**EXHIBIT 13.1**

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Table of Contents**

|                                                                                       | **Page** |
|--------------------------------------------------------------------------------------------|----------|
|                                                                                       |          |
| Selected Financial Data                                                                    | 2        |
| Management’s Discussion and   Analysis                                                | 3-21     |
| Report of Independent Registered   Public Accounting Firm                                  | 22       |
| Consolidated Balance Sheets                                                                | 23       |
| Consolidated Statements of Income                                                          | 24       |
| Consolidated Statements of Changes   in Shareholders’ Equity and Comprehensive Income | 25       |
| Consolidated Statements of Cash   Flows                                                    | 26       |
| Notes to Consolidated Financial   Statements                                               | 27-46    |
| Corporate Data                                                                             | 47-49    |

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Selected Financial Data**

The following selected financial data is derived from the consolidated financial statements and other data of First Reliance Bancshares, Inc. and Subsidiary (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.

| ***(Dollars in   thousands, except per share)***    |   | **2005** |      | **2004** |   | **2003**  |   | **2002** |      | **2001** |   |
|-----------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
|                                                     |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| **Income Statement Data:**                          |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Interest income                                     |   | $        | 23,131    |     | $      | 13,291    |   | $        | 8,499     |     | $      | 6,932 |   | $ | 6,251 |   |
| Interest expense                                    |   |     | 8,979     |     |   | 4,061     |   |     | 2,460     |     |   | 2,337 |   |   | 2,886 |   |
|                                                |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Net interest income                                 |   |     | 14,152    |     |   | 9,230     |   |     | 6,039     |     |   | 4,595 |   |   | 3,365 |   |
| Provision for loan losses                           |   |     | 1,811     |     |   | 1,362     |   |     | 792       |     |   | 349 |   |   | 347 |   |
|                                                |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Net interest income after provision for loan losses |   |     | 12,341    |     |   | 7,868     |   |     | 5,247     |     |   | 4,246 |   |   | 3,018 |   |
| Noninterest income                                  |   |     | 2,871     |     |   | 2,380     |   |     | 2,138     |     |   | 1,734 |   |   | 1,404 |   |
| Noninterest expense                                 |   |     | 12,475    |     |   | 8,338     |   |     | 5,966     |     |   | 4,680 |   |   | 3,493 |   |
|                                                |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Income before income taxes                          |   |     | 2,737     |     |   | 1,910     |   |     | 1,419     |     |   | 1,300 |   |   | 929 |   |
| Income tax expense                                  |   |     | 789       |     |   | 571       |   |     | 403       |     |   | 406 |   |   | 312 |   |
|                                                |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Net income                                          |   | **$**    | **1,948** |     | **$**  | **1,339** |   | **$**    | **1,016** |     | **$**  | **894** |   | **$** | **617** |   |
|                                                |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| **Balance Sheet Data:**                             |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Assets                                              |   | $        | 403,038   |     | $      | 284,971   |   | $        | 180,364   |     | $      | 116,077 |   | $ | 86,195 |   |
| Earning assets                                      |   |     | 381,158   |     |   | 271,020   |   |     | 169,205   |     |   | 108,114 |   |   | 80,380 |   |
| Securities available for sale(1)                    |   |     | 37,121    |     |   | 28,568    |   |     | 27,689    |     |   | 23,449 |   |   | 14,306 |   |
| Loans (2)                                           |   |     | 319,539   |     |   | 239,695   |   |     | 140,361   |     |   | 81,559 |   |   | 64,875 |   |
| Allowance for loan losses                           |   |     | 3,419     |     |   | 2,758     |   |     | 1,752     |     |   | 1,137 |   |   | 1,045 |   |
| Deposits                                            |   |     | 334,437   |     |   | 225,494   |   |     | 139,415   |     |   | 100,323 |   |   | 75,687 |   |
| Shareholders’ equity                           |   |     | 29,651    |     |   | 27,359    |   |     | 17,703    |     |   | 8,644 |   |   | 7,658 |   |
| **Per-Share Data:**(5)                              |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Basic earnings                                      |   | $        | .60       |     | $      | 0.52      |   | $        | 0.48      |     | $      | 0.62 |   | $ | 0.43 |   |
| Diluted earnings                                    |   |     | .57       |     |   | 0.48      |   |     | 0.46      |     |   | 0.59 |   |   | 0.42 |   |
| Book value (period end)                             |   |     | 8.97      |     |   | 8.54      |   |     | 7.18      |     |   | 5.97 |   |   | 5.29 |   |
| **Performance Ratios:**                             |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Return on average assets                            |   |     | 0.54      | %        |   | 0.59      | %      |     | 0.70      | %        |   | 0.86 | % |   | 0.79 | % |
| Return on average equity                            |   |     | 6.82      |     |   | 7.04      |   |     | 7.07      |     |   | 10.87 |   |   | 8.29 |   |
| Net interest margin (3)                             |   |     | 4.20      |     |   | 4.41      |   |     | 4.53      |     |   | 4.77 |   |   | 4.71 |   |
| Efficiency (4)                                      |   |     | 73.28     |     |   | 71.39     |   |     | 72.99     |     |   | 74.89 |   |   | 73.36 |   |
| **Capital and Liquidity Ratios:**                   |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Average equity to average assets                    |   |     | 7.96      |     |   | 8.43      |   |     | 9.93      |     |   | 7.92 |   |   | 9.58 |   |
| Leverage (4.00% required minimum)                   |   |     | 10.02     |     |   | 10.11     |   |     | 10.30     |     |   | 7.48 |   |   | 8.96 |   |
| Risk-based capital                                  |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Tier 1                                              |   |     | 12.02     |     |   | 11.36     |   |     | 12.60     |     |   | 10.21 |   |   | 11.07 |   |
| Total                                               |   |     | 13.05     |     |   | 12.52     |   |     | 13.85     |     |   | 11.46 |   |   | 12.32 |   |
| Average loans to average deposits                   |   |     | 102.07    |     |   | 101.16    |   |     | 94.43     |     |   | 82.51 |   |   | 82.39 |   |

|     |
|-----|
| (1) | Securities available-for-sale are stated at fair   value. |
| (2) | Loans are stated at gross amounts before allowance   for loan losses and include loans held for sale. |
| (3) | Tax equivalent 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 declared in 2002. |

-2-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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, Lexington County, and Charleston 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 serves as additional space for operational activities of the Bank, including data processing and auditing.  No customer services are being 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 was $8.00 per share.  This was a best efforts offering and was conducted without an underwriter.  The Company had sold 1,007,430 shares resulting in additional capital of $8,059,439 net of selling expenses of $162,965, at the close of the offering in May 2003.  Also 10,400 stock options were exercised in 2003 for a total amount of $52,000.

During the second quarter of 2004, the Bank opened its third branch in Lexington, South Carolina.  On March 15, 2005, the Bank opened its fourth branch in Charleston, South Carolina located at 51 State Street.  And on October 3, 2005, the Bank opened its fifth branch in Mount Pleasant, South Carolina located at 800 South Shelmore Blvd..

-3-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**General** - *continued*

On June 30, 2005 the Company formed First Reliance Capital Trust I (the “Trust”) for the purposed of issuing trust preferred securities, which enable the Company to obtain Tier 1 capital on a consolidated basis for regulatory purposes.  On July 1, 2005, the Company closed a private offering of $10,000,000 of floating rate preferred securities offered and sold by the Trust.  The proceeds from such issuance, together with the proceeds from a related issuance of common securities of the Trust purchased by the Company in the amount of $310,000, were invested by the Trust in floating rate Junior Subordinated Notes issued by the Company (the “Notes”) totaling $10.3 million.  The Notes are due and payable on November 23, 2035 and may be redeemed by the Company after five years, and sooner in certain specific events, including in the event that certain circumstances render the Notes ineligible for treatment as Tier 1 capital, subject toprior approval by the Federal Reserve Board, if then required.  The Notes presently qualify as Tier 1 capital for regulatory reporting.  The sole assets of the Trust are the Notes.  The Company owns 100% of the common securities of the Trust.  The Notes are unsecured and rank junior to all senior debt of the Company.  For the quarter ended December 31, 2005, the floating rate preferred securities and the Notes had an annual interest rate of 5.93%.  This interest rate is fixed until August 23, 2010, when the interest rate will adjust quarterly.  After August 23, 2010, the interest rate will equal three-month LIBOR plus 1.83%.

Like most financial institutions, our profitability depends largely upon net interest income, which is the difference between the interest received on earning assets, such as loans and investment securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings.  Our results of operations are also affected by our provision for loan losses; non-interest expenses, such as salaries, employee benefits, and occupancy expenses; and non-interest income, such as mortgage loan fees and service charges on deposit accounts.  

Economic conditions, competition and federal monetary and fiscal policies also affect financial institutions.  For example, 2005 was characterized by rising interest rates in the economy.  Lending activities are also influenced by regional and local economic factors, such as housing supply and demand, competition among lenders, customer preferences and levels of personal income and savings in our primary market area. 

Our balanced growth continued during 2005, with increases in assets, deposits, shareholders’ equity, earnings per share and returns on average assets and equity.  The following chart shows our growth in these areas from December 31, 2004 to December 31, 2005:

| ***(Dollars in millions, except per share   amounts)*** |   | **December   31,** |   | **Percent   Increase   (Decrease)** |   |
|---------------------------------------------------------|--------|--------------------|--------|-------------------------------------|--------|
|                                                         |
| **2005**                                                |   | **2004**           |
|                                                         |   |                    |        |                                |        |  |   |  |  |   |
| Total assets                                            |   | $                  | 403.0  |                                | $      | 285.0 |   |   | 41.40 | % |
| Loans                                                   |   |               | 311.5  |                                |   | 238.4 |   |   | 30.66 |   |
| Investment securities                                   |   |               | 39.2   |                                |   | 30.3 |   |   | 29.37 |   |
| Deposits                                                |   |               | 334.4  |                                |   | 225.5 |   |   | 48.29 |   |
| Shareholders’ equity                               |   |               | 29.7   |                                |   | 27.4 |   |   | 8.39 |   |

The additional capital increased our legal lending limit, thereby allowing us to extend larger loans to our customers. However, the additional capital also resulted in a decrease in our return on average equity in 2005 from 2004.  Our loan portfolio increased $73.1 million from December 31, 2004 to December 31, 2005.  Our deposit base also increased in 2005 by $108.9 million from $225.5 million in 2004.

The significant increase in average earning assets had a positive impact on our results of operations for 2005.  Average earning assets increased from $212.5 million in 2004 to $341.8 million in 2005.  However, return on average assets decreased from 2004 to 2005 due to the effect of compressed interest margins on net income.  Our increased volume in deposits also increased our fees from service charges and deposit accounts by approximately $125,455 from 2004 to 2005.  Gains on sales of mortgage loans were also an important source of noninterest income in 2005, increasing $293,820, or 50.3% from $584,023 in 2004 to $877,843 in 2005.

-4-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Results of Operations**

***Year ended December 31, 2005, compared with year ended December 31, 2004***

Net interest income increased $4,923,020, or 53.3%, to $14,152,433 in 2005 from $9,229,413 in 2004.  The increase in net interest income was due primarily to an increase in average earning assets.  Average earning assets increased $129,300,000 or 60.9%, mainly due to continued growth in the loan portfolio.  The primary components of interest income were interest on loans, including fees, of $21,236,608, and interest on taxable investment securities of $770,863.

The Company’s net interest spread and net interest margin were 3.78% and 4.20%, respectively, in 2005, compared to 4.08% and 4.41%, respectively, in 2004.  The decrease in net interest spread was primarily the result of an increase in average rates on paying liabilities which outpaced the increase in average rates on earning assets.  Yields on loans, our largest category of earnings assets, increased in 2005.  Overall yields on earning assets increased from 6.32% in 2004 to 6.82% in 2005.  Yields on interest-bearing liabilities increased from 2.24% in 2004 to 3.04% in 2005.

The provision for loan losses was $1,811,317 in 2005 compared to $1,361,762 in 2004.  The allowance for loan losses was 1.10% of total loans at December 31, 2005 as compared to 1.16% of total loans at December 31, 2004.  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 $491,764, or 20.7%, to $2,871,287 in 2005 from $2,379,523 in 2004.  The increase is primarily attributable to increased service charges on deposit accounts and other charges and gain on sale of mortgage loans.  Service charges on deposit accounts increased $125,455, or 10.2% from 2004, to $1,357,214 for the year ended December 31, 2005.  The increase in service charges on deposit accounts was attributable to an overall increase in the number of deposit accounts in 2005.  The gain on sale of mortgage loans increased $293,820 or 50.31% to $877,843 for the year ended December 31, 2005 as the demand for new mortgage loans and refinancings remained strong.  Securities and insurance brokerage income increased $28,943, or 21.99% from 2004, to $160,569 for the year ended December 31, 2005.  The increase is primarily attributable to a successful marketing campaign.  

Noninterest expense increased $4,137,499, or 49.6%, to $12,475,441 in 2005 from $8,337,942 in 2004.  Noninterest expenses increased in all categories as a result of our continued growth. The increase is primarily attributable to increased salaries and benefits and other operating expenses.  Salaries and employee benefits increased $2,262,341, or 46.4%, to $7,136,376 in 2005 from $4,874,035 in 2004.  A large portion of the increase in salaries was due to the addition of new staff to facilitate the new branch locations and growth of the Bank. Other operating expenses increased $1,285,138 from 2004 to $3,707,173 for the year ended December 31, 2005.  This increase was due to the expected increases in overhead caused by the growth of the Company.  The Company’s efficiency ratio was 73.28% in 2005, compared to 71.39% in 2004. 

Net income was $1,947,546 in 2005, compared to $1,338,699 in 2004.  The increase in net income reflects the Company’s continued growth, as average-earning assets increased from $212,457,065 for the year ended December 31, 2004 to $341,757,173 for the year ended December 31, 2005.  Return on average assets during 2005 was 0.54%, compared to 0.59% during 2004, and return on average equity was 6.82% during 2005, compared to 7.04% during 2004. 

