EXHIBIT 13.1



2002 Annual Report to Shareholders



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FIRST RELIANCE BANCSHARES, INC.



Table of Contents



|                                                                                    |  | Page 
|----------------------------------------------------------------------------------- |  | -----
|Selected Financial Data                                                             |  | 2    
|Management's Discussion and Analysis                                                |  | 3-21 
|Independent Auditors Reports                                                       |  | 22-23
|Consolidated Balance Sheets                                                         |  | 24   
|Consolidated Statements of Income                                                   |  | 25   
|Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income |  | 26   
|Consolidated Statements of Cash Flows                                               |  | 27   
|Notes to Consolidated Financial Statements                                          |  | 28-45
|Corporate Data                                                                      |  | 46-48



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Selected Financial Data



The following selected financial data for the years ended December 31, 2002, 2001, 2000 and 1999 are derived from the consolidated financial
statements and other data of the Company. The selected financial data should be read in conjunction with the consolidated financial statements of the Company, including the accompanying notes, included elsewhere herein.



|                                                    |  | 2002                                     |         |   | 2001 |   |        | 2000 |  |   | 1999   |  
|--------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                    |  | (Dollars in thousands, except per share) |        
|Income Statement Data:                              |  |                                          |         |   |      |   |        |      |  |   |        |  
|Interest income                                     |  | $                                        | 6,932   |   |      | $ | 6,251  |      |  | $ | 4,420  |  
|Interest expense                                    |  |                                          | 2,337   |   |      |   | 2,886  |      |  |   | 2,055  |  
|                                                    |  |                                          |         |   |      |   |        |      |  |   |        |  
|Net interest income                                 |  |                                          | 4,595   |   |      |   | 3,365  |      |  |   | 2,365  |  
|Provision for loan losses                           |  |                                          | 349     |   |      |   | 347    |      |  |   | 628    |  
|                                                    |  |                                          |         |   |      |   |        |      |  |   |        |  
|Net interest income after provision for loan losses |  |                                          | 4,246   |   |      |   | 3,018  |      |  |   | 1,737  |  
|Noninterest income                                  |  |                                          | 1,734   |   |      |   | 1,404  |      |  |   | 855    |  
|Noninterest expense                                 |  |                                          | 4,680   |   |      |   | 3,493  |      |  |   | 2,130  |  
|                                                    |  |                                          |         |   |      |   |        |      |  |   |        |  
|Income (loss) before income taxes                   |  |                                          | 1,300   |   |      |   | 929    |      |  |   | 462    |  
|Income tax expense (benefit)                        |  |                                          | 406     |   |      |   | 312    |      |  |   | 169    |  
|                                                    |  |                                          |         |   |      |   |        |      |  |   |        |  
|Net income (loss)                                   |  | $                                        | 894     |   |      | $ | 617    |      |  | $ | 293    |  
|                                                    |  |                                          |         |   |      |   |        |      |  |   |        |  
|Balance Sheet Data:                                 |  |                                          |         |   |      |   |        |      |  |   |        |  
|Assets                                              |  | $                                        | 116,077 |   |      | $ | 86,195 |      |  | $ | 64,366 |  
|Earning assets                                      |  |                                          | 108,114 |   |      |   | 80,380 |      |  |   | 58,835 |  
|Securities(1)                                       |  |                                          | 23,449  |   |      |   | 14,306 |      |  |   | 10,194 |  
|Loans(2)                                            |  |                                          | 81,559  |   |      |   | 64,875 |      |  |   | 46,745 |  
|Allowance for loan losses                           |  |                                          | 1,137   |   |      |   | 1,045  |      |  |   | 780    |  
|Deposits                                            |  |                                          | 100,323 |   |      |   | 75,687 |      |  |   | 54,643 |  
|Shareholders equity                                |  |                                          | 8,644   |   |      |   | 7,658  |      |  |   | 7,047  |  
|                                                    |  |                                          |         |  
|Per-Share Data:(5)                                  |  |                                          |         |   |      |   |        |      |  |   |        |  
|Basic earnings (losses)                             |  | $                                        | 0.62    |   |      | $ | 0.43   |      |  | $ | 0.20   |  
|Diluted earnings (losses)                           |  |                                          | 0.59    |   |      |   | 0.42   |      |  |   | 0.20   |  
|Book value (period end)                             |  |                                          | 5.97    |   |      |   | 5.29   |      |  |   | 4.87   |  
|                                                    |  |                                          |         |  
|Performance Ratios:                                 |  |                                          |         |   |      |   |        |      |  |   |        |  
|Return on average assets                            |  |                                          | 0.86    | % |      |   | 0.79   | %    |  |   | 0.56   | %
|Return on average equity                            |  |                                          | 10.87   |   |      |   | 8.29   |      |  |   | 4.28   |  
|Net interest margin(3)                              |  |                                          | 4.77    |   |      |   | 4.71   |      |  |   | 4.84   |  
|Efficiency(4)                                       |  |                                          | 74.89   |   |      |   | 73.36  |      |  |   | 66.13  |  
|                                                    |  |                                          |         |  
|Capital and Liquidity Ratios:                       |  |                                          |         |   |      |   |        |      |  |   |        |  
|Average equity to average assets                    |  |                                          | 7.92    | % |      |   | 9.58   | %    |  |   | 12.98  | %
|Leverage (4.00% required minimum)                   |  |                                          | 7.48    |   |      |   | 8.96   |      |  |   | 11.03  |  
|Risk-based capital                                  |  |                                          |         |   |      |   |        |      |  |   |        |  
|Tier 1                                              |  |                                          | 10.21   |   |      |   | 11.07  |      |  |   | 17.97  |  
|Total                                               |  |                                          | 11.46   |   |      |   | 12.32  |      |  |   | 19.22  |  
|Average loans to average deposits                   |  |                                          | 82.51   |   |      |   | 82.39  |      |  |   | 85.93  |  

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|1.) |  | All securities are available-for-sale and are stated at fair value.
|--- |  | -------------------------------------------------------------------

|2.) |  | Loans are stated at gross amounts before allowance for loan losses.
|--- |  | -------------------------------------------------------------------

|3.) |  | Net interest income divided by average earning assets.
|--- |  | ------------------------------------------------------

|4.) |  | Noninterest expense divided by the sum of net interest income and noninterest income, excluding gains and losses on sales of assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------

|5.) |  | Amounts have been restated for two for one stock split.
|--- |  | -------------------------------------------------------



2



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Basis of Presentation



The following discussion should be read in conjunction with the preceding Selected Financial Data and the Companys
Consolidated Financial Statements and the Notes thereto and the other financial data included elsewhere herein. The financial information provided below has been rounded in order to simplify its presentation. However, the ratios and percentages
provided below are calculated using the detailed financial information contained in the Consolidated Financial Statements, the Notes thereto and the other financial data included elsewhere herein.



General



First Reliance Bank (the Bank) is a state-chartered bank headquartered in Florence, South Carolina. The Bank opened for business on August
16, 1999. The principal business activity of the Bank is to provide banking services to domestic markets, principally in Florence County, South Carolina. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation.



On June 7, 2001, the shareholders of the Bank approved a plan of corporate reorganization
(the Reorganization) under which the Bank would become a wholly owned subsidiary of First Reliance Bancshares, Inc. (the Company), a South Carolina corporation. The Reorganization was accomplished through a statutory share
exchange between the Bank and the Company, whereby each outstanding share of common stock of the Bank was exchanged for one share of common stock of the Company. The Reorganization was completed on April 1, 2002, and the Bank became a wholly-owned
subsidiary of First Reliance Bancshares, Inc.



Organizing activities for the
Bank began on November 23, 1998. Upon the completion of the application process with the South Carolina State Board of Financial Institutions for a state charter and with the Federal Deposit Insurance Corporation for deposit insurance, the Bank
issued 723,518 shares of common stock at a price of $10.00 per share, resulting in capital totaling $7,173,293, net of selling expenses of $61,887.



The Bank began operations on August 16, 1999 at its temporary facility on West Palmetto Street in Florence, South Carolina. In June of 2000, the Bank moved into its
headquarters at 2170 West Palmetto Street in Florence, South Carolina. The Bank also opened a banking office on second Loop Road in Florence, South Carolina in April of 2001. On May 15, 2002, the Bank purchased an additional facility located at 2145
Fernleaf Drive in Florence, South Carolina. The Fernleaf Drive site contains approximately 0.5 acres of land and includes a 7,500 square feet building. The facility will serve as additional space for operational activities of the Bank, including
data processing and auditing. No customer services will be conducted in this facility.



On November 12, 2002, the Company commenced a stock offering whereby a minimum of 125,000 shares and a maximum of 1,250,000 shares of common stock were offered to fund continued expansion through First Reliance Bank. The offering price is
$8.00 per share. This is a best efforts offering we are conducting without an underwriter. At December 31, 2002, the Company had sold 162,125 shares and maintained the proceeds of this sale in an escrow account. Total proceeds in the escrow account
were $1,297,043 at December 31, 2002. The Company anticipates closing the offering in May 2003.



3



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Results of Operations



Year ended December 31, 2002, compared with year ended December 31, 2001



Net interest income increased $1,229,551, or 36.54%, to $4,594,771 in 2002 from $3,365,220
in 2001. The increase in net interest income was due primarily to an increase in average earning assets. Average earning assets increased $24,819,516 or 34.71%, mainly due to continued growth in the loan portfolio. The primary components of interest
income were interest on loans, including fees, of $5,939,949, and interest on taxable investment securities of $662,951.



The Companys net interest spread and net interest margin were 4.23% and 4.77%, respectively, in 2002, compared to 3.90% and 4.71%, respectively, in 2001. The
increase in net interest spread was primarily the result of managements efforts to maintain interest rates on loans, and to borrow at lower interest rates during a declining interest rate environment. Yields on all earning assets declined in
2002. Yields on earning assets decreased from 8.74% in 2001 to 7.20% in 2002. Yields on interest-bearing liabilities decreased from 4.84% in 2001 to 2.97% in 2002.



The provision for loan losses was $348,533 in 2002 compared to $347,000 in 2001. The allowance for loan losses was 1.39% of total loans at
December 31, 2002 as compared to 1.61% of total loans at December 31, 2001. The Company continues to maintain the allowance for loan losses at a level management believes to be sufficient to cover known and inherent losses in the loan portfolio.



Noninterest income increased $329,955, or 23.51%, to $1,733,517 in 2002 from
$1,403,562 in 2001. The increase is primarily attributable to increased residential mortgage origination fees and service charges on deposit accounts. Mortgage origination fees increased $113,605, or 15.87%, to $829,808 for the year ended December
31, 2002. The decline in interest rates during 2002 resulted in more home mortgage loans and refinancings. Service charges increased $85,586, or 16.96%, to $590,168 for the year ended December 31, 2002. The increase in service charges on deposit
accounts was attributable to an overall increase in the number of deposit accounts in 2002. Securities and brokerage commissions increased $19,684, or 23.92%, to $101,963 in 2002 from $82,279 in 2001. The Company also recognized gains on sales of
securities of $79,785 in 2002 as compared to $7,413 in 2001.



Noninterest
expense increased $1,186,363, or 33.96%, to $4,679,493 in 2002 from $3,493,130 in 2001. Noninterest expenses increased in all categories, with the exception of furniture and equipment expense, as a result of our continued growth. Other operating
expenses increased $438,645 to $1,643,238 for the year ended December 31, 2002. Included in this amount, the Company had data processing expenses of $285,887 due to the opening of the Second Loop branch and the increase in loan and deposit
transactions. Salaries and employee benefits increased $764,480, or 40.74%, to $2,641,032 in 2002 from $1,876,552 in 2001. This increase is attributable to normal pay increases, and expansion within the brokerage business. The Companys
efficiency ratio was 74.89% in 2002, compared to 73.36% in 2001.



The net
income was $894,303 in 2002, compared to $616,554 in 2001. The increase in net income reflects the Companys continued growth, as average-earning assets increased from $71,515,527 for the year ended December 31, 2001 to $96,335,043 for the year
ended December 31, 2002. Return on average assets during 2002 was 0.86%, compared to 0.79% during 2001, and return on average equity was 10.87% during 2002, compared to 8.29% during 2001.



4



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Results of Operations (continued)



Year ended December 31, 2001, compared with year ended December 31, 2000



Net interest income increased $999,833, or 42.27%, to $3,365,220 in 2001 from $2,365,387 in
2000. The increase in net interest income was due primarily to an increase in average earning assets. Average earning assets increased $22,601,376, or 46.21%, mainly due to continued growth in the loan portfolio. The primary components of interest
income were interest on loans, including fees, of $5,236,089, and interest on taxable investment securities of $766,410.



The Banks net interest spread and net interest margin were 3.90% and 4.71%, respectively, in 2001, compared to 3.12% and 4.84%, respectively, in 2000. The increase
in net interest spread was primarily the result of managements efforts to maintain interest rates on loans, and to borrow at lower interest rates during a declining interest rate environment. Yields on all earning assets declined in 2001.
Yields on earning assets decreased from 9.04% in 2000 to 8.74% in 2001. Yields on interest-bearing liabilities decreased from 5.92% in 2000 to 4.84% in 2001.



The provision for loan losses was $347,000 in 2001 compared to $628,312 in 2000. The allowance for loan losses was 1.61% of total loans at December 31, 2001 as compared
to 1.67% of total loans at December 31, 2000. The Bank continues to maintain the allowance for loan losses at a level management believes to be sufficient to cover known and inherent losses in the loan portfolio.



Noninterest income increased $548,792, or 64.20%, to $1,403,562 in 2001 from $854,770 in
2000. The increase is primarily attributable to increased residential mortgage origination fees and service charges on deposit accounts. Mortgage origination fees increased $291,549, or 68.66%, to $716,203 for the year ended December 31, 2001. The
decline in interest rates during 2001 resulted in more home mortgage loans and refinancings. Service charges increased $176,885, or 53.98%, to $504,582 for the year ended December 31, 2001. The increase in service charges on deposit accounts was
attributable to an overall increase in the number of deposit accounts in 2001. During 2001, the Bank began brokering securities and insurance. Income from these brokerage activities totaled $82,279 in 2001.



