,169 | 103,604,793 | ||||||
|
Time
deposits $100,000 and over
|
190,977,782 | 195,346,191 | ||||||
|
Other
time deposits
|
147,795,709 | 161,780,140 | ||||||
|
Total
deposits
|
526,679,195 | 552,762,979 | ||||||
|
Securities
sold under agreement to repurchase
|
603,062 | 598,342 | ||||||
|
Advances
from Federal Home Loan Bank
|
27,000,000 | 34,000,000 | ||||||
|
Junior
subordinated debentures
|
10,310,000 | 10,310,000 | ||||||
|
Accrued
interest payable
|
654,082 | 680,880 | ||||||
|
Other
liabilities
|
4,773,096 | 1,932,345 | ||||||
|
Total
liabilities
|
570,019,435 | 600,284,546 | ||||||
|
Shareholders’
Equity
|
||||||||
|
Preferred
stock, no par value, authorized 10,000,000 shares: Series
A cumulative perpetual preferred stock 15,349 issued and
outstanding at March 31, 2010 and December 31,
2009
|
14,584,146 | 14,536,176 | ||||||
|
Series
B cumulative perpetual preferred stock 767 shares issue and
outstanding at March 31, 2010 and December 31,
2009
|
831,890 | 835,960 | ||||||
|
Common
stock, $0.01 par value; 20,000,000 shares authorized, 3,703,375
and 3,582,691 shares issued and outstanding at
March 31, 2010 and December 31, 2009,
respectively
|
37,034 | 35,827 | ||||||
|
Capital
surplus
|
26,602,763 | 26,181,576 | ||||||
|
Treasury
stock at cost at 12,090 and 11,535 shares at at
March 31, 2010 and December 31, 2009,
respectively
|
(166,322 | ) | (163,936 | ) | ||||
|
Nonvested
restricted stock
|
(597,925 | ) | (206,004 | ) | ||||
|
Retained
earnings
|
5,546,577 | 5,269,463 | ||||||
|
Accumulated
other comprehensive income (loss)
|
(692,787 | ) | (1,265,235 | ) | ||||
|
Total
shareholders’ equity
|
46,145,376 | 45,223,827 | ||||||
|
Total
liabilities and shareholders’ equity
|
$ | 616,164,811 | $ | 645,508,373 | ||||
See notes
to condensed consolidated financial statements.
-3-
FIRST
RELIANCE BANCSHARES, INC.
Condensed
Consolidated Statements of Income
(Unaudited)
|
Three Months Ended
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Interest
income
|
||||||||
|
Loans,
including fees
|
$ | 6,213,086 | $ | 6,967,737 | ||||
|
Investment
securities
|
||||||||
|
Taxable
|
609,994 | 531,316 | ||||||
|
Nontaxable
|
652,898 | 313,418 | ||||||
|
Federal
funds sold
|
- | 983 | ||||||
|
Other
interest income
|
28,873 | 9,599 | ||||||
|
Total
|
7,504,851 | 7,823,053 | ||||||
|
Interest
expense
|
||||||||
|
Time
deposits over $100,000
|
1,455,703 | 1,192,567 | ||||||
|
Other
deposits
|
1,352,809 | 1,622,844 | ||||||
|
Other
interest expense
|
388,799 | 854,549 | ||||||
|
Total
|
3,197,311 | 3,669,960 | ||||||
|
Net
interest income
|
4,307,540 | 4,153,093 | ||||||
|
Provision
for loan losses
|
186,089 | 1,300,380 | ||||||
|
Net
interest income after provision for loan losses
|
4,121,451 | 2,852,713 | ||||||
|
Noninterest
income
|
||||||||
|
Service
charges on deposit accounts
|
468,220 | 460,608 | ||||||
|
Gain
on sale of mortgage loans
|
210,043 | 660,499 | ||||||
|
Income
from bank owned life insurance
|
104,658 | 105,150 | ||||||
|
Other
charges, commissions and fees
|
152,984 | 126,999 | ||||||
|
Gain
on sale of securities available-for-sale
|
1,602 | - | ||||||
|
Gain
(loss) on sale of other real estate owned
|
242,122 | (15,892 | ) | |||||
|
Gain
on sale of fixed assets
|
- | 86,810 | ||||||
|
Other
non-interest income
|
104,778 | 268,943 | ||||||
|
Total
|
1,284,407 | 1,693,117 | ||||||
|
Noninterest
expenses
|
||||||||
|
Salaries
and benefits
|
2,396,066 | 2,727,150 | ||||||
|
Occupancy
expense
|
399,534 | 355,857 | ||||||
|
Furniture
and equipment expense
|
310,225 | 285,865 | ||||||
|
Other
operating expenses
|
1,836,131 | 1,356,007 | ||||||
|
Total
|
4,941,956 | 4,724,879 | ||||||
|
Income
(loss) before taxes
|
463,902 | (179,049 | ) | |||||
|
Income
tax benefit
|
(66,232 | ) | (192,914 | ) | ||||
|
Net
income
|
530,134 | 13,865 | ||||||
|
Preferred
stock dividends
|
204,574 | 59,584 | ||||||
|
Deemed
dividends on preferred stock resulting from net accretion of discount and
amortization of premium
|
43,900 | 12,684 | ||||||
|
Net
Income (loss) available to common shareholders
|
$ | 281,660 | $ | (58,403 | ) | |||
|
Average
common shares outstanding, basic
|
3,584,032 | 3,525,004 | ||||||
|
Average
common shares outstanding, diluted
|
3,584,032 | 3,525,004 | ||||||
|
Basic
earnings (loss) per share
|
$ | 0.08 | $ | (0.02 | ) | |||
|
Diluted
earnings (loss) per share
|
$ | 0.08 | $ | (0.02 | ) | |||
See notes
to condensed consolidated financial statements.
-4-
FIRST
RELIANCE BANCSHARES, INC.
Condensed
Consolidated Statements of Shareholders’ Equity and Comprehensive
Income
For
the Three Months Ended March 31, 2010 and 2009
(Unaudited)
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Other
|
||||||||||||||||||||||||||||||||
|
Nonvested
|
Comprehensive
|
|||||||||||||||||||||||||||||||
|
Preferred
|
Common
|
Capital
|
Treasury
|
Restricted
|
Retained
|
Income
|
||||||||||||||||||||||||||
|
Stock
|
Stock
|
Surplus
|
Stock
|
Stock
|
Earnings
|
(Loss)
|
Total
|
|||||||||||||||||||||||||
|
Balance, December
31, 2008
|
$ | - | $ | 35,250 | $ | 26,120,460 | $ | (159,777 | ) | $ | (207,653 | ) | $ | 11,839,005 | $ | (201,527 | ) | $ | 37,425,758 | |||||||||||||
|
Issuance
of Series A preferred
stock, net of issuance
cost of $116,786
|
14,375,740 | 14,375,740 | ||||||||||||||||||||||||||||||
|
Issuance
of Series B preferred
stock, net of issuance
cost $6,902
|
849,572 | 849,572 | ||||||||||||||||||||||||||||||
|
Net
income
|
13,865 | 13,865 | ||||||||||||||||||||||||||||||
|
Other
comprehensive gain, net
of tax expense of $134,894
|
261,852 | 261,852 | ||||||||||||||||||||||||||||||
|
Comprehensive
income
|
275,717 | |||||||||||||||||||||||||||||||
|
Accretion
of Series A Preferred
stock discount
|
13,860 | (13,860 | ) | - | ||||||||||||||||||||||||||||
|
Amortization
of Series B Preferred
stock premium
|
(1,176 | ) | 1,176 | - | ||||||||||||||||||||||||||||
|
Non-vested
restricted stock
|
622 | 139,377 | (104,927 | ) | 35,072 | |||||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(3,656 | ) | (3,656 | ) | ||||||||||||||||||||||||||||
|
Balance,
March 31, 2009
|
$ | 15,237,996 | $ | 35,872 | $ | 26,259,837 | $ | (163,433 | ) | $ | (312,580 | ) | $ | 11,840,186 | $ | 60,325 | $ | 52,958,203 | ||||||||||||||
|
Balance, December
31, 2009
|
$ | 15,372,136 | $ | 35,827 | $ | 26,181,576 | $ | (163,936 | ) | $ | (206,004 | ) | $ | 5,269,463 | $ | (1,265,235 | ) | $ | 45,223,827 | |||||||||||||
|
Net
income
|
530,134 | 530,134 | ||||||||||||||||||||||||||||||
|
Other
comprehensive gain, net
of tax expense of
$294,897
|
572,448 | 572,448 | ||||||||||||||||||||||||||||||
|
Other
comprehensive income
|
1,102,582 | |||||||||||||||||||||||||||||||
|
Preferrd
Stock Dividend
|
(209,120 | ) | (209,120 | ) | ||||||||||||||||||||||||||||
|
Accretion
of Series A Preferred
stock discount
|
47,970 | (47,970 | ) | - | ||||||||||||||||||||||||||||
|
Amortization
of Series B Preferred
stock premium
|
(4,070 | ) | 4,070 | - | ||||||||||||||||||||||||||||
|
Issuance
Restricted Stock
|
1,207 | 421,187 | (391,921 | ) | 30,473 | |||||||||||||||||||||||||||
|
Purchase
of treasury stock
|
(2,386 | ) | (2,386 | ) | ||||||||||||||||||||||||||||
|
Balance,
March 31, 2010
|
$ | 15,416,036 | $ | 37,034 | $ | 26,602,763 | $ | (166,322 | ) | $ | (597,925 | ) | $ | 5,546,577 | $ | (692,787 | ) | $ | 46,145,376 | |||||||||||||
See notes
to condensed consolidated financial statements.
-5-
FIRST
RELIANCE BANCSHARES, INC.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
Three
Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income
|
$ | 530,134 | $ | 13,865 | ||||
|
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
||||||||
|
Provision
for loan losses
|
186,089 | 1,300,380 | ||||||
|
Depreciation
and amortization expense
|
274,165 | 269,374 | ||||||
|
Gain
on sale of securities available-for-sale
|
(1,602 | ) | - | |||||
|
Gain
on sale of premises and equipment
|
- | (86,810 | ) | |||||
|
(Gain)
loss on sale of other real estate owned
|
(242,122 | ) | 15,892 | |||||
|
Write
down of other real estate owned
|
187,582 | - | ||||||
|
Discount
accretion and premium amortization
|
62,220 | 44,471 | ||||||
|
Disbursements
for mortgage loans held for sale
|
(7,343,801 | ) | (51,727,574 | ) | ||||
|
Proceeds
from sale of mortgage loans held for sale
|
11,860,458 | 37,066,273 | ||||||
|
Decrease
in interest receivable
|
214,435 | 190,795 | ||||||
|
Decrease
in interest payable
|
(26,798 | ) | (12,406 | ) | ||||
|
Increase
for cash surrender value of life insurance
|
(104,658 | ) | (105,150 | ) | ||||
|
Amortization
of deferred compensation on restricted stock
|
30,473 | 35,072 | ||||||
|
Decrease
(increase) in other assets
|
239,289 | (562,383 | ) | |||||
|
Increase
in other liabilities
|
2,840,751 | 278,990 | ||||||
|
Net
cash provided (used) by operating activities
|
8,706,615 | (13,279,211 | ) | |||||
|
Cash
flows from investing activities:
|
||||||||
|
Net
decrease in loans receivable
|
10,826,774 | 1,605,843 | ||||||
|
Purchases
of securities available-for-sale
|
(2,888,381 | ) | - | |||||
|
Maturities
of securities available-for-sale
|
892,813 | 3,069,380 | ||||||
|
Sales
of securities available-for-sale
|
3,117,545 | - | ||||||
|
Sales
of other real estate owned
|
2,105,583 | 6,608 | ||||||
|
Increase
in time deposits in other banks
|
(1,018 | ) | - | |||||
|
Purchase
of non marketable equity securities
|
- | (709,900 | ) | |||||
|
Proceeds
from disposal of premises and equipment
|
- | 2,286,810 | ||||||
|
Purchases
of premises and equipment
|
(80,507 | ) | (259,629 | ) | ||||
|
Net
cash provided by investing activities
|
13,972,809 | 5,999,112 | ||||||
|
Cash
flows from financing activities:
|
||||||||
|
Net
decrease in demand deposits, interest-bearing transaction accounts and
savings accounts
|
(7,730,944 | ) | (16,908,694 | ) | ||||
|
Net
increase (decrease) in certificates of deposit and other time
deposits
|
(18,352,840 | ) | 57,724,870 | |||||
|
Net
increase (decrease) in securities sold under agreements to
repurchase
|
4,720 | (7,332,457 | ) | |||||
|
Net
decrease in advances from the Federal Home Loan Bank
|
(7,000,000 | ) | (8,500,000 | ) | ||||
|
Repayment
of note payable
|
- | (6,950,000 | ) | |||||
|
Net
proceeds from issuance of preferred stock
|
- | 15,225,312 | ||||||
|
Purchase
of treasury stock
|
(2,386 | ) | (3,656 | ) | ||||
|
Payment
of preferred stock dividends
|
(209,120 | ) | - | |||||
|
Net
cash provided (used) by financing activities
|
(33,290,570 | ) | 33,255,375 | |||||
|
Net
increase (decrease) in cash and cash equivalents
|
(10,611,146 | ) | 25,975,276 | |||||
|
Cash
and cash equivalents, beginning
|
53,298,486 | 5,708,607 | ||||||
|
Cash
and cash equivalents, end
|
$ | 42,687,340 | $ | 31,683,883 | ||||
|
Cash
paid during the period for:
|
||||||||
|
Income
taxes
|
$ | - | $ | 4,257 | ||||
|
Interest
|
$ | 3,224,109 | $ | 3,682,366 | ||||
|
Supplemental
noncash investing and financing activities:
|
||||||||
|
Foreclosures
on loans
|
$ | 346,230 | $ | 1,066,132 | ||||
See notes
to condensed consolidated financial statements.