**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.

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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**

|                                                |   | **2005**              |        | **2004**              |   | **2003**          |
|-----------------------------------------------------|--------|-----------------------|-------------|-----------------------|--------|-------------------|
|                                                |   |                       |        |                       |   |                   |
| **Year ended December 31,*(Dollars in thousands)*** |   | **Average   Balance** |        | **Income/   Expense** |   | **Yield/   Rate** |   | **Average   Balance** |   | **Income/   Expense** |   | **Yield/   Rate** |   | **Average   Balance** |   | **Income/   Expense** |   | **Yield/   Rate** |   |
|                                                     |   |                       |             |                  |        |                   |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **Assets:**                                         |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earning   Assets:                                   |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                         |   | $                     | 294,740     |                  | $      | 21,237            |   |   | 7.21 |   | $ | 182,996 |   | $ | 12,094 |   |   | 6.61 | % | $ | 110,051 |   | $ | 7,504 |   |   | 6.82 | % |
| Securities,   taxable(2)                            |   |                  | 17,491      |                  |   | 771               |   |   | 4.41 |   |   | 17,266 |   |   | 723 |   |   | 4.19 |   |   | 15,288 |   |   | 604 |   |   | 3.95 |   |
| Securities,   tax exempt(2)                         |   |                  | 13,007      |                  |   | 742               |   |   | 5.70 |   |   | 9,958 |   |   | 557 |   |   | 5.59 |   |   | 8,619 |   |   | 479 |   |   | 5.56 |   |
| Federal   funds sold and other                      |   |                  | 14,462      |                  |   | 479               |   |   | 3.31 |   |   | 1,119 |   |   | 17 |   |   | 1.52 |   |   | 1,469 |   |   | 18 |   |   | 1.23 |   |
| Nonmarketable   equity securities                   |   |                  | 2,057       |                  |   | 91                |   |   | 4.42 |   |   | 1,118 |   |   | 41 |   |   | 3.67 |   |   | 533 |   |   | 16 |   |   | 3.00 |   |
|                                                |   |                       |             |                  |        |                   |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Total   earning assets                              |   |                  | 341,757     |                  |   | 23,320            |   |   | 6.82 |   |   | 212,457 |   |   | 13,432 |   |   | 6.32 |   |   | 135,960 |   |   | 8,621 |   |   | 6.34 |   |
| Cash   and due from banks                           |   |                  | 5,316       |                  |   |              |   |   |   |   |   | 3,439 |   |   |   |   |   |   |   |   | 2,988 |   |   |   |   |   |   |   |
| Premises   and equipment                            |   |                  | 7,379       |                  |   |              |   |   |   |   |   | 5,862 |   |   |   |   |   |   |   |   | 5,381 |   |   |   |   |   |   |   |
| Other   assets                                      |   |                  | 7,596       |                  |   |              |   |   |   |   |   | 5,799 |   |   |   |   |   |   |   |   | 1,837 |   |   |   |   |   |   |   |
| Allowance   for loan losses                         |   |                  | (3,150      | )                     |   |              |   |   |   |   |   | (2,110 | ) |   |   |   |   |   |   |   | (1,350 | ) |   |   |   |   |   |   |
|                                                |   |                       |             |                  |   |              |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total   assets                                      |   | **$**                 | **358,898** |                  |   |              |   |   |   |   | **$** | **225,447** |   |   |   |   |   |   |   | **$** | **144,816** |   |   |   |   |   |   |   |
|                                                |   |                       |             |                  |   |              |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| **Liabilities:**                                    |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing   liabilities:                     |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing   transaction accounts             |   | $                     | 20,067      |                  | $      | 153               |   |   | 0.76 |   | $ | 15,985 |   | $ | 135 |   |   | 0.84 | % | $ | 17,720 |   | $ | 203 |   |   | 1.15 | % |
| Savings   deposits                                  |   |                  | 68,499      |                  |   | 1,877             |   |   | 2.74 |   |   | 29,544 |   |   | 489 |   |   | 1.66 |   |   | 15,994 |   |   | 196 |   |   | 1.23 |   |
| Time   deposits                                     |   |                  | 166,541     |                  |   | 5,552             |   |   | 3.33 |   |   | 110,894 |   |   | 2,874 |   |   | 2.59 |   |   | 64,926 |   |   | 1,799 |   |   | 2.77 |   |
| Junior   subordinated debentures                    |   |                  | 4,875       |                  |   | 306               |   |   | 6.28 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other   borrowings                                  |   |                  | 35,041      |                  |   | 1,090             |   |   | 3.11 |   |   | 24,506 |   |   | 563 |   |   | 2.30 |   |   | 12,780 |   |   | 262 |   |   | 2.05 |   |
|                                                |   |                       |             |                  |        |                   |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Total   interest-bearing liabilities                |   |                  | 295,023     |                  |   | 8,978             |   |   | 3.04 |   |   | 180,929 |   |   | 4,061 |   |   | 2.24 |   |   | 111,420 |   |   | 2,460 |   |   | 2.21 |   |
|                                                |   |                       |             |                  |        |                   |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Demand   deposits                                   |   |                  | 33,652      |                  |   |              |   |   |   |   |   | 24,474 |   |   |   |   |   |   |   |   | 17,903 |   |   |   |   |   |   |   |
| Accrued   interest and other liabilities            |   |                  | 1,666       |                  |   |              |   |   |   |   |   | 1,036 |   |   |   |   |   |   |   |   | 1,119 |   |   |   |   |   |   |   |
| Shareholders’   equity                         |   |                  | 28,557      |                  |   |              |   |   |   |   |   | 19,008 |   |   |   |   |   |   |   |   | 14,374 |   |   |   |   |   |   |   |
|                                                |   |                       |             |                  |   |              |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total   liabilities and shareholders’ equity   |   | **$**                 | **358,898** |                  |   |              |   |   |   |   | **$** | **225,447** |   |   |   |   |   |   |   | **$** | **144,816** |   |   |   |   |   |   |   |
|                                                |   |                       |             |                  |   |              |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Net interest spread                                 |   |                  |        |                  |   |              |   |   | 3.78 | % |   |   |   |   |   |   |   | 4.08 | % |   |   |   |   |   |   |   | 4.13 | % |
| Net interest income                                 |   |                  |        |                  | **$**  | **14,342**        |   |   |   |   |   |   |   | **$** | **9,371** |   |   |   |   |   |   |   | **$** | **6,161** |   |   |   |   |
|                                                |   |                  |        |                  |        |                   |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |
| Net interest margin                                 |   |                  |        |                  |   |              |   |   | 4.20 | % |   |   |   |   |   |   |   | 4.41 | % |   |   |   |   |   |   |   | 4.53 | % |

|     |
|-----|
| (1) | Nonaccrual loans are   included in the balances.  The effect   of these loans is not significant to the computations.  All loans    and deposits are domestic. |
| (2) | Fully tax-equivalent basis   at 34% tax rate for non-taxable securities and loans. |

-6-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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.

|                            |   | **2005   Compared to 2004   Due to increase (decrease) in** |      |
|---------------------------------|--------|-------------------------------------------------------------|-----------|
|                            |   |                                                             |      |
| ***(Dollars in thousands)***    |   | **Volume**                                                  |      | **Rate** |   | **Total** |   |
|                                 |   |                                                             |           |   |  |  |   |  |  |   |
| Interest   income:              |   |                                                        |      |   |   |   |   |   |   |   |
| Loans                           |   | $                                                           | 7,966     |   | $ | 1,177 |   | $ | 9,143 |   |
| Securities, taxable             |   |                                                        | 9         |   |   | 39 |   |   | 48 |   |
| Securities, tax exempt          |   |                                                        | 174       |   |   | 11 |   |   | 185 |   |
| Federal funds sold and other    |   |                                                        | 434       |   |   | 22 |   |   | 456 |   |
| Nonmarketable equity securities |   |                                                        | 38        |   |   | 18 |   |   | 56 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Total interest income           |   |                                                        | 8,621     |   |   | 1,267 |   |   | 9,888 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Interest   expense:             |   |                                                        |      |   |   |   |   |   |   |   |
| Interest-bearing deposits       |   |                                                        | 32        |   |   | (14 | ) |   | 18 |   |
| Savings deposits                |   |                                                        | 927       |   |   | 461 |   |   | 1,388 |   |
| Time deposits                   |   |                                                        | 1,705     |   |   | 973 |   |   | 2,678 |   |
| Junior subordinated debentures  |   |                                                        | 306       |   |   | —   |   |   | —   |   |
| Other borrowings                |   |                                                        | 289       |   |   | 238 |   |   | 527 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Total interest expense          |   |                                                        | 3,259     |   |   | 1,658 |   |   | 4,917 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Net interest income             |   | **$**                                                       | **5,362** |   | **$** | **(391** | **)** | **$** | **4,971** |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |

|                            |   | **2004   Compared to 2003   Due to increase (decrease) in** |      |
|---------------------------------|--------|-------------------------------------------------------------|-----------|
|                            |   |                                                             |      |
| ***(Dollars in thousands)***    |   | **Volume**                                                  |      | **Rate** |   | **Total** |   |
|                                 |   |                                                             |           |   |  |  |   |  |  |   |
| Interest   income:              |   |                                                        |      |   |   |   |   |   |   |   |
| Loans                           |   | $                                                           | 4,828     |   | $ | (238 | ) | $ | 4,590 |   |
| Securities, taxable             |   |                                                        | 81        |   |   | 38 |   |   | 119 |   |
| Securities, tax exempt          |   |                                                        | 75        |   |   | 3 |   |   | 78 |   |
| Federal funds sold and other    |   |                                                        | (5        | ) |   | 10 |   |   | 5 |   |
| Nonmarketable equity securities |   |                                                        | 18        |   |   | 1 |   |   | 19 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Total interest income           |   |                                                        | 4,997     |   |   | (186 | ) |   | 4,811 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Interest   expense:             |   |                                                        |      |   |   |   |   |   |   |   |
| Interest-bearing deposits       |   |                                                        | (18       | ) |   | (50 | ) |   | (68 | ) |
| Savings deposits                |   |                                                        | 207       |   |   | 86 |   |   | 293 |   |
| Time deposits                   |   |                                                        | 1,199     |   |   | (124 | ) |   | 1,075 |   |
| Other borrowings                |   |                                                        | 266       |   |   | 35 |   |   | 301 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Total interest expense          |   |                                                        | 1,654     |   |   | (53 | ) |   | 1,601 |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |
| Net interest income             |   | **$**                                                       | **3,343** |   | **$** | **(133** | **)** | **$** | **3,210** |   |
|                            |   |                                                             |           |   |  |  |   |  |  |   |

-7-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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 fallinginterest rates.

The following table sets forth the Company’s interest rate sensitivity at December 31, 2005.

**Interest Sensitivity Analysis**

| **December 31, 2005*(Dollars in thousands)***     |   | **Within One   Month** |               | **After One   Through   Three   Months** |   | **After   Three   Through   Twelve   Months** |   | **Within   One   Year** |               | **Greater   Than One   Year or   Non-   Sensitive** |   | **Total**          |   |
|---------------------------------------------------|--------|------------------------|--------------------|------------------------------------------|--------|-----------------------------------------------|--------|-------------------------|--------------------|-----------------------------------------------------|--------|--------------------|--------|
|                                                   |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |  |  |   |
| **Assets**                                        |   |                   |               |                                     |   |                                          |   |                    |               |                                                |   |               |   |   |   |   |   |   |   |
| Interest-earning assets                           |   |                   |               |                                     |   |                                          |   |                    |               |                                                |   |               |   |   |   |   |   |   |   |
| Loans,   including held for sale                  |   | $                      | 170,353            |                                     | $      | 19,855                                        |   | $                       | 20,046             |                                                | $      | 210,254            |   | $ | 109,285 |   | $ | 319,539 |   |
| Securities,   taxable                             |   |                   | —   |                                     |   | —                              |   |                    | —   |                                                |   | —   |   |   | 22,868 |   |   | 22,868 |   |
| Securities,   nontaxable                          |   |                   | —   |                                     |   | —                              |   |                    | —   |                                                |   | —   |   |   | 14,253 |   |   | 14,253 |   |
| Nonmarketable   securities                        |   |                   | 1,746              |                                     |   | —                              |   |                    | —   |                                                |   | 1,746              |   |   | —   |   |   | 1,746 |   |
| Investment   in trust                             |   |                   | —   |                                     |   | —                              |   |                    | —   |                                                |   | —   |   |   | 310 |   |   | 310 |   |
| Federal   funds sold                              |   |                   | 22,442             |                                     |   | —                              |   |                    | —   |                                                |   | 22,442             |   |   | —   |   |   | 22,442 |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Total   earning assets                            |   |                   | 194,541            |                                     |   | 19,855                                        |   |                    | 20,046             |                                                |   | 234,442            |   |   | 146,716 |   |   | 381,158 |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |  |  |   |
| **Liabilities**                                   |   |                   |               |                                     |   |                                          |   |                    |               |                                                |   |               |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                     |   |                   |               |                                     |   |                                          |   |                    |               |                                                |   |               |   |   |   |   |   |   |   |
| Interest-bearing   deposits:                      |   |                   |               |                                     |   |                                          |   |                    |               |                                                |   |               |   |   |   |   |   |   |   |
| Demand   deposits                                 |   |                   | 29,437             |                                     |   | —                              |   |                    | —   |                                                |   | 29,437             |   |   | —   |   |   | 29,437 |   |
| Savings   deposits                                |   |                   | 79,663             |                                     |   | —                              |   |                    | —   |                                                |   | 79,663             |   |   | —   |   |   | 79,663 |   |
| Time   deposits                                   |   |                   | 15,599             |                                     |   | 27,453                                        |   |                    | 91,430             |                                                |   | 134,482            |   |   | 51,632 |   |   | 186,114 |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Total   interest-bearing deposits                 |   |                   | 124,699            |                                     |   | 27,453                                        |   |                    | 91,430             |                                                |   | 243,582            |   |   | 51,632 |   |   | 295,214 |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Advances   from Federal Home Loan Bank            |   |                   | —   |                                     |   | 5,000                                         |   |                    | 2,500              |                                                |   | 7,500              |   |   | 16,000 |   |   | 23,500 |   |
| Junior   subordinated debentures                  |   |                   | —   |                                     |   | —                              |   |                    | —   |                                                |   | —   |   |   | 10,310 |   |   | 10,310 |   |
| Repurchase   agreements                           |   |                   | 3,860              |                                     |   | —                              |   |                    | —   |                                                |   | 3,860              |   |   | —   |   |   | 3,860 |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Total   interest-bearing liabilities              |   |                   | 128,559            |                                     |   | 32,453                                        |   |                    | 93,930             |                                                |   | 254,942            |   |   | 77,942 |   |   | 332,884 |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Period gap                                        |   | **$**                  | **65,982**         |                                     | **$**  | **(12,598**                                   | **)**  | **$**                   | **(73,884**        | **)**                                               | **$**  | **(20,500**        | **)**  | **$** | **68,774** |   |   |   |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |   |   |   |
| Cumulative gap                                    |   | **$**                  | **65,982**         |                                     | **$**  | **53,384**                                    |   | **$**                   | **(20,500**        | **)**                                               | **$**  | **(20,500**        | **)**  | **$** | **48,274** |   |   |   |   |
|                                              |   |                        |                    |                                     |        |                                               |   |                         |                    |                                                |        |                    |   |  |  |   |   |   |   |
| Ratio of cumulative gap to   total earning assets |   |                   | 17.31              | %                                        |   | 14.01                                         | %      |                    | (5.38              | )%                                                  |   | (5.38              | )%     |   | 12.67 | % |   |   |   |

-8-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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 Company the opportunity to vary the rates paid on thosedeposits within a thirty-day or shorter period.  However, the Company 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 and junior subordinated debentures are reflected at their contractual maturity date.

The Company is in a liability sensitive position (or a negative gap) of  $20.5 million over the 12 month time frame.  The gap is positive when interest sensitive assets exceed interest sensitive liabilities, as was the case at the end of 2005 with respect to the one-year time horizon. When interest sensitive liabilities exceed interest sensitive assets for a specific repricing “horizon”, a negative interest sensitivity gap is the result.

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

The Company’s Board of Directors and management review the Asset Liability Management with information obtained from our system which measure the interest rate sensitivity.  The Company’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.  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 has positioned itself where there is minimal impact on interest income in a rising or falling rate environment.

-9-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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 a level greater or equal to the Company’s internal risk measurement system for loan risk. The Board maintained an allowance for loan losses level of 1.10% and 1.16% of total loans at December 31, 2005 and 2004, respectively.  Management believes the allowance is adequate to meet any loan losses the Company may experience. 

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.

The allowance represents an amount which we believe will be adequate to absorb inherent 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 limited historical loan loss experience and a review of specific problem loans. 

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 (i.e., real estate, consumer, commercial and mortgage), 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 specificfactors 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, 2005 and 2004, the Company had no specific allocations on its significant credits in its calculation of the allowance for loan losses.

-10-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Provision and Allowance for Loan Losses -***continued*

The Company calculates its general reserve based on percentages tied to our credit grading system.  Each loan is assigned one of eight loan risk ratings, based on the loan’s specific characteristics.  Any loan assigned an adverse ranking is specifically allocated a loss.  For all remaining loans, the general reserve amount is calculated based upon a reserve percentage for each risk rating.  The Company 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 Bank has developed a loan risk monitoring system that assesses the potential risk the Bank may have in its loan portfolio.  This system is monitored monthly by management to insure that adequate provisions and loan allowances are maintained.  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, 2005, the Company’s general reserves totaled $3,419,368, an increase of $661,143 from 2004.  As of December 31, 2004, the Company’s general reserves totaled $2,758,225, an increase of $1,005,943 from 2003.  Thecategories and concentrations of loans have been consistent between the past two years.

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, 2005, 2004, 2003, 2002 and 2001.