Noninterest expense increased $1,363,703, or 64.04%, to $3,493,130 in 2001 from $2,129,427 in
2000. Noninterest expenses increased in all categories as a result of our continued growth. Other operating expenses increased $392,846 to $1,204,593 for the year ended December 31, 2001. The Bank had increased data processing expense of $77,318 due
to the opening of the Second Loop branch and the increase in loan and deposit transactions. Salaries and employee benefits increased $725,334, or 63.01%, to $1,876,552 in 2001 from $1,151,218 in 2000. This increase is attributable to normal pay
increases, the opening of the Second Loop branch, and the opening of the brokerage business. The Banks efficiency ratio was 73.36% in 2001, compared to 66.13% in 2000.



The net income was $616,554 in 2001, compared to $293,018 in 2000. The increase in net income reflects the Banks continued growth, as
average-earning assets increased from $48,914,151 for the year ended December 31, 2000 to $71,515,527 for the year ended December 31, 2001. Return on average assets during 2001 was 0.79%, compared to 0.56% during 2000, and return on average equity
was 8.29% during 2001, compared to 4.28% during 2000.



Net Interest Income



General. The largest component of the
Companys net income is its net interest income, which is the difference between the income earned on assets and interest paid on deposits and on borrowings used to support such assets. Net interest income is determined by the yields earned on
the Companys interest-earning assets and the rates paid on its 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 the Companys net interest rate spread.



5



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Net Interest Income (continued)



Average Balances, Income and Expenses, and Rates. The following table sets forth, for the
years indicated, certain information related to the Companys average balance sheet and its 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



|                                           |  | 2002                   |         |   | 2001           |  
|------------------------------------------ |  | ---------------------- | ------- | - | -------------- | -
|                                           |  | AverageBalance         |         |   | Income/Expense |  
|                                           |  | (Dollars in thousands) |        
|Assets:                                    |  |                        |         |   |                |  
|Earning Assets:                            |  |                        |         |   |                |  
|Loans(1)(2)                                |  | $                      | 73,777  |   |                | $
|Securities, taxable(2)                     |  |                        | 12,519  |   |                |  
|Securities, tax exempt(2)                  |  |                        | 5,193   |   |                |  
|Federal funds sold                         |  |                        | 4,630   |   |                |  
|Nonmarketable equity securities            |  |                        | 215     |   |                |  
|                                           |  |                        |         |   |                |  
|Total earning assets                       |  |                        | 96,334  |   |                |  
|                                           |  |                        |         |   |                |  
|Cash and due from banks                    |  |                        | 3,394   |   |                |  
|Premises and equipment                     |  |                        | 3,860   |   |                |  
|Other assets                               |  |                        | 1,350   |   |                |  
|Allowance for loan losses                  |  |                        | (1,113  | ) |                |  
|                                           |  |                        |         |   |                |  
|Total assets                               |  | $                      | 103,825 |   |                |  
|                                           |  |                        |         |   |                |  
|Liabilities:                               |  |                        |         |   |                |  
|Interest-bearing liabilities:              |  |                        |         |   |                |  
|Interest-bearing transaction accounts      |  | $                      | 14,659  |   |                |  
|Savings deposits                           |  |                        | 13,795  |   |                |  
|Time deposits                              |  |                        | 47,328  |   |                |  
|Other short-term borrowings                |  |                        | 5,400   |   |                |  
|                                           |  |                        |         |   |                |  
|Total interest-bearing liabilities         |  |                        | 81,182  |   |                |  
|                                           |  |                        |         |   |                |  
|Demand deposits                            |  |                        | 13,637  |   |                |  
|Accrued interest and other liabilities     |  |                        | 785     |   |                |  
|Shareholders' equity                       |  |                        | 8,221   |   |                |  
|                                           |  |                        |         |   |                |  
|Total liabilities and shareholders' equity |  | $                      | 103,825 |   |                |  
|                                           |  |                        |         |   |                |  
|Net interest spread                        |  |                        |         |   |                |  
|Net interest income                        |  |                        |         |   |                | $
|                                           |  |                        |         |   |                |  
|Net interest margin                        |  |                        |         |   |                |  

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|(1) |  | Nonaccraul loans are included in the balances. The effect of these loans is not significant to the computations. All loans and deposits are domestic.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Tax exempt income is based on actual amounts and are not on a tax equivalent basis. A tax equivalent adjustment to net
interest income of $121 would adjust the yield for assets earning tax exempt income to a comparable yield on a taxable basis. (This results in an estimated 2% overall increase in the tax rate).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6



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Rate/Volume Analysis



Analysis of Changes in Net Interest Income. Net interest income can also be analyzed in terms of the impact of changing rates and changing
volume. The following table describes the extent to which changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities have affected the Banks interest income and interest expense during the periods
indicated. Information on changes in each category attributable to (i) changes due to volume (change in volume multiplied by prior period rate), (ii) changes due to rates (changes in rates multiplied by prior period volume) and (iii) changes in
rate/volume (change in rate multiplied by the change in volume) is provided in the table below. Changes to both rate and volume, (in iii above) which cannot be segregated, have been allocated proportionately.



|                                |  | 2002 compared to 2001Due to increase (decrease) in |      
|------------------------------- |  | -------------------------------------------------- | -----
|                                |  | Volume                                             |      
|                                |  | (Dollars in thousands)                             |      
|Taxable securities              |  | $                                                  | 83   
|Nontaxable securities           |  |                                                    | 162  
|Loans                           |  |                                                    | 1,604
|Federal funds sold              |  |                                                    | 33   
|Nonmarketable equity securities |  |                                                    | 6    
|                                |  |                                                    |      
|Total interest income           |  |                                                    | 1,888
|                                |  |                                                    |      
|Interest expense:               |  |                                                    |      
|Interest-bearing deposits       |  |                                                    | 173  
|Savings deposits                |  |                                                    | 10   
|Time deposits                   |  |                                                    | 438  
|Other borrowings                |  |                                                    | 69   
|                                |  |                                                    |      
|Total interest expense          |  |                                                    | 690  
|                                |  |                                                    |      
|Net interest income             |  | $                                                  | 1,198
|                                |  |                                                    |      



|                                                          |  | 2001 compared to 2000Due to increase (decrease) in |      
|--------------------------------------------------------- |  | -------------------------------------------------- | -----
|                                                          |  | Volume                                             |      
|                                                          |  | (Dollars in thousands)                             |      
|Interest income:                                          |  |                                                    |      
|Taxable securities                                        |  | $                                                  | 441  
|Nontaxable securities                                     |  |                                                    |     
|Loans                                                     |  |                                                    | 1,601
|Federal funds sold                                        |  |                                                    | (41  
|Certificates of deposit with other financial institutions |  |                                                    | (9   
|Nonmarketable equity securities                           |  |                                                    | 6    
|                                                          |  |                                                    |      
|Total interest income                                     |  |                                                    | 1,998
|                                                          |  |                                                    |      
|Interest expense:                                         |  |                                                    |      
|Interest-bearing deposits                                 |  |                                                    | 1,158
|Other borrowings                                          |  |                                                    | 55   
|                                                          |  |                                                    |      
|Total interest expense                                    |  |                                                    | 1,213
|                                                          |  |                                                    |      
|Net interest income                                       |  | $                                                  | 785  
|                                                          |  |                                                    |      



7



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Net Interest Income



Interest Sensitivity. The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the
potential adverse impact that changes in interest rates could have on its net interest income. The principal monitoring technique employed by the Company is the measurement of the Companys 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.



The following table sets forth the Companys interest rate sensitivity at December 31, 2002



Interest Sensitivity Analysis



|                                                |  | December 31, 2002     
|----------------------------------------------- |  | ----------------------
|                                                |  | Within OneMonth       
|                                                |  | (Dollars in thousands)
|Assets                                          |  |                       
|Interest-earning assets                         |  |                       
|Loans                                           |  | $                     
|Securities, taxable                             |  |                       
|Securities, nontaxable                          |  |                       
|Nonmarketable securities                        |  |                       
|Federal funds sold                              |  |                       
|                                                |  |                       
|Total earning assets                            |  |                       
|                                                |  |                       
|                                                |  |                       
|Liabilities                                     |  |                       
|Interest-bearing liabilities:                   |  |                       
|Interest-bearing deposits:                      |  |                       
|Demand deposits                                 |  |                       
|Savings deposits                                |  |                       
|Time deposits                                   |  |                       
|                                                |  |                       
|Total interest-bearing deposits                 |  |                       
|                                                |  |                       
|Advances from Federal Home Loan Bank            |  |                       
|Repurchase agreements                           |  |                       
|                                                |  |                       
|Total interest-bearing liabilities              |  |                       
|                                                |  |                       
|Period gap                                      |  | $                     
|                                                |  |                       
|Cumulative gap                                  |  | $                     
|                                                |  |                       
|Ratio of cumulative gap to total earning assets |  |                       



8



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Net Interest Income (continued)



The above table reflects the balances of interest-earning assets and interest-bearing
liabilities at the earlier of their repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing interval due to the immediately available nature of the instruments. Debt securities are reflected at each
instruments ultimate maturity date. Scheduled payment amounts of fixed rate amortizing loans are reflected at each scheduled payment date. Scheduled payment amounts of variable rate amortizing loans are reflected at each scheduled payment date
until the loan may be repriced contractually; the unamortized balance is reflected at that point. Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the
earliest repricing period due to contractual arrangements which give the Bank the opportunity to vary the rates paid on those deposits within a thirty-day or shorter period. However, the Bank is not obligated to vary the rates paid on these deposits
within any given period. Fixed rate time deposits, principally certificates of deposit, are reflected at their contractual maturity dates. Securities sold under agreements to repurchase mature on a daily basis and are reflected in the earliest
pricing period. Advances from the Federal Home Loan Bank are reflected at their contractual maturity date.



The Bank is in a liability sensitive position (or a negative gap) of $23.8 million over the 12 month timeframe. The gap is negative when interest sensitive liabilities exceed interest sensitive assets, as was the
case at the end of 2002 with respect to the one-year time horizon. When interest sensitive assets exceed interest sensitive liabilities for a specific repricing horizon, a positive interest sensitivity gap results.



A negative gap generally has an adverse effect on net interest income during periods of
rising rates. A negative one year gap position occurs when the dollar amount of rate sensitive liabilities maturing or repricing within one year exceeds the dollar amount of rate sensitive assets maturing or repricing during that same period. As a
result, during periods of rising interest rates, the interest paid on interest-bearing liabilities will increase faster than interest received from earning assets, thus reducing interest income. The reverse is true in periods of declining interest
rates resulting generally in an increase in net interest income.



The
Banks Board of Directors and management review the Asset Liability Management with information obtained from our system which measures the interest rate sensitivity. The Banks asset and liability policies are to focus on maximizing long
term profitability while managing acceptable interest rate risk.



However,
the Companys gap analysis is not a precise indicator of its 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 management as
significantly less interest-sensitive than market-based rates such as those paid on non-core deposits. Accordingly, management believes a liability-sensitive gap position is not as indicative of the Companys true interest sensitivity as it
would be for an organization which depends to a greater extent on purchased funds to support earning assets. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and
mix of earning assets and interest-bearing liabilities. The Company cannot predict if interest rates will rise or fall in 2003.



Provision and Allowance for Loan Losses



General. The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem
credits. On a quarterly basis, the Companys Board of Directors reviews and approves the appropriate level for the Companys 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 its market. The objective of management has been to fund the allowance for loan losses at approximately 1.00% to 1.50% of total loans outstanding until a history is established.



Additions to the allowance for loan losses, which are expensed as the provision for loan
losses on the Companys income statement, 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.



Provision and
Allowance for Loan Losses (continued)



The allowance represents an amount
which we believe will be adequate to absorb probable losses on existing loans that may become uncollectible. Our judgment in determining the adequacy of the allowance is based on evaluations of the collectibility 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.



9



---

The Company adjusts the amount of the allowance periodically based on changing circumstances as a component of the
provision for loan losses. We charge recognized losses against the allowance and add subsequent recoveries back to the allowance. We do not allocate the allowance for loan losses to specific categories of loans but evaluate the adequacy on an
overall portfolio basis utilizing our credit grading system which we apply to each loan. We combine our estimates of the reserves needed for each component of the portfolio, including loans analyzed on a pool basis and loans analyzed individually.
The allowance is divided into two portions: (1) an amount for specific allocations on significant individual credits and (2) a general reserve amount. We analyze individual loans within the portfolio and make allocations to the allowance based on
each individual loans specific factors and other circumstances that affect the collectibility of the credit. Significant, individual credits classified as doubtful or substandard/special mention within our credit grading system require both
individual analysis and specific allocation. Loans in the substandard category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action such as declining or negative earnings trends
and declining or inadequate liquidity. Loans in the doubtful category exhibit the same weaknesses found in the substandard loan; however, the weaknesses are more pronounced. However, these loans are not yet rated as loss because certain events may
occur which could salvage the debt such as injection of capital, alternative financing or liquidation of assets. As of December 31, 2002 and 2001, the Company had no specific allocations on significant credits in its calculation of the allowance
for loan losses.



The Company calculates its general reserve based on a
percentage allocation for each of the categories of the following unclassified loan types: real estate, commercial, consumer and mortgage. The Company applies general loss factors to each category and may adjust these percentages as appropriate
given consideration of local economic conditions, exposure concentration that may exist in the portfolio, changes in trends of past due loans, problem loans and charge-offs and anticipated loan growth. The general estimate is then added to the
specific allocations made to determine the amount of the total allowance for loan losses. Due to our limited operating history, the provision for loan losses has been made primarily as a result of managements assessment of general loan loss
risk. Our evaluation is inherently subjective as it requires estimates that are susceptible to significant change. In addition, various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may
require us to record 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 December 31, 2002, the Companys general reserves totaled $ 1,137,337, an increase of $92,323 from the prior year. This increase results
from an overall increase of $ 16,683,636 in our loan portfolio. The categories and concentrations of loans have been consistent from during the past two years.