-6-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 1 - Basis of
Presentation
The
accompanying condensed consolidated 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 consolidated financial statements. The consolidated financial
statements as of March 31, 2010 and for the interim periods ended March 31, 2010
and 2009 are unaudited and, in the opinion of management, include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation. The consolidated financial information as of December 31,
2009 has been derived from the audited consolidated financial statements as of
that date. For further information, refer to the consolidated financial
statements and the notes included in First Reliance Bancshares, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2009.
Note 2 - Recently Issued
Accounting Pronouncements
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
January 2010, compensation guidance was updated to reflect the Securities and
Exchange Commission’s (the “SEC”) views of when escrowed share arrangements are
considered to be compensatory. Historically the SEC staff has expressed the view
that an escrowed share arrangement involving the release of shares to certain
shareholders based on performance-related criteria is presumed to be
compensatory. Facts and circumstances may indicate that the arrangement is
an incentive made to facilitate a transaction on behalf of the company if the
escrowed shares will be released or canceled without regard to continued
employment. In such cases, the SEC staff generally believes that the arrangement
should be recognized and measured according to its nature and reflected as a
reduction of the proceeds allocated to the newly issued securities. The SEC
staff believes that an escrowed share arrangement in which the shares are
automatically forfeited if employment terminates is compensation. The guidance
is effective upon issuance and had no impact on the Company’s financial
statements.
In
January 2010, fair value guidance was amended to require disclosures for
significant amounts transferred in and out of Levels 1 and 2 and the reasons for
such transfers and to require that gross amounts of purchases, sales, issuances
and settlements be provided in the Level 3 reconciliation. The new disclosures
are effective for the Company for the current quarter and have been reflected in
Note 10, Fair Value measurements.
Guidance
related to subsequent events was amended in February 2010 to remove the
requirement for an SEC filer to disclose the date through which subsequent
events were evaluated. The amendments were effective upon issuance and had no
significant impact on the Company’s financial statements.
Consolidation
guidance was amended in February 2010 to defer guidance regarding the analysis
of interests in variable interest entities issued in June 2009 for entities
having attributes of investment companies or that apply investment company
measurement principles. Disclosure requirements provided in the June 2009
guidance were not deferred. The amendments were effective January 1, 2010 and
had no effective on the Company’s financial statements.
In March
2010, guidance related to derivatives and hedging was amended to exempt embedded
credit derivative features related to the transfer of credit risk from potential
bifurcation and separate accounting. Embedded features related to other
types of risk and other embedded credit derivative features were not exempt from
potential bifurcation and separate accounting. The amendments will be
effective for the Company on July 1, 2010 although early adoption is
permitted. The Company does not expect these amendments to have any impact
on the 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.
-7-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 3 -
Reclassifications
Certain
captions and amounts in the financial statements in the Company’s Form 10-Q for
the quarter ended March 31, 2009 were reclassified to conform to the March 31,
2010 presentation.
Note 4 - Comprehensive
Income
Comprehensive
Income - Accounting principles generally require that recognized income,
expenses, gains, and losses be included in net income. Although certain changes
in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
The
components of other comprehensive income and related tax effects are as
follows:
|
Pre-tax
Amount
|
Tax
Expense
|
Net-of-Tax
Amount
|
||||||||||
|
For the Quarter Ended March 31,
2010:
|
||||||||||||
|
Unrealized
gains on securities available-for-sale
|
$ | 868,947 | $ | (295,442 | ) | $ | 573,505 | |||||
|
Reclassification
adjustment for gains (losses) realized in net income
|
1,602 | (545 | ) | 1,057 | ||||||||
| $ | 867,345 | $ | (294,897 | ) | $ | 572,448 | ||||||
|
For the Quarter Ended March 31,
2009:
|
||||||||||||
|
Unrealized
gains on securities available-for-sale
|
$ | 396,746 | $ | 134,894 | $ | 261,852 | ||||||
| $ | 396,746 | $ | 134,894 | $ | 261,852 | |||||||
Note 5 - Investment
Securities
The
amortized cost and estimated fair values of securities available-for-sale
were:
|
Amortized
|
Gross Unrealized
|
Estimated
|
||||||||||||||
|
Cost
|
Gains
|
Losses
|
Fair Value
|
|||||||||||||
|
March
31, 2010
|
||||||||||||||||
|
U.S.
Government agencies
|
$ | 3,009,668 | $ | 25,766 | $ | - | $ | 3,035,434 | ||||||||
|
Mortgage-backed
securities
|
58,402,107 | 19,488 | 489,986 | 57,931,609 | ||||||||||||
|
Municipals
|
61,052,646 | 522,749 | 962,799 | 60,612,596 | ||||||||||||
|
Other
|
218,750 | - | 164,895 | 53,855 | ||||||||||||
| $ | 122,683,171 | $ | 568,003 | $ | 1,617,680 | $ | 121,633,494 | |||||||||
|
December
31, 2009
|
||||||||||||||||
|
U.S.
Government agencies
|
$ | 3,021,782 | $ | 751 | $ | 11,167 | $ | 3,011,366 | ||||||||
|
Mortgage-backed
securities
|
59,324,978 | - | 1,192,307 | 58,132,671 | ||||||||||||
|
Municipals
|
61,300,256 | 460,262 | 1,023,326 | 60,737,192 | ||||||||||||
|
Other
|
218,750 | - | 151,235 | 67,515 | ||||||||||||
| $ | 123,865,766 | $ | 461,013 | $ | 2,378,035 | $ | 121,948,744 | |||||||||
The
following is a summary of maturities of securities available-for-sale as of
March 31, 2010. The amortized cost and estimated 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.
-8-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 5 -
Investment Securities –(continued)
|
Securities
|
||||||||
|
Available-For-Sale
|
||||||||
|
Amortized
|
Estimated
|
|||||||
|
Cost
|
Fair Value
|
|||||||
|
Due
after one year but within five years
|
$ | 3,441,501 | $ | 3,399,029 | ||||
|
Due
after five years but with ten years
|
29,752,335 | 29,418,256 | ||||||
|
Due
after ten years
|
30,868,478 | 30,830,745 | ||||||
| 64,062,314 | 63,648,030 | |||||||
|
Mortgage-backed
securities
|
58,402,107 | 57,931,609 | ||||||
|
Other
|
218,750 | 53,855 | ||||||
|
Total
|
$ | 122,683,171 | $ | 121,633,494 | ||||
The
following table shows gross unrealized losses and fair value, aggregated by
investment category, and length of time that individual securities have been in
a continuous unrealized loss position, at March 31, 2010 and December 31,
2009.
|
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||
|
Less
Than 12 Months
|
||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | - | $ | - | $ | 2,995,629 | $ | 11,167 | ||||||||
|
Mortgage-backed
securities
|
45,523,829 | 489,985 | 58,132,671 | 1,192,307 | ||||||||||||
|
Municipals
|
26,112,244 | 623,505 | 27,850,269 | 688,885 | ||||||||||||
| 71,636,073 | 1,113,490 | 88,978,569 | 1,892,359 | |||||||||||||
|
12
Months or More
|
||||||||||||||||
|
Municipals
|
4,307,603 | 339,295 | 4,314,797 | 334,441 | ||||||||||||
|
Other
|
53,855 | 164,895 | 67,515 | 151,235 | ||||||||||||
| 4,361,458 | 504,190 | 4,382,312 | 485,676 | |||||||||||||
|
Total
securities available-for-sale
|
$ | 75,997,532 | $ | 1,617,680 | $ | 93,360,881 | $ | 2,378,035 | ||||||||
At March
31, 2010, securities classified as available-for-sale are recorded at fair
market value. Approximately 31.17% of the unrealized losses, or 10 individual
securities, consisted of securities in a continuous loss position for twelve
months or more. The Company does not intend to sell these securities 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, based
on industry analyst reports and credit ratings, that the deterioration in value
is attributable to changes in market interest rates and is not in the credit
quality of the issuer and therefore, these losses are not considered
other-than-temporary.
During
the first quarter of 2010 and 2009, gross proceeds from the sale of
available-for-sale securities were $3,117,545 and $0, respectively. Gains on
available-for-sale securities totaled $1,602 and $0 for the first quarter 2010
and 2009, respectively.
Note 6 – Shareholders’
Equity
Common
Stock – The
following is a summary of the changes in common shares outstanding for the three
months ended March 31, 2010 and 2009.
|
Three Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Common
shares outstanding at beginning of the period
|
3,582,691 | 3,525,004 | ||||||
|
Issuance
of non-vested restricted shares
|
120,684 | 62,222 | ||||||
|
Common
shares outstanding at end of the period
|
3,703,375 | 3,587,226 | ||||||
-9-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 6 –
Shareholders’ Equity –
(continued)
Preferred
Stock
- On February 24, 2009, the Company’s Articles of Incorporation were
amended to authorize the issuance of a class of 10,000,000 shares of preferred
stock, having no par value. Subject to certain conditions, the amendment
authorizes the Company’s Board of Directors to issue preferred stock without
shareholders’ approval. Under this amendment, the Board is authorized to
determine the terms of one or more series of preferred stock, including the
preferences, rights, and limitations of each series.
On March
6, 2009, the Company completed a transaction with the United States Treasury
(“Treasury”) under the Troubled Asset Relief Program Capital Purchase Program
(“TARP CPP”), which was amended by the enactment of the American Recovery and
Reinvestment Act of 2009 on February 17, 2009. Under the TARP CPP,
the Company sold 15,349 shares of its Series A Cumulative Perpetual Preferred
Stock. In addition, the Treasury received a warrant to purchase 767 shares of
the Company’s Series B Cumulative Perpetual Preferred Stock, which was
immediately exercised by the Treasury for a nominal exercise price. The
preferred shares issued to the Treasury qualify as tier 1 capital for regulatory
purposes.
The
Series A Preferred Stock is a senior cumulative perpetual preferred stock that
has a liquidation preference of $1,000 per share, pays cumulative dividends at a
rate of 5% per year for the first five years and thereafter at a rate of 9% per
year. Dividends are payable quarterly. At any time, the Company may, 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 is
generally non-voting. Prior to March 6, 2012, unless the Company has redeemed
the Series A Preferred Stock or the Treasury has transferred the Series A
Preferred Stock to a third party, the consent of the Treasury will be required
for the Company to increase its common stock dividend or repurchase its common
stock or other equity or capital securities, other than in connection with
benefit plans consistent with past practices and certain other circumstances. A
consequence of the Series A Preferred Stock purchase includes certain
restrictions on executive compensation that could limit the tax deductibility of
compensation the Company pays to executive management.
The
Series B Preferred Stock is a cumulative perpetual preferred stock that has the
same rights, preferences, privileges, voting rights and other terms as the
Series A Preferred Stock, except that dividends will be paid at the rate of 9%
per year and may not be redeemed until all the Series A Preferred Stock has been
redeemed.
The
proceeds from the issuance of the Series A and Series B were allocated based on
the relative fair value of each series based on a discounted cash flow model. As
a result of the valuations, $14,492,526 and $856,474 was allocated to the Series
A Preferred Stock and Series B Preferred Stock, respectively. This resulted in a
discount of $973,260 for the Series A stock and a premium of $82,572 for the
Series B stock. The discount and premium are being accreted and amortized,
respectively, through retained earnings over a five-year estimated life using
the effective interest method. For the
quarter ended March 31, 2010 and 2009, accretion of the Series A Preferred Stock
discount totaled $47,970 and $13,860, respectively. Amortization of the Series B
Preferred Stock premium totaled $4,070 and $1,176 for the first quarter of 2010
and 2009, respectively. The net amount of the accretion and amortization was
treated as a deemed dividend to preferred shareholders in the computation of
earnings per share.
Note 7 - Earnings Per
Share
Net
income available to common shareholders represents net income adjusted for
preferred dividends including dividends declared, accretions of discounts and
amortization of premiums on preferred stock issuances and cumulative dividends
related to the current dividend period that have not been declared as of period
end.
The
following is a summary of the earnings (loss) per share calculations for the
three months ended March 31, 2010 and 2009.