**Allowance for Loan Losses**

| ***(Dollars in   thousands)***                              |   | **2005** |               | **2004** |   | **2003**           |   | **2002** |               | **2001** |   |
|-------------------------------------------------------------|--------|----------|--------------------|----------|--------|--------------------|--------|----------|--------------------|----------|--------|
|                                                             |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Total   loans outstanding at end of year                    |   | **$**    | **311,544**        |     | **$**  | **238,362**        |   | **$**    | **139,389**        |     | **$**  | **81,558** |   | **$** | **64,875** |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Average   loans outstanding                                 |   | **$**    | **294,740**        |     | **$**  | **182,996**        |   | **$**    | **100,051**        |     | **$**  | **73,777** |   | **$** | **54,921** |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Balance   of allowance for loan losses at beginning of year |   | $        | 2,758              |     | $      | 1,752              |   | $        | 1,137              |     | $      | 1,045 |   | $ | 780 |   |
| Loans   charged off:                                        |   |     |               |     |   |               |   |     |               |     |   |   |   |   |   |   |
| Real estate - construction                                  |   |     | 142                |     |   | —   |   |     | —   |     |   | —   |   |   | —   |   |
| Real estate - mortgage                                      |   |     | 472                |     |   | 166                |   |     | 47                 |     |   | 32 |   |   | —   |   |
| Commercial and industrial                                   |   |     | 317                |     |   | 44                 |   |     | 42                 |     |   | 78 |   |   | —   |   |
| Consumer and other                                          |   |     | 300                |     |   | 181                |   |     | 106                |     |   | 185 |   |   | 127 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Total loan losses                                           |   |     | 1,231              |     |   | 391                |   |     | 195                |     |   | 295 |   |   | 127 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Recoveries   of previous loan losses:                       |   |     |               |     |   |               |   |     |               |     |   |   |   |   |   |   |
| Real estate - construction                                  |   |     | —   |     |   | —   |   |     | —   |     |   | —   |   |   | —   |   |
| Real estate - mortgage                                      |   |     | 38                 |     |   | —   |   |     | —   |     |   | 2 |   |   | —   |   |
| Commercial and industrial                                   |   |     | 12                 |     |   | —   |   |     | —   |     |   | —   |   |   | —   |   |
| Consumer and other                                          |   |     | 31                 |     |   | 35                 |   |     | 18                 |     |   | 36 |   |   | 45 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Total recoveries                                            |   |     | 81                 |     |   | 35                 |   |     | 18                 |     |   | 38 |   |   | 45 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Net   charge-offs                                           |   |     | 1,150              |     |   | 356                |   |     | 177                |     |   | 257 |   |   | 82 |   |
| Provision   for loan losses                                 |   |     | 1,811              |     |   | 1,362              |   |     | 792                |     |   | 349 |   |   | 347 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Balance   of allowance for loan losses at end of year       |   | **$**    | **3,419**          |     | **$**  | **2,758**          |   | **$**    | **1,752**          |     | **$**  | **1,137** |   | **$** | **1,045** |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Ratios:                                                     |   |     |               |     |   |               |   |     |               |     |   |   |   |   |   |   |
| Net   charge-offs to average loans outstanding              |   |     | 0.39               | %        |   | 0.20               | %      |     | 0.18               | %        |   | 0.35 | % |   | 0.15 | % |
| Net   charge-offs to loans at end of year                   |   |     | 0.37               |     |   | 0.15               |   |     | 0.13               |     |   | 0.32 |   |   | 0.13 |   |
| Allowance   for loan losses to average loans                |   |     | 1.16               |     |   | 1.51               |   |     | 1.75               |     |   | 1.54 |   |   | 1.90 |   |
| Allowance   for loan losses to loans at end of year         |   |     | 1.10               |     |   | 1.16               |   |     | 1.26               |     |   | 1.39 |   |   | 1.61 |   |
| Net   charge-offs to allowance for loan losses              |   |     | 33.64              |     |   | 12.90              |   |     | 10.10              |     |   | 22.60 |   |   | 7.85 |   |
| Net   charge-offs to provisions for loan losses             |   |     | 63.50              |     |   | 26.13              |   |     | 22.35              |     |   | 73.64 |   |   | 23.63 |   |

-11-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Nonperforming Assets**

***Nonperforming Assets****.* There were $1,792,702 and $1,186,183 loans in nonaccrual status at December 31, 2005 and 2004, respectively.  There were $704,800 and $59,148 in loans ninety days or more overdue and still accruing interest at December 31, 2005 and 2004, respectively.  There was $285,000 and $499,423 in restructured loans at December 31, 2005 and 2004, respectively.

The following table shows the nonperforming assets, percentages of net charge-offs, and the related percentage of allowance for loan losses for the five years ended December 31, 2005.  All loans over 90 days past due are on and included in loans on nonaccrual.

| ***(Dollars in   thousands)***                                |   | **2005** |      | **2004** |   | **2003**  |   | **2002** |               | **2001** |   |
|---------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|--------------------|----------|--------|
|                                                               |   |          |           |     |        |           |   |          |                    |     |        |  |   |  |  |   |
| Loans   over 90 days past due and still accruing              |   | $        | 705       |     | $      | 59        |   | $        | 460                |     | $      | 585 |   | $ | 155 |   |
|                                                          |   |          |           |     |        |           |   |          |                    |     |        |  |   |  |  |   |
| Loans   on nonaccrual:                                        |   |     |      |     |   |      |   |     |               |     |   |   |   |   |   |   |
| Mortgage                                                      |   |     | 1,619     |     |   | 1,078     |   |     | —   |     |   | 90 |   |   | 126 |   |
| Commercial                                                    |   |     | 95        |     |   | 17        |   |     | —   |     |   | 155 |   |   | —   |   |
| Consumer                                                      |   |     | 78        |     |   | 91        |   |     | —   |     |   | 47 |   |   | 20 |   |
|                                                          |   |          |           |     |        |           |   |          |                    |     |        |  |   |  |  |   |
| Total nonaccrual loans                                        |   |     | 1,792     |     |   | 1,186     |   |     | —   |     |   | 292 |   |   | 146 |   |
|                                                          |   |          |           |     |        |           |   |          |                    |     |        |  |   |  |  |   |
| Total of nonperforming loans                                  |   |     | 2,497     |     |   | 1,245     |   |     | 460                |     |   | 877 |   |   | 301 |   |
| Other   nonperforming assets                                  |   |     | 346       |     |   | 321       |   |     | 279                |     |   | 121 |   |   | 87 |   |
|                                                          |   |          |           |     |        |           |   |          |                    |     |        |  |   |  |  |   |
| Total nonperforming assets                                    |   | **$**    | **2,843** |     | **$**  | **1,566** |   | **$**    | **739**            |     | **$**  | **998** |   | **$** | **388** |   |
|                                                          |   |          |           |     |        |           |   |          |                    |     |        |  |   |  |  |   |
| Percentage   of total assets                                  |   |     | 0.71      | %        |   | 0.55      | %      |     | 0.41               | %        |   | 0.86 | % |   | 0.45 | % |
| Percentage   of nonperforming loans and assets to gross loans |   |     | 0.91      | %        |   | 0.66      | %      |     | 0.53               | %        |   | 1.25 | % |   | 0.60 | % |
| Allowance   for loan losses to gross loans                    |   |     | 1.10      | %        |   | 1.16      | %      |     | 1.26               | %        |   | 1.39 | % |   | 1.61 | % |
| Net   charge-offs to average loans                            |   |     | 0.39      | %        |   | 0.19      | %      |     | 0.18               | %        |   | 0.35 | % |   | 0.15 | % |

Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, 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 havebeen 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, 2005, the Company had classified loans totaling $3,767,776 as compared to $2,153,221 at December 31, 2004.  Classified loans as a percentage of total loans was 1.21% at December 31, 2005 as compared to 0.91% at December 31, 2004.  The loan portfolio increased 30.70% during the same period.

-12-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Noninterest Income and Expense**

***Noninterest Income****.*  Noninterest income for year ended December 31, 2005 was $2,871,287, an increase of $491,764 from $2,379,523 in 2004.  The increase is primarily attributable to increased service charges on deposit accounts and gain on sale of mortgage loans.  Service charges increased $125,455, or 10.19% from 2004, to $1,357,214 for the year ended December 31, 2005.  The increase in service charges on deposit accounts was attributable to an overall increase in the number of deposit accounts in 2005.  This increase is attributable to market conditions and a successful marketing campaign.  The gain on sale of mortgage loans increased $293,820, or 50.31%, to $877,843 in 2005, from $584,023 in 2004.  Securities and brokerage commissions increased $28,943, or 21.99%, to $160,569 in 2005 from $131,626 in 2004.

The following table sets forth the principal components of noninterest income for the years ended December 31, 2005, 2004 and 2003.

| ***(Dollars in   thousands)***                   |   | **2005** |      | **2004** |   | **2003**  |   |
|--------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                                  |   |          |           |     |        |           |   |  |  |   |
| Service   charges on deposit accounts            |   | $        | 1,357     |     | $      | 1,232     |   | $ | 957 |   |
| Credit   life insurance commissions              |   |     | 33        |     |   | 82        |   |   | 64 |   |
| Gain   on sale of mortgage loans                 |   |     | 878       |     |   | 584       |   |   | 906 |   |
| Securities   and insurance brokerage commissions |   |     | 161       |     |   | 132       |   |   | 29 |   |
| Other   income                                   |   |     | 442       |     |   | 350       |   |   | 182 |   |
|                                             |   |          |           |     |        |           |   |  |  |   |
| Total noninterest income                         |   | **$**    | **2,871** |     | **$**  | **2,380** |   | **$** | **2,138** |   |
|                                             |   |          |           |     |        |           |   |  |  |   |

***Noninterest Expense****. *Noninterest expense increased $4,137,499, or 49.62%, to $12,475,441 for year ended December 31, 2005 as compared to 2004.  Of this total, other operating expenses increased $1,285,138, or 53.06%, to $3,707,173 in 2005 from $2,422,035 in 2004.  Salaries and employee benefits increased $2,262,341, or 46.42%, to $7,136,376 in 2005 from $4,874,035 in 2004.  This increase is primarily attributable to new hire employee compensation as the Bank expands into different markets.  Net occupancy and equipment expense increased $590,020, or 56.63%, to $1,631,892 in 2005 largely due to operating costs associated with the Bank’s branch expansion effort in 2005.

The following table sets forth the primary components of noninterest expense for the years ended December 31, 2005, 2004 and 2003.

| ***(Dollars in   thousands)***              |   | **2005** |       | **2004** |   | **2003**  |   |
|---------------------------------------------|--------|----------|------------|----------|--------|-----------|--------|
|                                             |   |          |            |     |        |           |   |  |  |   |
| Salaries   and employee benefits            |   | $        | 7,136      |     | $      | 4,874     |   | $ | 3,345 |   |
| Net   occupancy                             |   |     | 920        |     |   | 426       |   |   | 238 |   |
| Furniture   and equipment                   |   |     | 712        |     |   | 616       |   |   | 358 |   |
| Advertising   and public relations          |   |     | 292        |     |   | 101       |   |   | 73 |   |
| Office   supplies, stationery, and printing |   |     | 224        |     |   | 145       |   |   | 146 |   |
| Data   processing and supplies              |   |     | 21         |     |   | 13        |   |   | 231 |   |
| Computer   and software                     |   |     | 483        |     |   | 342       |   |   | 177 |   |
| Professional   fees and services            |   |     | 377        |     |   | 193       |   |   | 231 |   |
| Employee   education and conventions        |   |     | 60         |     |   | 49        |   |   | 67 |   |
| Loan   origination costs                    |   |     | 106        |     |   | 103       |   |   | 66 |   |
| Other                                       |   |     | 2,144      |     |   | 1,476     |   |   | 1,035 |   |
|                                        |   |          |            |     |        |           |   |  |  |   |
| Total noninterest expense                   |   | **$**    | **12,475** |     | **$**  | **8,338** |   | **$** | **5,967** |   |
|                                        |   |          |            |     |        |           |   |  |  |   |
| Efficiency   ratio                          |   |     | 73.28      | %        |   | 71.39     | %      |   | 72.99 | % |

-13-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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 $294,740,266 in 2005 compared to $182,996,219 in 2004, an increase of $111,744,047 or 61.06%.  At December 31, 2005, total loans were $311,544,385 compared to $238,362,092 at December 31, 2004, an increase of $73,182,293, or 30.70%.

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 Portfolio**

|                                         |   | **2005**   |        | **2004**               |   | **2003**   |   |
|----------------------------------------------|--------|------------|-------------|------------------------|--------|------------|--------|
|                                         |   |            |        |                        |   |            |   |
| **December 31,*****(Dollars in thousands)*** |   | **Amount** |        | **Percent   of Total** |   | **Amount** |   | **Percent   of Total** |   | **Amount** |   | **Percent   of Total** |   |
|                                              |   |            |             |                   |        |            |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Commercial   and industrial                  |   | $          | 50,320      |                   |   | 16.15      |   | $ | 47,890 |   |   | 20.09 | % | $ | 27,893 |   |   | 20.00 | % |
| Real   estate                                |   |       |        |                   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                                 |   |       | 52,268      |                   |   | 16.78      |   |   | 39,023 |   |   | 16.37 |   |   | 18,343 |   |   | 13.16 |   |
| Mortgage-residential                         |   |       | 86,716      |                   |   | 27.83      |   |   | 69,921 |   |   | 29.33 |   |   | 42,267 |   |   | 30.32 |   |
| Mortgage-nonresidential                      |   |       | 106,125     |                   |   | 34.06      |   |   | 63,189 |   |   | 26.51 |   |   | 32,826 |   |   | 23.56 |   |
| Consumer                                     |   |       | 13,953      |                   |   | 4.48       |   |   | 13,931 |   |   | 5.84 |   |   | 13,200 |   |   | 9.47 |   |
| Other                                        |   |       | 2,162       |                   |   | 0.70       |   |   | 4,408 |   |   | 1.86 |   |   | 4,860 |   |   | 3.49 |   |
|                                         |   |            |             |                   |        |            |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total loans                                  |   |       | 311,544     |                   |   | **100.00** | **%**  |   | 238,362 |   |   | **100.00** | **%** |   | 139,389 |   |   | **100.00** | **%** |
| Allowance   for loan losses                  |   |       | (3,419      | )                      |   |       |   |   | (2,758 | ) |   |   |   |   | (1,752 | ) |   |   |   |
|                                         |   |            |             |                   |   |       |   |  |  |   |   |   |   |  |  |   |   |   |   |
| Net loans                                    |   | **$**      | **308,125** |                   |   |       |   | **$** | **235,604** |   |   |   |   | **$** | **137,637** |   |   |   |   |
|                                         |   |            |             |                   |   |       |   |  |  |   |   |   |   |  |  |   |   |   |   |

|                                     |   | **2002**   |       | **2001**               |   |
|------------------------------------------|--------|------------|------------|------------------------|--------|
|                                     |   |            |       |                        |   |
| **December 31,*(Dollars in thousands)*** |   | **Amount** |       | **Percent   of Total** |   | **Amount** |   | **Percent   of Total** |   |
|                                          |   |            |            |                   |        |  |   |  |  |   |  |  |   |
| Commercial   and industrial              |   | $          | 15,628     |                   |   | 19.16 | % | $ | 13,978 |   |   | 21.55 | % |
| Real   estate                            |   |       |       |                   |   |   |   |   |   |   |   |   |   |
| Construction                             |   |       | 9,799      |                   |   | 12.01 |   |   | 6,749 |   |   | 10.40 |   |
| Mortgage-residential                     |   |       | 24,994     |                   |   | 30.65 |   |   | 17,628 |   |   | 27.17 |   |
| Mortgage-nonresidential                  |   |       | 20,632     |                   |   | 25.30 |   |   | 15,029 |   |   | 23.17 |   |
| Consumer                                 |   |       | 9,944      |                   |   | 12.19 |   |   | 11,310 |   |   | 17.43 |   |
| Other                                    |   |       | 561        |                   |   | 0.69 |   |   | 181 |   |   | 0.28 |   |
|                                     |   |            |            |                   |        |  |   |  |  |   |  |  |   |
| Total loans                              |   |       | 81,558     |                   |   | **100.00** | **%** |   | 64,875 |   |   | **100.00** | **%** |
| Allowance   for loan losses              |   |       | (1,137     | )                      |   |   |   |   | (1,045 | ) |   |   |   |
|                                     |   |            |            |                   |   |   |   |  |  |   |   |   |   |
| Net loans                                |   | **$**      | **80,421** |                   |   |   |   | **$** | **63,830** |   |   |   |   |
|                                     |   |            |            |                   |   |   |   |  |  |   |   |   |   |

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, 2005, real estate mortgage loans totaled $192,840,976 and represented 61.90% of the total loan portfolio, compared to $133,110,000 or 55.84%, at December 31, 2004.