10



---

Provision and Allowance for Loan Losses (continued)



The following table sets forth certain information with respect to the Companys
allowance for loan losses and the composition of chargeoffs and recoveries for the years ended December 31, 2002, 2001 and 2000.



Allowance for Loan Losses



|                                                          |  | 2002                   |        |   | 2001 |   |        | 2000 | 
|--------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- | 
|                                                          |  | (Dollars in thousands) |       
|Total loans outstanding at end of year                    |  | $                      | 81,559 |   |      | $ | 64,875 |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Average loans outstanding                                 |  | $                      | 73,777 |   |      | $ | 54,921 |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Balance of allowance for loan losses at beginning of year |  | $                      | 1,045  |   |      | $ | 780    |      | 
|Loans charged off:                                        |  |                        |        |   |      |   |        |      | 
|Real estateconstruction                                  |  |                        |       |   |      |   |       |      | 
|Real estatemortgage                                      |  |                        | 32     |   |      |   |       |      | 
|Commercial and industrial                                 |  |                        | 78     |   |      |   |       |      | 
|Consumer and other                                        |  |                        | 185    |   |      |   | 127    |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Total loan losses                                         |  |                        | 295    |   |      |   | 127    |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Recoveries of previous loan losses:                       |  |                        |        |   |      |   |        |      | 
|Real estateconstruction                                  |  |                        |       |   |      |   |       |      | 
|Real estatemortgage                                      |  |                        | 2      |   |      |   |       |      | 
|Commercial and industrial                                 |  |                        |       |   |      |   |       |      | 
|Consumer and other                                        |  |                        | 36     |   |      |   | 45     |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Total recoveries                                          |  |                        | 38     |   |      |   | 45     |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Net charge-offs                                           |  |                        | 257    |   |      |   | 82     |      | 
|Provision for loan losses                                 |  |                        | 349    |   |      |   | 347    |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Balance of allowance for loan losses at end of year       |  | $                      | 1,137  |   |      | $ | 1,045  |      | 
|                                                          |  |                        |        |   |      |   |        |      | 
|Ratios:                                                   |  |                        |        |   |      |   |        |      | 
|Net charge-offs to average loans outstanding              |  |                        | 0.35   | % |      |   | 0.15   | %    | 
|Net charge-offs to loans at end of year                   |  |                        | 0.32   | % |      |   | 0.13   | %    | 
|Allowance for loan losses to average loans                |  |                        | 1.54   | % |      |   | 1.90   | %    | 
|Allowance for loan losses to loans at end of year         |  |                        | 1.39   | % |      |   | 1.61   | %    | 
|Net charge-offs to allowance for loan losses              |  |                        | 22.60  | % |      |   | 7.85   | %    | 
|Net charge-offs to provisions for loan losses             |  |                        | 73.64  | % |      |   | 23.63  | %    | 



Nonperforming Assets



Nonperforming Assets. There were loans totaling
$292,725 and $8,872 in nonaccrual status as December 31, 2002 and 2001, respectively. There was $291,804 and $146,436 in loans ninety days or more overdue and still accruing interest at December 31, 2002 and 2001, respectively. There were $307,000
in restructured loans at December 31, 2002. There were no restructured loans as of December 31, 2001.



11



---

Nonperforming Assets (continued)



Accrual of interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the borrowers financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more
past due. When a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from current earnings as a reduction of reported interest income. No additional interest is accrued on
the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual write-down or chargeoff of the principal balance of the loan which would
necessitate additional charges to earnings. For all periods presented, the additional interest income, which would have been recognized into earnings if the Companys nonaccrual loans had been current in accordance with their original terms,
and the amount of interest income on such loans that was included in net income is immaterial.



Potential Problem Loans. At December 31, 2002, the Bank had criticized loans of $1,848,866 and classified loans of $740,367. At December 31, 2001, the Bank had criticized loans of $5,249,102 and classified loans of
$703,919. The significant decrease in the amount of criticized loans is attributable to managements restructuring of its risk rating system. The results of this internal review process are considered in determining managements assessment
of the adequacy of the allowance for loan losses. However, the Bank has exceeded its overall objective, which has been to maintain the allowance for loan losses at approximately 1.00% to 1.50% of total loans to provide for potential problem loans
until a history has been established.



Noninterest Income and Expense



Noninterest Income.



Noninterest income for year ended December 31,
2002 was $1,733,517, an increase of $329,955 from $1,403,562 in 2001. The increase is primarily attributable to increased residential mortgage origination fees and service charges on deposit accounts. Mortgage origination fees increased $113,605, or
15.87%, to $829,808 for the year ended December 31, 2002. Service charges increased $85,586, or 16.96%, to $590,168 for the year ended December 31, 2002. The increase in service charges on deposit accounts was attributable to an overall increase in
the number of deposit accounts in 2002. Securities and brokerage commissions increased $19,684, or 23.92%, to $101,963 in 2002 from $82,279 in 2001. The Company also realized gains on the sales of securities available-for-sale totaling $79,785
during 2002 as compared to $7,413 in 2001.



Noninterest income for the year
ended December 31, 2001, was $1,403,562, an increase of $548,792 from $854,770 for the year ended December 31, 2000. The increase is primarily a result of increased residential mortgage origination fees and service charges on deposit accounts.
Mortgage origination fees increased $291,549, or 68.66%, to $716,203 for the year ended December 31, 2001. Service charges increased $176,885, or 53.98%, to $504,582 for the year ended December 31, 2001. The increase in service charges on deposit
accounts was attributable to an overall increase in the number of deposit accounts during 2001.



The following table sets forth the principal components of noninterest income for the years ended December 31, 2002, 2001 and 2000.



|                                               |  | 2002                   |       | 2001 |   | 2000 
|---------------------------------------------- |  | ---------------------- | ----- | ---- | - | -----
|                                               |  | (Dollars in thousands)
|Service charges on deposit accounts            |  | $                      | 590   |      | $ | 505  
|Credit life insurance commissions              |  |                        | 31    |      |   | 51   
|Residential mortgage origination fees          |  |                        | 830   |      |   | 716  
|Securities and insurance brokerage commissions |  |                        | 102   |      |   | 82   
|Other income                                   |  |                        | 181   |      |   | 50   
|                                               |  |                        |       |      |   |      
|Total noninterest income                       |  | $                      | 1,734 |      | $ | 1,404
|                                               |  |                        |       |      |   |      



12



---

Noninterest Income and Expense (continued)



Noninterest Expense.



Noninterest expense increased $1,186,363, or 33.96%, to $4,679,493 for year ended December
31, 2002 as compared to 2001. Of this total, other operating expenses increased $438,645, or 36.41%, to $1,643,238 in 2002 from $1,204,593 in 2001. Salaries and employee benefits increased $764,480, or 40.74%, to $2,641,032 in 2002 from $1,876,552
in 2001. This increase is attributable to normal pay increases and expansion within the brokerage business.



Noninterest expense increased $1,363,703, or 64.04%, to $3,493,130 for the year ended December 31, 2001. Of this total, other operating expenses increased $392,846, or 48.40%, to $1,204,593 in 2001 from $811,747 in
2000. The increase in data processing expense of $77,318 was due to the opening of the Second Loop branch and the increase in loan and deposit transactions. Salaries and employee benefits increased $725,334, or 63.01%, to $1,876,552 in 2001 from
$1,151,218 in 2000. This increase is attributable to normal pay increases, the opening of the Second Loop branch, and the opening of the brokerage business.



The following table sets forth the primary components of noninterest expense for the years ended December 31, 2002, 2001 and 2000.



|                                          |  | 2002                   |       |   | 2001 |   |       | 2000 | 
|----------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- | 
|                                          |  | (Dollars in thousands) |      
|Salaries and employee benefits            |  | $                      | 2,641 |   |      | $ | 1,877 |      | 
|Net occupancy and equipment expense       |  |                        | 395   |   |      |   | 412   |      | 
|Advertising and public relations          |  |                        | 118   |   |      |   | 85    |      | 
|Office supplies, stationery, and printing |  |                        | 141   |   |      |   | 155   |      | 
|Data processing and supplies              |  |                        | 286   |   |      |   | 202   |      | 
|Computer and software                     |  |                        | 112   |   |      |   | 120   |      | 
|Professional fees and services            |  |                        | 172   |   |      |   | 159   |      | 
|Employee education and conventions        |  |                        | 120   |   |      |   | 84    |      | 
|Loan origination fees                     |  |                        | 35    |   |      |   | 29    |      | 
|Other                                     |  |                        | 659   |   |      |   | 370   |      | 
|                                          |  |                        |       |   |      |   |       |      | 
|Total noninterest expense                 |  | $                      | 4,679 |   |      | $ | 3,493 |      | 
|                                          |  |                        |       |   |      |   |       |      | 
|Efficiency ratio                          |  |                        | 74.89 | % |      |   | 73.36 | %    | 



Earning Assets



Loans. Loans 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 $73,777,402
in 2002 compared to $54,920,786 in 2001, an increase of $18,856,616, or 34.33%. At December 31, 2002, total loans were $81,558,827, compared to $64,875,191 at December 31, 2001, an increase of $16,683,636, or 25.72%.



13



---

Earning Assets (continued)



The following table sets forth the composition of the loan portfolio by category at the
dates indicated and highlights the Companys general emphasis on all types of lending.



|                          |  | Composition of Loan PortfolioDecember 31, |       
|------------------------- |  | ----------------------------------------- | ------
|                          |  | 2002                                      |       
|                          |  | Amount                                    |       
|                          |  | (Dollars in thousands)                    |       
|Commercial and industrial |  | $                                         | 15,628
|Real estate               |  |                                           |       
|Construction              |  |                                           | 9,799 
|Mortgage-residential      |  |                                           | 24,994
|Mortgage-nonresidential   |  |                                           | 20,632
|Consumer                  |  |                                           | 9,944 
|Other                     |  |                                           | 561   
|                          |  |                                           |       
|Total loans               |  |                                           | 81,558
|Allowance for loan losses |  |                                           | (1,137
|                          |  |                                           |       
|Net loans                 |  | $                                         | 80,421
|                          |  |                                           |       



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 the Companys 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.



The largest component of the Companys loan portfolio is real estate mortgage loans. At December 31, 2002, real estate mortgage loans totaled $45,625,701 and
represented 55.95% of the total loan portfolio, compared to $32,657,440 or 50.34%, at December 31, 2001.



Residential mortgage loans totaled $24,993,590 at December 31, 2002, and represented 30.65% of the total loan portfolio, compared to $17,628,428 at December 31, 2001. 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 $20,632,111 at December 31, 2002, compared to
$15,029,012 at December 31, 2001. This represents an increase of $5,603,099, or 37.28%, from the December 31, 2001 amount. The demand for residential and commercial real estate loans in the Florence market has remained stable.



Commercial and industrial loans increased $1,649,881, or 11.80%, to $15,627,587 at December
31, 2002, from $13,977,706 at December 31, 2001.



The Companys loan
portfolio is also comprised of consumer loans. Consumer loans decreased $1,365,967, or 12.08%, to $9,944,293 at December 31, 2002, from $11,310,260 at December 31, 2001.



The Companys loan portfolio reflects the diversity of its market. The Companys home office is located in Florence County, South
Carolina. The economy of Florence contains elements of medium and light manufacturing, higher education, regional health care, and distribution facilities. Management expects the area to remain stable with continued growth in the near future. The
diversity of the economy creates opportunities for all types of lending. The Company does not engage in foreign lending.



14



---

Earning Assets (continued)



The repayment of loans in the loan portfolio as they mature is also a source of liquidity
for the Bank. The following table sets forth the Banks loans maturing within specified intervals at December 31, 2002.



Loan Maturity Schedule and Sensitivity to Changes in Interest Rates



|                                    |  | December 31, 2002     
|----------------------------------- |  | ----------------------
|                                    |  | One Year orLess       
|                                    |  | (Dollars in thousands)
|Commercial and industrial           |  | $                     
|Real estate                         |  |                       
|Consumer and other                  |  |                       
|                                    |  |                       
|                                    |  | $                     
|                                    |  |                       
|                                    |  |                       
|Loans maturing after one year with: |  |                       
|Fixed interest rates                |  |                       
|Floating interest rates             |  |                       
|                                    |  |                       
|                                    |  |                       
|                                    |  |                       



The information presented in the above
table is based on the contractual maturities of the 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. Consequently, management believes this treatment presents fairly the maturity and repricing structure of the loan portfolio shown in the above table.



Investment Securities. The investment securities portfolio is also a component of the Companys total earning assets. Total securities available-for-sale averaged
$17,712,186 in 2002, compared to $12,856,364 in 2001. At December 31, 2002, total securities available-for-sale were $23,448,775, an increase of $9,143,089, or 63.91%, over the December 31, 2001 balance. Investment securities also contains Federal
Home Loan Bank stock. This stock is recorded its original cost and totaled $250,000 and $142,400 at December 31, 2002 and 2001, respectively.



The following table sets forth the fair market value of the securities available-for-sale held by the Bank at December 31, 2002 and 2001.



|                                          |  | Fair Value of Securities available-for-saleDecember 31,
|----------------------------------------- |  | -------------------------------------------------------
|                                          |  | 2002                                                   
|                                          |  | (Dollars in thousands)                                 
|U.S. government agencies and corporations |  | $                                                      
|Municipals                                |  |                                                        
|Mortgage-backed securities                |  |                                                        
|Commercial paper                          |  |                                                        
|                                          |  |                                                        
|Total securities available-for-sale       |  | $                                                      
|                                          |  |                                                        



15



---

Earning Assets (continued)



The following table sets forth the scheduled maturities and average yields of securities
held at December 31, 2002.