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Earnings
(loss) available to common shareholders
|
||||||||
|
Net
income
|
$ | 530,134 | $ | 13,865 | ||||
|
Preferred
stock dividends
|
204,574 | 59,584 | ||||||
|
Deemed
dividends on preferred stock resulting from net accretion of discount and
amortization of premium
|
43,900 | 12,684 | ||||||
|
Net
income (loss) available to common shareholders
|
$ | 281,660 | $ | (58,403 | ) | |||
-10-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 7 -
Earnings Per Share –
(continued)
|
March
31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Basic
earnings per share:
|
||||||||
|
Net
income (loss) available to common shareholders
|
$ | 281,660 | $ | (58,403 | ) | |||
|
Average
common shares outstanding - basic
|
3,584,032 | 3,525,004 | ||||||
|
Basic
earnings (loss) per share
|
$ | 0.08 | $ | (0.02 | ) | |||
|
Diluted
earnings per share:
|
||||||||
|
Net
income (loss) available to common shareholders
|
$ | 281,660 | $ | (58,403 | ) | |||
|
Average
common shares outstanding – basic
|
3,584,032 | 3,525,004 | ||||||
|
Dilutive
potential common shares
|
- | - | ||||||
|
Average
common shares outstanding - diluted
|
3,584,032 | 3,525,004 | ||||||
|
Diluted
earnings (loss) per share
|
$ | 0.08 | $ | (0.02 | ) | |||
Note 8 - Equity Incentive
Plan
On
January 19, 2006, the Company adopted the 2006 Equity Incentive Plan, which
provides 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 plan allows granting up to 350,000 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. Under this Plan, our Board of Directors has
sole discretion as to the exercise date of any awards
granted. The per-share exercise price of incentive stock awards may not be less
than the market value of a share of common stock on the date the award is
granted. Any awards that expire unexercised or are canceled become available for
re-issuance.
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 Plan, 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 as established by the Plan Committee at the time of grant.
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 or vested.
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.
During
the three months ended March 31, 2010 and 2009 the Company issued 120,684 and
62,222, respectively, of restricted stock pursuant to the 2006 Equity Incentive
Plan. The shares cliff vest in three years and are fully vested in 2012 and
2011, respectively. The weighted-average fair value of restricted stock issued
during the three months ended March 31, 2010 and 2009 was $3.50 and $2.25 per
share, respectively. Compensation cost associated with the issuance for 2010 and
2009 was $422,394 and $139,999, respectively. There were no restricted stock
forfeitures during the first quarter of 2010 or 2009. Deferred compensation
expense of $30,473 and $35,072, relating to restricted stock, was amortized to
income during three months ended March 31, 2010 and 2009,
respectively.
-11-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 8 -
Equity Incentive Plan -
(continued)
The 2006
Equity Incentive Plan allows for the issuance of Stock Appreciation Rights
("SARs"). The SARs entitle the participant to receive the excess of (1) the
market value of a specified or determinable number of shares of the stock at the
exercise date over the fair value at grant date or (2) a specified or
determinable price which may not in any event be less than the fair market value
of the stock at the time of the award. Upon exercise, the Company can elect to
settle the awards using either Company stock or cash. The shares start vesting
after five years and vest at 20% per year until fully vested. Compensation cost
for SARs is amortized to compensation expense over the vesting
period.
The SARs
compensation expense for both the quarters ended March 31, 2010 and 2009 was
$18,356.
A summary
of the status of the Company’s SARs as of March 31, 2010 and 2009 and changes
during the period then ended is presented below.
|
2010
|
2009
|
|||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Exercise
|
Exercise
|
|||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
89,293 | $ | 14.95 | 93,981 | $ | 14.95 | ||||||||||
|
Forfeited
|
(794 | ) | 15.00 | - | - | |||||||||||
|
Outstanding
at end of year
|
88,499 | $ | 14.95 | 93,981 | $ | 14.95 | ||||||||||
Note 9 – Stock-Based
Compensation
The
Company terminated its 2003 Employee Stock Option Plan and replaced it with the
2006 Equity Incentive Plan. Outstanding options issued under any former stock
option plans will be honored in accordance with the terms and conditions in
effect at the time they were granted, except that they are not subject to
reissuance. At March 31, 2010, 203,746 options were outstanding and exercisable.
No stock options have been granted since June 2005.
A summary
of the status of the Company’s 2003 stock option plan as of March 31, 2010 and
2009, and changes during the period is presented below:
|
2010
|
2009
|
|||||||||||||||
|
Weighted-
|
Weighted-
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Exercise
|
Exercise
|
|||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||
|
Outstanding
at beginning of year
|
206,547 | $ | 9.38 | 269,447 | $ | 8.36 | ||||||||||
|
Forfeited
|
(2,800 | ) | 6.96 | - | ||||||||||||
|
Outstanding
at end of period
|
203,747 | $ | 9.42 | 269,447 | $ | 8.36 | ||||||||||
Note 10 – Fair Value
Measurements
The
current accounting literature requires the disclosure of fair value information
for financial instruments, whether or not they are recognized in the
consolidated balance sheets, when it is practical to estimate the fair value.
The guidance defines a financial instrument as cash, evidence of an ownership
interest in an entity or contractual obligations, which require the exchange of
cash, or other financial instruments. Certain items are specifically excluded
from the disclosure requirements, including the Company’s common stock, premises
and equipment, accrued interest receivable and payable, and other assets and
liabilities.
The fair
value of a financial instrument is the amount at which the asset or obligation
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. Fair value estimates are made at a specific
point in time based on relevant market information and information about the
financial instruments. Because no market value exists for a significant portion
of the financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors.
-12-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 10 –
Fair Value Measurements – (continued)
The
Company has used management’s best estimate of fair value based on the above
assumptions. Thus, the fair values presented may not be the amounts, which could
be realized, in an immediate sale or settlement of the instrument. In addition,
any income taxes or other expenses, which would be incurred in an actual sale or
settlement, are not taken into consideration in the fair values
presented.
The
following methods and assumptions were used to estimate the fair value of
significant financial instruments:
Cash and Due from
Banks and Interest-bearing Deposits with Other Banks - The carrying amount is
a reasonable estimate of fair value.
Federal Funds
Sold and Purchased - Federal funds sold and
purchased are for a term of one day and the carrying amount approximates the
fair value.
Time Deposits in
other Banks - The carrying amount is
a reasonable estimate of fair value.
Securities
Available-for-Sale - Investment 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 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, U.S. 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.
Nonmarketable
Equity Securities - The carrying amount of
nonmarketable equity securities is a reasonable estimate of fair value since no
ready market exists for these securities.
Loans
Held-for-Sale - The carrying amount of loans held for sale is a
reasonable estimate of fair value.
Loans
Receivable-
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
losses 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 agreement are considered impaired. The fair value of impaired loans is
estimated using one of several methods, including collateral value, market value
of similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. At March 31, 2010, substantially all of the total
impaired loans were evaluated based on 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 impaired 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 impaired loan as nonrecurring
Level 3.
Other Real Estate
Owned - Other
real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans
to OREO. Subsequently, OREO is carried at the lower of carrying value or fair
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
OREO as nonrecurring Level 3.
Deposits - The fair value of
demand deposits, savings, and money market accounts is the amount payable on
demand at the reporting date. The fair values of certificates of deposit are
estimated using a discounted cash flow calculation that applies current interest
rates to a schedule of aggregated expected maturities.
-13-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 10 –
Fair Value Measurements – (continued)
Securities Sold
Under Agreements to Repurchase - The carrying amount is
a reasonable estimate of fair value because these instruments typically have
terms of one day.
Advances From
Federal Home Loan Bank - The fair values of fixed
rate borrowings are estimated using a discounted cash flow calculation that
applies the Company’s current borrowing rate from the Federal Home Loan Bank.
The carrying amounts of variable rate borrowings are reasonable estimates of
fair value because they can be repriced frequently.
Junior
Subordinated Debentures and Note
Payable - The carrying value of the junior subordinated debentures and
note payable approximates there fair value since they were issued at a floating
rate.
Accrued Interest
Receivable and Payable - The carrying value of
these instruments is a reasonable estimate of fair value.
Off-Balance Sheet
Financial Instruments - Fair values of
off-balance sheet lending commitments are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing.
The
carrying values and estimated fair values of the Company’s financial instruments
were as follows:
|
March
31,
|
December
31,
|
|||||||||||||||
|
2010
|
2009
|
|||||||||||||||
|
Carrying
|
Estimated
Fair
|
Carrying
|
Estimated
Fair
|
|||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash
and due from banks
|
$ | 2,029,201 | 2,029,201 | $ | 2,942,295 | 2,942,295 | ||||||||||
|
Interest-bearing
deposits with other banks
|
40,658,139 | 40,658,139 | 50,356,191 | 50,356,191 | ||||||||||||
|
Time
deposits in other banks
|
503,107 | 503,107 | 502,089 | 502,089 | ||||||||||||
|
Securities
available-for-sale
|
121,633,494 | 121,633,494 | 121,948,744 | 121,948,744 | ||||||||||||
|
Nonmarketable
equity securities
|
4,812,100 | 4,812,100 | 4,812,100 | 4,812,100 | ||||||||||||
|
Loans,
including loans held for sale
|
392,776,688 | 392,135,000 | 411,728,010 | 410,265,000 | ||||||||||||
|
Accrued
interest receivable
|
2,446,595 | 2,446,595 | 2,661,030 | 2,661,030 | ||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Demand deposit,
interest-bearing transaction, and savings
accounts
|
187,905,704 | 187,905,704 | $ | 195,636,648 | 195,636,648 | |||||||||||
|
Certificates
of deposit
|
338,773,491 | 340,483,000 | 357,126,331 | 352,318,000 | ||||||||||||
|
Securities sold under
agreements to
repurchase
|
603,602 | 603,602 | 598,342 | 598,342 | ||||||||||||
|
Advances
from Federal Home Loan Bank
|
27,000,000 | 27,163,000 | 34,000,000 | 33,992,000 | ||||||||||||
|
Junior
subordinated debentures
|
10,310,000 | 10,310,000 | 10,310,000 | 10,310,000 | ||||||||||||
|
Accrued
interest payable
|
654,082 | 654,082 | 680,880 | 680,880 | ||||||||||||
|
Notional
|
Estimated Fair
|
Notional
|
Estimated Fair
|
|||||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
|||||||||||||
|
Off-Balance
Sheet Financial Instruments:
|
||||||||||||||||
|
Commitments
to extend credit
|
$ | 38,229,146 | - | 39,873,440 | $ | - | ||||||||||
|
Standby
letters of credit
|
2,112,497 | - | 2,583,466 | - | ||||||||||||
-14-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 10 –
Fair Value Measurements – (continued)
In
determining appropriate levels, the Company performs a detailed analysis of the
assets and liabilities that are subject to fair value disclosures. At each
reporting period, all assets and liabilities for which the fair value
measurement is based on significant unobservable inputs are classified as Level
3.
Assets
and liabilities that are carried at fair value are classified in one of the
following three categories based on a hierarchy for ranking the quality and
reliability of the information used to determine fair value:
|
Level
1 —
|
Quoted
prices in active markets for identical assets or
liabilities.
|
|
|
Level
2 —
|
Observable
market based inputs or unobservable inputs that are corroborated by market
data.
|
|
|
Level
3 —
|
Unobservable
inputs that are not corroborated by market
data.
|
The table
below presents the balances of assets measured at fair value on a recurring
basis as of March 31, 2010 and December 31, 2009, aggregated by the level in the
fair value hierarchy within which those measurements fall.
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
March
31, 2010
|
||||||||||||||||
|
Available
for- sale- securities:
|
||||||||||||||||
|
U.S.
Government agencies
|
$ | 3,035,434 | $ | - | $ | 3,035,434 | $ | - | ||||||||
|
Mortgage-backed
securities
|
57,931,609 | - | 57,931,609 | - | ||||||||||||
|
Municipals
|
60,612,596 | - | 60,612,596 | - | ||||||||||||
|
Other
|
53,855 | - | 53,855 | - | ||||||||||||
| 121,633,494 | - | 121,633,494 | $ | - | ||||||||||||
|
Mortgage
loans held for sale (1)
|
583,952 | - | 583,952 | - | ||||||||||||
| $ |
122,217,446
|
$ | - | $ |
122,217,446
|
$ | ||||||||||
|
|
||||||||||||||||
|
December
31, 2009
|
||||||||||||||||
|
Available
for- sale- securities
|
||||||||||||||||
|
U.S.
Government agencies
|
$ | 3,011,366 | $ | - | $ | 3,011,366 | $ | - | ||||||||
|
Mortgage-backed
securities
|
58,132,671 | 58,132,671 | ||||||||||||||
|
Municipals
|
60,737,192 | 60,737,192 | ||||||||||||||
|
Other
|
67,515 | 67,515 | ||||||||||||||
| $ | 121,948,744 | $ | $ | 121,948,744 | $ | |||||||||||
|
Mortgage
loans held for sale (1)
|
5,100,609 | - | 5,100,609 | - | ||||||||||||
| $ | 127,049,353 | $ | - | $ | 127,049,353 | $ | - | |||||||||
(1)
Carried at the lower of cost or market.