-14-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Earning Assets***- continued*

Residential mortgage loans totaled $86,715,873 at December 31, 2005, and represented 27.83% of the total loan portfolio, compared to $69,920,728 at December 31, 2004 or 29.33%.  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 $106,125,103 at December 31, 2005, compared to $63,188,726 at December 31, 2004.  This represents an increase of $42,936,377, or 67.95%, from the December 31, 2004 balance.  The demand for residential and commercial real estate loans in the Bank’s market area remained strong.

Commercial and industrial loans increased $2,430,330 or 5.07%, to $50,320,434 at December 31, 2005, from $47,890,104 at December 31, 2004.

The Company’s loan portfolio is also comprised of consumer loans.  Consumer loans increased $22,499, or 0.16%, to $13,953,632 at December 31, 2005, from $13,931,133 at December 31, 2004.

The Company’s loan portfolio reflects the diversity of its markets.  The economies of the Company’s markets 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.

The repayment of loans in the loan portfolio as they mature is also a source of liquidity for the Company.  The following table sets forth the Company’s loans maturing within specified intervals at December 31, 2005.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

| **December 31, 2005*(Dollars in thousands)*** |   | **One Year   or   Less** |       | **Over One   Year   Through   Five Years** |   | **Over Five   Years** |   | **Total** |       |
|-----------------------------------------------|--------|--------------------------|------------|--------------------------------------------|--------|-----------------------|--------|-----------|------------|
|                                               |   |                          |            |                                       |        |                       |   |           |            |   |  |  |   |
| Commercial and industrial                     |   | $                        | 21,114     |                                       | $      | 28,057                |   | $         | 1,149      |   | $ | 50,320 |   |
| Real estate                                   |   |                     | 71,100     |                                       |   | 138,471               |   |      | 35,538     |   |   | 245,109 |   |
| Consumer and other                            |   |                     | 5,053      |                                       |   | 10,925                |   |      | 137        |   |   | 16,115 |   |
|                                          |   |                          |            |                                       |        |                       |   |           |            |   |  |  |   |
|                                          |   | **$**                    | **97,267** |                                       | **$**  | **177,453**           |   | **$**     | **36,824** |   | **$** | **311,544** |   |
|                                          |   |                          |            |                                       |        |                       |   |           |            |   |  |  |   |
| Loans maturing after one   year with:         |   |                     |       |                                       |   |                  |   |      |       |   |   |   |   |
| Fixed   interest rates                        |   |                     |       |                                       |   |                  |   |      |       |   | $ | 91,914 |   |
| Floating   interest rates                     |   |                     |       |                                       |   |                  |   |      |       |   |   | 122,363 |   |
|                                          |   |                     |       |                                       |   |                  |   |      |       |   |  |  |   |
|                                          |   |                     |       |                                       |   |                  |   |      |       |   | **$** | **214,277** |   |
|                                          |   |                     |       |                                       |   |                  |   |      |       |   |  |  |   |

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 $30,497,571 in 2005, compared to $27,223,928 in 2004.  At December 31, 2005, total securities available-for-sale were $37,121,479, an increase of $8,553,813, or 29.94%, over the December 31, 2004 balance.  Investment securities also contains Federal Home Loan Bank stock and the stock of several unrelated financial institutions.  These stocks are recorded at their original cost and totaled $1,745,850 and $1,714,700 at December 31, 2005 and 2004, respectively.

-15-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Earning Assets***- continued*

The following table sets forth the fair market value of the securities available-for-sale held by the Bank at December 31, 2005, 2004 and 2003.

**Fair Value of Securities available-for-sale**

| **December 31,*(Dollars in   thousands)***  |   | **2005** |               | **2004** |   | **2003**   |   |
|---------------------------------------------|--------|----------|--------------------|----------|--------|------------|--------|
|                                             |   |          |                    |     |        |            |   |  |  |   |
| U.S.   government agencies and corporations |   | $        | 9,439              |     | $      | 2,410      |   | $ | 3,536 |   |
| Municipals                                  |   |     | 14,252             |     |   | 11,311     |   |   | 8,793 |   |
| Mortgage-backed   securities                |   |     | 13,430             |     |   | 14,783     |   |   | 15,196 |   |
| Other   Securities                          |   |     | —   |     |   | 64         |   |   | 164 |   |
|                                        |   |          |                    |     |        |            |   |  |  |   |
| Total securities available-for-sale         |   | **$**    | **37,121**         |     | **$**  | **28,568** |   | **$** | **27,689** |   |
|                                        |   |          |                    |     |        |            |   |  |  |   |

The following table sets forth the scheduled maturities and average yields of securities held at December 31, 2005.

**Investment Securities Maturity Distribution and Yields**

| **December 31, 2005*(Dollars in thousands)*** |       | **Within One   Year** |                   | **After One   But   Within Five Years** |       | **After Five   But   Within Ten Years** |      | **After Ten   Years** |       | **Total** |      |
|-----------------------------------------------|------------|-----------------------|------------------------|-----------------------------------------|------------|-----------------------------------------|-----------|-----------------------|------------|-----------|-----------|
|                                          |            |                  |                        |                                    |            |                                    |           |                  |            |      |
|                                          | **Amount** |                  | **Yield**              |                                    | **Amount** |                                    | **Yield** |                  | **Amount** |      | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
|                                               |       |                       |                        |                                    |            |                                         |      |                       |            |      |           |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| U.S. government agencies and   corporations   |       | $                     | —       |                                    |       | —                        | %         | $                     | 5,318      |      |      | 5.07 | % | $ | 149 |   |   | 5.79 | % | $ | 3,972 |   |   | 5.34 | % | $ | 9,439 |   |   | 5.20 | % |
| Municipals(2)                                 |       |                  | —       |                                    |       | —                        |      |                  | 768        |      |      | 5.37 | % |   | 1,134 |   |   | 5.50 | % |   | 12,350 |   |   | 6.61 | % |   | 14,252 |   |   | 6.45 | % |
|                                          |       |                       |                        |                                    |       |                                    |      |                       |            |      |      |   |   |  |  |   |   |   |   |  |  |   |   |   |   |  |  |   |   |   |   |
| Total   securities(1)                         |       | **$**                 | **—  ** |                                    |       | —                        | %         | **$**                 | **6,086**  |      |      | 5.11 | **%** | **$** | **1,283** |   |   | 5.53 | **%** | **$** | **16,322** |   |   | 6.29 | **%** | **$** | **23,691** |   |   | 5.94 | % |
|                                          |       |                       |                        |                                    |       |                                    |      |                       |            |      |      |   |   |  |  |   |   |   |   |  |  |   |   |   |   |  |  |   |   |   |   |

|     |
|-----|
| (1) | Excludes mortgage-backed securities totaling   $13,430,000 with a yield of 4.34% 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.”

***Federal Funds Sold and Other***.  Federal funds sold and other, which consists of federal funds sold, interest earning deposits and an investment in trust, averaged $14,461,843 in 2005 compared to $1,118,915 in 2004.  At December 31, 2005 and 2004, federal funds sold totaled $22,442,000 and $1,042,000, and interest earning deposits totaled $83,928 and $100,707, respectively.  The investment in trust totaled $310,000 at December 31, 2005.

**Deposits and Other Interest-Bearing Liabilities**

Average interest-bearing liabilities increased $114,094,000, or 63.1%, to $295,023,000 in 2005, from $180,929,000 in 2004.  The increase is primarily a result of the continued growth of the Company.

***Deposits****.*  Average total deposits increased $109,510,196, or 38%, to $288,759,121 in 2005, from $180,896,147 in 2004. At December 31, 2005, total deposits were $334,436,898 compared to $225,493,827 a year earlier, an increase of 48.31%.

-16-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Deposits and Other Interest-Bearing Liabilities*-****continued*

The following table sets forth the average balance amounts and the average rates paid on deposits of the Company by category at December 31, 2005, 2004 and 2003.

**Deposits**

|                                     |   | **2005**          |        | **2004**                  |   | **2003**             |   |
|------------------------------------------|--------|-------------------|-------------|---------------------------|--------|----------------------|--------|
|                                     |   |                   |        |                           |   |                      |   |
| **December 31,*(Dollars in thousands)*** |   | **AverageAmount** |        | **Average   Rate   Paid** |   | **Average   Amount** |   | **Average   Rate   Paid** |   | **Average   Amount** |   | **Average   Rate   Paid** |   |
|                                          |   |                   |             |                      |        |                      |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Demand   deposit accounts                |   | $                 | 33,652      |                      |   | —     | %      | $ | 24,474 |   |   | —   | % | $ | 17,903 |   |   | —   | % |
| NOW   accounts                           |   |              | 20,067      |                      |   | 0.76                 |   |   | 15,985 |   |   | 1.66 |   |   | 17,720 |   |   | 1.15 |   |
| Savings   accounts                       |   |              | 68,499      |                      |   | 2.74                 |   |   | 29,544 |   |   | 2.59 |   |   | 15,994 |   |   | 1.23 |   |
| Time   deposits $100,000 and over        |   |              | 105,628     |                      |   | 3.30                 |   |   | 73,472 |   |   | 2.55 |   |   | 33,286 |   |   | 2.61 |   |
| Other   time deposits                    |   |              | 60,913      |                      |   | 3.39                 |   |   | 37,422 |   |   | 2.68 |   |   | 31,640 |   |   | 2.94 |   |
|                                     |   |                   |             |                      |        |                      |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total deposits                           |   | **$**             | **288,759** |                      |   | **2.63**             | **%**  | **$** | **180,897** |   |   | **1.93** | **%** | **$** | **116,543** |   |   | **1.89** | **%** |
|                                     |   |                   |             |                      |        |                      |   |  |  |   |  |  |   |  |  |   |  |  |   |

Core deposits, which exclude time deposits 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 $221,167,977 and $131,517,915 at December 31, 2005 and 2004, respectively.  Included in time deposits at December 31, 2005 and 2004 are brokered time deposits of $39,213,743 and $51,598,000, respectively.

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.  However, advances from the Federal Home Loan Bank are being used as an alternative source of funds.  The Company’s loan-to-deposit ratio was 93.15% at December 31, 2005, and 105.71% at December 31, 2004.  The maturity distribution of the Company’s time deposits over $100,000 at December 31, 2005, is set forth in the following table:

**Maturities of Time Deposits of $100,000 or More**

| ***(Dollars in thousands)***                  |   | **Within   Three   Months** |       | **After   Three   Through Six   Months** |   | **After Six   Through   Twelve   Months** |   | **After   Twelve   Months** |       | **Total** |   |
|-----------------------------------------------|--------|-----------------------------|------------|------------------------------------------|--------|-------------------------------------------|--------|-----------------------------|------------|-----------|--------|
|                                               |   |                             |            |                                     |        |                                           |   |                             |            |      |        |  |   |  |  |   |
| Certificates of deposit of   $100,000 or more |   | **$**                       | **21,778** |                                     | **$**  | **23,878**                                |   | **$**                       | **28,953** |      | **$**  | **38,660** |   | **$** | **113,269** |   |
|                                          |   |                             |            |                                     |        |                                           |   |                             |            |      |        |  |   |  |  |   |

Approximately 19.23% of the Company’s time deposits of $113,268,921 or more had scheduled maturities within three months, and 21.08% had maturities within three to 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 30% of the Bank’s totalassets which provided additional available funds of $97,544,429 at December 31, 2005 and lines available to purchase federal funds with various financial institutions up to $33,500,000 at December 31, 2005.  Management believes that these funds would be sufficient to meet future liquidity needs.

-17-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Deposits and Other Interest-Bearing Liabilities*-****continued*

***Other Borrowings***.  The following table summarizes the Company’s borrowings for the years ended December 31, 2005, 2004 and 2003.  These borrowings consist of securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, federal funds purchased and junior subordinated debentures.  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 Company’s one to four family residential mortgage loans and the Company’s investment in Federal Home Loan Bank stock.  Federal funds purchased are short-term borrowings from other financial institutions that mature daily.

| ***(Dollars in thousands)***                    |   | **Maximum   Outstanding   at any   Month End** |               | **Average   Balance** |   | **Weighted   Average   Interest Rate** |   | **Balance   December 31,** |               | **Interest   Rate at   December 31,** |   |
|-------------------------------------------------|--------|------------------------------------------------|--------------------|-----------------------|--------|----------------------------------------|--------|----------------------------|--------------------|---------------------------------------|--------|
|                                                 |   |                                                |                    |                  |        |                                        |   |                            |                    |                                  |        |  |   |  |  |   |
| **December 31, 2005**                           |   |                                           |               |                  |   |                                   |   |                       |               |                                  |   |   |   |   |   |   |
| Securities sold under agreement to   repurchase |   | $                                              | 4,223              |                  | $      | 3,600                                  |   |                       | 2.54               | %                                     | $      | 3,860 |   |   | 3.88 | % |
| Advances from Federal Home   Loan Bank          |   |                                           | 36,000             |                  |   | 31,301                                 |   |                       | 3.28               |                                  |   | 23,500 |   |   | 3.28 |   |
| Federal funds purchased                         |   |                                           | —   |                  |   | —                       |   |                       | —   |                                  |   | —   |   |   | —   |   |
| Junior subordinated   debentures                |   |                                           | 10,310             |                  |   | 4,875                                  |   |                       | 6.28               |                                  |   | 10,310 |   |   | 5.93 |   |
| **December 31, 2004**                           |   |                                           |               |                  |   |                                   |   |                       |               |                                  |   |   |   |   |   |   |
| Securities sold under   agreement to repurchase |   | $                                              | 3,062              |                  | $      | 2,460                                  |   |                       | 0.83               | %                                     | $      | 3,062 |   |   | 1.86 | % |
| Advances from Federal Home   Loan Bank          |   |                                           | 27,900             |                  |   | 21,106                                 |   |                       | 2.53               |                                  |   | 27,900 |   |   | 2.44 |   |
| Federal funds purchased                         |   |                                           | 3,960              |                  |   | 922                                    |   |                       | 1.01               |                                  |   | —   |   |   | 2.44 |   |
| **December 31, 2003**                           |   |                                           |               |                  |   |                                   |   |                       |               |                                  |   |   |   |   |   |   |
| Securities sold underagreement to   repurchase  |   | $                                              | 2,686              |                  | $      | 2,273                                  |   |                       | 0.45               | %                                     | $      | 2,364 |   |   | 0.31 | % |
| Advances from Federal Home   Loan Bank          |   |                                           | 19,100             |                  |   | 9,228                                  |   |                       | 2.72               |                                  |   | 19,100 |   |   | 2.90 |   |
| Federal funds purchased                         |   |                                           | 1,043              |                  |   | 389                                    |   |                       | 2.67               |                                  |   | 1,043 |   |   | 1.30 |   |

**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.

-18-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Capital***- continued*

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, 2005.  The following table shows the Company’s and the Bank’s ratios at December 31, 2005:

**Analysis of Capital and Capital Ratios**

| ***(Dollars in thousands)***                                         |   | **Company** |        | **Bank** |   |
|----------------------------------------------------------------------|--------|-------------|-------------|----------|--------|
|                                                                      |   |             |             |     |        |  |   |
| Tier 1 capital                                                       |   | $           | 40,072      |     | $      | 38,780 |   |
| Tier 2 capital                                                       |   |        | 3,419       |     |   | 3,419 |   |
|                                                                 |   |             |             |     |        |  |   |
| Total   qualifying capital                                           |   | **$**       | **43,491**  |     | **$**  | **42,199** |   |
|                                                                 |   |             |             |     |        |  |   |
| Risk-adjusted total assets   (including off-balance-sheet exposures) |   | **$**       | **333,378** |     | **$**  | **332,815** |   |
|                                                                 |   |             |             |     |        |  |   |
| Risk-based capital ratios:                                           |   |        |        |     |   |   |   |
| Tier   1 risk-based capital ratio                                    |   |        | 12.02       | %        |   | 11.65 | % |
| Total   risk-based capital ratio                                     |   |        | 13.05       | %        |   | 12.68 | % |
| Tier   1 leverage ratio                                              |   |        | 10.02       | %        |   | 9.80 | % |

**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 withoutbeing 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, 2005, commitments to extend credit totaled $59,196,000 and its standby letters of credit totaled $1,699,000.