Investment
Securities Maturity Distribution and Yields



|                                          |  | December 31, 2002 |      
|----------------------------------------- |  | ----------------- | -----
|                                          |  | Within One Year   |      
|                                          |  | Amount            |      
|U.S. government agencies and corporations |  | $                 | 2,205
|Municipals(2)                             |  |                   | 762  
|                                          |  |                   |      
|Total securities(1)                       |  | $                 | 2,967
|                                          |  |                   |      

---

|(1) |  | Excludes mortgage-backed securities totaling $10,821 with a yield of 4.67 % and
non-marketable equity securities.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(2) |  | Yields are based on a tax equivalent basis of 34%.
|--- |  | --------------------------------------------------



Other attributes of the securities portfolio, including yields and maturities, are discussed
above in Net Interest Income Interest Sensitivity Analysis.



Short-Term Investments. Short-term investments, which consist of federal funds sold, averaged $4,630,128 in 2002 compared to $3,624,848 in 2001. At December 31, 2002 and 2001, short-term investments totaled $2,856,000 and $1,057,000,
respectively.



Deposits and Other
Interest-Bearing Liabilities



Average interest-bearing liabilities increased
$21,548,671, or 36.13%, to $81,182,888 in 2002, from $59,634,217 in 2001. Average interest-bearing deposits increased $18,798,283, or 32.99%, to $75,782,406, from $56,984,123 in 2001. These increases resulted from increases in all categories of
interest-bearing liabilities, primarily as a result of the continued growth of the Company.



Deposits. Average total deposits increased $22,757,229, or 34.14%, to $89,419,745 in 2002, from $66,662,516 in 2001. At December 31, 2002, total deposits were $100,323,081, compared to $75,686,644 a year earlier, an
increase of 32.55%.



The following table sets forth the deposits of the Company
by category at December 31, 2002 and 2001.



Deposits



|                                  |  | December 31,           |        
|--------------------------------- |  | ---------------------- | -------
|                                  |  | 2002                   |        
|                                  |  | Amount                 |        
|                                  |  | (Dollars in thousands) |        
|Demand deposit accounts           |  | $                      | 16,471 
|NOW accounts                      |  |                        | 16,490 
|Savings accounts                  |  |                        | 15,493 
|Time deposits less than $100,000  |  |                        | 30,344 
|Time deposits of $100,000 or over |  |                        | 21,525 
|                                  |  |                        |        
|Total deposits                    |  | $                      | 100,323
|                                  |  |                        |        



Core deposits, which exclude
certificates of deposit of $100,000 or more, provide a relatively stable funding source for the Companys loan portfolio and other earning assets. The Companys core deposits were $78,797,896 and $60,811,717 at December 31, 2002 and 2001,
respectively.



16



---

Deposits and Other Interest-Bearing Liabilities (continued)



Deposits, and particularly core deposits, have been the Companys primary source of
funding and have enabled the Company to meet successfully both its short-term and long-term liquidity needs. Management anticipates that such deposits will continue to be the Companys primary source of funding in the future. The Companys
loan-to-deposit ratio was 81.30% at December 31, 2002, and 85.72% at December 31, 2001. The maturity distribution of the Companys time deposits over $100,000 at December 31, 2002, is set forth in the following table:



Maturities of Time Deposits of $100,000 or More



|                                            |  | Within ThreeMonths     |       | After ThreeThrough SixMonths |   | After SixThroughTwelveMonths |  | After TwelveMonths |        | Total
|------------------------------------------- |  | ---------------------- | ----- | ---------------------------- | - | ---------------------------- |  | ------------------ | ------ | -----
|                                            |  | (Dollars in thousands)
|Certificates of deposit of $100,000 or more |  | $                      | 6,600 |                              | $ | 3,051                        |  | $                  | 10,248 |      



Approximately 30.66% of the
Companys time deposits of $100,000 or more had scheduled maturities within three months, and 44.84% had maturities within six months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these
deposits less reliable sources of funding for liquidity planning purposes than core deposits. The current interest rate environment has led depositors to invest in short term deposit accounts. The Company expects most certificates of deposits with
maturities less than twelve months to be renewed upon maturity. However, there is the possibility that some certificates may not be renewed. Management believes that should that occur, the impact would be minimal on the Companys operations and
liquidity due to other funding sources. The Company has an available line to borrow funds from the Federal Home Loan Bank up to 10% of the Banks total assets which totaled $ 11,630,000 at December 31, 2002 and lines available to purchase
federal funds with various financial institutions up to $6,100,000 at December 31, 2002. Management believes that these funds would be sufficient to meet future liquidity needs.



Other Short-term Borrowings. The following table summarizes the Companys short-term borrowings for the years ended December 31, 2002
and 2001. These borrowings consist of securities sold under agreements to repurchase and advances from the Federal Home Loan Bank. Securities sold under agreements to repurchase mature on a one to seven day basis. These agreements are secured by
U.S. government agencies. Advances from Federal Home Loan Bank mature at different periods as discussed in the footnotes to the financial statements and are secured by the Banks one to four family residential mortgage loans and the Banks
investment in Federal Home Loan Bank stock.



|                                               |  | Year Ended December 31,           |      
|---------------------------------------------- |  | --------------------------------- | -----
|                                               |  | MaximumOutstandingat anyMonth End |      
|                                               |  | (Dollars in thousands)            |      
|2002                                           |  |                                   |      
|                                               |  |                                   |      
|Securities sold under agreements to repurchase |  | $                                 | 1,928
|Advances from Federal Home Loan Bank           |  |                                   | 4,500
|                                               |  |                                   |      
|2001                                           |  |                                   |      
|Securities sold under agreements to repurchase |  |                                   | 3,494
|Advances from Federal Home Loan Bank           |  |                                   |     



17



---

Capital



The Company and the Bank 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.



The Company and the Bank exceeded the regulatory capital requirements at December 31, 2002 and 2001. The following table sets for the
Banks ratios at December 31, 2002 and 2001:



|                                                                   |  | Analysis of Capital and Capital RatiosDecember 31, |       
|------------------------------------------------------------------ |  | -------------------------------------------------- | ------
|                                                                   |  | 2002                                               |       
|                                                                   |  | (Dollars in thousands)                             |       
|Tier 1 capital                                                     |  | $                                                  | 8,539 
|Tier 2 capital                                                     |  |                                                    | 1,047 
|                                                                   |  |                                                    |       
|Total qualifying capital                                           |  | $                                                  | 9,586 
|                                                                   |  |                                                    |       
|Risk-adjusted total assets (including off-balance-sheet exposures) |  | $                                                  | 83,634
|                                                                   |  |                                                    |       
|Risk-based capital ratios:                                         |  |                                                    |       
|Tier 1 risk-based capital ratio                                    |  |                                                    | 10.21 
|Total risk-based capital ratio                                     |  |                                                    | 11.46 
|Tier 1 leverage ratio                                              |  |                                                    | 7.48  



The Company is in the
process of a secondary stock offering whereby a minimum of 125,000 shares and a maximum of 1,250,000 shares are being issued at $8.00 per share to fund the expansion of the Company. This additional capital will improve the Company and the
Banks capital ratios.





18



---

Impact of Off-Balance Sheet Instruments



The Company is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of the Companys customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are legally binding agreements to lend to
a customer at predetermined interest rates as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment
involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the
contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Letters of credit are conditional
commitments issued to guarantee a customers performance to a third party and have essentially the same credit risk as other lending facilities. Standby letters of credit often expire without being used.



The Company uses the same credit underwriting procedures for commitments to extend credit and
standby letters of credit as it does for its on-balance sheet instruments. The credit worthiness of each borrower is evaluated and the amount of collateral, if deemed necessary, is based on the credit evaluation. Collateral held for commitments to
extend credit and standby letters of credit varies but may include accounts receivable, inventory, property, plant, equipment, and income-producing commercial properties.



The Company is not involved in off-balance sheet contractual relationships, other than those disclosed in this report, that could result in
liquidity needs or other commitments or that could significantly impact earnings.



As of December 31, 2002, commitments to extend credit totaled $11,040,303 and its standby letters of credit totaled $159,000. As of December 31, 2001, commitments to extend credit totaled $10,831,678 and its standby letters of credit
totaled $211,894.



The following table sets forth the length of time until
maturity for unused commitments to extend credit and standby letters of credit at December 31, 2002.



|                                    |  | Within OneMonth        |     | After OneThroughThreeMonths |   | After ThreeThroughTwelveMonths |  | Within OneYear |       | GreaterThanOne Year |   | Total
|----------------------------------- |  | ---------------------- | --- | --------------------------- | - | ------------------------------ |  | -------------- | ----- | ------------------- | - | -----
|                                    |  | (Dollars in thousands)
|Unused commitments to extend credit |  | $                      | 380 |                             | $ | 723                            |  | $              | 2,001 |                     | $ | 3,104
|Standby letters of credit           |  |                        | 75  |                             |   |                               |  |                | 76    |                     |   | 151  
|                                    |  |                        |     |                             |   |                                |  |                |       |                     |   |      
|Totals                              |  | $                      | 455 |                             | $ | 723                            |  | $              | 2,077 |                     | $ | 3,255
|                                    |  |                        |     |                             |   |                                |  |                |       |                     |   |      



The Company evaluates each
customers credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company 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.



19



---

Liquidity Management and Capital Resources



Liquidity is the ability to meet current and future obligations through liquidation or
maturity of existing assets or the acquisition of additional liabilities. Adequate liquidity is necessary to meet the requirements of customers for loans and deposit withdrawals in the most timely and economical manner. Some liquidity is ensured by
maintaining assets that may be immediately converted into cash at minimal cost (amounts due from banks and federal funds sold). However, the most manageable sources of liquidity are composed of liabilities, with the primary focus on liquidity
management being on the ability to obtain deposits within the Banks service area. Core deposits (total deposits less time deposits greater than $100,000) provide a relatively stable funding base, and were equal to 67.9% of total assets at
December 31, 2002. Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold, and funds from maturing loans. The Bank had over $6.6 million in cash and liquid assets at December 31, 2002. The Bank has
$6.1 million available through a line of credit with other banks as an additional source of liquidity funding. The Bank also has a line of credit to borrow funds from the Federal Home Loan Bank up to $11.6 million, of which $7.1 million is available
at December 31, 2002.



During 2002, the Companys primary sources of cash
were $24.6 million from deposits and $4.5 million from Federal Home Loan Bank advances. The Companys primary uses of cash resources were to fund loans of approximately $15.2 million and the purchase of investment securities of approximately
$8.9 million, net of maturities and sales. These trends are consistent with those of a growing bank operation and consistent with past cash uses and sources. Management believes that the Banks overall liquidity sources are adequate to meet its
operating needs in the ordinary course of its business. Accordingly, the Company does not expect to have to raise additional funds in 2003 to meet either short or long-term needs.



Impact of Inflation



Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Companys performance than do the general rate of inflation and of goods and services. In addition, interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those
resulting from inflation.



Accounting and
Financial Reporting Issues



The Company has adopted various accounting
policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies are described in the footnotes to the financial statements at
December 31, 2002 as filed on the annual report on Form 10-KSB. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities. The Company
considers these accounting policies to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Because of the
nature of the judgments and assumptions made, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and the results of operations.



Of these significant accounting policies, the Company considers its policies regarding the
allowance for loan losses (the Allowance) to be its most critical accounting policy due to the significant degree of management judgment involved in determining the amount of Allowance. The Company has developed policies and procedures
for assessing the adequacy of the Allowance, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Companys assessments may be impacted in future periods by changes in economic
conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which is not known to management at the time of the issuance of the consolidated financial statements. Refer to the discussion under
Provision and Allowance for Loan Losses section of this document for a detailed description of the Companys estimation process and methodology related to the allowance for loan losses.



20



---

Industry Developments



On November 4, 1999, the U.S. Senate and House of Representatives each passed the Gramm-Leach-Bliley Act, previously known as the Financial
Services Modernization Act of 1999. The Act was signed into law by President Clinton in November 1999. Among other things, the Act repeals the restrictions on companies affiliating with securities firms contained in sections 20 and 32 of the
Glass-Steagall Act. The Act also creates a new financial holding company under the Bank Holding Company Act, which will permit holding companies to engage in a statutorily provided list of financial activities, including insurance and
securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities. The Act also authorizes activities that are complementary to financial activities. The Act is intended to grant to
community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, the Act may have the result of increasing the amount of competition that the Company faces from larger institutions and
other types of companies. In fact, it is not possible to predict the full effect that the Act will have on the Company.



From time to time, various bills are introduced in the United States Congress with respect to the regulation of financial institutions. Certain legislation, if adopted,
could significantly change the regulation of banks and the financial services industry. The Company cannot predict whether any such legislation will be adopted or, if adopted, how it would affect the Company.



Change of Accountants



Legislation and Securities Exchange Commission rules adopted in 2002 have significantly
increased, and will continue to increase, the regulatory burdens on audit firms that audit the financial statements of companies that are subject to the reporting requirements of the Securities Exchange Act of 1934. Consequently, many smaller audit
firms are deciding to limit their audit practice to companies that are not subject to the 1934 Act. Tourville, Simpson & Caskey, L.L.P., which served as the Companys principal independent accountant since the Companys inception, is
one such firm. Accordingly, effective January 2, 2003, Tourville, Simpson & Caskey resigned as the Companys principal independent public accountant. Elliott Davis, LLC was engaged by the Company on January 2, 2003 to audit the
Companys financial statements for the year ended December 31, 2002, and has also been selected to audit the Companys financial statements for the year ending December 31, 2003.



Tourville, Simpson & Caskey, L.L.P.s reports on the Companys financial
statements for the years ended December 31, 2002, 2001 and 2000 neither contained an adverse opinion or disclaimer of opinion, nor was modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Tourville,
Simpson & Caskey, L.L.P. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Tourville, Simpson & Caskey, L.L.P.s satisfaction, would have
caused it to make reference to the subject matter of the disagreement in its report.



21



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Financial Statements



Years Ended December 31, 2002 and 2001



and



Independent Auditors Report



---

INDEPENDENT AUDITORS REPORT



The Board of Directors

First Reliance Bancshares, Inc.