There
were no liabilities carried at fair value at March 31, 2010 and December 31,
2009.
-15-
FIRST
RELIANCE BANCSHARES, INC.
Notes
to Condensed Consolidated Financial Statements
Note 10 – Fair Value
Measurements – (continued)
Certain
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, the instruments are not measured at fair value on an ongoing basis but are
subject to fair value adjustments in certain circumstances (for example, when
there is evidence of impairment). The following table presents the assets and
liabilities carried on the balance sheet by caption and by level within the
valuation hierarchy (as described above) as of March 31, 2010 and 2009, for
which a nonrecurring change in fair value has been recorded during the three
months and the year ended March 31, 2010 and December 31, 2009,
respectively.
|
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
|
March
31, 2010
|
||||||||||||||||
|
Impaired
loans receivable
|
$ | 24,565,466 | $ | - | 24,565,466 | $ | - | |||||||||
|
Other
real estate owned
|
7,249,401 | - | 7,249,401 | - | ||||||||||||
|
Total
assets at fair value
|
$ | 31,814,867 | $ | - | $ | 31,814,867 | $ | - | ||||||||
|
December
31, 2009
|
||||||||||||||||
|
Impaired
loans receivable
|
$ | 44,937,157 | $ | - | $ | 44,937,157 | $ | - | ||||||||
|
Other
real estate owned
|
8,954,214 | - | 8,954,214 | - | ||||||||||||
|
Total
assets at fair value
|
$ | 53,891,371 | $ | - | $ | 53,891,371 | $ | - | ||||||||
The
Company has no liabilities carried at fair value or measured at fair value on a
nonrecurring basis at March 31, 2010 and December 31, 2009.
Note 11 – Subsequent
Events
In
preparing these financial statements, subsequent events were evaluated through
the time the financial statements were issued. Financial statements are
considered issued when they are widely distributed to all shareholders and other
financial statement users, or filed with the SEC.
On April
9, 2010, the Company issued 345,145 shares of its common stock at $4.50 for a
total of $1,530,653 and 2,293 shares of its Series C preferred stock at $1,000
per share for a total of $2,293,000. Of the shares issued, 119,179 and 335
shares of common stock and Series C preferred stock, respectively, were issued
to related parties.
The
Series C preferred stock consists of 7% cumulative mandatory convertible
preferred stock, which will be convertible into common shares for up to three
years at the lesser of $6.50 per share or tangible common equity per share as of
the calendar quarter ending on or before the conversion date.
The total
stock offering fees associated with the above stock issuances are approximately
$315,000. These securities were offered and sold in a private offering exempt
from the registration requirements of the Securities Act of 1933, as amended,
and applicable state securities laws.
In
conjunction with applicable accounting standards, there were no other subsequent
material events which should have been either recognized in the financial
statements or disclosed in the notes to the financial
statements.
-16-
FIRST
RELIANCE BANCSHARES, INC.
Item 2. Management's
Discussion and Analysis of Financial Condition and Results of
Operation
The
following discussion of financial condition as of March 31, 2010 compared to
December 31, 2009, and the results of operations for the three months ended
March 31, 2010 compared to the three months ended March 31, 2009 should be read
in conjunction with the condensed financial statements and accompanying
footnotes appearing elsewhere in this report.
Advisory
Note Regarding Forward-Looking Statements
The
statements contained in this report on Form 10-Q 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 are 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
SEC;
|
|
|
·
|
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 SEC; 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.
-17-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Overview
The
following discussion describes our results of operation for the quarter ended
March 31, 2010 as compared to the quarter ended March 31, 2009 and also analyzes
our financial condition as of March 31, 2010 as compared to December 31,
2009.
Like most
community bank holding companies, we derive the majority of our income from
interest received on our loans and investments. Our primary source of funds for
making these loans and investments is our deposits, on which we pay interest.
Consequently, one of the key measures of our success is our amount of net
interest income, or the difference between the income on our interest-earning
assets, such as loans and investments, and the expense on our interest-bearing
liabilities, such as deposits and borrowings. Another key measure is the spread
between the yield we earn on these interest-earning assets and the rate we pay
on our interest-bearing liabilities, which is called our net interest
spread.
There are
risks inherent in all loans, so we maintain an allowance for loan losses to
absorb probable losses on existing loans that may become uncollectible. We
maintain this allowance by charging a provision for loan losses against our
operating earnings for each period. We have included a detailed discussion of
this process, as well as several tables describing our allowance for loan
losses.
In
addition to earning interest on our loans and investments, we earn income
through fees and other charges to our customers. We have also included a
discussion of the various components of this non-interest income, as well as of
our non-interest expense.
The
following discussion and analysis also identifies significant factors that have
affected our financial position and operating results during the periods
included in the accompanying financial statements. We encourage you to read this
discussion and analysis in conjunction with our financial statements and the
other statistical information included in our filings with the SEC.
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, 2009 as filed on
our annual report on Form 10-K. 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.
Effect
of Economic Trends
Economic
conditions, competition and federal monetary and fiscal policies also affect
financial institutions. Lending activities are also influenced by regional and
local economic factors, such as housing supply and demand, competition among
lenders, customer preferences and levels of personal income and savings in our
primary market area.
-18-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Results of
Operations
We
realized net income available to common shareholders for the first quarter of
2010 of $281,660, or $0.08 per basic and diluted share, compared to a net loss
available to common shareholders for the first quarter of 2009 of $58,403, or
$0.02 per basic and diluted share.
Our operating results for the first
quarter of 2010 were favorably impacted by the stabilization of the credit
quality of our loan portfolio, which resulted in a provision for loan losses of
$186,089 for the first quarter of 2010 compared to $1,300,380 for the first
quarter of 2009. We believe this stabilization is attributed to the implementation of a
loss mitigation and recovery division staffed with experienced bankers, who
specifically handle nonperforming and deteriorating assets. Additionally, we
have strengthened our credit review process by being proactive in making
conservative lending decisions.
Net Interest
Income
The
largest component of our net income is its net interest income, which is the
difference between the income earned on assets and interest paid on deposits and
on the borrowings used to support such assets. Net interest income is determined
by the yields earned on our interest-earning assets and the rates paid on
interest-bearing liabilities, the relative amounts of interest-earning assets
and interest-bearing liabilities, and the degree of mismatch and the maturity
and repricing characteristics of its interest-earning assets and
interest-bearing liabilities. Total interest-earning assets yield less total
interest-bearing liabilities rate represents our net interest rate
spread.
Net
interest income increased $154,447, or 3.72%, to $4,307,540 for the quarter
ended March 31, 2010, from $4,153,093 for the comparable period of 2009. We were
able to improve our net interest income mainly by lowering the rates paid for
interest-bearing deposits. The annualized yield on average earning assets
decreased 9 basis points for 2010 compared to 2009, while our annualized average
cost of our interest-bearing liabilities decreased 31 basis points for 2010
compared to 2009. See “Rate/Volume Analysis” below for a more detailed
discussion.
For the
first quarter of 2010, average-earning assets totaled $565,972,425 with an
annualized average yield of 5.55% compared to $571,053,186, and 5.63%,
respectively, for the first quarter of 2009. Average interest-bearing
liabilities totaled $527,745,383 with an annualized average cost of 2.46% for
first quarter of 2010 compared to $536,833,143 and 2.77%, respectively, for the
first quarter of 2009.
Our net
interest margin and net interest spread were 3.25% and 3.08%, respectively, for
the first quarter of 2010 compared to 3.03% and 2.86%, respectively, for the
first quarter of 2009.
Because
loans often provide a higher yield than other types of earning assets, one of
our goals is to maintain our loan portfolio as the largest component of total
earning assets. Loans comprised 71.24% and 85.43% of average earning assets for
at March 31, 2010 and 2009, respectively. Loan interest income for the three
months ended March 31, 2010 and 2009 was $6,213,086 and $6,967,737,
respectively. The annualized average yield on loans was 6.25% and 5.79% for the
first quarter of 2010 and 2009, respectively. Average balances of loans
decreased to $403,233,736 during the first quarter of 2010, a decrease of
$84,645,235 from the average of $487,878,971 during first quarter of 2009. Our
loan income for the first of 2010 was significantly impacted by the depressed
real estate market, the significant increase in charged off loans, and the
average volume of nonperforming loans. The decrease in the average volume of
loans had a significant impact on our net interest income. Because of the
economic downturn in our markets that caused the volume of new loan customers to
decrease, we began shifting our asset mix toward securities after the first
quarter of 2009.
-19-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Available-for-sale
investment securities averaged $121,661,899, or 21.50% of average earning
assets, for the first quarter of 2010 compared to $75,641,778, or 13.25% of
average earning assets for the first quarter of 2009. Interest earned on these
securities amounted to $1,262,892 for the first quarter of 2010, compared to
$844,734 for the same period last year. Our fully tax-equivalent yield was 4.95%
and 5.10% for the three months ended March 31, 2010 and 2009,
respectively.
Our total
average interest-bearing deposits were $488,882,534 and $432,663,627 for
quarters ended March 31, 2010 and 2009, respectively, which represented an
increase of $56,218,907, or 12.99%. The increase in deposits resulted from
successful pricing and marketing promotions, a key strategic initiative for our
Company. Total interest paid on deposits for the quarters ended March 31, 2010
and 2009 was $2,808,512 and $2,815,411, respectively. The annualized average
cost of deposits was 2.33% and 2.64% for the first quarter of 2010 and 2009,
respectively. The decline in average rate paid for deposits is mainly due to our
decision to lower the overall cost of our interest-bearing liabilities by
lowering the rates we paid for deposits.
The
average balance of other interest-bearing liabilities was $38,862,848 and
$104,169,516 for the first quarter of 2010 and 2009, respectively. This
represented a decrease of $65,306,668, or 62.69%. The decrease is partially
attributable to the decrease of $54,263,655 in our average borrowings from the
Federal Home Loan Bank. With the availability of interest-bearing deposits at
lower cost, we became less reliant on using borrowings from the Federal Home
Loan Bank to fund loan demands. The low market interest rates that existed
during 2009 and continuing into 2010 for federal funds purchased and securities
sold under agreements to repurchase resulted in an average decrease of
$5,019,676 in the use of these types of financial instruments.
-20-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
The
following table sets forth, for the period indicated, certain information
related to our average balance sheet and our average yields on assets and
average costs of liabilities. Such yields are derived by dividing
income or expense by the average balance of the corresponding assets or
liabilities. Average balances have been derived from the daily
balances throughout the periods indicated.
|
Average Balances, Income and Expenses, and Rates
|
||||||||||||||||||||||||||||||||||||
|
Three Months Ended March, 31,
|
2010
|
2009
|
2008
|
|||||||||||||||||||||||||||||||||
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
Average
|
Income/
|
Yield/
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)(3)
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Loans
(2)
|
$ | 403,234 | $ | 6,213 | 6.25 | % | $ | 487,879 | $ | 6,968 | 5.79 | % | $ | 486,027 | $ | 9,099 | 7.53 | % | ||||||||||||||||||
|
Securities,
taxable
|
61,135 | 610 | 4.05 | 46,575 | 531 | 5.63 | 27,214 | 347 | 5.12 | |||||||||||||||||||||||||||
|
Securities,
nontaxable
(1)
|
60,526 | 875 | 5.86 | 29,067 | 420 | 5.86 | 30,952 | 439 | 5.70 | |||||||||||||||||||||||||||
|
Federal
funds sold
|
- | - | - | 2,076 | 1 | 0.19 | 147 | 2 | 5.18 | |||||||||||||||||||||||||||
|
Other
earning assets
|
41,077 | 29 | 0.29 | 5,456 | 10 | 0.71 | 4,673 | 51 | 4.37 | |||||||||||||||||||||||||||
|
Total
earning assets
|
565,972 | 7,727 | 5.55 | 571,053 | 7,930 | 5.63 | 549,013 | 9,938 | 7.28 | |||||||||||||||||||||||||||
|
Non
earning assets
|
54,180 | 54,765 | 39,927 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 620,152 | $ | 625,818 | $ | 588,940 | ||||||||||||||||||||||||||||||
|
Liabilities
and Shareholders' Equity
|
||||||||||||||||||||||||||||||||||||
|
Interest-bearing
deposits:
|
||||||||||||||||||||||||||||||||||||
|
Transaction
accounts
|
$ | 41,354 | $ | 44 | 0.43 | % | $ | 34,086 | $ | 50 | 0.59 | % | $ | 31,527 | $ | 59 | 0.75 | % | ||||||||||||||||||
|
Savings
and money market accounts
|
101,138 | 337 | 1.35 | 99,194 | 370 | 1.51 | 89,629 | 633 | 2.84 | |||||||||||||||||||||||||||
|
Time
deposits
|
346,391 | 2,428 | 2.84 | 299,383 | 2,395 | 3.25 | 280,664 | 3,247 | 4.65 | |||||||||||||||||||||||||||
|
Total
interest-bearing deposits
|
488,883 | 2,809 | 2.33 | 432,663 | 2,815 | 2.64 | 401,820 | 3,939 | 3.94 | |||||||||||||||||||||||||||
|
Other
interest-bearing liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Securities
sold under agreement to repurchase
|
770 | - | 0.25 | 5,709 | 1 | 0.08 | 8,000 | 48 | 2.40 | |||||||||||||||||||||||||||
|
Federal
funds purchased
|
2 | - | 0.77 | 83 | - | 0.77 | 8,953 | 58 | 2.58 | |||||||||||||||||||||||||||
|
Federal
Home Loan Bank borrowing
|
27,780 | 236 | 3.44 | 82,045 | 667 | 3.29 | 72,792 | 621 | 3.42 | |||||||||||||||||||||||||||
|
Junior
subordinated debentures
|
10,310 | 153 | 6.01 | 10,310 | 152 | 5.99 | 10,310 | 155 | 6.01 | |||||||||||||||||||||||||||
|
Note
payable
|
- | - | - | 6,023 | 35 | 2.35 | 3,000 | 38 | 5.15 | |||||||||||||||||||||||||||
|
Total
other interest-bearing liabilities
|
38,862 | 389 | 4.06 | 104,170 | 855 | 3.33 | 103,055 | 920 | 3.59 | |||||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
527,745 | 3,198 | 2.46 | 536,833 | 3,670 | 2.77 | 504,875 | 4,859 | 3.87 | |||||||||||||||||||||||||||
|
Noninterest-bearing
deposits
|
43,367 | 47,575 | 43,667 | |||||||||||||||||||||||||||||||||
|
Other
liabilities
|
3,412 | 1,507 | 2,754 | |||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
45,628 | 39,903 | 37,644 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and equity
|
$ | 620,152 | $ | 625,818 | $ | 588,940 | ||||||||||||||||||||||||||||||
|
Net
interest income/interest spread
|
$ | 4,529 | 3.09 | % | $ | 4,260 | 2.86 | % | $ | 5,079 | 3.41 | % | ||||||||||||||||||||||||
|
Net
yield on earning assets
|
3.25 | % | 3.03 | % | 3.71 | % | ||||||||||||||||||||||||||||||
|
|
(1)
|
Fully
tax-equivalent basis at 34% tax rate for nontaxable
securities
|
|
|
(2)
|
Includes
mortgage loans held for sale and nonaccruing
loans
|
|
|
(3)
|
Prior
year percentages based on actual dollar
amounts
|
-21-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Net
interest income can be analyzed in terms of the impact of changing interest
rates and changing volume. The following table sets forth the effect which
the varying levels of interest-earning assets and interest-bearing liabilities
and the applicable rates have had on changes in net interest income for the
periods presented.