-19-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**Impact of Off-Balance Sheet Instruments***- continued*

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, 2005.

| ***(Dollars in thousands)***          |   | **Within One   Month** |      | **After One   Through   Three   Months** |   | **After   Three   Through   Twelve   Months** |   | **Within One   Year** |       | **Greater   Than   One Year** |   | **Total**  |   |
|---------------------------------------|--------|------------------------|-----------|------------------------------------------|--------|-----------------------------------------------|--------|-----------------------|------------|-------------------------------|--------|------------|--------|
|                                       |   |                        |           |                                     |        |                                               |   |                       |            |                          |        |            |   |  |  |   |  |  |   |
| Unused commitments to   extend credit |   | $                      | 6,871     |                                     | $      | 1,686                                         |   | $                     | 19,171     |                          | $      | 27,728     |   | $ | 31,468 |   | $ | 59,196 |   |
| Standby letters of credit             |   |                   | 8         |                                     |   | 10                                            |   |                  | 1,351      |                          |   | 1,369      |   |   | 330 |   |   | 1,699 |   |
|                                  |   |                        |           |                                     |        |                                               |   |                       |            |                          |        |            |   |  |  |   |  |  |   |
| Totals                                |   | **$**                  | **6,879** |                                     | **$**  | **1,696**                                     |   | **$**                 | **20,522** |                          | **$**  | **29,097** |   | **$** | **31,798** |   | **$** | **60,895** |   |
|                                  |   |                        |           |                                     |        |                                               |   |                       |            |                          |        |            |   |  |  |   |  |  |   |

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.

**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 Company’s service area.  Core deposits (total deposits less time deposits greater than $100,000) provide a relatively stable funding base, and were equal to 54.88% of total assets at December 31, 2005.  Asset liquidity is provided from several sources, including amounts due from banks, federal fundssold, securities available for sale, and funds from maturing loans. The Company had $29,706,897 in cash and cash equivalents and $37,121,479 in securities available for sale at December 31, 2005.  The Company has $33,500,000 available through a line of credit with other banks as an additional source of liquidity funding.  The Company also has a line of credit to borrow funds from the Federal Home Loan Bank up to $120,911,365 of which $97,544,429 is available at December 31, 2005.

During 2005, the Company’s primary sources of cash were $108,943,071 from deposits.  The Company’s primary uses of cash resources were to fund loans of approximately $74,687,811 and the purchase of investment securities of approximately $9,176,072, 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 Company’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 2005 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.

-20-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Management’s Discussion and Analysis of Financial Condition and Results of Operations**

**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, 2005 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 carryingvalues 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 estimationprocess and methodology related to the allowance for loan losses.

**Industry Developments**

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.

-21-

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

| The Board of Directors                         |
|------------------------------------------------|
| First Reliance Bancshares, Inc. and Subsidiary |
| Florence, South Carolina                       |

We have audited the accompanying consolidated balance sheets of First Reliance Bancshares, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income**,** and cash flows for the years then ended.  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 audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide 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. and subsidiary as of December 31, 2005 and 2004, and the consolidated results of their operations and cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

| Elliott Davis, LLC       |
|--------------------------|
| Columbia, South Carolina |
| February 9, 2006         |

-22-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Balance Sheets**

|                                                                                                                                                               |   | **December   31,** |            |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------------|
|                                                                                                                                                               |   |                    |            |
|                                                                                                                                                               |   | **2005**           |            | **2004** |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| **Assets:**                                                                                                                                                        |   |               |            |   |   |   |   |
| Cash and cash equivalents:                                                                                                                                         |   |               |            |   |   |   |   |
| Cash and due from banks                                                                                                                                            |   | $                  | 7,264,897       |   | $ | 3,803,535 |   |
| Federal funds sold                                                                                                                                                 |   |               | 22,442,000      |   |   | 1,042,000 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Total cash and cash equivalents                                                                                                                                    |   |               | 29,706,897      |   |   | 4,845,535 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Investment securities:                                                                                                                                             |   |               |            |   |   |   |   |
| Securities available-for-sale                                                                                                                                      |   |               | 37,121,479      |   |   | 28,567,666 |   |
| Nonmarketable equity securities                                                                                                                                    |   |               | 1,745,850       |   |   | 1,714,700 |   |
| Investment in trust                                                                                                                                                |   |               | 310,000         |   |   | —   |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Total investment securities                                                                                                                                        |   |               | 39,177,329      |   |   | 30,282,366 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Loans held for sale                                                                                                                                                |   |               | 7,994,603       |   |   | 1,332,890 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Loans receivable                                                                                                                                                   |   |               | 311,544,385     |   |   | 238,362,092 |   |
| Less allowance for loan losses                                                                                                                                     |   |               | (3,419,368      | ) |   | (2,758,225 | ) |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Loans, net                                                                                                                                                         |   |               | 308,125,017     |   |   | 235,603,867 |   |
| Premises, furniture and equipment, net                                                                                                                             |   |               | 10,020,537      |   |   | 5,891,402 |   |
| Accrued interest receivable                                                                                                                                        |   |               | 2,189,742       |   |   | 1,458,673 |   |
| Other real estate owned                                                                                                                                            |   |               | 345,550         |   |   | 320,598 |   |
| Cash surrender value life insurance                                                                                                                                |   |               | 3,752,165       |   |   | 3,415,582 |   |
| Other assets                                                                                                                                                       |   |               | 1,726,044       |   |   | 1,819,970 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Total assets                                                                                                                                                       |   | **$**              | **403,037,884** |   | **$** | **284,970,883** |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| **Liabilities:**                                                                                                                                                   |   |               |            |   |   |   |   |
| Deposits:                                                                                                                                                          |   |               |            |   |   |   |   |
| Noninterest-bearing transaction accounts                                                                                                                           |   | $                  | 39,222,574      |   | $ | 27,560,581 |   |
| Interest-bearing transaction accounts                                                                                                                              |   |               | 29,437,107      |   |   | 15,525,590 |   |
| Savings                                                                                                                                                            |   |               | 79,663,175      |   |   | 46,299,198 |   |
| Time deposits $100,000 and over                                                                                                                                    |   |               | 113,268,921     |   |   | 93,975,912 |   |
| Other time deposits                                                                                                                                                |   |               | 72,845,121      |   |   | 42,132,546 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Total deposits                                                                                                                                                     |   |               | 334,436,898     |   |   | 225,493,827 |   |
| Securities sold under agreements to repurchase                                                                                                                     |   |               | 3,859,904       |   |   | 3,061,903 |   |
| Advances from Federal Home Loan Bank                                                                                                                               |   |               | 23,500,000      |   |   | 27,900,000 |   |
| Junior subordinated debentures                                                                                                                                     |   |               | 10,310,000      |   |   | —   |   |
| Accrued interest payable                                                                                                                                           |   |               | 446,303         |   |   | 742,017 |   |
| Other liabilities                                                                                                                                                  |   |               | 834,144         |   |   | 414,487 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Total liabilities                                                                                                                                                  |   |               | 373,387,249     |   |   | 257,612,234 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Commitments   and contingencies (Notes 4, 5 and 14)                                                                                                                |   |               |            |   |   |   |   |
| **Shareholders’ Equity:**                                                                                                                                     |   |               |            |   |   |   |   |
| Common stock, $0.01 par value, 5,000,000 shares   authorized;3,306,117   and 3,203,942 shares issued and outstanding at December 31, 2005 and 2004,   respectively |   |               | 33,061          |   |   | 32,039 |   |
| Capital surplus                                                                                                                                                    |   |               | 24,127,329      |   |   | 23,428,034 |   |
| Treasury stock (800 shares in 2005 and 600 shares in   2004)                                                                                                       |   |               | (9,896          | ) |   | (7,396 | ) |
| Retained earnings                                                                                                                                                  |   |               | 5,611,847       |   |   | 3,664,301 |   |
| Accumulated other comprehensive income (loss)                                                                                                                      |   |               | (111,706        | ) |   | 241,671 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Total shareholders’ equity                                                                                                                                    |   |               | 29,650,635      |   |   | 27,358,649 |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |
| Total liabilities and shareholders’ equity                                                                                                                    |   | **$**              | **403,037,884** |   | **$** | **284,970,883** |   |
|                                                                                                                                                               |   |                    |                 |   |  |  |   |

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

-23-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Statements of Income**

|                                                    |   | **For the years   ended   December 31,** |               |
|---------------------------------------------------------|--------|------------------------------------------|--------------------|
|                                                    |   |                                          |               |
|                                                    |   | **2005**                                 |               | **2004** |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Interest income:**                                    |   |                                     |               |   |   |   |   |
| Loans, including fees                                   |   | $                                        | 21,236,608         |   | $ | 12,094,388 |   |
| Investment securities:                                  |   |                                     |               |   |   |   |   |
| Taxable                                                 |   |                                     | 770,863            |   |   | 723,439 |   |
| Tax exempt                                              |   |                                     | 553,993            |   |   | 415,347 |   |
| Federal funds sold                                      |   |                                     | 478,597            |   |   | 16,942 |   |
| Other interest income                                   |   |                                     | 91,051             |   |   | 40,365 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| Total                                                   |   |                                     | 23,131,112         |   |   | 13,290,481 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Interest expense:**                                   |   |                                     |               |   |   |   |   |
| Time deposits $100,000 and over                         |   |                                     | 3,485,397          |   |   | 1,870,930 |   |
| Other deposits                                          |   |                                     | 4,097,836          |   |   | 1,627,009 |   |
| Other interest expense                                  |   |                                     | 1,395,446          |   |   | 563,129 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| Total                                                   |   |                                     | 8,978,679          |   |   | 4,061,068 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Net interest income**                                 |   |                                     | 14,152,433         |   |   | 9,229,413 |   |
| Provision   for loan losses                             |   |                                     | 1,811,317          |   |   | 1,361,762 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Net interest income after provision for loan losses** |   |                                     | 12,341,116         |   |   | 7,867,651 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Noninterest income:**                                 |   |                                     |               |   |   |   |   |
| Service charges on deposit accounts                     |   |                                     | 1,357,214          |   |   | 1,231,759 |   |
| Gain on sale of mortgage loans                          |   |                                     | 877,843            |   |   | 584,023 |   |
| Brokerage fees                                          |   |                                     | 160,569            |   |   | 131,626 |   |
| Credit life insurance commissions                       |   |                                     | 32,606             |   |   | 82,090 |   |
| Other service charges, commissions, and fees            |   |                                     | 206,783            |   |   | 145,403 |   |
| Gain on sale of securities available-for-sale           |   |                                     | —   |   |   | 5,971 |   |
| Loss on sale of other real estate                       |   |                                     | (66,815            | ) |   | (55,966 | ) |
| Loss on sale of fixed assets                            |   |                                     | (287               | ) |   | (20,000 | ) |
| Other                                                   |   |                                     | 303,374            |   |   | 274,617 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| Total                                                   |   |                                     | 2,871,287          |   |   | 2,379,523 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Noninterest expenses:**                               |   |                                     |               |   |   |   |   |
| Salaries and benefits                                   |   |                                     | 7,136,376          |   |   | 4,874,035 |   |
| Occupancy                                               |   |                                     | 919,584            |   |   | 425,686 |   |
| Furniture and equipment related expenses                |   |                                     | 712,308            |   |   | 616,186 |   |
| Other operating                                         |   |                                     | 3,707,173          |   |   | 2,422,035 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| Total                                                   |   |                                     | 12,475,441         |   |   | 8,337,942 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Income before income taxes**                          |   |                                     | 2,736,962          |   |   | 1,909,232 |   |
| Income   tax expense                                    |   |                                     | 789,416            |   |   | 570,533 |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Net income**                                          |   |                                     | **1,947,546**      |   | **$** | **1,338,699** |   |
|                                                    |   |                                          |                    |   |  |  |   |
| **Earnings per share:**                                 |   |                                     |               |   |   |   |   |
| Basic                                                   |   | **$**                                    | **0.60**           |   | **$** | **0.52** |   |
|                                                    |   |                                          |                    |   |  |  |   |
| Diluted                                                 |   | **$**                                    | **0.57**           |   | **$** | **0.48** |   |
|                                                    |   |                                          |                    |   |  |  |   |

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

-24-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income For the years ended December 31, 2005 and 2004**

|                                                       |   | **Common Stock** |          | **Capital   Surplus** |   | **Treasury   Stock** |   | **Retained   Earnings** |           | **Accumulated   Other   Comprehensive   Income   (Loss)** |   | **Total**          |   |
|------------------------------------------------------------|--------|------------------|---------------|-----------------------|--------|----------------------|--------|-------------------------|----------------|-----------------------------------------------------------|--------|--------------------|--------|
|                                                            |
| **Shares**                                                 |   | **Amount**       |
|                                                       |   |                  |               |                  |        |                      |   |                         |                |                                                      |        |                    |   |  |  |   |  |  |   |  |  |   |
| **Balance, December 31, 2003**                             |   |             | 2,466,660     |                  | $      | 24,667               |   | $                       | 15,106,070     |                                                      | $      | —   |   | $ | 2,325,602 |   | $ | 246,300 |   | $ | 17,702,639 |   |
|                                                       |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   |   |   |   |   |   |  |  |   |
| Net   income                                               |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   | 1,338,699 |   |   |   |   |   | 1,338,699 |   |
| Other   comprehensive loss, net of tax benefit of $2,384   |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   |   |   |   | (4,629 | ) |   | (4,629 | ) |
|                                                       |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   |   |   |   |   |   |  |  |   |
| Comprehensive   income                                     |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   |   |   |   |   |   |   | 1,334,070 |   |
| Proceeds   from stock issuance                             |   |             | 700,000       |                  |   | 7,000                |   |                    | 8,043,000      |                                                      |   |               |   |   |   |   |   |   |   |   | 8,050,000 |   |
| Costs   associated with stock offering                     |   |             |          |                  |   |                 |   |                    | (75,960        | )                                                         |   |               |   |   |   |   |   |   |   |   | (75,960 | ) |
| Issuance   of shares to ESOP                               |   |             | 37,282        |                  |   | 372                  |   |                    | 354,924        |                                                      |   |               |   |   |   |   |   |   |   |   | 355,296 |   |
| Purchase   of treasury stock                               |   |             |          |                  |   |                 |   |                    |           |                                                      |   | (7,396             | )      |   |   |   |   |   |   |   | (7,396 | ) |
|                                                       |   |                  |               |                  |        |                      |   |                         |                |                                                      |        |                    |   |  |  |   |  |  |   |  |  |   |
| **Balance, December 31, 2004**                             |   |             | 3,203,942     |                  |   | 32,039               |   |                    | 23,428,034     |                                                      |   | (7,396             | )      |   | 3,664,301 |   |   | 241,671 |   |   | 27,358,649 |   |
| Net   income                                               |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   | 1,947,546 |   |   |   |   |   | 1,947,546 |   |
| Other   comprehensive loss, net of tax benefit of $182,043 |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   |   |   |   | (353,377 | ) |   | (353,377 | ) |
|                                                       |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   |   |   |   |   |   |  |  |   |
| Comprehensive   income                                     |   |             |          |                  |   |                 |   |                    |           |                                                      |   |               |   |   |   |   |   |   |   |   | 1,594,169 |   |
| Purchase   of treasury stock                               |   |             |          |                  |   |                 |   |                    |           |                                                      |   | (2,500             | )      |   |   |   |   |   |   |   | (2,500 | ) |
| Issuance   of shares to ESOP                               |   |             | 23,175        |                  |   | 232                  |   |                    | 298,725        |                                                      |   |               |   |   |   |   |   |   |   |   | 298,957 |   |
| Exercise   of stock options                                |   |             | 79,000        |                  |   | 790                  |   |                    | 400,570        |                                                      |   |               |   |   |   |   |   |   |   |   | 401,360 |   |
|                                                       |   |                  |               |                  |        |                      |   |                         |                |                                                      |        |                    |   |  |  |   |  |  |   |  |  |   |
| **Balance, December 31, 2005**                             |   |             | **3,306,117** |                  | **$**  | **33,061**           |   | **$**                   | **24,127,329** |                                                      | **$**  | **(9,896**         | **)**  | **$** | **5,611,847** |   | **$** | **(111,706** | **)** | **$** | **29,650,635** |   |
|                                                       |   |                  |               |                  |        |                      |   |                         |                |                                                      |        |                    |   |  |  |   |  |  |   |  |  |   |