Florence, South Carolina



We have audited the
accompanying consolidated balance sheet of First Reliance Bancshares, Inc. as of December 31, 2002 and the related consolidated statements of income, changes in shareholders equity and comprehensive income, and cash flows for the year ended
December 31, 2002. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The financial statements
of First Reliance Bancshares, Inc. as of and for each of the two years in the period ended December 31, 2001, were audited by other auditors whose report dated February 1, 2002, expressed an unqualified opinion on those consolidated statements.



We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of First Reliance Bancshares, Inc. as
of December 31, 2002 and the consolidated results of their operations and cash flows for the year ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.



Elliott Davis, LLC

Columbia, South Carolina

January 31, 2003



22



---

INDEPENDENT AUDITORS REPORT



The Board of Directors

First Reliance Bank

Florence, South Carolina



We have audited the accompanying balance
sheets of First Reliance Bank as of December 31, 2001 and 2000 and the related statements of income, changes in shareholders equity and comprehensive income, and cash flows for the years ended December 31, 2001 and 2000 and for the period
August 16, 1999 to December 31, 1999. These financial statements are the responsibility of the Banks management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.



In our
opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Reliance Bank as of December 31, 2001 and 2000 and the results of its operations and cash flows for the years ended
December 31, 2001 and 2000 and for the period August 16, 1999 to December 31, 1999 in conformity with accounting principles generally accepted in the United States of America.



Tourville, Simpson and Caskey, L.L.P.

Columbia, South Carolina

February 1, 2002



Tourville, Simpson & Caskey, LLP ceased operations on December 31, 2002.

Therefore, the above opinions have
not been reissued.



23



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Balance Sheets



|                                                                                                                                                            |  | December 31, |            
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -----------
|                                                                                                                                                            |  | 2002         |            
|Assets:                                                                                                                                                     |  |              |            
|Cash and cash equivalents:                                                                                                                                  |  |              |            
|Cash and due from banks                                                                                                                                     |  | $            | 3,789,927  
|Federal funds sold                                                                                                                                          |  |              | 2,856,000  
|                                                                                                                                                            |  |              |            
|Total cash and cash equivalents                                                                                                                             |  |              | 6,645,927  
|                                                                                                                                                            |  |              |            
|Investment securities:                                                                                                                                      |  |              |            
|Securities available-for-sale                                                                                                                               |  |              | 23,448,775 
|Nonmarketable equity securities                                                                                                                             |  |              | 250,000    
|                                                                                                                                                            |  |              |            
|Total investment securities                                                                                                                                 |  |              | 23,698,775 
|                                                                                                                                                            |  |              |            
|Loans receivable                                                                                                                                            |  |              | 81,558,827 
|Less allowance for loan losses                                                                                                                              |  |              | (1,137,337 
|                                                                                                                                                            |  |              |            
|Loans, net                                                                                                                                                  |  |              | 80,421,490 
|Premises, furniture and equipment, net                                                                                                                      |  |              | 3,993,363  
|Accrued interest receivable                                                                                                                                 |  |              | 698,590    
|Other real estate owned                                                                                                                                     |  |              | 120,872    
|Other assets                                                                                                                                                |  |              | 497,574    
|                                                                                                                                                            |  |              |            
|Total assets                                                                                                                                                |  | $            | 116,076,591
|                                                                                                                                                            |  |              |            
|Liabilities:                                                                                                                                                |  |              |            
|Deposits:                                                                                                                                                   |  |              |            
|Noninterest-bearing transaction accounts                                                                                                                    |  | $            | 16,470,767 
|Interest-bearing transaction accounts                                                                                                                       |  |              | 16,489,757 
|Savings                                                                                                                                                     |  |              | 15,492,740 
|Time deposits $100,000 and over                                                                                                                             |  |              | 21,525,185 
|Other time deposits                                                                                                                                         |  |              | 30,344,632 
|                                                                                                                                                            |  |              |            
|Total deposits                                                                                                                                              |  |              | 100,323,081
|Securities sold under agreements to repurchase                                                                                                              |  |              | 1,881,750  
|Advances from Federal Home Loan Bank                                                                                                                        |  |              | 4,500,000  
|Accrued interest payable                                                                                                                                    |  |              | 376,961    
|Other liabilities                                                                                                                                           |  |              | 350,621    
|                                                                                                                                                            |  |              |            
|Total liabilities                                                                                                                                           |  |              | 107,432,413
|                                                                                                                                                            |  |              |            
|Commitments and contingencies (Notes 6, 7 and 15)                                                                                                           |  |              |            
|Shareholders Equity:                                                                                                                                       |  |              |            
|Common stock, $0.01 par value, 5,000,000 shares authorized; 1,448,830 and 724,115 shares issued and outstanding at December 31,
2002 and 2001, respectively |  |              | 14,488     
|Capital Surplus                                                                                                                                             |  |              | 7,091,562  
|Retained earnings                                                                                                                                           |  |              | 1,309,803  
|Accumulated other comprehensive income                                                                                                                      |  |              | 228,325    
|                                                                                                                                                            |  |              |            
|Total shareholders equity                                                                                                                                  |  |              | 8,644,178  
|                                                                                                                                                            |  |              |            
|Total liabilities and shareholders equity                                                                                                                  |  | $            | 116,076,591
|                                                                                                                                                            |  |              |            



The
accompaying notes are an integral part of the consolidated financial statements.



24



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Statements of Income



|                                                    |  | For the years ended December 31,
|--------------------------------------------------- |  | --------------------------------
|                                                    |  | 2002                            
|Interest income:                                    |  |                                 
|Loans, including fees                               |  | $                               
|Investment securities:                              |  |                                 
|Taxable                                             |  |                                 
|Tax exempt                                          |  |                                 
|Federal funds sold                                  |  |                                 
|Other interest income                               |  |                                 
|                                                    |  |                                 
|Total                                               |  |                                 
|                                                    |  |                                 
|Interest expense:                                   |  |                                 
|Time deposits $100,000 and over                     |  |                                 
|Other deposits                                      |  |                                 
|Other interest expense                              |  |                                 
|                                                    |  |                                 
|Total                                               |  |                                 
|                                                    |  |                                 
|Net interest income                                 |  |                                 
|                                                    |  |                                 
|Provision for loan losses                           |  |                                 
|                                                    |  |                                 
|Net interest income after provision for loan losses |  |                                 
|                                                    |  |                                 
|Noninterest income:                                 |  |                                 
|Service charges on deposit accounts                 |  |                                 
|Residential mortgage origination fees               |  |                                 
|Securities and insurance brokerage commissions      |  |                                 
|Credit life insurance commissions                   |  |                                 
|Other service charges, commissions, and fees        |  |                                 
|Gain of sales of securities available-for-sale      |  |                                 
|Other                                               |  |                                 
|                                                    |  |                                 
|Total                                               |  |                                 
|                                                    |  |                                 
|Noninterest expenses:                               |  |                                 
|Salaries and benefits                               |  |                                 
|Occupancy                                           |  |                                 
|Furniture and equipment                             |  |                                 
|Other operating                                     |  |                                 
|                                                    |  |                                 
|Total                                               |  |                                 
|                                                    |  |                                 
|Income before income taxes                          |  |                                 
|Income tax expense                                  |  |                                 
|                                                    |  |                                 
|Net income                                          |  | $                               
|                                                    |  |                                 
|Earnings per share:                                 |  |                                 
|Basic                                               |  | $                               
|Diluted                                             |  | $                               



The
accompanying notes are an integral part of the consolidated financial statements.



25



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Statements of Changes in Stockholders Equity and

Comprehensive Income



For the years ended December 31, 2002, 2001 and 2000



|                                                          |  | Common stock |  | Capitalsurplus |        |  | Retainedearnings(deficit) |           |   | Accumulatedothercomprehensive income |   |           | Total | 
|--------------------------------------------------------- |  | ------------ |  | -------------- | ------ |  | ------------------------- | --------- | - | ------------------------------------ | - | --------- | ----- | 
|                                                          |  | Shares       |  | Amount         |        |  |                           |          
|Balance, December 31, 1999                                |  | 723,518      |  | $              | 5,518  |  | $                         | 7,167,775 |   |                                      | $ | (494,072  | )     | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Net income                                                |  |              |  |                |        |  |                           |           |   |                                      |   | 293,018   |       | 
|Other comprehensive income, net of tax expense of $41,868 |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Comprehensive income                                      |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Balance, December 31, 2000                                |  | 723,518      |  |                | 5,518  |  |                           | 7,167,775 |   |                                      |   | (201,054  | )     | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Net income                                                |  |              |  |                |        |  |                           |           |   |                                      |   | 616,554   |       | 
|Other comprehensive loss, net of tax benefit of $10,677   |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Comprehensive income                                      |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Exercise of stock options                                 |  | 597          |  |                | 5,970  |  |                           |           |   |                                      |   |           |       | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Balance, December 31, 2001                                |  | 724,115      |  |                | 11,488 |  |                           | 7,167,775 |   |                                      |   | 415,500   |       | 
|Net income                                                |  |              |  |                |        |  |                           |           |   |                                      |   | 894,303   |       | 
|Other comprehensive income, net of tax expense of $85,042 |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Comprehensive income                                      |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Stock issuance costs (Note 2)                             |  |              |  |                |        |  |                           | (76,213   | ) |                                      |   |           |       | 
|Exercise of stock options                                 |  | 600          |  |                | 3,000  |  |                           |           |   |                                      |   |           |       | 
|Two for one stock split                                   |  | 724,115      |  |                |        |  |                           |           |   |                                      |   |           |       | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 
|Balance, December 31, 2002                                |  | 1,448,830    |  | $              | 14,488 |  | $                         | 7,091,562 |   |                                      | $ | 1,309,803 |       | 
|                                                          |  |              |  |                |        |  |                           |           |   |                                      |   |           |       | 



The
accompanying notes are an integral part of the consolidated financial statements.



26



---

FIRST RELIANCE BANCSHARES, INC.



Consolidated Statements of Cash Flows



|                                                                                            |  | For the years ended December 31, |            
|------------------------------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                                            |  | 2002                             |            
|Cash flows from operating activities:                                                       |  |                                  |            
|Net income                                                                                  |  | $                                | 894,303    
|Adjustments to reconcile net income to net cash provided (used) by operating activities:    |  |                                  |            
|Provision for loan losses                                                                   |  |                                  | 348,533    
|Depreciation and amortization expense                                                       |  |                                  | 281,470    
|Gain on sales of securities available-for-sales                                             |  |                                  | (79,785    
|Discount (accretion) and premium amortization                                               |  |                                  | 86,406     
|Disbursements for mortgages held for sale                                                   |  |                                  | (16,397,632
|Proceeds from sales of mortgages held for sale                                              |  |                                  | 14,640,257 
|Deferred income tax provision (benefit)                                                     |  |                                  | (5,607     
|Increase in interest receivable                                                             |  |                                  | (10,979    
|Increase (decrease) in interest payable                                                     |  |                                  | (95,887    
|Increase in other assets                                                                    |  |                                  | (175,205   
|Increase (decrease) in other liabilities                                                    |  |                                  | (134,432   
|                                                                                            |  |                                  |            
|Net cash provided (used) by operating activities                                            |  |                                  | (648,558   
|                                                                                            |  |                                  |            
|Cash flows from investing activities:                                                       |  |                                  |            
|Purchases of securities available-for-sale                                                  |  |                                  | (22,726,876
|Maturities of securities available-for-sale                                                 |  |                                  | 6,392,036  
|Proceeds from sales of securities available-for-sale                                        |  |                                  | 7,439,616  
|Purchase of Federal Home Loan Bank stock                                                    |  |                                  | (107,600   
|Net increase in loans receivable                                                            |  |                                  | (15,248,343
|Purchases of premises, furniture and equipment                                              |  |                                  | (544,912   
|Proceeds from sale of other real estate owned                                               |  |                                  | 28,160     
|                                                                                            |  |                                  |            
|Net cash used by investing activities                                                       |  |                                  | (24,767,919
|                                                                                            |  |                                  |            
|Cash flows from financing activities:                                                       |  |                                  |            
|Net increase in demand deposits, interest-bearing transaction accounts and savings accounts |  |                                  | 12,788,711 
|Net increase in certificates of deposit and other time deposits                             |  |                                  | 11,847,726 
|Increase in advances from Federal Home Loan Bank                                            |  |                                  | 4,500,000  
|Net increase (decrease) in securities sold under agreements to repurchase                   |  |                                  | (45,414    
|Stock issuance costs                                                                        |  |                                  | (76,213    
|Exercise of stock options                                                                   |  |                                  | 3,000      
|                                                                                            |  |                                  |            
|Net cash provided by financing activities                                                   |  |                                  | 29,017,810 
|                                                                                            |  |                                  |            
|Net increase (decrease) in cash and cash equivalents                                        |  |                                  | 3,601,333  
|Cash and cash equivalents, beginning of year                                                |  |                                  | 3,044,594  
|                                                                                            |  |                                  |            
|Cash and cash equivalents, end of year                                                      |  | $                                | 6,645,927  
|                                                                                            |  |                                  |            
|Cash paid during the year for:                                                              |  |                                  |            
|Income taxes                                                                                |  | $                                | 640,543    
|Interest                                                                                    |  | $                                | 2,432,859  
|Supplemental noncash investing and financing activities:                                    |  |                                  |            
|Foreclosures on loans                                                                       |  | $                                | 65,872     



The
accompanying notes are an integral part of the consolidated financial statements.



27



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



OrganizationFirst Reliance Bancshares, Inc. (the Company) was incorporated to serve as a bank holding company for its subsidiary (Note
2), First Reliance Bank (the Bank). First Reliance Bank was incorporated on August 9, 1999 and commenced business on August 16, 1999. The principal business activity of the Bank is to provide banking services to domestic markets, principally in
Florence County, South Carolina. The Bank is a state-chartered commercial Bank, and its deposits are insured by the Federal Deposit Insurance Corporation. The consolidated financial statements include the accounts of the parent company and its
wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.