|
2010
Compared to 2009
|
2009
Compared to 2008
|
|||||||||||||||||||||||
|
Due
to increase (decrease) in
|
Due
to increase (decrease) in
|
|||||||||||||||||||||||
|
(Dollars
in thousands)
|
Volume
|
Rate
|
Total
|
Volume
|
Rate
|
Total
|
||||||||||||||||||
|
Interest
income:
|
||||||||||||||||||||||||
|
Loans
|
$ | (1,277 | ) | $ | 522 | $ | (755 | ) | $ | 33 | $ | (2,165 | ) | $ | (2,132 | ) | ||||||||
|
Securities,
taxable
|
152 | (73 | ) | 79 | 221 | (36 | ) | 185 | ||||||||||||||||
|
Securities,
tax exempt
|
455 | - | 455 | (30 | ) | 11 | (19 | ) | ||||||||||||||||
|
Federal
funds sold
|
- | (1 | ) | (1 | ) | 3 | (3 | ) | - | |||||||||||||||
|
Other
earning assets
|
28 | (9 | ) | 19 | 7 | (49 | ) | (42 | ) | |||||||||||||||
|
Total
interest income
|
(642 | ) | 439 | (203 | ) | 234 | (2,242 | ) | (2,008 | ) | ||||||||||||||
|
Interest
expense:
|
||||||||||||||||||||||||
|
Interest-bearing
deposits
|
||||||||||||||||||||||||
|
Interest-bearing
transaction accounts
|
9 | (15 | ) | (6 | ) | 4 | (14 | ) | (10 | ) | ||||||||||||||
|
Savings
and money market accounts
|
7 | (40 | ) | (33 | ) | 60 | (324 | ) | (264 | ) | ||||||||||||||
|
Time
deposits
|
353 | (321 | ) | 32 | 197 | (1,048 | ) | (851 | ) | |||||||||||||||
|
Total
interest-bearing deposits
|
369 | (376 | ) | (7 | ) | 261 | (1,386 | ) | (1,125 | ) | ||||||||||||||
|
Other
interest-bearing liabilities
|
||||||||||||||||||||||||
|
Securities
sold under agreement to repurchase
|
(2 | ) | 1 | (1 | ) | (11 | ) | (36 | ) | (47 | ) | |||||||||||||
|
Federal
funds purchased
|
(1 | ) | - | (1 | ) | (34 | ) | (24 | ) | (58 | ) | |||||||||||||
|
Federal
Home Loan Bank borrowings
|
(460 | ) | 29 | (431 | ) | 71 | (25 | ) | 46 | |||||||||||||||
|
Junior
subordinated debentures
|
1 | - | 1 | - | (2 | ) | (2 | ) | ||||||||||||||||
|
Note
payable
|
(17 | ) | (17 | ) | (34 | ) | 25 | (28 | ) | (3 | ) | |||||||||||||
|
Total
other interest-bearing liabilities
|
(479 | ) | 13 | (466 | ) | 51 | (115 | ) | (64 | ) | ||||||||||||||
|
Total
interest expense
|
(110 | ) | (363 | ) | (473 | ) | 312 | (1,501 | ) | (1,189 | ) | |||||||||||||
|
Net
interest income
|
$ | (532 | ) | $ | 802 | $ | 270 | $ | (78 | ) | $ | (741 | ) | $ | (819 | ) | ||||||||
Provision
and Allowance for Loan Losses
We have
developed policies and procedures for evaluating the overall quality of our
credit portfolio and the timely identification of potential problem
credits. On a quarterly basis, our Board of Directors reviews and
approves the appropriate level for the allowance for loan losses based upon
management’s recommendations, the results of the internal monitoring and
reporting system, and an analysis of economic conditions in our
market. The objective of management has been to fund the allowance
for loan losses at a level greater than or equal to our internal risk
measurement system for loan risk.
Additions
to the allowance for loan losses, which are expensed as the provision for loan
losses on our statement of income, are made periodically to maintain the
allowance at an appropriate level based on management’s analysis of the
potential risk in the loan portfolio. Loan losses and recoveries are
charged or credited directly to the allowance. The amount of the
provision is a function of the level of loans outstanding, the level of
nonperforming loans, historical loan loss experience, the amount of loan losses
actually charged against the reserve during a given period, and current and
anticipated economic conditions.
The
allowance represents an amount which management believes will be adequate to
absorb inherent losses on existing loans that may become
uncollectible. Our judgment as to the adequacy of the allowance for
loan losses is based on a number of assumptions about future events, which we
believe to be reasonable, but which may or may not prove to be accurate. Our
determination of the allowance for loan losses is based on evaluations of the
collectability of loans, including consideration of factors such as the balance
of impaired loans, the quality, mix, and size of our overall loan portfolio,
economic conditions that may affect the borrower’s ability to repay, the amount
and quality of collateral securing the loans, our historical loan loss
experience, and a review of specific problem loans. We also consider subjective
issues such as changes in the lending policies and
procedures, changes in the local and national economy, changes in volume or type
of credits, changes in the volume or severity of problem loans, quality of loan
review and board of director oversight, concentrations of credit, and peer group
comparisons.
-22-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
More
specifically, in determining our allowance for loan loss, we review loans for
specific and impaired reserves based on current appraisals less estimated
closing costs. General and unallocated reserves are determined using historical
loss trends applied to risk rated loans grouped by loan type. The general and
unallocated reserves are calculated by applying the appropriate historical loss
ratio to the loan categories. Impaired loans are excluded from this analysis.
The sum of all such amounts determines our general and unallocated
reserves.
We also
track our portfolio and analyze loans grouped by loan type categories. The first
step in this process is to risk grade each and every loan in the portfolio based
on one common set of parameters. These parameters include items like
debt-to-worth ratio, liquidity of the borrower, net worth, experience in a
particular field and other factors such as underwriting exceptions. Weight is
also given to the relative strength of any guarantors on the loan. We
anticipate, however, that this analysis will eventually provide us with
historical behavioral indications by credit grading as we develop sufficient
history to analyze the general allowance related to non-impaired
loans.
After
risk grading each loan, we then use 15 qualitative factors to analyze the trends
in the portfolio. These 15 factors include both internal and external factors.
The internal factors include the concentration of credit across the portfolio,
current delinquency ratios and trends, the experience level of management and
staff, our adherence to lending policies and procedures, current loss and
recovery trends, the nature and volume of the portfolio’s categories, current
non-accrual and problem loan trends, the quality of our loan review system, and
other factors which include collateral, loan to value ratio, and policy
exceptions. The external factors include the current economic and business
environment, which includes indicators such as national GDP, pricing indicators,
employment statistics, housing statistics, market indicators, financial
regulatory economic analysis, and economic forecasts from reputable sources. A
quantitative value is assigned to each of the 15 internal and external factors,
which, when added together, creates a net qualitative weight. The net
qualitative weight is then added to the minimum loss ratio. Negative trends in
the loan portfolio increase the quantitative values assigned to each of the
qualitative factors and, therefore, increase the loss ratio. As a result, an
increased loss ratio will result in a higher allowance for loan loss. For
example, as general economic and business conditions decline, this qualitative
factor’s quantitative value will increase, which will increase the net
qualitative weight and the loss ratio (assuming all other qualitative factors
remain constant). Similarly, positive trends in the loan portfolio, such as an
improvement in general economic and business conditions, will decrease the
quantitative value assigned to this qualitative factor, thereby decreasing the
net qualitative weight (assuming all other qualitative factors remain constant).
These factors are reviewed and updated by our risk management committee on a
quarterly basis to arrive at a consensus for our qualitative
adjustments.
We then
create a loss range by applying average historical industry loss rates for the
last 10 years to determine the level of the allowance for loan and lease losses
on the non-impaired loans in the portfolio. We utilize a 10 year time frame, as
we believe it includes numerous complete economic cycles. As such, we consider
the time frame long enough to include both favorable and problematic industry
trends relevant in determining historical loss rates. The resulting unadjusted
historical loss factor is used as a beginning point upon which we add our
quantitative adjustments based on the qualitative factors discussed above. Once
the qualitative adjustments are made, we refer to the final amount as the
historical loss factor. The historical loss factor is then multiplied by the
loans outstanding for the period ended, except for any loans classified as
non-performing, which are addressed specifically as discussed
below.
Separately,
we review all impaired loans individually to determine a specific allocation for
each. In our assessment of impaired loans, we consider the primary source of
repayment when determining whether loans are collateral dependent or
not.
Periodically,
we adjust the amount of the allowance based on changing circumstances. We
recognize loan losses to the allowance and add subsequent recoveries back to the
allowance for loan losses. In addition, on a quarterly basis we informally
compare our allowance for loan losses to various peer institutions; however, we
recognize that allowances will vary as financial institutions are unique in the
make-up of their loan portfolios and customers, which necessarily creates
different risk profiles for the institutions. We would only consider further
adjustments to our allowance for loan losses based on this peer review if our
allowance was significantly different from our peer group. To date, we have not
made any such adjustment. There can be no assurance that charge-offs of loans in
future periods will not exceed the allowance for loan losses as estimated at any
point in time or that provisions for loan losses will not be significant to a
particular accounting period, especially considering the overall weakness in the
commercial real estate market in our market areas.
-23-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Various
regulatory agencies review our allowance for loan losses through their periodic
examinations, and they may require additions to the allowance for loan losses
based on their judgment about information available to them at the time of their
examinations. Our losses will undoubtedly vary from our estimates, and it is
possible that charge-offs in future periods will exceed the allowance for loan
losses as estimated at any point in time.
As of
March 31, 2010 and 2009, the allowance for loan losses was $6,725,174 and
$7,331,051, respectively, a decrease of $605,877, or 8.26%, from the 2009
allowance. As a percentage of total loans, the allowance for loan
losses 1.71% and 1.58% at March 31, 2010 and 2009, respectively. The
decrease in the allowance for loan losses was driven by the significant increase
in net loans charged off during the first quarter of 2010 compared to the first
quarter of 2009. During the first quarter of 2010, net loans charged
off totaled $3,261,661 compared to $2,193,228 for the quarter ended March 31,
2009, an increase of $1,068,433. Additionally, our loan portfolio at
March 31, 2010 compared to March 31, 2009, was $71,932,263 or 15.50%
lower. See “Loans” below for additional information regarding our
asset quality and loan portfolio.
For the
first quarter of 2010 and 2009, the provision for loan losses was $186,089 and
$1,300,380, respectively. This represents a decrease of $1,114,291,
which is primarily attributable to the stabilization of the credit quality of
our loan portfolio.