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

-25-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Consolidated Statements of Cash Flows**

|                                                                                       |   | **For the   years ended   December 31,** |               |
|--------------------------------------------------------------------------------------------|--------|------------------------------------------|--------------------|
|                                                                                       |   |                                          |               |
|                                                                                       |   | **2005**                                 |               | **2004** |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| **Cash flows from operating activities:**                                                  |   |                                     |               |   |   |   |   |
| Net income                                                                                 |   | $                                        | 1,947,546          |   | $ | 1,338,699 |   |
| Adjustments to reconcile net income to net cashprovided (used) by operating activities:    |   |                                     |               |   |   |   |   |
| Provision for loan losses                                                                  |   |                                     | 1,811,317          |   |   | 1,361,762 |   |
| Depreciation and amortization expense                                                      |   |                                     | 658,255            |   |   | 548,822 |   |
| Gain on sales of securities available-for-sales                                            |   |                                     | —   |   |   | (5,971 | ) |
| Discount accretion and premium amortization                                                |   |                                     | 86,839             |   |   | 108,066 |   |
| Disbursements for mortgages held for sale                                                  |   |                                     | (74,459,914        | ) |   | (25,160,598 | ) |
| Proceeds from sales of mortgages held for sale                                             |   |                                     | 67,798,201         |   |   | 24,799,335 |   |
| Writedown of other real estate owned                                                       |   |                                     | 45,750             |   |   | 58,000 |   |
| (Gain) loss on sale of other real estate owned                                             |   |                                     | (8,735             | ) |   | 18,815 |   |
| Deferred income tax provision (benefit)                                                    |   |                                     | (136,148           | ) |   | (50,801 | ) |
| Increase in interest receivable                                                            |   |                                     | (774,975           | ) |   | (509,010 | ) |
| Decrease in interest payable                                                               |   |                                     | (251,808           | ) |   | 299,784 |   |
| (Increase) decrease in other assets                                                        |   |                                     | 75,534             |   |   | (3,989,862 | ) |
| Increase (decrease) in other liabilities                                                   |   |                                     | 419,657            |   |   | 116,997 |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| Net cash provided (used) by operating activities                                           |   |                                     | (2,788,481         | ) |   | (1,065,962 | ) |
|                                                                                       |   |                                          |                    |   |  |  |   |
| **Cash flows from investing activities:**                                                  |   |                                     |               |   |   |   |   |
| Purchases of securities available-for-sale                                                 |   |                                     | (13,757,943        | ) |   | (11,232,623 | ) |
| Maturities of securities available-for-sale                                                |   |                                     | 4,581,871          |   |   | 4,268,455 |   |
| Proceeds from sales of nonmarketable equity securities                                     |   |                                     | 1,629,000          |   |   | 5,976,385 |   |
| Purchases of nonmarketable equity securities                                               |   |                                     | (1,660,150         | ) |   | (839,700 | ) |
| Purchase of junior subordinated debentures                                                 |   |                                     | (310,000           | ) |   | —   |   |
| Proceeds from the sales of nonmarketable equity   securities                               |   |                                     | —   |   |   | 180,000 |   |
| Net increase in loans receivable                                                           |   |                                     | (74,687,811        | ) |   | (99,855,322 | ) |
| Purchases of premises, furniture and equipment                                             |   |                                     | (4,815,411         | ) |   | (643,405 | ) |
| Proceeds from disposal of premises, furniture and   equipment                              |   |                                     | 28,021             |   |   | —   |   |
| Proceeds from sale of other real estate owned                                              |   |                                     | 293,377            |   |   | 408,455 |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| Net cash used by investing activities                                                      |   |                                     | (88,699,046        | ) |   | (101,737,755 | ) |
|                                                                                       |   |                                          |                    |   |  |  |   |
| **Cash flows from financing activities:**                                                  |   |                                     |               |   |   |   |   |
| Net increase in demand deposits, interest-bearingtransaction accounts and savings accounts |   |                                     | 58,937,487         |   |   | 36,217,217 |   |
| Net increase in certificates of deposit and other time   deposits                          |   |                                     | 50,005,584         |   |   | 49,861,660 |   |
| Increase (decrease) in advances from Federal Home Loan   Bank                              |   |                                     | (4,400,000         | ) |   | 8,800,000 |   |
| Increase (decrease) in federal funds purchased                                             |   |                                     | —   |   |   | (1,043,000 | ) |
| Net increase (decrease) in securities soldunder agreements to repurchase                   |   |                                     | 798,001            |   |   | 698,333 |   |
| Proceeds from junior subordinated debentures                                               |   |                                     | 10,310,000         |   |   | —   |   |
| Stock issuance costs                                                                       |   |                                     | —   |   |   | (75,960 | ) |
| Exercise of stock options                                                                  |   |                                     | 401,360            |   |   | —   |   |
| Proceeds from stock issuance                                                               |   |                                     | —   |   |   | 8,050,000 |   |
| Issuance of shares to ESOP                                                                 |   |                                     | 298,957            |   |   | 355,296 |   |
| Purchase of treasury stock                                                                 |   |                                     | (2,500             | ) |   | (7,396 | ) |
|                                                                                       |   |                                          |                    |   |  |  |   |
| Net cash provided by financing activities                                                  |   |                                     | 116,348,889        |   |   | 102,856,150 |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| **Net increase (decrease) in cash and cash equivalents**                                   |   |                                     | 24,861,362         |   |   | 52,433 |   |
| **Cash and cash equivalents, beginning of year**                                           |   |                                     | 4,845,535          |   |   | 4,793,102 |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| **Cash and cash equivalents, end of year**                                                 |   | **$**                                    | **29,706,897**     |   | **$** | **4,845,535** |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| **Cash paid during the year for:**                                                         |   |                                     |               |   |   |   |   |
| Income taxes                                                                               |   | **$**                                    | **763,000**        |   | **$** | **658,331** |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| Interest                                                                                   |   | **$**                                    | **9,274,393**      |   | **$** | **3,761,284** |   |
|                                                                                       |   |                                          |                    |   |  |  |   |
| **Supplemental noncash investing and   financing activities:**                             |   |                                     |               |   |   |   |   |
| Foreclosures on loans                                                                      |   | **$**                                    | **355,344**        |   | **$** | **526,475** |   |
|                                                                                       |   |                                          |                    |   |  |  |   |

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

-26-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**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, 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, Lexington, and Charleston Counties in South Carolina.  The Bank is a state-chartered commercial Bank, and its deposits are insured by the Federal Deposit Insurance Corporation.  In 2005, the Company formed First Reliance Capital Trust I (the “Trust”) for the purpose of issuing trust preferred securities.  The Trust is not consolidated in these financial statements.  The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompanybalances 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.

**Concentrations of Credit Risk** - Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in Florence, Lexington, Charleston and Mount Pleasant, South Carolina.  At December 31, 2005, the majority of the total loan portfolio was to borrowers from within these areas.

The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers.  Additionally, management is not aware of any concentrations of loans to groups of borrowers or industries that would be similarly affected by economic conditions.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, Management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-to-value ratios.  Management has determined that there is no concentration of credit risk associated with its lending policies or practices.

Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life.  For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans).  These loans are underwritten and monitored to manage the associated risks.  Therefore, management believes that these particular practices do not subject the Company to unusual credit risk. 

The Company’s investment portfolio consists principally of obligations of the United States and its agencies or its corporations.  In the opinion of Management, there is no concentration of credit risk in its investment portfolio.  The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions.  Management believes credit risk associated with correspondent accounts is not significant.

-27-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***- continued*

**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 and the stock of another community bank holding company.  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, 2005 and 2004, the Company’s investment in Federal Home Loan Bank stock was $1,627,100 and $1,614,700, respectively. Dividends received on this stock are included as a separate component of interest income.  In 2003, the Company purchased $100,000 of common stock in Tidelands Bancshares, Inc., the holding company for Tidelands Bank in Mount Pleasant, South Carolina.  Its investment in this stock was $100,000 at December 31, 2005 and 2004, respectively.  In 2005 thecompany purchased $18,750 of common stock in Beach First National Bancshares, Inc.  Its investment in this stock was $18,750 at December 31,2005.

**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 contractually 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.

Loan origination and commitment fees and certain direct loan origination costs (principally salaries and employee benefits) are deferred and amortized to income over the contractual life of the related loans or commitments, adjusted for prepayments, using the straight-line method.

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.

**Residential Mortgages Held-For-Sale** - The Company’s mortgage activities are comprised of accepting residential mortgage loan applications, qualifying borrowers to standards established by investors, funding residential mortgages and selling mortgages to investors under pre-existing commitments.  Funded residential mortgages held temporarily for sale to investors are recorded at the lower of cost or market value.  Application and originations fees collected by the Company are recognized as income upon sale to the investor.

**Other Real Estate Owned** - Other real estate owned includes real estate acquired through foreclosure.  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.

-28-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***- continued*

**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.

**Residential Mortgage Origination Fees **Residential mortgage orgination fees include fees from residential mortgage loans originated by the Company and subsequently sold in the secondary market.  These fees are recognized as income at the time of the sale to the investor.

**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.

**Advertising Expense** - Advertising and public relations costs are generally expensed as incurred.  External costs incurred in producing media advertising are expensed the first time the advertising takes place.  External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent.  Advertising and public relations costs of $291,903 and $124,448, were included in the Company’s results of operations for 2005 and 2004.

**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.  In 2004, the Company converted the 401(k) plan to a 404(c) plan.  The 404 (c) plan changes investment alternatives to include the Company’s stock.  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 $169,112 and $112,636 to earnings for the retirement savings plan in 2005 and 2004, respectively.

In 2004, the Company enacted a Stock Appreciation Rights (SARS) plan and Virtual Stock Plan which serve as deferred compensation for its executives.  Both policies are based on the appreciation of the Company’s stock over the executive’s service period during which time the Company accrues the deferred compensation based on the number of notional shares the executive is granted.  The granting of the notional shares under both plans is at the discretion of the Company’s Board of Directors.  Both plans have required service periods for the executives to become vested in the retirement benefits. Each plan pays out the executives over a 180 month period following their retirement.  During 2004 the Company recognized $ 4,638 in compensation expense related to the Virtual Stock Plan and no expense related to the SARS Plan. During 2005 there were no expenses related to these plans and as of December 31, 2005, both the Virtual Stock Planand SARS have been canceled.

**Stock-Based Compensation** - The Company has a stock-based employee compensation plan which is further described in Note 16.  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.

-29-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***- continued*

**Stock-Based Compensation** - *continued*

|                                                                                                                                                  |   | **For the   years ended   December 31,** |          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|
|                                                                                                                                                  |   |                                          |          |
|                                                                                                                                                  |   | **2005**                                 |          | **2004** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |
| Net income, as reported                                                                                                                               |   | $                                        | 1,947,546     |   | $ | 1,338,699 |   |
| Deduct:  Total stock-based employee compensation   expense determined under fair value based method for all awards, net of   related tax effects |   |                                     | 767,326       |   |   | 234,770 |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |
| Pro forma net income                                                                                                                                  |   | **$**                                    | **1,180,220** |   | **$** | **1,103,929** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |
| Earnings per share:                                                                                                                                   |   |                                     |          |   |   |   |   |
| Basic   - as reported                                                                                                                                 |   | **$**                                    | **0.60**      |   | **$** | **0.52** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |
| Basic   - pro forma                                                                                                                                   |   | **$**                                    | **0.36**      |   | **$** | **0.43** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |
| Diluted   - as reported                                                                                                                               |   | **$**                                    | **0.57**      |   | **$** | **0.48** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |
| Diluted   - pro forma                                                                                                                                 |   | **$**                                    | **0.34**      |   | **$** | **0.40** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |

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:

|                      |   | **2005** |    | **2004** |   |
|---------------------------|--------|----------|---------|----------|--------|
|                      |   |          |         |     |        |  |   |
| Dividend   yield          |   |     | 0.00    | %        |   | 0.00 | % |
| Expected   volatility     |   |     | 38.22   | %        |   | 44.47 | % |
| Risk-free   interest rate |   |     | 4.17    | %        |   | 4.38 | % |
| Expected   life           |   |     | 8 years |     |   | 10 years |   |

The Financial Accounting Standards Board recently published Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). SFAS No. 123(R), which is effective on January 1, 2006, and will require that the fair value of share-based payments to employees, including stock options, be recognized as compensation expense in the statement of income in the financial statements. Accordingly, the Company will implement the revised standard on January 1, 2006. Currently, the Company accounts for its share-based payment transactions under the provisions of APB No. 25, under which it has not recognized any compensation expense for its stock option grants and related accounting interpretations, including FASB Interpretation Number 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN No. 44”) in accounting for stock options.

On July 12, 2005, the board of directors approved accelerating the vesting of all unvested stock options. The accelerated vesting was effective as of June 30, 2005. All of the other terms and conditions applicable to the outstanding stock options remained unchanged. 

The decision to accelerate vesting of these options will avoid recognition of pre-tax compensation expense by the Company upon the adoption of SFAS 123(R). In the Company’s view, the future compensation expense could outweigh the incentive and retention value associated with the stock options. The future pre-tax compensation expense that will be avoided, based upon the effective date of January 1, 2006, is expected to be approximately $419,263 and $108,981 in fiscal years 2006 and 2007, respectively.  The Company believes that the acceleration of vesting stock options meets the criteria for variable accounting under FIN No. 44.  Based upon past experience, the Company believes the grantees of these stock options will remain as a director or employee of the Company.

-30-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES***- continued*

**Common Stock Owned by the 401(k) Plan and Employee Stock Ownership Plan (ESOP)** - All shares held by the 401(k) and ESOP Plans, collectively referred to as the 404 (c), are treated as outstanding for purposes of computing earnings per share. 404 (C) purchases and redemptions of the Company’s common stock are at estimated fair value as determined by independent valuations.  Dividends on 404 (c) shares are charged to retained earnings.   At December 31, 2005, the 404 (c) owned 66,991 shares of the Company’s common stock with an estimated value of $1,038,361.  At December 31, 2004, the 404 (c) owned 38,782 shares of the Company’s common stock with an estimated value of $486,714.  All of these shares were allocated.  Contributions to the 404 (c) in 2005 and 2004 were $169,112 and $112,636, respectively.

**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 (see Note 15).

**Comprehensive Income** - Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

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

|                                                          |   | **For the   years ended   December 31,** |               |
|---------------------------------------------------------------|--------|------------------------------------------|--------------------|
|                                                          |   |                                          |               |
|                                                          |   | **2005**                                 |               | **2004** |   |
|                                                          |   |                                          |                    |   |  |  |   |
| Unrealized   gains (losses) on securities available-for-sale: |   | $                                        | (535,420           | ) | $ | (7,014 | ) |
| Reclassification adjustment for gains realizedin net income   |   |                                     | —   |   |   | (5,971 | ) |
|                                                          |   |                                          |                    |   |  |  |   |
| Net   unrealized gains (losses) on securities                 |   |                                     | (535,420           | ) |   | (12,985 | ) |
| Tax   effect                                                  |   |                                     | 182,043            |   |   | 8,356 |   |
|                                                          |   |                                          |                    |   |  |  |   |
| Net-of-tax amount                                             |   | **$**                                    | **(353,377**       | **)** | **$** | **(4,629** | **)** |
|                                                          |   |                                          |                    |   |  |  |   |

**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.

-31-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**- *continued*

**Recent Accounting Pronouncements****-**The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), *“Share-Based Payment”* (“SFAS No. 123(R)”).  SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements.  In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosures related to the income tax and cash flow effects resulting from share-based payment arrangements.  SFAS No. 123(R) is effective beginning as of the first annual reporting period beginning after December 15, 2005.  SFAS No. 123(R) allows for adoption using either the modified prospective or modified retrospective methods.  The Company anticipates using the modified prospective method when this statement is adopted in the first quarter of2006.  The Company has evaluated the impact upon adoption of SFAS No. 123(R) and has concluded that the adoption will not have a material impact on financial position or results of operations upon adoption.  