Managements EstimatesThe preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.



Material estimates that are particularly
susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated
useful lives and methods for depreciating premises and equipment.



While
management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the Companys allowances for losses on loans and foreclosed real estate. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information
available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate may change materially in the near term.



Significant Group Concentrations of Credit RiskMost of the Companys activities
are with customers located within Florence County in South Carolina. The types of securities in which the Company invests are discussed in Note 5. The types of lending in which the Company engages are discussed in Note 6. The Company does not have
any significant concentrations with any one industry or customer.



Securities
Available-for-SaleSecurities available-for-sale are carried at amortized cost and adjusted to estimated market value by recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are
recorded in shareholders equity net of deferred income taxes. Reductions in market value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security. The adjusted cost
basis of investments available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.



Nonmarketable Equity SecuritiesNonmarketable equity securities include the cost of the Companys investment in the stock of Federal Home Loan Bank. The stock
has no quoted market value and no ready market exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. At December 31, 2002 and 2001,
the Companys investment in Federal Home Loan Bank stock was $250,000 and $142,400, respectively. Dividends received on this stock is included as a separate component of interest income.



28



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Loans receivableLoans receivable are stated at their unpaid principal balance.
Interest income is computed using the simple interest method and is recorded in the period earned.



When serious doubt exists as to the collectibility of a loan or when a loan becomes ninety days past due as to principal or interest, interest income is generally discontinued unless the estimated net realizable value
of collateral exceeds the principal balance and accrued interest. When interest accruals are discontinued, income earned but not collected is reversed.



Impaired loans are measured based on the present value of discounted expected cash flows. When it is determined that a loan is impaired, a direct charge to bad debt
expense is made for the difference between the net present value of expected future cash flows based on the contractual rate and discount rate and the Companys recorded investment in the related loan. The corresponding entry is to a related
allowance account. Interest is discontinued on impaired loans when management determines that a borrower may be unable to meet payments as they become due.



Allowance for Loan LossesAn allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent risks
in the loan portfolio. The allowance is based upon a continuing review of past loan loss experience, current and future economic conditions which may affect the borrowers ability to pay and the underlying collateral value of the loans. Loans,
which are deemed to be uncollectible, are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously charged off are added to the allowance.



Other Real Estate OwnedOther real estate owned includes real estate acquired through
foreclosure. Collateral is considered foreclosed in substance when the borrower has little or no equity in the fair value of the collateral, proceeds for repayment of the debt can be expected to come only from the sale of the collateral, and it is
doubtful that the borrower can rebuild equity or otherwise repay the loan in the foreseeable future. Other real estate owned is carried at the lower of cost (principal balance at the date of foreclosure) or fair value minus estimated costs to sell.
Any write-downs at the date of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets, subsequent changes in the valuation allowance, and gains and losses on disposal are included in other expenses.



Premises, Furniture and EquipmentPremises, furniture and equipment are stated at cost,
less accumulated depreciation. The provision for depreciation is computed by the straight-line method, based on the estimated useful lives for buildings of 40 years and furniture and equipment of 5 to 10 years. Leasehold improvements are being
amortized over 20 years. The cost of assets sold or otherwise disposed of and the related allowance for depreciation is eliminated from the accounts and the resulting gains or losses are reflected in the income statement when incurred. Maintenance
and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.



Income TaxesIncome taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are
determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance
for loan losses and depreciable premises and equipment.



Retirement
BenefitsA trusteed retirement savings plan is sponsored by the Company and provides retirement benefits to substantially all officers and employees who meet certain age and service requirements. The plan includes a salary reduction
feature pursuant to Section 401(k) of the Internal Revenue Code. Under the plan and present policies, participants are permitted to make contributions up to 15% of their annual compensation. At its discretion, the Company can make matching
contributions up to 6% of the participants compensation. The Company charged $39,795, $21,141, and $13,323 to earnings for the retirement savings plan in 2002, 2001, and 2000, respectively.



29



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



Stock-Based CompensationThe Company has a stock-based employee compensation plan which
is further described in Note 17. The Company accounts for the plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following
table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.



|                                                                                                                                            |  | For the years ended December 31,
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------
|                                                                                                                                            |  | 2002                            
|Net income, as reported                                                                                                                     |  | $                               
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects |  |                                 
|                                                                                                                                            |  |                                 
|Pro forma net income                                                                                                                        |  | $                               
|                                                                                                                                            |  |                                 
|Earnings per share:                                                                                                                         |  |                                 
|Basicas reported                                                                                                                           |  | $                               
|                                                                                                                                            |  |                                 
|Basicpro forma                                                                                                                             |  | $                               
|                                                                                                                                            |  |                                 
|Dilutedas reported                                                                                                                         |  | $                               
|                                                                                                                                            |  |                                 
|Dilutedpro forma                                                                                                                           |  | $                               
|                                                                                                                                            |  |                                 



Common Stock Owned by the Employee
Stock Ownership Plan (ESOP)ESOP purchases and redemptions of the Companys common stock are at estimated fair value. Dividends on ESOP shares are charged to retained earnings. All shares held by the ESOP are treated as outstanding for
purposes of computing earnings per share.



Earnings Per ShareBasic
earnings per share represents income available to shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if
dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. Earnings per share have been restated to
reflect the two for one stock split. See Note 16.



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.



30



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



The components of other comprehensive income and related tax effects are as follows:



|                                                             |  | For the years ended December 31, |        
|------------------------------------------------------------ |  | -------------------------------- | -------
|                                                             |  | 2002                             |        
|Unrealized gains (losses) on securities available-for-sale:  |  | $                                | 334,275
|Reclassification adjustment for gains realized in net income |  |                                  | (79,785
|                                                             |  |                                  |        
|Net unrealized gains (losses) on securities                  |  |                                  | 254,490
|Tax effect                                                   |  |                                  | (89,409
|                                                             |  |                                  |        
|Net-of-tax amount                                            |  | $                                | 165,081
|                                                             |  |                                  |        



Statements of Cash FlowsFor
purposes of reporting cash flows in the consolidated financial statements, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due
from banks and federal funds sold. Generally, federal funds are sold for one-day periods.



Changes in the valuation account of securities available-for-sale, including the deferred tax effects, are considered noncash transactions for purposes of the statement of cash flows and are presented in detail in the
notes to the consolidated financial statements.



Off-Balance-Sheet Financial
InstrumentsIn the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the consolidated
financial statements when they become payable by the customer.



Recent
Accounting PronouncementsIn October 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 147, Acquisitions of Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9, which brings all business combinations involving financial institutions, except mutual financial institutions, into the scope of SFAS No. 141, Business Combinations. This statement requires that all acquisitions of
financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with SFAS No. 141 and the related intangibles
accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such acquisitions from the scope of SFAS No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions. SFAS No. 147 also amends SFAS No. 144 to include in its scope
long-term customer relationship intangibles of financial institutions. SFAS No. 147 was effective upon issuance and had no impact on the Companys financial statements.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of
FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company adopted this standard effective December 31, 2002 and has included the required disclosures in the footnotes to the financials. The Company has not elected the fair value treatment
of stock-based compensation and the adoption of this standard had no impact on its financial position.



31



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



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



ReclassificationsCertain captions and amounts in the 2001 and 2000 consolidated financial statements were reclassified to conform with
the 2002 presentation.



NOTE 2CORPORATE REORGANIZATION



At the annual meeting of the shareholders of the Bank held on June 7, 2001, the
Banks shareholders approved the reorganization (the Reorganization) of the Bank into a holding company structure pursuant to the terms of a Plan of Reorganization and Exchange that provides for a statutory share exchange between
the shareholders of the Bank and the Company whereby each outstanding share of common stock of the Bank would be exchanged for one share of common stock of the Company. The statutory share exchange took effect and the Reorganization was completed on
April 1, 2002. As a result and as a matter of convenience for presentation, the financial statements for the year ended December 31, 2002 are presented as if the Reorganization had occurred on January 1, 2000. The accompanying financial statements
for the periods ended in 2001 and 2000 are unchanged from the amounts previously reported by the Bank except for amounts affected by the stock split.



NOTE 3STOCK OFFERING



On November 12, 2002, the Company commenced a stock offering whereby a minimum of 125,000 shares and a maximum of 1,250,000 shares of common stock were offered to fund
continued expansion through First Reliance Bank. The offering price is $8.00 per share. This is a best efforts offering we are conducting without an underwriter. At December 31, 2002, the Company had sold 162,125 shares and maintained the proceeds
of this sale in an escrow account. Total proceeds in the escrow account were $1,297,043 at December 31, 2002. The Company anticipates closing the offering in May 2003. As of December 31, 2002, the Company had incurred $76,213 in costs directly
associated with the stock sale.



NOTE 4CASH AND DUE FROM BANKS



The Company is required to maintain balances with The Bankers Bank, a
correspondent bank, sufficient to cover all cash letter transactions. At December 31, 2002, the requirement was met by the cash balance in the account and by the line available for federal funds.



32



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 5INVESTMENT SECURITIES



The amortized cost and estimated fair values of securities available-for-sale were:



|                           |  | AmortizedCost |            | Gross Unrealized |        | Estimated Fair Value
|-------------------------- |  | ------------- | ---------- | ---------------- | ------ | --------------------
|                           |  |               | Gains      |                  | Losses |                     
|December 31, 2002          |  |               |            |                  |        |                     
|U.S. Government agencies   |  | $             | 4,327,391  |                  | $      | 82,565              
|Mortgage-backed securities |  |               | 10,646,356 |                  |        | 177,189             
|Municipals                 |  |               | 8,129,798  |                  |        | 105,645             
|                           |  |               |            |                  |        |                     
|                           |  | $             | 23,103,545 |                  | $      | 365,399             
|                           |  |               |            |                  |        |                     
|December 31, 2001          |  |               |            |                  |        |                     
|U.S. Government agencies   |  | $             | 6,209,906  |                  | $      | 129,073             
|Mortgage-backed securities |  |               | 3,376,873  |                  |        | 40,151              
|Municipals                 |  |               | 3,113,998  |                  |        |                    
|Commercial paper           |  |               | 1,514,169  |                  |        | 12,688              
|                           |  |               |            |                  |        |                     
|                           |  | $             | 14,214,946 |                  | $      | 181,912             
|                           |  |               |            |                  |        |                     



For the years ended December 31, 2002
and 2001, proceeds from the sales of securities available-for-sale amounted to $7,439,616 and $1,374,108, respectively. Gross realized gains amounted to $79,785 and $7,413, respectively. There were no gross realized losses. There were no sales of
securities in 2000.



The following is a summary of maturities of securities
available-for-sale as of December 31, 2002. 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.



|                                          |  | SecuritiesAvailable-For-Sale
|----------------------------------------- |  | ----------------------------
|                                          |  | AmortizedCost               
|Due after one year but within five years  |  | $                           
|Due after five years but within ten years |  |                             
|Due after ten years                       |  |                             
|                                          |  |                             
|                                          |  |                             
|Mortgage-backed securities                |  |                             
|                                          |  |                             
|Total                                     |  | $                           
|                                          |  |                             



At December 31, 2002 and 2001,
securities with amortized costs of $4,293,005 and $4,231,635 and estimated fair values of $4,434,777 and $4,269,785, respectively, were pledged to secure public deposits and for other purposes as required and permitted by law.



33



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 6LOANS RECEIVABLE



Major classifications of loans receivable are summarized as follows:



|                               |  | December 31,
|------------------------------ |  | ------------
|                               |  | 2002        
|Mortgage loans on real estate: |  |             
|Residential 1-4 family         |  | $           
|Commercial                     |  |             
|Construction                   |  |             
|Second mortgages               |  |             
|Equity lines of credit         |  |             
|                               |  |             
|                               |  |             
|Commercial and industrial      |  |             
|Consumer                       |  |             
|Other                          |  |             
|Total gross loans              |  | $           
|                               |  |             



The Company identifies impaired loans
through its normal internal loan review process. Loans on the Companys problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to
be collected. Loans are not considered impaired if a minimal delay occurs and all amounts due including accrued interest at the contractual interest rate for the period of delay are expected to be collected. At December 31, 2002, management has
determined that no impairment of loans existed.



Transactions in the allowance
for loan losses are summarized below:



|                                           |  | For the years ended December 31, |          
|------------------------------------------ |  | -------------------------------- | ---------
|                                           |  | 2002                             |          
|Balance, beginning of year                 |  | $                                | 1,045,014
|Provision charged to operations            |  |                                  | 348,533  
|Recoveries on loans previously charged-off |  |                                  | 37,659   
|Loans charged-off                          |  |                                  | (293,869 
|                                           |  |                                  |          
|Balance, end of year                       |  | $                                | 1,137,337
|                                           |  |                                  |          



As of December 31, 2002, there were
$291,804 in loans past due ninety days or more and $292,725 of loans in nonaccrual status. There were $146,436 in loans past due ninety days or more and $8,872 of loans in nonaccrual status at December 31, 2001.



Loans sold with limited recourse are 1-4 family residential mortgages originated by the
Company and sold to various other financial institutions. These loans are sold with the agreement that a loan may be returned to the Company at any time in the event the Company fails to provide necessary documents related to the mortgages to the
buyers, or if it makes false representations or warranties to the buyers. One of the agreements also states that if a loan becomes 60 days or more delinquent during the first four months following the first payment due and is subsequently
recommended for foreclosure in the 12 months following the payment due the buyer, then the loan is subject to repurchase by the Company. Loans sold to this buyer in 2002 total $7,010,693. The Company uses the same credit policies in making loans
held for sale as it does for on-balance-sheet instruments.



34



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 6LOANS (continued)



The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the
balance sheet. The Companys exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Letters of
credit are conditional commitments issued to guarantee a customers performance to a third party and have essentially the same credit risk as other lending facilities.