We
believe the allowance for loan losses at March 31, 2010, is adequate to meet
potential loan losses inherent in the loan portfolio.
Noninterest
Income
The
following is a summary of noninterest income for the three months ended March
31, 2020 and 2009.
|
Three
Months Ended
|
||||||||
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Service
fees on deposit accounts
|
$ | 468,220 | $ | 460,608 | ||||
|
Gain
on sale of mortgage loans
|
210,043 | 660,499 | ||||||
|
Gain
(loss) on sale of other real estate owned
|
242,122 | (15,892 | ) | |||||
|
Gain
on sale of fixed assets
|
- | 86,810 | ||||||
|
Other
income
|
364,022 | 501,092 | ||||||
|
Total
noninterest income
|
$ | 1,284,407 | $ | 1,693,117 | ||||
Noninterest
income decreased $408,710, or 24.14%, to $1,284,407 for the first quarter of
2010 from $1,693,117 for the first quarter of 2009. The decrease is
primarily attributable to the decrease in the gain on the sale of mortgage
loans, which decrease due to the weak demand for mortgage loan and the bottoming
out of residential mortgages being refinanced because of low interest
rates.
Noninterest
Expense
Total
noninterest expense increased by $217,077, or 4.59%, to $4,941,956 for the first
quarter of 2010 from $4,724,879 for the first quarter of 2009. The increase is
largely attributable to the increase in the expenses relating to our foreclosed
properties, which were $511,094 higher for the first quarter of 2010 compared to
the first quarter of 2009. This increase was offset by the reduction
of $331,084 in our salaries and employee benefits, resulting from a reduction in
our staff.
For the
first quarter of 2010 and 2009 salary and employee benefits expense was
$2,396,066 and $2,727,150, respectively. Other operating expenses for
the quarter ended March 31, 2010 and 2009 was $1,836,131 and $1,356,007,
respectively
Our
income tax provision for the three months ended March 31, 2010, compared to the
same period in 2009, decreased $126,682, which is mainly attributable to
increase in pretax income.
-24-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Balance Sheet
Review
General
At March
31, 2010, we had total assets of $616.1 million, consisting principally of
$392.2 million in loans, $126.4 million in investments, and $42.7 million in
cash and due from banks. Our liabilities at March 31, 2010 totaled $570.0
million, which consisted principally of $526.7 million in deposits, $27.05
million in FHLB advances, and $10.9 million in other borrowings. At
March 31, 2010, our shareholders’ equity was $46.1 million.
At
December 31, 2009, we had total assets of $645.5 million, consisting principally
of $406.6 million in loans, $126.7 million in investments, and $53.3 million in
cash and due from banks. Our liabilities at December 31, 2009 totaled
$560.3 million, consisting principally of $552.7 million in deposits, $34.0
million in FHLB advances, and $10.9 million in other borrowings. At
December 31, 2009, our shareholders' equity was $45.2 million.
Investments
Securities
The
investment securities portfolio, which is also a component of our total earning
assets, consists of securities available-for-sale and nonmarketable equity
securities.
At March 31, 2010 and
December 31, 2009, we had investment securities totaling $126,445,594 and
$126,760,844, respectively, which represented 20.52% and 19.63% of our total
assets, respectively.
Nonmarketable
equity securities consist of Federal Home Loan Bank stock, which is recorded at
its original cost of $4,812,100 and $5,284,600 at March 31, 2010 and 2009,
respectively.
The
amortized costs and the fair value of our securities available-for-sale at March
31, 2010 and December 31, 2009 are shown in the following table.
|
March
31, 2010
|
December
31,2009
|
|||||||||||||||
|
Amortized
|
Amortized
|
|||||||||||||||
|
Cost
|
Estimated
|
Cost
|
Estimated
|
|||||||||||||
|
(Book Value)
|
Fair
Value
|
(Book Value)
|
Fair
Value
|
|||||||||||||
|
Government
sponsored enterprises
|
3,009,668 | 3,035,434 | 3,021,782 | 3,011,366 | ||||||||||||
|
Mortgage-backed
securities
|
58,402,107 | 57,931,609 | 59,324,978 | 58,132,671 | ||||||||||||
|
Municipal
securities
|
61,052,646 | 60,612,596 | 61,300,256 | 60,737,192 | ||||||||||||
|
Other
|
218,750 | 53,855 | 218,750 | 67,515 | ||||||||||||
| $ | 122,683,171 | $ | 121,633,494 | $ | 123,865,766 | $ | 121,948,744 | |||||||||
At March
31, 2010, securities classified as available-for-sale are recorded at fair
market value. Approximately 31.17% of the unrealized losses, or 10
individual securities, consisted of securities in a continuous loss position for
twelve months or more. The Company does not intend to sell these
securities 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, based on industry analyst reports and credit ratings, that the
deterioration in value is attributable to changes in market interest rates and
is not in the credit quality of the issuer and therefore, these losses are not
considered other-than-temporary.
During
the first quarter of 2010 and 2009, gross proceeds from the sale of
available-for-sale securities were $3,117,545 and $0,
respectively. Gains on available-for-sale securities totaled $1,602
and $0 for the first quarter 2010 and 2009, respectively.
-25-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Securities
Available-for-Sale Maturity Distribution and Yields
Contractual
maturities and yields on our available for sale securities at March 31, 2010 are
shown in the following table. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
After
One But
|
After
Five But
|
|||||||||||||||||||||||||||||||
|
March
31, 2010
|
Within
Five Years
|
Within
Ten Years
|
After
Ten Years
|
Total
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
||||||||||||||||||||||||
|
U.S.
government agencies and
corporations
|
$ | 9 | 6.32 | % | $ | 3,026 | 4.18 | % | $ | - | - | % | $ | 3,035 | 4.19 | % | ||||||||||||||||
|
Municipals(2)
|
3,390 | 6.29 | 26,392 | 6.52 | 30,831 | 6.88 | 60,613 | 6.69 | ||||||||||||||||||||||||
|
Total
securities(1)
|
$ | 3,399 | 6.29 | % | $ | 29,418 | 6.29 | % | $ | 30,831 | 6.19 | % | $ | 63,648 | 6.58 | % | ||||||||||||||||
|
(1)
|
Excludes
mortgage-backed securities totaling $57,931,609
with a yield of 4.256% and other equity securities totaling
$53,835.
|
|
(2)
|
Yields
are based on a tax equivalent basis of
34%.
|
Loans
Loans,
including loans held for sale, are the largest category of earning assets and
typically provide higher yields than the other types of earning
assets. Associated with the higher loan yields are the inherent
credit and liquidity risks which management attempts to control and
counterbalance. Loans averaged $403,233,736 during the first quarter
of 2010 compared to $487,878,971 during the first quarter of 2009, a decrease of
$84,645,235, or 17.35%. At March 31, 2010, total loans were
$392,776,688 compared to $411,728,010 at December 31, 2009, a decrease of
$18,951,322, or 4.60%. Excluding loans held for sale, loans were
$392,192,736 at March 31,2010, compared to $406,627,401 at December 31, 2009,
which equated to a decrease of $14,434,665, or 3.55%. This decrease is the
result of the economic downturn in our markets that caused the volume of new
loan customers to decrease.
The
following table sets forth the composition of the loan portfolio, excluding
loans held for sale, by category at the dates indicated and highlights the
Company’s general emphasis on all types of lending.
The
following table summarizes the composition of our loan portfolio March 31, 2010
and December 31, 2009.
|
March 31,
|
% of
|
December 31,
|
% of
|
|||||||||||||
|
2010
|
Total
|
2009
|
Total
|
|||||||||||||
|
Mortgage
loans on real estate
|
||||||||||||||||
|
Residential
1-4 family
|
$ | 56,206,272 | 14.33 | % | 57,539,371 | 14.15 | % | |||||||||
|
Multifamily
|
10,644,714 | 2.71 | 9,962,625 | 2.45 | ||||||||||||
|
Commercial
|
164,908,332 | 42.05 | 169,933,348 | 41.79 | ||||||||||||
|
Construction
|
72,663,156 | 18.53 | 77,566,504 | 19.08 | ||||||||||||
|
Second
mortgages
|
4,601,939 | 1.17 | 4,746,686 | 1.17 | ||||||||||||
|
Equity
lines of credit
|
30,499,086 | 7.78 | 31,596,471 | 7.77 | ||||||||||||
|
Total
mortgage loans
|
339,523,499 | 86.57 | 351,345,005 | 86.40 | ||||||||||||
|
Commercial
and industrial
|
44,297,408 | 11.29 | 45,887,237 | 11.28 | ||||||||||||
|
Consumer
|
7,398,528 | 1.89 | 7,942,668 | 1.95 | ||||||||||||
|
Other,
net
|
973,301 | 0.25 | 1,452,491 | 0.36 | ||||||||||||
|
Total
loans
|
$ |
392,192,736
|
100.00 | % | $ | 406,627,401 | 100.00 | % | ||||||||
In the
context of this discussion, a “real estate mortgage loan” is defined as any
loan, other than a loan for construction purposes, secured by real estate,
regardless of the purpose of the loan. It is common practice for
financial institutions in our market area to obtain a mortgage on real estate
whenever possible, in addition to any other available
collateral. This collateral is taken to reinforce the likelihood of
the ultimate repayment of the loan and tends to increase management’s
willingness to make real estate loans and, to that extent, also tends to
increase the magnitude of the real estate loan portfolio component.
-26-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
The
largest component of our loan portfolio is real estate mortgage
loans. At March 31, 2010, real estate mortgage loans totaled
$266,860,343 and represented 68.04% of the total loan portfolio, compared to
$273,778,501, or 67.33%, at December 31, 2009.
Residential
mortgage loans totaled $101,952,010 at March 31, 2010, and represented 25.99% of
the total loan portfolio, compared to $103,845,154 and 25.54%, respectively, at
December 31, 2009. Residential real estate loans consist of first and
second mortgages on single or multi-family residential
dwellings. Nonresidential mortgage loans, which include commercial
loans and other loans secured by multi-family properties and farmland, totaled
$164,908,332 at March 31, 2010, compared to $169,933,348 at December 31,
2009. This represents a decrease of $5,025,016, or 2.96%, from the
December 31, 2009 balance. Real estate construction loans were
$72,663,156 and $77,566,504 at March 31, 2010 and December 31, 2009,
respectively, and represented 18.53% and 19.08% of the total loan portfolio,
respectively. Currently, the demand for all types of real estate
mortgage loans in our market area is very weak.
Commercial
and industrial loans decreased $1,589,829, or 3.46%, to $44,297,408 at March
31, 2010, from $45,887,237 at
December 31, 2009. The decrease is mainly due to the economic
downturn in our markets that caused the demand for these types of loans to
decrease and to the reclassification of certain loans to real estate
construction loans.
Our loan
portfolio is also comprised of consumer loans. Consumer loans
decreased $544,140, or 6.85%, to $7,398,528 at March
31, 2010, from $7,942,668 at December 31, 2009.
Our loan
portfolio reflects the diversity of our markets. The economies of our
markets contain elements of medium and light manufacturing, higher education,
regional health care, and distribution facilities. We expect the area to remain
stable; however due to the current depressed economies of our markets, we do not
expect any material growth in the near future. The diversity of the
economy creates opportunities for all types of lending. We do not
engage in foreign lending.
Maturities
and Sensitivity of Loans to Changes in Interest Rates
The
information in the following tables is based on the contractual maturities of
individual loans, including loans, which may be subject to renewal at their
contractual maturity. Renewal of such loans is subject to review and
credit approval, as well as modification of terms upon maturity. Actual
repayments of loans may differ from the maturities reflected below because
borrowers have the right to prepay obligations with or without prepayment
penalties.
The
following table summarizes the loan maturity distribution by type and related
interest rate characteristics at March 31, 2010.
Loan
Maturity Schedule and Sensitivity to Changes in Interest Rates
|
March
31, 2010
|
Over
|
|||||||||||||||
|
(Dollars
in thousands)
|
One
Year
|
|||||||||||||||
|
One
Year or
|
Through
|
Over
Five
|
||||||||||||||
|
Less
|
Five Years
|
Years
|
Total
|
|||||||||||||
|
Commercial
and industrial
|
$ | 59 | $ | 40,680 | $ | 3,558 | $ | 44,297 | ||||||||
|
Real
estate
|
17,133 | 257,454 | 64,937 | 339,524 | ||||||||||||
|
Consumer
and other
|
516 | 6,476 | 1,380 | 8,372 | ||||||||||||
| $ | 17,708 | $ | 304,610 | $ | 69,875 | $ | 392,193 | |||||||||
|
Loans
maturing after one year with:
|
||||||||||||||||
|
Fixed
interest rates
|
$ | 187,979 | ||||||||||||||
|
Floating
interest rates
|
186,506 | |||||||||||||||
| $ | 374,485 | |||||||||||||||
-27-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
The
following table summarizes the activity related to our allowance for loan losses
for the three months ended March 31, 2010 and 2009:
|
March 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balance,
January 1,
|
$ | 9,800,746 | $ | 8,223,899 | ||||
|
Provision
for loan losses for the period
|
186,089 | 1,300,380 | ||||||
|
Net
loans (charged-off) recovered for the period
|
(3,261,661 | ) | (2,193,228 | ) | ||||
|
Balance,
end of period
|
$ | 6,725,174 | $ | 7,331,051 | ||||
|
Total
loans outstanding, end of period
|
$ | 392,192,736 | $ | 464,124,999 | ||||
|
Allowance
for loan losses to loans outstanding
|
1.71 | % | 1.58 | % | ||||
Risk
Elements in the Loan Portfolio
Nonperforming
Assets - At
March 31, 2010 and 2009, loans totaling $24,787,204 and $20,952,510,
respectively, were in nonaccrual status, total loans of $635 and $1,983,307,
respectively, were 90 days or more overdue and still accruing
interest.