In April 2005, the Securities and Exchange Commission’s Office of the Chief Accountant and its Division of Corporation Finance issued Staff Accounting Bulletin (“SAB”) No. 107 to provide guidance regarding the application of SFAS No. 123(R).  SAB No. 107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as the staff’s views regarding the valuation of share-based payment arrangements for public companies.  SAB No. 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to SFAS No. 123(R).

In December 2004, the FASB issued SFAS No. 153, *“Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29”.*  The standard is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and eliminates the exception under ABP Opinion No. 29 for an exchange of similar productive assets and replaces it with an exception for exchanges of nonmonetary assets that do not have commercial substance.  A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  The standard is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005.  The adoption of SFAS 153 is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2005, the FASB issued SFAS No. 154, *“Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3”.*  SFAS No. 154 establishes retrospective application as the required method for reporting a change in accounting principle, unless it is impracticable, in which case the changes should be applied to the latest practicable date presented.  SFAS No. 154 also requires that a correction of an error be reported as a prior period adjustment by restating prior period financial statements.  SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

In March 2004, the FASB issued Emerging Issues Task Force (“EITF”) Issue No. 03-1, *“The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”.*  This issue addresses the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and it also provides guidance on quantitative and qualitative disclosures.  The disclosure requirements in paragraph 21 of this Issue were effective for annual financial statements for fiscal years ending after December 15, 2003 and were adopted by the Company effective December 31, 2003.

-32-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES***- continued*

**Recent Accounting Pronouncements***(continued)*- The recognition and measurement guidance in paragraphs 6-20 of this Issue was to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004, but was delayed by FASB action in October 2004 through the issuance of a proposed FASB Staff Position (“FSP”) on the issue.  In July 2005, the FASB issued FSP FAS 115-1 and FAS 124-1 - *“The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”.*  This final guidance eliminated paragraphs 10-18 of EITF-03-1 (paragraphs 19-20 have no material impact on the financial position or results of operations of the Company) and will be effective for other-than-temporary impairment analysis conducted in periods beginning after December 15, 2005.  The Company has evaluated the impact that the adoption of FSP FAS 115-1 and FAS 124-1 and has concludedthat the adoption will not have a material impact on financial position and results of operations upon adoption.

In December 2005, the FASB issued FSP SOP 94-6-1, *“Terms of Loan Products that May Give Rise to a Concentration of Credit Risk”.*  The disclosure guidance in this FSP is effective for interim and annual periods ending after December 19, 2005.  The FSP states that the terms of certain loan products may increase a reporting entity’s exposure to credit risk and thereby may result in a concentration of credit risk as that term is used in SFAS No. 107, either as an individual product type or as a group of products with similar features.  SFAS No. 107 requires disclosures about each significant concentration, including “information about the (shared) activity, region, or economic characteristic that identifies the concentration.”  The FSP suggests possible shared characteristics on which significant concentrations may be determined which include, but are not limited to borrowers subject to significant payment increases,loans with terms that permit negative amortization and loans with high loan-to-value ratios.

This FSP requires entities to provide the disclosures required by SFAS No. 107 for loan products that are determined to represent a concentration of credit risk in accordance with the guidance of this FSP for all periods presented.  The Company adopted this disclosure standard effective December 31, 2005.

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.

**Risks and Uncertainties** - In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory.  There are three main components of economic risk:  interest rate risk, credit risk and market risk.  The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis, than its interest-earning assets.  Credit risk is the risk of default on the Company’s loan portfolio that results from borrower’s inability or unwillingness to make contractually required payments.  Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmental agencies.  These regulations can and do change significantly from period to period.  The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.

**Reclassifications** - Certain captions and amounts in the 2004 consolidated financial statements were reclassified to conform with the 2005 presentation.

-33-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 2 - CASH AND DUE FROM BANKS**

The Company is required to maintain balances with The Federal Reserve computed as a percentage of deposits.  At December 31, 2005 and 2004, this requirement was $ 1,205,000 and $1,105,000, respectively.  This requirement was met by vault cash and balances on deposit with the Federal Reserve.

**NOTE 3 - INVESTMENT SECURITIES**

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

|                         |   | **Amortized   Cost** |           | **Gross Unrealized** |   | **Estimated   Fair Value** |   |
|------------------------------|--------|----------------------|----------------|----------------------|--------|----------------------------|--------|
|                              |
| **Gains**                    |   | **Losses**           |
|                         |   |                      |                |                 |        |                            |   |  |  |   |  |  |   |
| **December 31, 2005**        |   |                 |           |                 |   |                       |   |   |   |   |   |   |   |
| U.S.   Government agencies   |   | $                    | 9,553,869      |                 | $      | —           |   | $ | 114,625 |   | $ | 9,439,244 |   |
| Mortgage-backed   securities |   |                 | 13,790,202     |                 |   | 17,682                     |   |   | 378,270 |   |   | 13,429,614 |   |
| Municipals                   |   |                 | 13,947,622     |                 |   | 327,337                    |   |   | 22,338 |   |   | 14,252,621 |   |
|                         |   |                      |                |                 |        |                            |   |  |  |   |  |  |   |
|                         |   | **$**                | **37,291,693** |                 | **$**  | **345,019**                |   | **$** | **515,233** |   | **$** | **37,121,479** |   |
|                         |   |                      |                |                 |        |                            |   |  |  |   |  |  |   |
| **December 31, 2004**        |   |                 |           |                 |   |                       |   |   |   |   |   |   |   |
| U.S.   Government agencies   |   | $                    | 2,424,872      |                 | $      | 49,176                     |   | $ | —   |   | $ | 2,474,048 |   |
| Mortgage-backed   securities |   |                 | 14,863,372     |                 |   | 29,954                     |   |   | 110,661 |   |   | 14,782,665 |   |
| Municipals                   |   |                 | 10,914,216     |                 |   | 398,036                    |   |   | 1,299 |   |   | 11,310,953 |   |
|                         |   |                      |                |                 |        |                            |   |  |  |   |  |  |   |
|                         |   | **$**                | **28,202,460** |                 | **$**  | **477,166**                |   | **$** | **111,960** |   | **$** | **28,567,666** |   |
|                         |   |                      |                |                 |        |                            |   |  |  |   |  |  |   |

There were no sales of securities available-for-sale during 2005.  For the year ended December 31, 2004, proceeds from the sales of securities available-for-sale amounted to $5,976,385.  Gross realized gains amounted to $5,971 for the year ended December 31, 2004.  There were no gross realized losses.

The following is a summary of maturities of securities available-for-sale as of December 31, 2005.  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.

|                                        |   | **Securities   Available-For-Sale** |           |
|---------------------------------------------|--------|-------------------------------------|----------------|
|                                        |   |                                     |           |
|                                        |   | **Amortized   Cost**                |           | **Estimated   Fair Value** |   |
|                                        |   |                                     |                |   |  |  |   |
| Due   after one year but within five years  |   | $                                   | 6,155,886      |   | $ | 6,086,015 |   |
| Due   after five years but within ten years |   |                                | 1,283,706      |   |   | 1,283,230 |   |
| Due   after ten years                       |   |                                | 16,061,899     |   |   | 16,322,620 |   |
|                                        |   |                                     |                |   |  |  |   |
|                                        |   |                                | 23,501,491     |   |   | 23,691,865 |   |
| Mortgage-backed   securities                |   |                                | 13,790,202     |   |   | 13,429,614 |   |
|                                        |   |                                     |                |   |  |  |   |
| Total                                       |   | **$**                               | **37,291,693** |   | **$** | **37,121,479** |   |
|                                        |   |                                     |                |   |  |  |   |

-34-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 3 - INVESTMENT SECURITIES** - *continued*

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2005.

**Securities Available for Sale**

|                       |   | **Less than   twelve months** |           | **Twelve   months   or more** |   | **Total**      |   |
|----------------------------|--------|-------------------------------|----------------|-------------------------------|--------|----------------|--------|
|                       |   |                               |           |                               |   |                |   |
|                       |   | **Fair value**                |           | **Unrealized   losses**       |   | **Fair value** |   | **Unrealized   losses** |   | **Fair value** |   | **Unrealized   losses** |   |
|                       |   |                               |                |                          |        |                |   |  |  |   |  |  |   |  |  |   |  |  |   |
| U.S. government agencies   |   | $                             | 9,439,244      |                          | $      | 114,625        |   | $ | —   |   | $ | —   |   | $ | 9,439,244 |   | $ | 114,625 |   |
| Municipals                 |   |                          | 2,298,360      |                          |   | 22,338         |   |   | —   |   |   | —   |   |   | 2,298,360 |   |   | 22,338 |   |
| Mortgage-backed securities |   |                          | 1,241,120      |                          |   | 16,644         |   |   | 10,232,228 |   |   | 361,626 |   |   | 11,473,348 |   |   | 378,270 |   |
|                       |   |                               |                |                          |        |                |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total                      |   | **$**                         | **12,978,724** |                          | **$**  | **153,607**    |   | **$** | **10,232,228** |   | **$** | **361,626** |   | **$** | **23,210,952** |   | **$** | **515,233** |   |
|                       |   |                               |                |                          |        |                |   |  |  |   |  |  |   |  |  |   |  |  |   |

Securities classified as available-for-sale are recorded at fair market value.  Approximately 71% of the unrealized losses, or seven individual securities, consisted of securities in a continuous loss position for twelve months or more.  The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

At December 31, 2005 and 2004, securities with amortized costs of $6,249,272 and $13,485,307 and estimated fair values of $6,197,672 and $13,634,554 , respectively, were pledged to secure public deposits and for other purposes as required and permitted by law.

**NOTE 4 - LOANS RECEIVABLE**

Major classifications of loans receivable are summarized as follows:

|                             |   | **December 31,** |            |
|----------------------------------|--------|------------------|-----------------|
|                             |   |                  |            |
|                             |   | **2005**         |            | **2004** |   |
|                             |   |                  |                 |   |  |  |   |
| Mortgage   loans on real estate: |   |             |            |   |   |   |   |
| Residential 1-4 family           |   | $                | 50,937,658      |   | $ | 50,429,754 |   |
| Multifamily                      |   |             | 6,322,957       |   |   | 2,786,453 |   |
| Commercial                       |   |             | 106,125,103     |   |   | 63,188,726 |   |
| Construction                     |   |             | 52,267,759      |   |   | 39,023,385 |   |
| Second mortgages                 |   |             | 4,885,095       |   |   | 5,311,537 |   |
| Equity lines of credit           |   |             | 24,570,163      |   |   | 14,179,437 |   |
|                             |   |                  |                 |   |  |  |   |
|                             |   |             | 245,108,735     |   |   | 174,919,292 |   |
| Commercial   and industrial      |   |             | 50,320,434      |   |   | 47,890,104 |   |
| Consumer                         |   |             | 13,953,632      |   |   | 13,931,133 |   |
| Other                            |   |             | 2,161,584       |   |   | 1,621,563 |   |
|                             |   |                  |                 |   |  |  |   |
| Total gross loans                |   | **$**            | **311,544,385** |   | **$** | **238,362,092** |   |
|                             |   |                  |                 |   |  |  |   |

The Company has pledged certain loans as collateral to secure its borrowings from the Federal Home Loan Bank.  The total of loans pledged was $211,589,263 at December 31, 2005 (see Note 8).

-35-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 4 - LOANS RECEIVABLE***- continued*

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, 2005, impaired loans totaled $2,778,090, and specific write downs on these loans totaled $218,287.  Accrued interest related to these loans totaled $23,053.  At December 31, 2004, management believes that impaired loans closely approximated nonaccrual loans. 

Transactions in the allowance for loan losses are summarized below:

|                                         |   | **For the   years ended   December 31,** |          |
|----------------------------------------------|--------|------------------------------------------|---------------|
|                                         |   |                                          |          |
|                                         |   | **2005**                                 |          | **2004** |   |
|                                         |   |                                          |               |   |  |  |   |
| Balance,   beginning of year                 |   | $                                        | 2,758,225     |   | $ | 1,752,282 |   |
| Provision   charged to operations            |   |                                     | 1,811,317     |   |   | 1,361,762 |   |
| Recoveries   on loans previously charged-off |   |                                     | 81,813        |   |   | 35,156 |   |
| Loans   charged-off                          |   |                                     | (1,231,987    | ) |   | (390,975 | ) |
|                                         |   |                                          |               |   |  |  |   |
| Balance, end of year                         |   | **$**                                    | **3,419,368** |   | **$** | **2,758,225** |   |
|                                         |   |                                          |               |   |  |  |   |

As of December 31, 2005, there were $704,800 in loans past due ninety days or more and still accruing interest and $1,792,702 in loans on nonaccrual status.  There were $59,148 in loans past due ninety days or more and still accruing interest and $1,186,183 in loans in nonaccrual status at December 31, 2004.

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. Loans sold under these agreements in 2005 total $67,798,201.  The Company uses the same credit policies in making loans held for sale as it does for on-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 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 donot 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,** |       |
|--------------------------------|--------|------------------|------------|
|                           |   |                  |       |
|                           |   | **2005**         |       | **2004** |   |
|                           |   |                  |            |   |  |  |   |
| Commitments   to extend credit |   | $                | 59,196,000 |   | $ | 31,702,000 |   |
| Standby   letters of credit    |   |             | 1,699,000  |   |   | 720,000 |   |

-36-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT**

Premises, furniture and equipment consisted of the following:

|                             |   | **December 31,** |           |
|----------------------------------|--------|------------------|----------------|
|                             |   |                  |           |
|                             |   | **2005**         |           | **2004** |   |
|                             |   |                  |                |   |  |  |   |
| Land                             |   | $                | 4,655,609      |   | $ | 1,305,609 |   |
| Building                         |   |             | 4,066,613      |   |   | 4,048,181 |   |
| Leasehold   improvements         |   |             | 117,197        |   |   | 117,197 |   |
| Furniture   and equipment        |   |             | 2,262,900      |   |   | 1,881,453 |   |
| Construction   in progress       |   |             | 1,017,947      |   |   | 22,552 |   |
|                             |   |                  |                |   |  |  |   |
| Total                            |   |             | 12,120,266     |   |   | 7,374,992 |   |
| Less,   accumulated depreciation |   |             | 2,099,729      |   |   | 1,483,590 |   |
|                             |   |                  |                |   |  |  |   |
| Premises and equipment, net      |   | **$**            | **10,020,537** |   | **$** | **5,891,402** |   |
|                             |   |                  |                |   |  |  |   |

Depreciation expense for the years ended December 31, 2005 and 2004 amounted to $658,255 and $548,822, respectively.

Construction in process consists of renovations to the Company’s corporate office and architect fees and site work for the Lexington and Mount Pleasant branches.

**NOTE 6 - DEPOSITS**

At December 31, 2005, the scheduled maturities of time deposits were as follows:

| **Maturing In** |   | **Amount** |            |
|-----------------|--------|------------|-----------------|
|                 |   |            |                 |   |
| 2006            |   | $          | 134,481,951     |   |
| 2007            |   |       | 34,064,131      |   |
| 2008            |   |       | 11,635,457      |   |
| 2009            |   |       | 5,291,138       |   |
| 2010            |   |       | 641,365         |   |
|            |   |            |                 |   |
| Total           |   | **$**      | **186,114,042** |   |
|            |   |            |                 |   |

Included in total time deposits at December 31, 2005 and 2004 were brokered time deposits of $39,213,743 and $51,598,000, respectively.

**NOTE 7 - 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,** |      |
|---------------------------------------------|--------|----------------------------------------|-----------|
|                                        |   |                                        |      |
|                                        |   | **2005**                               |      | **2004** |   |
|                                        |   |                                        |           |   |  |  |   |
| Balance   at end of the year                |   | $                                      | 3,859,904 |   | $ | 3,061,903 |   |
| Average   balance during the year           |   |                                   | 3,599,716 |   |   | 2,460,237 |   |
| Average   interest rate during the year     |   |                                   | 2.54      | % |   | 0.83 | % |
| Maximum   month-end balance during the year |   |                                   | 4,223,149 |   |   | 3,061,903 |   |

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, 2005 and 2004, the par value and market value of the securities held by the third-party for the underlying agreements were $4,818,637 and $4,901,635, respectively, and $4,791,987 and $4,833,784, respectively. 