Collateral held for commitments to extend credit and standby letters of credit varies but may include accounts receivable, inventory,
property, plant, equipment, and income-producing commercial properties.



The
following table summarizes the Companys off-balance-sheet financial instruments whose contract amounts represent credit risk:



|                             |  | December 31,
|---------------------------- |  | ------------
|                             |  | 2002        
|Commitments to extend credit |  | $           
|Standby letters of credit    |  |             



Management is not aware of any
significant concentrations of loans to classes of borrowers or industries that would be affected similarly by economic conditions. Although the Companys loan portfolio is diversified, a substantial portion of its borrowers ability to
honor the terms of their loans is dependent on the economic conditions in Florence County and surrounding areas.



NOTE 7PREMISES, FURNITURE AND EQUIPMENT



Premises, furniture and equipment consisted of the following:



|                               |  | December 31,
|------------------------------ |  | ------------
|                               |  | 2002        
|Land                           |  | $           
|Building                       |  |             
|Furniture and equipment        |  |             
|Construction in progress       |  |             
|                               |  |             
|Total                          |  |             
|Less, accumulated depreciation |  |             
|                               |  |             
|Premises and equipment, net    |  | $           
|                               |  |             



Depreciation expense for the years
ended December 31, 2002, 2001, and 2000 amounted to $281,470, $286,087, and $97,080, respectively.



The Company is in the process of purchasing and renovating adjacent property to be used as the operations center. In addition to the amount in construction in progress, the Company is committed to spend an additional
$680,000.



35



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 8DEPOSITS



At December 31, 2002, the scheduled maturities of time deposits were as follows:



|Maturing In |  | Amount
|----------- |  | ------
|2003        |  | $     
|2004        |  |       
|2005        |  |       
|2006        |  |       
|2007        |  |       
|            |  |       
|Total       |  | $     
|            |  |       



NOTE 9SHORT-TERM BORROWINGS



Short-term borrowings payable are securities sold under agreements to
repurchase which generally mature on a one to thirty day basis. Information concerning securities sold under agreements to repurchase is summarized as follows:



|                                          |  | For the years ended December 31, |          
|----------------------------------------- |  | -------------------------------- | ---------
|                                          |  | 2002                             |          
|Average balance during the year           |  | $                                | 1,683,987
|Average interest rate during the year     |  |                                  | 0.87     
|Maximum month-end balance during the year |  | $                                | 1,927,726



Under the terms of the repurchase
agreement, the Company sells an interest in securities issued by United States Government agencies and agrees to repurchase the same securities the following business day. As of December 31, 2002 and 2001, the par value and market value of the
securities held by the third-party for the underlying agreements were $2,790,904 and $4,232,966, respectively, and $2,790,904 and $4,269,785, respectively. See Note 5.



NOTE 10ADVANCES FROM FEDERAL HOME LOAN BANK



Advances from the Federal Home Loan Bank consisted of the following:



|Description                   |  | Interest Rate |   |  | December 31,2002
|----------------------------- |  | ------------- | - |  | ----------------
|Fixed rate advances maturing: |  |               |   |  |                 
|January 16, 2003              |  | 2.23          | % |  | $               
|July 16, 2003                 |  | 2.53          | % |  |                 
|January 16, 2004              |  | 3.04          | % |  |                 
|July 1, 2004                  |  | 3.46          | % |  |                 
|July 1, 2005                  |  | 4.12          | % |  |                 
|January 17, 2012              |  | 3.83          | % |  |                 
|July 5, 2012                  |  | 4.08          | % |  |                 
|                              |  |               |   |  |                 
|                              |  |               |   |  | $               
|                              |  |               |   |  |                 



36



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 10ADVANCES FROM FEDERAL HOME LOAN BANK (continued)



Scheduled principal reductions of Federal Home Loan Bank advances are as follows:



|           |  | Amount
|---------- |  | ------
|2003       |  | $     
|2004       |  |       
|2005       |  |       
|2006       |  |       
|2007       |  |       
|Thereafter |  |       
|           |  |       
|Total      |  | $     
|           |  |       



As collateral, the Company had pledged
first mortgage loans on one to four family residential loans aggregating $20,632,111 (see Note 6) at December 31, 2002. In addition, the Companys Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to
prepayment penalties.



NOTE 11RESTRICTIONS ON
SHAREHOLDERS EQUITY



South Carolina banking regulations restrict the
amount of dividends that can be paid to shareholders. All of the Banks dividends to First Reliance Bancshares, Inc. are payable only from the undivided profits of the Bank. At December 31, 2002, the Bank had undivided profits of $1,356,712.
The Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the Commissioner of Banking provided that the Bank received a composite rating of one or two at the last Federal or
State regulatory examination. Under Federal Reserve Board regulations, the amounts of loans or advances from the Bank to the parent company are also restricted.



NOTE 12OTHER OPERATING EXPENSES



Other operating expenses are summarized below:



|                                       |  | For the years ended December 31,
|-------------------------------------- |  | --------------------------------
|                                       |  | 2002                            
|Professional fees                      |  | $                               
|Office supplies, forms, and stationery |  |                                 
|Advertising                            |  |                                 
|Data processing and supplies           |  |                                 
|Loan origination expenses              |  |                                 
|Employee education and conventions     |  |                                 
|Computer and software                  |  |                                 
|Other                                  |  |                                 
|                                       |  |                                 
|Total                                  |  | $                               
|                                       |  |                                 



37



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 13INCOME TAXES



Income tax expense is summarized as follows:



|                         |  | For the years ended December 31, |        
|------------------------ |  | -------------------------------- | -------
|                         |  | 2002                             |        
|Currently payable        |  |                                  |        
|Federal                  |  | $                                | 370,121
|State                    |  |                                  | 41,445 
|                         |  |                                  |        
|Total current            |  |                                  | 411,566
|                         |  |                                  |        
|Deferred                 |  |                                  |        
|Federal                  |  |                                  | 31,843 
|State                    |  |                                  | 51,957 
|                         |  |                                  |        
|Total deferred           |  |                                  | 83,800 
|                         |  |                                  |        
|Total income tax expense |  | $                                | 495,366
|                         |  |                                  |        



Income tax expense is allocated as
follows:



|To continuing operations |  | $ | 405,959 |  | $ | 312,098 |   |  | $ | 169,400
|------------------------ |  | - | ------- |  | - | ------- | - |  | - | -------
|To shareholders equity  |  |   | 89,407  |  |   | (10,677 | ) |  |   | 41,868 
|                         |  |   |         |  |   |         |   |  |   |        
|                         |  | $ | 495,366 |  | $ | 301,421 |   |  | $ | 211,268
|                         |  |   |         |  |   |         |   |  |   |        



The components of deferred tax assets
and deferred tax liabilities are as follows:



|                                                 |  | December 31, |        
|------------------------------------------------ |  | ------------ | -------
|                                                 |  | 2002         |        
|Deferred tax assets:                             |  |              |        
|Allowance for loan losses                        |  | $            | 357,523
|Organizational costs                             |  |              | 46,181 
|Other                                            |  |              | 9,330  
|                                                 |  |              |        
|Total gross deferred tax assets                  |  |              | 413,034
|Less, valuation allowance                        |  |              |       
|                                                 |  |              |        
|Total net deferred tax assets                    |  |              | 413,034
|                                                 |  |              |        
|Deferred tax liabilities:                        |  |              |        
|Unrealized gain on securities available-for-sale |  |              | 116,905
|Accumulated depreciation                         |  |              | 49,811 
|                                                 |  |              |        
|Total gross deferred tax liabilities             |  |              | 166,716
|                                                 |  |              |        
|Net deferred tax asset recognized                |  | $            | 246,318
|                                                 |  |              |        



Deferred tax assets represent the
future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. As of December 31, 2002,
management has determined that it is more likely than not that the total deferred tax asset will be realized and, accordingly, has not established a valuation allowance. Net deferred tax assets are included in other assets at December 31, 2002 and
2001.



38



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 13INCOME TAXES (continued)



A reconciliation between the income tax expense and the amount computed by applying the federal statutory rate of 34% to income before
income taxes follows:



|                                                    |  | For the years ended December 31, |        
|--------------------------------------------------- |  | -------------------------------- | -------
|                                                    |  | 2002                             |        
|Tax expense at statutory rate                       |  | $                                | 442,089
|State income tax, net of federal income tax benefit |  |                                  | 33,716 
|Tax-exempt interest income                          |  |                                  | (81,562
|Disallowed interest expense                         |  |                                  | 7,948  
|Other, net                                          |  |                                  | 3,768  
|                                                    |  |                                  |        
|                                                    |  | $                                | 405,959
|                                                    |  |                                  |        



NOTE 14RELATED PARTY
TRANSACTIONS



Certain parties (principally certain directors and executive
officers of the Company, their immediate families and business interests) were loan customers of and had other transactions in the normal course of business with the Company. Related party loans are made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. As of December 31, 2002 and 2001, the Company had related party loans
totaling $3,028,776, $2,035,157 and $1,539,142, respectively. During 2002, $2,491,966 of advances were made to related parties and repayments totaled $1,498,347. During 2001, $1,217,552 of advances were made to related parties and repayments totaled
$721,557.



At December 31, 2002 and 2001, the Company had securities sold under
agreements to repurchase with related parties of $415,215 and $400,082, respectively.



NOTE 15COMMITMENTS AND CONTINGENCIES



In the ordinary course of business, the Company may, from time to time, become a party to legal claims and disputes. At December 31, 2002, management and legal counsel are not aware of any pending or threatened litigation or unasserted
claims or assessments that could result in losses, if any, that would be material to the consolidated financial statements.



39



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FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 16EARNINGS PER SHARE



Earnings per sharebasic is computed by dividing net income by the weighted average number of common shares outstanding. Earnings per sharediluted is computed
by dividing net income by the weighted average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. Dilutive common share equivalents include common shares issuable upon exercise of outstanding
stock options.



|                                                            |  | For the years ended December 31,
|----------------------------------------------------------- |  | --------------------------------
|                                                            |  | 2002                            
|Basic earnings per share:                                   |  |                                 
|Net income available to common shareholders                 |  | $                               
|                                                            |  |                                 
|Average common shares outstandingbasic                     |  |                                 
|                                                            |  |                                 
|Basic earnings per share                                    |  | $                               
|                                                            |  |                                 
|Diluted earnings per share:                                 |  |                                 
|Net income available to common shareholders                 |  | $                               
|                                                            |  |                                 
|Average common shares outstandingbasic                     |  |                                 
|Incremental shares from assumed conversion of stock options |  |                                 
|                                                            |  |                                 
|Average common shares outstandingdiluted                   |  |                                 
|                                                            |  |                                 
|Diluted earnings per share                                  |  | $                               
|                                                            |  |                                 



NOTE 17STOCK COMPENSATION
PLAN



On August 16, 1999, the Company established the 1999 First Reliance
Bank Employee Stock Option Plan (Stock Plan) that provides for the granting of options to purchase up to 119,000 shares (238,000 shares after the effects of the stock split) of the Companys common stock to directors, officers, or employees of
the Company. The per-share exercise price of incentive stock options granted under the Stock Plan may not be less than the fair market value of a share on the date of grant. The per-share exercise price of stock options granted is determined by a
committee appointed by the Board of Directors. The expiration date of any option may not be greater than ten years from the date of grant. Options that expire, unexercised or are canceled become available for reissuance. At December 31, 2002, there
were 5,800 options available for grant.



In calculating the pro forma
disclosures, the fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions:



|                        |  | 2002     |   |  | 2001 |  | 2000     |  
|----------------------- |  | -------- | - |  | ---- |  | -------- | -
|Dividend yield          |  | 0.00     | % |  | N/A  |  | 0.00     | %
|Expected volatility     |  | 10.00    | % |  | N/A  |  | 0.00     | %
|Risk-free interest rate |  | 5.41     | % |  | N/A  |  | 6.52     | %
|Expected life           |  | 10 years |   |  | N/A  |  | 10 years |  



There were no options
granted during 2001.



40



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 17STOCK COMPENSATION PLAN (continued)



A summary of the status of the Companys stock option plan as of December 31, 2002,
2001 and 2000, and changes during the period is presented below:



|                                 |  | 2002    |   | 2001 |                               | 2000
|-------------------------------- |  | ------- | - | ---- | ----------------------------- | ----
|                                 |  | Shares  |   |      | Weighted-AverageExercisePrice |     
|Outstanding at beginning of year |  | 222,800 |   |      | $                             | 5.04
|Granted                          |  | 14,000  |   |      |                               | 6.59
|Exercised                        |  | (600    | ) |      |                               | 5.00
|Cancelled                        |  | (4,000  | ) |      |                               | 6.59
|                                 |  |         |   |      |                               |     
|Outstanding at end of year       |  | 232,200 |   |      |                               | 5.11
|                                 |  |         |   |      |                               |     



The prior year number of options and
prices have been adjusted to reflect the two for one stock split.



The
following table summarizes information about stock options outstanding under the Companys plan at December 31, 2002:



|                                |  | Outstanding |            | Exercisable
|------------------------------- |  | ----------- | ---------- | -----------
|Number of options               |  |             | 232,200    |            
|Weighted average remaining life |  |             | 6.80 years |            
|Weighted average exercise price |  | $           | 5.11       |            
|High exercise price             |  | $           | 6.59       |            
|Low exercise price              |  | $           | 5.00       |            



NOTE 18REGULATORY MATTERS



The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Bank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 Banks assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings,
and other factors.



Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum ratios 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 consists of common
shareholders equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total regulatory minimum
requirements are 4% for Tier 1 and 8% for total risk-based capital.



The Bank
is 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.



41



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 18REGULATORY MATTERS (continued)



As of December 31, 2002, the most recent notification from the Banks primary regulator categorized it as well-capitalized under the
regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Banks category.