The
following table shows the nonperforming assets, percentages of net charge-offs,
and the related percentage of allowance for loan losses for the three months
ended March 31, 2010 and 2009.
|
(Dollars
in thousands)
|
2010
|
2009
|
||||||
|
Loans
over 90 days past due and still accruing
|
$ | 1 | $ | 1,983 | ||||
|
Loans
on nonaccrual:
|
||||||||
|
Real
Estate Construction
|
15,103 | 11,767 | ||||||
|
Real
Estate Mortgage
|
8,668 | 8,728 | ||||||
|
Commercial
|
1,004 | 399 | ||||||
|
Consumer
|
12 | 59 | ||||||
|
Total
nonaccrual loans
|
24,787 | 20,953 | ||||||
|
Total
of nonperforming loans
|
24,788 | 22,936 | ||||||
|
Other
nonperforming assets
|
7,249 | 1,983 | ||||||
|
Total
nonperforming assets
|
$ | 32,037 | $ | 24,919 | ||||
|
Percentage
of nonperforming assets to total assets
|
5.20 | % | 3.86 | % | ||||
|
Percentage
of nonperforming loans to total loans
|
6.32 | % | 4.94 | % | ||||
|
Allowance
for loan losses as a percentage of non-performing loans
|
27.13 | % | 31.96 | % | ||||
Generally,
loans are placed on nonaccrual status if principal or interest payments become
90 days past due and/or we deem the collectability of the principal and/or
interest to be doubtful. Once a loan is placed in nonaccrual status,
all previously accrued and uncollected interest is reversed against interest
income. Interest income on nonaccrual loans is recognized on a cash
basis when the ultimate collectability is no longer considered
doubtful. Loans are returned to accrual status when the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured. All nonaccruing loans at March 31, 2010 and 2009
were included in our classification of impaired loans at those
dates.
-28-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Impaired
loans – We consider all loans in nonaccrual status to be
impaired. At March 31, 2010, we had impaired loans totaling
$24,787,204, as compared to $47,752,613 at March 31, 2009. The
significant reduction in impaired loans is due mainly to the removal of
approximately $20,000,000 of loans from the impaired loan
classification. As a result of external loan reviews, we have
modified the manner in which we apply the definition of an impaired loan in the
evaluation of the adequacy of our allowance for loan
losses. Additionally, during the first quarter of 2010 we charged off
approximately $3,200,000 in impaired loans. Included in the impaired
loans at March 31, 2010, were 12 borrowers that accounted for approximately
70.69% of the total amount of the impaired loans at that date. These
loans were primarily commercial real estate loans isolated to the coastal
regions of South Carolina. Impaired loans, as a percentage of total
loans, were 6.32% at March 31, 2010.
During
the first quarter of 2010, the average investment in impaired loans was
$34,862,181 as compared to $36,968,107 for the first quarter of
2009. Impaired loans with a specific allocation of the allowance for
loan losses totaled $2,817,993 and $26,427,132 at March 31, 2010 and 2009,
respectively. The amount of the specific allocation at March 31, 2010
and 2009 was $221,738 and $3,860,741, respectively.
The
recent downturn in the real estate market has resulted in an increase in loan
delinquencies, defaults and foreclosures; however, we believe these trends are
stabilizating. In some cases, this downturn has resulted in a
significant impairment to the value of our collateral and ability to sell the
collateral upon foreclosure at its appraised value. However, there is a risk
that these trends could continue at a higher pace. If real estate
values continue to decline, it is also more likely that we would be required to
increase our allowance for loan losses.
On a
monthly basis, we analyze each loan that is classified as impaired to determine
the potential for possible loan losses. This analysis is focused upon
determining the then current estimated value of the collateral, local market
condition, and estimated costs to foreclose, repair and resell the
property. The net realizable value of the property is then computed
and compared to the loan balance to determine the appropriate amount of specific
reserve for each loan.
Deposits
and Other Interest-Bearing Liabilities
Average
interest-bearing liabilities decreased $9,087,760 or 1.69%, to $527,745,383 for
the first quarter of 2010, from $536,833,143 on December 31, 2009.
Deposits -
For the quarter ended March 31, 2010 and 2009, average total deposits were
$532,249,647 and 480,238,833, respectively, which is an increase of $52,010,814,
or 10.83%. At March 31, 2010 and December 31, 2009, total deposits
were $526,679,195 and $552,762,979, respectively, a decrease of $26,083,784, or
4.72%.
Average
interest-bearing deposits increased $56,218,907, or 12.99%, to $488,882,534 for
the quarter ended March 31, 2010, from $432,663,627 for the quarter ended March
31, 2009.
The
average balance of non-interest bearing deposits decreased $4,208,093, or 8.85%,
to $43,637,113 for the three months ended March 31, 2010, from $47,575,206 for
the three months ended March 31, 2009.
-29-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
The
following table shows the average balance amounts and the average rates paid on
deposits held by us for the three months ended March 31, 2010 and
2009.
|
2010
|
2009
|
|||||||||||||||
|
Average
|
Average
|
Average
|
Average
|
|||||||||||||
|
Amount
|
Rate
|
Amount
|
Rate
|
|||||||||||||
|
Noninterest
bearing demand deposits
|
$ | 43,367,113 | 0.0 | % | $ | 47,575,206 | 0.00 | % | ||||||||
|
Interest
bearing demand deposits
|
41,354,002 | 0.43 | 34,087,269 | 0.59 | ||||||||||||
|
Savings
accounts
|
101,137,758 | 1.35 | 99,193,160 | 1.51 | ||||||||||||
|
Time
deposits
|
346,390,774 | 2.84 | 299,383,198 | 3.25 | ||||||||||||
| $ | 532,249,647 | 2.14 | % | $ | 480,238,833 | 2.37 | % | |||||||||
Core
deposits, which exclude time deposits of $100,000 or more, provide a relatively
stable funding source for our loan portfolio and other earning
assets. Our core deposits were $335,701,413 and $357,416,788 at March
31, 2010 and December 31, 2009, respectively. This equates to a
decrease in core deposits of $21,715,375, or 6.08%.
Included
in time deposits $100,000 and over, at March 31, 2010 and 2009 are brokered time
deposits of $117,468,000 and $144,258,000, respectively. We
anticipate being able to either renew or replace brokered deposits when they
mature, although we may not be able to replace them with deposits with the same
terms or rates.
Deposits,
and particularly core deposits, have been our primary source of funding and have
enabled us to meet successfully both our short-term and long-term liquidity
needs. We anticipate that such deposits will continue to be our
primary source of funding in the future. However, advances from the
Federal Home Loan Bank are being used as an alternative source of
funds. Our loan-to-deposit ratio was 74.46% on March 31, 2010, and
73.56% at December 31, 2009.
All of
our time deposits are certificates of deposits. The maturity distribution
of our time deposits of $100,000 or more at March 31, 2010 was as
follows:
|
March
31,
|
||||
|
2010
|
||||
|
Three
months or less
|
$ | 16,895,535 | ||
|
Over
three through twelve months
|
62,815,841 | |||
|
Over
one year through three years
|
59,986,578 | |||
|
Over
three years
|
51,279,828 | |||
|
Total
|
$ | 190,977,782 | ||
Borrowings
The
following table outlines our various sources of borrowed funds during the three
months ended March 31, 2010 and the year ended December 31, 2009, the amounts
outstanding at the end of each period, at the maximum point for each component
during the periods and on average for each period, and the average interest rate
that we paid for each borrowing source. The maximum month-end balance
represents the high indebtedness for each component of borrowed funds at any
time during each of the periods shown.
-30-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
|
Maximum
|
||||||||||||||||||||
|
Outstanding
|
Weighted
|
|||||||||||||||||||
|
(Dollars in thousands)
|
at any
|
Average
|
Average
|
Ending
|
Period
|
|||||||||||||||
|
Month End
|
Balance
|
Interest Rate
|
Balance
|
End Rate
|
||||||||||||||||
|
At
or for the three months ended March 31, 2010
|
||||||||||||||||||||
|
Securities
sold under agreement to repurchase
|
$ | 818 | $ | 770 | 0.25 | % | $ | 603 | 0.25 | % | ||||||||||
|
Advances
from Federal
|
||||||||||||||||||||
|
Home
Loan Bank
|
27,010 | 27,780 | 3.44 | 27,000 | 3.17 | |||||||||||||||
|
Junior
subordinated debentures
|
10,310 | 10,310 | 6.01 | 10,310 | 5.93 | |||||||||||||||
|
At
or for the year ended December 31, 2009
|
||||||||||||||||||||
|
Securities
sold under agreement to repurchase
|
$ | 7,664 | $ | 2,262 | 0.05 | % | $ | 598 | 0.25 | % | ||||||||||
|
Advances
from Federal Home Loan Bank
|
93,500 | 59,800 | 3.57 | 34,000 | 3.17 | |||||||||||||||
|
Federal
funds purchased
|
11,482 | 21 | 0.82 | - | - | |||||||||||||||
|
Note
payable
|
6,950 | 1,485 | 2.01 | - | - | |||||||||||||||
|
Junior
subordinated debentures
|
10,310 | 10,310 | 5.95 | 10,310 | 5.93 | |||||||||||||||
Capital
Resources
Total
shareholders' equity at March 31, 2010 and December 31, 2009 was $46,145,376 and
$45,223,827, respectively. The $921,549 increase during the first
three months of 2010 resulted primarily from the increase in accumulated other
comprehensive income of $572,448 and the net income of $530,134 for the first
quarter of 2010.
The
following table shows the return on average assets (net income divided by
average total assets), return on average equity (net income divided by average
equity), and equity to assets ratio (average equity divided by average total
assets) for the three months ended March 31, 2010 and 2009. Since our
inception, we have not paid cash dividends on our common stock.
|
March 31,
|
March 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
Return
on average assets
|
0.35 | % | 0.01 | % | ||||
|
Return
on average equity
|
4.71 | 0.13 | ||||||
|
Average
equity to average assets ratio
|
7.36 | 6.38 | ||||||
The
Company and its bank subsidiary are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the Company’s consolidated 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 Company’s assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company’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
Company 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%. Tier 1 capital of the Company consists of common
shareholders’ equity, excluding the unrealized gain or loss on securities
available-for-sale, minus certain intangible assets. The Company’s
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 capital and 8% for total risk-based
capital.
The
Company and the bank are also required to maintain capital at a minimum level
based on 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.
-31-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
The
following table sets forth the holding company's and the bank's various capital
ratios at March 31, 2010 and at December 31, 2009. For all periods, the
bank was considered "well capitalized" and the holding company met or exceeded
its applicable regulatory capital requirements.
|
March 31, 2010
|
December 31, 2009
|
|||||||||||||||
|
Holding
|
Holding
|
|||||||||||||||
|
Company
|
Bank
|
Company
|
Bank
|
|||||||||||||
|
Tier
1 capital (to risk-weighted assets)
|
12.00 | % | 11.27 | % | 12.78 | % | 12.01 | % | ||||||||
|
Total
capital (to risk-weighted assets)
|
13.25 | % | 12.52 | % | 11.52 | % | 10.75 | % | ||||||||
|
Leverage
or Tier 1 capital (to total average assets)
|
8.84 | % | 8.29 | % | 8.25 | % | 7.69 | % | ||||||||
Effect of Inflation and
Changing Prices
The
effect of relative purchasing power over time due to inflation has not been
taken into account in our consolidated financial statements. Rather, our
financial statements have been prepared on an historical cost basis in
accordance with generally accepted accounting principles.
Unlike
most industrial companies, our assets and liabilities are primarily monetary in
nature. Therefore, the effect of changes in interest rates will have a
more significant impact on our performance than will the effect of changing
prices and inflation in general. In addition, interest rates may generally
increase as the rate of inflation increases, although not necessarily in the
same magnitude. As discussed previously, we seek to manage the
relationships between interest sensitive assets and liabilities in order to
protect against wide rate fluctuations, including those resulting from
inflation.
Off-Balance Sheet
Risk
Through
our operations, we have made contractual commitments to extend credit in the
ordinary course of its business activities. These commitments are
legally binding agreements to lend money to our customers at predetermined
interest rates for a specified period of time. At March 31, 2010 we
had issued commitments to extend credit of $38.2 million and standby letters of
credit of $2.1 million through various types of commercial lending arrangements.