The following table summarizes the capital amounts and ratios of the Bank and the regulatory minimum requirements.



|                                         |  | Actual |           |       | For CapitalAdequacy Purposes |   |        | To Be Well-Capitalized UnderPrompt CorrectiveAction Provisions |          
|---------------------------------------- |  | ------ | --------- | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------- | ---------
|                                         |  | Amount |           | Ratio |                              |   | Amount |                                                                | Ratio    
|December 31, 2002                        |  |        |           |       |                              |   |        |                                                                |          
|Total capital (to risk-weighted assets)  |  | $      | 9,586,230 |       | 11.46                        | % |        | $                                                              | 6,692,520
|Tier 1 capital (to risk-weighted assets) |  |        | 8,538,974 |       | 10.21                        |   |        |                                                                | 3,345,760
|Tier 1 capital (to average assets)       |  |        | 8,538,974 |       | 7.48                         |   |        |                                                                | 4,567,160
|                                         |  |        |           |       |                              |  
|December 31, 2001                        |  |        |           |       |                              |   |        |                                                                |          
|Total capital (to risk-weighted assets)  |  | $      | 8,455,137 |       | 12.32                        | % |        | $                                                              | 6,788,240
|Tier 1 capital (to risk-weighted assets) |  |        | 7,594,763 |       | 11.07                        |   |        |                                                                | 3,389,120
|Tier 1 capital (to average assets)       |  |        | 7,594,763 |       | 8.96                         |   |        |                                                                | 2,745,040



The Federal Reserve Board has similar
requirements for bank holding companies. The Company is currently not subject to these requirements because the Federal Reserve guidelines contain an exemption for bank holding companies with less than $150,000,000 in consolidated assets.



NOTE 19UNUSED LINES OF CREDIT



As of December 31, 2002, the Company had unused lines of credit to purchase federal funds
from unrelated companies totaling $6,100,000. These lines of credit are available on a one to fourteen day basis for general corporate purposes. The Company also has a line of credit to borrow funds from the Federal Home Loan Bank up to 10% of the
Companys total assets, which totaled $11,629,692 as of December 31, 2002. As of December 31, 2002, the Company had borrowed $4,500,000 on this line.



NOTE 20FAIR VALUE OF FINANCIAL INSTRUMENTS



The fair value of a financial instrument is the amount for 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.



The following methods and assumptions were used to estimate the fair value of
significant financial instruments:



Cash and Due from BanksThe carrying
amount is a reasonable estimate of fair value.



Federal Funds SoldFederal
funds sold are for a term of one day and the carrying amount approximates the fair value.



Securities available-for-saleFair value equals the carrying amount which is the quoted market price. If quoted market prices are not available, fair values are based on quoted market prices of comparable
securities.



42



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 20FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)



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 receivableFor certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk and credit card receivables, fair values are based on the
carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to the borrowers with similar credit ratings and for the same remaining
maturities.



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.



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.



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.



Accrued Interest Receivable and PayableThe carrying value of these
instruments is a reasonable estimate of fair value.



Off-Balance-Sheet
Financial InstrumentsThe contractual amount is a reasonable estimate of fair value for the instruments because commitments to extend credit and standby letters of credit are issued on a short-term or floating rate basis.



The carrying values and estimated fair values of the Companys financial instruments
were as follows:



|                                                                   |  | December 31,  
|------------------------------------------------------------------ |  | --------------
|                                                                   |  | 2002          
|                                                                   |  | CarryingAmount
|Financial Assets:                                                  |  |               
|Cash and due from banks                                            |  | $             
|Federal funds sold                                                 |  |               
|Securities available-for-sale                                      |  |               
|Nonmarketable equity securities                                    |  |               
|Loans receivable                                                   |  |               
|Accrued interest receivable                                        |  |               
|Financial Liabilities:                                             |  |               
|Demand deposit, interest-bearing transaction, and savings accounts |  | $             
|Certificates of deposit                                            |  |               
|Securities sold under agreements to repurchase                     |  |               
|Advances from Federal Home Loan Bank                               |  |               
|Accrued interest payable                                           |  |               

|                                         |  |                |            |                    
|---------------------------------------- |  | -------------- | ---------- | -------------------
|                                         |  | NotionalAmount |            | Estimated FairValue
|Off-Balance-Sheet Financial Instruments: |  |                |            |                    
|Commitments to extend credit             |  | $              | 11,040,303 |                    
|Standby letters of credit                |  |                | 159,000    |                    



43



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 21FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY ONLY)



Condensed Balance Sheet



|                                           |  | December 31,2002
|------------------------------------------ |  | ----------------
|Assets                                     |  |                 
|Investment in banking subsidiary           |  | $               
|Other assets                               |  |                 
|                                           |  |                 
|Total assets                               |  | $               
|                                           |  |                 
|Liabilities                                |  |                 
|Due to banking subsidiary                  |  | $               
|Shareholders equity                       |  |                 
|                                           |  |                 
|Total liabilities and shareholders equity |  | $               
|                                           |  |                 



Condensed Statement of
Income



|                                                                                             |  | For the periodApril 2, 2002throughDecember 31,2002 |        
|-------------------------------------------------------------------------------------------- |  | -------------------------------------------------- | -------
|Income                                                                                       |  | $                                                  |       
|Expenses                                                                                     |  |                                                    | 74,823 
|                                                                                             |  |                                                    |        
|Income (loss) before income taxes and equity in undistributed earnings of banking subsidiary |  |                                                    | (74,823
|Income tax benefit                                                                           |  |                                                    | (27,915
|                                                                                             |  |                                                    |        
|Loss before equity in undistributed earning of banking subsidiary                            |  |                                                    | (46,908
|Equity in undistributed earnings of banking subsidiary                                       |  |                                                    | 748,994
|                                                                                             |  |                                                    |        
|Net income                                                                                   |  | $                                                  | 702,086
|                                                                                             |  |                                                    |        



44



---

FIRST RELIANCE BANCSHARES, INC.



Notes to Consolidated Financial Statements



NOTE 21FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY ONLY) (continued)



Condensed Statement of Cash Flows



|                                                                                  |  | For the periodApril 2, 2002throughDecember 31,2002 |         
|--------------------------------------------------------------------------------- |  | -------------------------------------------------- | --------
|Cash flows from operating activities                                              |  |                                                    |         
|Net income                                                                        |  | $                                                  | 702,086 
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                                    |         
|Increase in other assets                                                          |  |                                                    | (27,915 
|Increase in other liabilities                                                     |  |                                                    | 151,036 
|Equity in undistributed earnings of banking subsidiary                            |  |                                                    | (748,994
|                                                                                  |  |                                                    |         
|Net cash provided by operating activities                                         |  |                                                    | 76,213  
|                                                                                  |  |                                                    |         
|Cash flows from financing activities                                              |  |                                                    |         
|Stock issuance costs                                                              |  |                                                    | (76,213 
|                                                                                  |  |                                                    |         
|Net cash used by financing activities                                             |  |                                                    | (76,213 
|                                                                                  |  |                                                    |         
|Increase (decrease) in cash                                                       |  |                                                    |        
|Cash and cash equivalents, beginning of period                                    |  |                                                    |        
|                                                                                  |  |                                                    |         
|Cash and cash equivalents, ending of period                                       |  | $                                                  |        
|                                                                                  |  |                                                    |         



45



---

FIRST RELIANCE BANCSHARES, INC.



Corporate Data



ANNUAL MEETING:



The annual meeting of Shareholders of First Reliance Bancshares, Inc. will be held at First Reliance Bank on June 19, 2003.



|CORPORATE OFFICE:                                                                             |  | INDEPENDENT AUDITORS:                                                          
|--------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------
|                                                                                              | 
|2170 West Palmetto StreetFlorence, South Carolina 29501Phone (843) 662-8802Fax (843) 662-8373 |  | Elliott Davis, LLC1901 Main Street, Suite 1650P.O. Box 2227Columbia, S.C. 29202



|STOCK TRANSFER DEPARTMENT:                                                    
|------------------------------------------------------------------------------
|                                                                              
|Registrar and TransferCompany 10 Commerce DriveCranford, New Jersey 07016-3572



MARKET FOR FIRST RELIANCE
BANCSHARES, INC. COMMON STOCK; PAYMENT OF DIVIDENDS



The Companys
common stock is not traded on any stock exchange or in the over-the-counter market, and there is no public trading market for the common stock. Arms-length transactions in the common stock are anticipated to be infrequent and negotiated privately
between the persons involved in those transactions.



On April 1, 2002, the
Company acquired the Bank pursuant to a statutory share exchange whereby each share of the common stock of the Bank was exchanged for one share of the common stock of the Company. The Company repurchased the 100 shares of common stock held by F. R.
Saunders, Jr., who was the incorporator of the Company, for the purchase price paid by Mr. Saunders for such shares. Other than the issuance of the shares in the share exchange and the repurchase, there have been no transactions in the common stock
of the Company.



High and Low Stock Price Information for First Reliance
Bancshares, Inc.



|                     |  | 2002
|-------------------- |  | ----
|Applicable Period(1) |  | High
|Third Quarter        |  | $   
|Fourth Quarter       |  | $   

---

|(1) |  | Represents the quarter periods after the Companys acquisition, by share exchange, of all of the outstanding and issued shares of First Reliance Bank.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



46



---

FIRST RELIANCE BANCSHARES, INC.



Corporate Data (continued)



Prior to the reorganization of the Bank into a holding company structure, the Banks common stock had been traded in infrequent transactions. The Bank maintained a
register of all sales of stock reported to the Bank. The following limited trading information relating to arms-length transactions in the common stock of the Bank during 2001 and 2002 has been compiled from information made available to the Bank
and maintained in the stock register, and should not be viewed as complete or necessarily reflective of the actual or market value of the common stock of the Company. The following prices for the common stock of the Bank have been adjusted to
reflect the one for one stock dividend that was paid on April 1, 2002.



High and Low Stock Price Information for First Reliance Bank



|                  |  | 2002 |      | 2001
|----------------- |  | ---- | ---- | ----
|Applicable Period |  | High |      | Low 
|First Quarter     |  | $    | 7.50 |     
|Second Quarter    |  | $    | 7.50 |     
|Third Quarter     |  |      | N/A  |     
|Fourth Quarter    |  |      | N/A  |     



As of April 18, 2003, there were
1,458,830 shares of common stock outstanding, held of record by approximately 683 shareholders. The Company has the discretionary authority to repurchase limited amounts of shares of its common stock consistent with regulatory, capital and other
restrictions.



The Company is a legal entity separate and distinct from the
Bank. The principal sources of the Companys cash flow, including cash flow to pay dividends to its shareholders, are dividends that the Bank pays to its sole shareholder, the Company. Statutory and regulatory limitations apply to the
Banks payment of dividends to the Company as well as to the Companys payment of dividends to its shareholders. Statutory and regulatory limitations apply to the Banks payment of dividends to the Company as well as to the
Companys payment of dividends to its shareholders. For example, all FDIC insured institutions, regardless of their level of capitalization, are prohibited from paying any dividend or making any other kind of distribution if following the
payment or distribution the institution would be undercapitalized. Moreover, federal agencies having regulatory authority over the Company or the Bank have issued policy statements that provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.



Additionally,
under South Carolina law, the Bank is authorized to pay cash dividends up to 100% of net income in any calendar year without obtaining the prior approval of the State Board, provided that the Bank received a composite rating of one or two at the
last examination conducted by a state or federal regulatory authority. All other cash dividends require prior approval by the State Board. South Carolina law requires each state nonmember bank to maintain the same reserves against deposits as are
required for a state member bank under the Federal Reserve Act. This requirement is not expected to limit the ability of the Bank to pay dividends on its common stock.



It is the current policy of the Bank to retain earnings to permit possible future expansion. As a result, the Company has no current plans
to initiate the payment of cash dividends, and its future dividend policy will depend on the Banks earnings, capital requirements, financial condition and other factors considered relevant by the board of directors of the Company and the Bank.



Shareholders may obtain, without charge, a copy of the Companys Annual
Report filed with the Securities and Exchange Commission on Form 10-KSB for the period ended December 31, 2002. Written requests should be addressed to Jeffrey A. Paolucci, 2170 W. Palmetto Street, Florence, South Carolina 29501.



47



---

FIRST RELIANCE BANCSHARES, INC.



Corporate Data (continued)



EXECUTIVE OFFICERS OF FIRST RELIANCE BANCSHARES, INC.



F. R. Saunders, Jr.

President and Chief Executive Officer



Paul C. Saunders

Senior Vice President and Assistant Secretary



A. Dale Porter

Executive Vice President, Senior Retail Officer and Secretary



Jeffrey A. Paolucci

Executive Vice President and Chief Financial Officer



DIRECTORS OF FIRST RELIANCE BANCSHARES, INC.



F. R. Saunders, Jr.

President and Chief Executive Officer of First Reliance Bancshares, Inc. and First Reliance Bank



Paul C. Saunders

Senior Vice President and Assistant Secretary of First Reliance Bancshares, Inc. and First Reliance Bank



A. Dale Porter

Executive Vice President, Senior Retail Officer and Secretary of First Reliance Bancshares, Inc. and First Reliance Bank



William P. Campbell

Chairman of the Board of Directors of Computer Dimensions, Inc., a computer software company



Leonard A. Hoogenboom

Chairman of the Board of Directors of First Reliance Bancshares, Inc.; Owner and Chief Executive Officer of Hoogenboom & Co. CPA



John M. Jebaily

Self-employed real estate agent



Wilie Jones

Insurance agent with New York Life Insurance Company; Owner and President of Professional Insurance and Financial Services, Inc.



Andrew G. Kampiziones

Owner, President and Treasurer of Fairfax Development Corporation, a real estate development corporation



Nathaniel Lockhart

U.S. Postal Service employee; President of Solid Vision, an investment group; Co-owner of Accustaff Incorporated, a temporary staffing service



C. Dale Lusk, MD

Physician with Advanced Womens Care



T. Daniel Turner

Owner and President of Turners Custom Auto Glass Inc.; Vice President of Bob Smith
Chevrolet GMC Geo; Owner of Carolina Connection, a billing service company



A. Joe Willis

President of Willis Chiromed, a chiropractic practice



48