Approximately $31.76 million 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,
2010:
|
After
|
||||||||||||||||||||||||
|
After
One
|
Three
|
|||||||||||||||||||||||
|
Through
|
Through
|
Greater
|
||||||||||||||||||||||
|
Within
One
|
Three
|
Twelve
|
Within
One
|
Than
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
Month
|
Months
|
Months
|
Year
|
One Year
|
Total
|
||||||||||||||||||
|
Unused
commitments to extend credit
|
$ | 6,233 | $ | 2,864 | $ | 10,339 | $ | 19,436 | $ | 18,793 | $ | 38,229 | ||||||||||||
|
Standby
letters of credit
|
10 | 2,005 | 2,015 | 97 | 2,112 | |||||||||||||||||||
|
Totals
|
$ | 6,243 | $ | 2,864 | $ | 12,344 | $ | 21,451 | $ | 18,890 | $ | 40,341 | ||||||||||||
We
evaluate each customer’s credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by us
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.
Market
Risk
Market
risk is the risk of loss from adverse changes in market prices and rates, which
principally arises from interest rate risk inherent in our lending, investing,
deposit gathering, and borrowing activities. Other types of market risks,
such as foreign currency exchange rate risk and commodity price risk, do not
generally arise in the normal course of our business. Our finance
committee monitors and considers methods of managing exposure to interest rate
risk. We have both an internal finance committee consisting of senior
management that meets at various times during each quarter and a management
finance committee that meets weekly as needed. The finance committees are
responsible for maintaining the level of interest rate
sensitivity of our interest sensitive assets and liabilities within
board-approved limits.
-32-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
We
actively monitor and manage our interest rate risk exposure principally by
measuring our interest sensitivity "gap," which is the positive or negative
dollar difference between assets and liabilities that are subject to interest
rate repricing within a given period of time. Interest rate sensitivity
can be managed by repricing assets or liabilities, selling securities available
for sale, replacing an asset or liability at maturity, or adjusting the interest
rate during the life of an asset or liability. Managing the amount of
assets and liabilities repricing in this same time interval helps to hedge the
risk and minimize the impact on net interest income of rising or falling
interest rates. We generally would benefit from increasing market rates of
interest when we have an asset-sensitive gap position and generally would
benefit from decreasing market rates of interest when we are
liability-sensitive.
We were
asset sensitive during most of the year ended December 31, 2009 and during the
three months ended March 31, 2010. As of March 31, 2010, we expect to be
liability sensitive for the next nine months because a majority of our deposits
reprice over a 12-month period. Approximately 55% of our loans were
variable rate loans at March 31, 2010. The ratio of cumulative gap to
total earning assets after 12 months was (28.07%) because $157.3 million more
assets will reprice in a 12 month period than liabilities. However,
our gap analysis is not a precise indicator of our interest sensitivity
position. The analysis presents only a static view of the timing of
maturities and repricing opportunities, without taking into consideration that
changes in interest rates do not affect all assets and liabilities
equally. For example, rates paid on a substantial portion of core deposits
may change contractually within a relatively short time frame, but those rates
are viewed by us as significantly less interest-sensitive than market-based
rates such as those paid on noncore deposits. Net interest income may be
affected by other significant factors in a given interest rate environment,
including changes in the volume and mix of interest-earning assets and
interest-bearing liabilities.
Liquidity
and Interest Rate Sensitivity
Liquidity
represents the ability of a company to convert assets into cash or cash
equivalents without significant loss, and the ability to raise additional funds
by increasing liabilities. Liquidity management involves monitoring our
sources and uses of funds in order to meet our day-to-day cash flow requirements
while maximizing profits. Liquidity management is made more complicated
because different balance sheet components are subject to varying degrees of
management control. For example, the timing of maturities of our
investment portfolio is fairly predictable and subject to a high degree of
control at the time investment decisions are made. However, net deposit
inflows and outflows are far less predictable and are not subject to the same
degree of control.
At March
31, 2010, our liquid assets, consisting of cash and cash equivalents due from
banks amounted to $42.7 million, or 6.93% of total assets. Our investment
securities, excluding nonmarketable securities, at March 31, 2010 amounted to
$121.6 million, or 19.74% of total assets. Investment securities
traditionally provide a secondary source of liquidity since they can be
converted into cash in a timely manner. However, $115.6 million of these
securities are pledged against unused FHLB borrowing lines, the Federal Reserve
line of credit, and other required deposit accounts. At December 31, 2009,
our liquid assets amounted to $53.3 million, or 8.26% of total assets. Our
investment securities, excluding nonmarketable securities, at December 31, 2009
amounted to $121.9 million, or 18.89% of total assets. However, $115.3
million of these securities were pledged.
Our
ability to maintain and expand our deposit base and borrowing capabilities
serves as our primary source of liquidity. We plan to meet our future cash
needs through the liquidation of temporary investments, the generation of
deposits, and from additional borrowings. In addition, we will receive
cash upon the maturity and sale of loans and the maturity of investment
securities. During most of 2009 and the first three months of 2010, as a result
of historically low rates that were being earned on short-term liquidity
investments, we maintained a lower than normal level of short-term liquidity
securities. In addition, we maintain five federal funds purchased lines of
credit with correspondent banks giving us credit availability totaling
approximately $17.0 million for which there were no borrowings against the lines
at March 31, 2010. We are also a member of the Federal Home Loan Bank of
Atlanta, from which applications for borrowings can be made for leverage
purposes. The FHLB requires that securities, qualifying mortgage loans,
and stock of the FHLB owned by the bank be pledged to secure any advances from
the FHLB. The Company has an available line to borrow funds from the Federal
Home Loan Bank up to 30% of the Bank’s total assets which provide additional
available funds of $102.7 million at March 31, 2010. At March 31,
2010 the bank had $27 million outstanding in FHLB advances. Additionally, the
Company has an available line of credit at the Federal Reserve of $52.5
million. At March 31, 2010, there were no borrowings against this
line. We believe that sources described above will be sufficient to meet our
future liquidity needs.
-33-
FIRST
RELIANCE BANCSHARES, INC.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - continued
Asset/liability
management is the process by which we monitor and control the mix and maturities
of our assets and liabilities. The essential purposes of asset/liability
management are to ensure adequate liquidity and to maintain an appropriate
balance between interest sensitive assets and liabilities in order to minimize
potentially adverse impacts on earnings from changes in market interest rates.
We have both an internal finance committee consisting of senior management that
meets at various times during each quarter and a management finance committee
that meets weekly as needed. The finance committees are responsible for
maintaining the level of interest rate sensitivity of our interest sensitive
assets and liabilities within board-approved limits.
The
following table sets forth information regarding our rate sensitivity as of
March 31, 2010 for each of the time intervals indicated. The information in the
table may not be indicative of our rate sensitivity position at other points in
time. In addition, the maturity distribution indicated in the table may
differ from the contractual maturities of the earning assets and
interest-bearing liabilities presented due to consideration of prepayment speeds
under various interest rate change scenarios in the application of the interest
rate sensitivity methods described above.
Interest
Sensitivity Analysis
March
31, 2010
|
After
One
|
Three
|
Greater
Than
|
||||||||||||||||||||||
|
Through
|
Through
|
One
Year or
|
||||||||||||||||||||||
|
Within
One
|
Three
|
Twelve
|
Within
One
|
Non-
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
Month
|
Months
|
Months
|
Year
|
Sensitive
|
Total
|
||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Interest-earning
assets
|
||||||||||||||||||||||||
|
Interest-bearing
deposits in other banks
|
$ | 40,658 | $ | - | $ | - | $ | 40, 658 | $ | - | $ | 40, 658 | ||||||||||||
|
Loans
(1)
|
48,336 | 29,528 | 78,849 | 156,713 | 236,064 | 392,777 | ||||||||||||||||||
|
Securities,
taxable
|
54 | - | - | 54 | 60,967 | 61,021 | ||||||||||||||||||
|
Securities,
nontaxable
|
- | - | - | - | 60,612 | 60,612 | ||||||||||||||||||
|
Nonmarketable
securities
|
4,812 | - | - | 4,812 | - | 4,812 | ||||||||||||||||||
|
Time
Deposits in other banks
|
503 | 503 | 503 | |||||||||||||||||||||
|
Total
earning assets
|
93,860 | 29,528 | 79,352 | 202,740 | 357,643 | 560,383 | ||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||
|
Interest-bearing
deposits:
|
||||||||||||||||||||||||
|
Demand
deposits
|
39,366 | - | - | 39,366 | - | 39,366 | ||||||||||||||||||
|
Savings
deposits
|
104,310 | - | - | 104,310 | - | 104,310 | ||||||||||||||||||
|
Time
deposits
|
24,974 | 30,697 | 146,082 | 201,753 | 137,020 | 338,773 | ||||||||||||||||||
|
Total
interest-bearing deposits
|
168,650 | 30,697 | 146,082 | 345,429 | 137,020 | 482,449 | ||||||||||||||||||
|
Federal
Home Loan Bank Advances
|
1,000 | - | 13,000 | 14,000 | 13,000 | 27,000 | ||||||||||||||||||
|
Junior
subordinated debentures
|
- | - | - | - | 10,310 | 10,310 | ||||||||||||||||||
|
Repurchase
agreements
|
603 | - | - | 603 | - | 603 | ||||||||||||||||||
|
Total
interest-bearing liabilities
|
170.253 | 30,697 | 159,082 | 360,032 | 160,330 | 520,362 | ||||||||||||||||||
|
Period
gap
|
$ | (76,393 | ) | $ | (1,169 | ) | $ | (79,730 | ) | $ | (157,292 | ) | $ | 197,313 | ||||||||||
|
Cumulative
gap
|
$ | (76,393 | ) | $ | (77,562 | ) | $ | (157,292 | ) | $ | (157,292 | ) | $ | 40,021 | ||||||||||
|
Ratio
of cumulative gap to total earning assets
|
(13.63 | )% | (13.84 | )% | (28.07 | )% | (28.07 | )% | 7.14 | % | ||||||||||||||
(1) Including
mortgage loans held for sale.
-34-
FIRST
RELIANCE BANCSHARES, INC.
Item 3 - Quantitative and
Qualitative Disclosures About Market Risk
See
"Market Risk" and "Liquidity and Interest Rate Sensitivity" in Item 2,
Management Discussion and Analysis of Financial Condition and Results of
Operations for quantitative and qualitative disclosures about market risk, which
information is incorporated herein by reference.
Item 4. Controls
and Procedures
As of the
end of the period covered by this Quarterly Report on Form 10-Q, our chief
executive officer and chief financial officer have evaluated the effectiveness
of our “disclosure controls and procedures” (“Disclosure Controls”).
Disclosure Controls, as defined in Rule 13a-15(e) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”), are procedures that are designed with
the objective of ensuring that information required to be disclosed in our
reports filed under the Exchange Act, such as this Quarterly Report on Form
10-Q, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms.
Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO
and CFO, as appropriate to allow timely decisions regarding required
disclosure.
Our
management, including the CEO and CFO, does not expect that our Disclosure
Controls will prevent all error and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the company have been detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
Based
upon their controls evaluation, our CEO and CFO have concluded that our
Disclosure Controls are effective at a reasonable assurance level.
There
have been no changes in our internal controls over financial reporting during
our first fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.
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 1A. Risk
Factors
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1. Business" under the heading
"Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2009, which could materially affect our business, financial condition or future
results. The risks described in our Annual Report on Form 10-K are
not the only risks facing our Company. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
-35-
FIRST
RELIANCE BANCSHARES, INC.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
(a)
|
Not
applicable.
|
|
(b)
|
Not
applicable.
|
|
(c)
|
The
following stock repurchases were made during the period covered by this
report in connection with administration of the Company’s employee stock
ownership plan.
|
|
Period
|
Total Number
of Shares
Purchased
|
Average Price
Paid per
Share
|
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
|
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
|
|||||||
|
January
1, 2010 – January 31, 2010
|
217
|
$
|
4.30
|
-
|
-
|
||||||
|
February
1, 2010 - February 28, 2010
|
338
|
$
|
4.30
|
-
|
-
|
||||||
|
March
1, 2010 – March 31, 2010
|
-
|
$
|
-
|
-
|
-
|
||||||
|
555
|
$
|
4.30
|
-
|
-
|
|||||||
Item 6.
Exhibits
|
Exhibit Number
|
Exhibit
|
|
|
10.1
|
Form
of Director Retirement Agreement.
|
|
|
10.2
|
Form
of Amendment to Director Retirement Agreement.
|
|
|
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.
|
|
|
32.2
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of
2002.
|
-36-
FIRST
RELIANCE BANCSHARES, INC.
SIGNATURES
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.
|
||
|
Date: May
14, 2010
|
By
|
/s/ F.R. SAUNDERS, JR.
|
|
F.
R. Saunders, Jr.
|
||
|
President
& Chief Executive Officer
|
||
|
Date: May
14, 2010
|
By:
|
/s/ JEFFERY A. PAOLUCCI
|
|
Jeffery
A. Paolucci
|
||
|
Senior
Vice President and Chief Financial
Officer
|
||
-37-