-37-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK**

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

|                               |   |                |   |     | **December   31,** |               |
|------------------------------------|--------|---------------------|--------|----------|--------------------|--------------------|
|                               |   |                |   |     |                    |               |
| **Description**                    |   | **Interest   Rate** |   | **2005** |               | **2004**           |   |
|                                    |   |                     |        |     |                    |                    |   |  |  |   |
| Fixed rate advances   maturing:    |   |                |   |     |               |               |   |   |   |   |
| January   18, 2005                 |   |                | 2.24   | %        | $                  | —   |   | $ | 500,000 |   |
| April   8, 2005                    |   |                | 2.04   | %        |               | —   |   |   | 1,000,000 |   |
| July   1, 2005                     |   |                | 4.12   | %        |               | —   |   |   | 500,000 |   |
| February   3, 2006                 |   |                | 3.40   | %        |               | 5,000,000          |   |   | —   |   |
| April   10, 2006                   |   |                | 2.60   | %        |               | 1,000,000          |   |   | 1,000,000 |   |
| September   12, 2006               |   |                | 2.66   | %        |               | —   |   |   | 3,500,000 |   |
| December   19, 2006                |   |                | 2.87   | %        |               | 1,500,000          |   |   | 1,500,000 |   |
| January   12, 2007                 |   |                | 3.72   | %        |               | 2,000,000          |   |   | —   |   |
| April   9, 2007                    |   |                | 3.13   | %        |               | 1,000,000          |   |   | 1,000,000 |   |
| July   2, 2007                     |   |                | 3.56   | %        |               | 500,000            |   |   | 500,000 |   |
| December   19, 2007                |   |                | 3.44   | %        |               | 1,500,000          |   |   | 1,500,000 |   |
| April   8, 2008                    |   |                | 3.46   | %        |               | 1,000,000          |   |   | 1,000,000 |   |
| March   19, 2009                   |   |                | 2.48   | %        |               | 3,000,000          |   |   | 3,000,000 |   |
| December   10, 2009                |   |                | 2.56   | %        |               | —   |   |   | 4,000,000 |   |
| January   17, 2012                 |   |                | 3.83   | %        |               | —   |   |   | 1,000,000 |   |
| March   10, 2015                   |   |                | 3.44   | %        |               | 6,000,000          |   |   | —   |   |
| July   5, 2012                     |   |                | 4.08   | %        |               | 1,000,000          |   |   | —   |   |
| Variable rate advances   maturing: |   |                |   |     |               |               |   |   |   |   |
| March   25, 2006                   |   |                | 2.44   | %        |               | —   |   |   | 6,900,000 |   |
| July   5, 2012                     |   |                | 4.08   | %        |               | —   |   |   | 1,000,000 |   |
|                               |   |                |   |     |                    |                    |   |  |  |   |
|                               |   |                |   |     | **$**              | **23,500,000**     |   | **$** | **27,900,000** |   |
|                               |   |                |   |     |                    |                    |   |  |  |   |

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

|       |   | **Amount** |               |
|------------|--------|------------|--------------------|
|       |   |            |                    |   |
| 2006       |   | $          | 7,500,000          |   |
| 2007       |   |       | 5,000,000          |   |
| 2008       |   |       | 1,000,000          |   |
| 2009       |   |       | 3,000,000          |   |
| 2010       |   |       | —   |   |
| Thereafter |   |       | 7,000,000          |   |
|       |   |            |                    |   |
| Total      |   | **$**      | **23,500,000**     |   |
|       |   |            |                    |   |

As collateral, the Company had pledged blanket liens on its first mortgage one to four family loans, its multifamily residential property loans, and its revolving, open-end loans secured by 1-4 family residential properties and extended under lines of credit.  The aggregate balance of these loan types was $211,589,263 (see Note 4) at December 31, 2005.  In addition, the Company’s Federal Home Loan Bank stock is pledged to secure the borrowings. Certain advances are subject to prepayment penalties.

-38-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 9 - JUNIOR SUBORDINATED DEBENTURES**

On June 30, 2005 the Company formed First Reliance Capital Trust I (the “Trust”) for the purposed of issuing trust preferred securities, which enable the Company to obtain Tier 1 capital on a consolidated basis for regulatory purposes. On July 1, 2005, the Company closed a private offering of $10,000,000 of floating rate preferred securities offered and sold by the Trust.  The proceeds from such issuance, together with the proceeds from a related issuance of common securities of the Trust purchased by the Company in the amount of $310,000, were invested by the Trust in floating rate Junior Subordinated Debentures issued by the Company (the “Debentures”) totaling $10,310,000.  The Debentures are due and payable on November 23, 2035 and may be redeemed by the Company after five years, and sooner in certain specific events, including in the event that certain circumstances render the Debentures ineligible for treatment as Tier 1 capital,subject to prior approval by the Federal Reserve Board, if then required.  The Debentures presently qualify as Tier 1 capital for regulatory reporting.  The sole assets of the Trust are the Debentures.  The Company owns 100% of the common securities of the Trust.  The Debentures are unsecured and rank junior to all senior debt of the Company.  At December 31, 2005, the floating rate preferred securities and the Debentures had an annual interest rate of 5.93%.  This interest rate is fixed until August 23, 2010, when the interest rate will adjust quarterly.  After August 23, 2010, the interest rate will equal three-month LIBOR plus 1.83%.

**NOTE 10 - 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, 2005, the Bank had undivided profits of $5,623,976.  The Bank is authorized to upstream 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 11 - OTHER OPERATING EXPENSES**

Other operating expenses are summarized below:

|                                          |   | **For the   years ended   December 31,** |          |
|-----------------------------------------------|--------|------------------------------------------|---------------|
|                                          |   |                                          |          |
|                                          |   | **2005**                                 |          | **2004** |   |
|                                          |   |                                          |               |   |  |  |   |
| Professional   fees                           |   | $                                        | 377,356       |   | $ | 193,034 |   |
| Office   supplies, forms, and stationery      |   |                                     | 224,235       |   |   | 144,798 |   |
| Advertising                                   |   |                                     | 291,903       |   |   | 124,448 |   |
| Data   processing and supplies                |   |                                     | 20,616        |   |   | 12,597 |   |
| Employee   education and conventions          |   |                                     | 60,015        |   |   | 48,502 |   |
| Computer   supplies and software amortization |   |                                     | 483,168       |   |   | 342,487 |   |
| Telephone                                     |   |                                     | 153,922       |   |   | 121,249 |   |
| Directors   fees                              |   |                                     | 138,600       |   |   | 91,100 |   |
| Other                                         |   |                                     | 1,957,358     |   |   | 1,343,820 |   |
|                                          |   |                                          |               |   |  |  |   |
| Total                                         |   | **$**                                    | **3,707,173** |   | **$** | **2,422,035** |   |
|                                          |   |                                          |               |   |  |  |   |

-39-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 12 - INCOME TAXES**

Income tax expense is summarized as follows:

|                                          |   | **For the   years ended   December 31,** |        |
|-----------------------------------------------|--------|------------------------------------------|-------------|
|                                          |   |                                          |        |
|                                          |   | **2005**                                 |        | **2004** |   |
|                                          |   |                                          |             |   |  |  |   |
| Currently   payable                           |   |                                     |        |   |   |   |   |
| Federal                                       |   | $                                        | 828,285     |   | $ | 707,796 |   |
| State                                         |   |                                     | 97,745      |   |   | 66,667 |   |
|                                          |   |                                          |             |   |  |  |   |
| Total current                                 |   |                                     | 926,030     |   |   | 774,463 |   |
|                                          |   |                                          |             |   |  |  |   |
| Deferred   income taxes                       |   |                                     | (318,657    | ) |   | (206,314 | ) |
|                                          |   |                                          |             |   |  |  |   |
| Total income tax expense                      |   | **$**                                    | **607,373** |   | **$** | **568,149** |   |
|                                          |   |                                          |             |   |  |  |   |
| Income tax expense is   allocated as follows: |   |                                     |        |   |   |   |   |
| To continuing operations                      |   | $                                        | 789,416     |   | $ | 570,533 |   |
| To shareholders’ equity                  |   |                                     | (182,043    | ) |   | (2,384 | ) |
|                                          |   |                                          |             |   |  |  |   |
|                                          |   | **$**                                    | **607,373** |   | **$** | **568,149** |   |
|                                          |   |                                          |             |   |  |  |   |

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

|                                             |   | **December 31,** |               |
|--------------------------------------------------|--------|------------------|--------------------|
|                                             |   |                  |               |
|                                             |   | **2005**         |               | **2004** |   |
|                                             |   |                  |                    |   |  |  |   |
| Deferred   tax assets:                           |   |             |               |   |   |   |   |
| Allowance for loan losses                        |   | $                | 914,956            |   | $ | 814,656 |   |
| Organizational costs                             |   |             | 6,013              |   |   | 15,349 |   |
| Deferred compensation                            |   |             | 65,027             |   |   | —   |   |
| Unrealized loss on securities available for sale |   |             | 58,508             |   |   | —   |   |
| Other                                            |   |             | 35,882             |   |   | 26,996 |   |
|                                             |   |                  |                    |   |  |  |   |
| Total gross deferred tax assets                  |   |             | 1,080,386          |   |   | 857,001 |   |
| Deferred   tax liabilities:                      |   |             |               |   |   |   |   |
| Unrealized gain on securities available-for-sale |   |             | —   |   |   | 123,535 |   |
| Accumulated depreciation                         |   |             | 180,792            |   |   | 241,387 |   |
| Prepaid expenses                                 |   |             | 57,232             |   |   | —   |   |
| Other                                            |   |             | 31,626             |   |   | —   |   |
|                                             |   |                  |                    |   |  |  |   |
| Total gross deferred tax liabilities             |   |             | 269,650            |   |   | 364,922 |   |
|                                             |   |                  |                    |   |  |  |   |
| Net deferred tax asset recognized                |   | **$**            | **810,736**        |   | **$** | **492,079** |   |
|                                             |   |                  |                    |   |  |  |   |

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, 2005, 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, 2005 and 2004.

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,** |        |
|-------------------------------------------------------|--------|------------------------------------------|-------------|
|                                                  |   |                                          |        |
|                                                  |   | **2005**                                 |        | **2004** |   |
|                                                  |   |                                          |             |   |  |  |   |
| Tax   expense at statutory rate                       |   | $                                        | 930,567     |   | $ | 649,139 |   |
| State   income tax, net of federal income tax benefit |   |                                     | 64,512      |   |   | 40,785 |   |
| Tax-exempt   interest income                          |   |                                     | (188,419    | ) |   | (141,973 | ) |
| Disallowed   interest expense                         |   |                                     | 21,503      |   |   | 11,918 |   |
| Other,   net                                          |   |                                     | (38,747     | ) |   | 10,664 |   |
|                                                  |   |                                          |             |   |  |  |   |
|                                                  |   | **$**                                    | **789,416** |   | **$** | **570,533** |   |
|                                                  |   |                                          |             |   |  |  |   |

-40-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 13 - 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, 2005 and 2004, the Company had related party loans totaling $1,499,117 and $1,516,176, respectively. During 2005, $32,770 of advances were made to related parties and repayments totaled $49,829.  During 2004, $91,806 of advances were made to related parties and repayments totaled $902,220.

At December 31, 2005 and 2004, the Company had securities sold under agreements to repurchase with related parties of $2,740,443 and $2,007,734, respectively.

Deposits from directors and executive officers and their related interests totaled $4,663,922 and $3,217,322 at December 31, 2005 and 2004, respectively.

During 2005, the Company entered into a lease agreement with SP Financial LLC (The LLC), a limited liability company owned 50% each by two of the Bank’s executive officers.  The LLC obtained third party financing to purchase the property to be leased to the Bank.  The debt related to this property is guaranteed by these officers but not by the Company. Additionally, the Company has no investment risk related to the property, and has a valid lease agreement which will remain in place even if an ownership transfer occurs.  For these reasons the LLC is not considered a Variable Interest Entity under FIN 46(R), and its financial statements have not been consolidated with the Company’s.  The lease has an initial five year term and is included in the total future rental payments discussed in Note 14. 

**NOTE 14 - 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, 2005, 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.

The Company has entered into six separate lease agreements for properties in Florence, Charleston, Mount Pleasant and Lexington, South Carolina for branch banking and mortgage operations.  The leases have various initial terms and expire on various dates. The lease agreements generally provide that the Bank is responsible for ongoing repairs and maintenance, insurance and real estate taxes.  The leases also provide for renewal options and certain scheduled increases in monthly lease payments. Rental expenses recorded under leases for the years ended December 31, 2005 and 2004 were $341,339 and $33,000, respectively.

Under this scenario, minimal future rental payments under non-cancelable operating leases having remaining terms in excess of one year, for each of the next five years in the aggregate are:

| 2006   |   | $      | 491,587       |   |
|--------|--------|--------|---------------|--------|
| 2007   |   |   | 382,578       |   |
| 2008   |   |   | 363,000       |   |
| 2009   |   |   | 363,000       |   |
| 2010   |   |   | 363,000       |   |
|   |   |        |               |   |
|   |   | **$**  | **1,963,165** |   |
|   |   |        |               |   |

On January 19, 2006, the Company’s Board of Directors approved plans to purchase property and construct or renovate buildings at several locations for future branch and administrative sites.  Future costs related to these plans are estimated to be approximately $8.9 million.

-41-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 15 - 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,** |          |
|---------------------------------------------------------------|--------|------------------------------------------|---------------|
|                                                          |   |                                          |          |
|                                                          |   | **2005**                                 |          | **2004** |   |
|                                                          |   |                                          |               |   |  |  |   |
| **Basic earnings per share:**                                 |   |                                     |          |   |   |   |   |
| Net   income available to common shareholders                 |   | **$**                                    | **1,947,546** |   | **$** | **1,338,699** |   |
|                                                          |   |                                          |               |   |  |  |   |
| Average   common shares outstanding - basic                   |   |                                     | **3,251,457** |   |   | **2,580,251** |   |
|                                                          |   |                                          |               |   |  |  |   |
| Basic   earnings per share                                    |   | **$**                                    | **0.60**      |   | **$** | **0.52** |   |
|                                                          |   |                                          |               |   |  |  |   |
| **Diluted earnings per share:**                               |   |                                     |          |   |   |   |   |
| Net   income available to common shareholders                 |   | **$**                                    | **1,947,546** |   | **$** | **1,338,699** |   |
|                                                          |   |                                          |               |   |  |  |   |
| Average   common shares outstanding - basic                   |   |                                     | 3,251,457     |   |   | 2,580,251 |   |
| Incremental   shares from assumed conversion of stock options |   |                                     | 185,293       |   |   | 182,636 |   |
|                                                          |   |                                          |               |   |  |  |   |
| Average   common shares outstanding - diluted                 |   |                                     | **3,436,750** |   |   | **2,762,887** |   |
|                                                          |   |                                          |               |   |  |  |   |
| Diluted   earnings per share                                  |   | **$**                                    | **0.57**      |   | **$** | **0.48** |   |
|                                                          |   |                                          |               |   |  |  |   |

**NOTE 16 - STOCK COMPENSATION PLAN**

On June 19, 2003, the Company established the 2003 First Reliance Bank Employee Stock Option Plan (Stock Plan) that provides for the granting of options to purchase up to 250,000 shares of the Company’s common stock to directors, officers, or employees of the Company.  This plan was preceded by the 1999 First Reliance Bank Employee Stock Option Plan, which provided for the granting of options to purchase up to 238,000 shares 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 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 forreissuance.  At December 31, 2005, there were no options available for grant under the 2003 plan and no options available for grant under the 1999 plan.

A summary of the status of the Company’s stock option plan as of December 31, 2005 and 2004, and changes during the period is presented below:

|                               |   | **2005**   |               | **2004**                                    |   |
|------------------------------------|--------|------------|--------------------|---------------------------------------------|--------|
|                               |   |            |               |                                             |   |
|                               |   | **Shares** |               | **Weighted-****Average   Exercise   Price** |   | **Shares** |   | **Weighted-   Average   Exercise   Price** |   |
|                               |   |            |                    |                                        |        |  |   |  |  |   |  |  |   |
| Outstanding   at beginning of year |   |       | 409,063            |                                        | $      | 6.59 |   |   | 390,918 |   | $ | 6.38 |   |
| Granted                            |   |       | 70,300             |                                        |   | 11.51 |   |   | 18,145 |   |   | 11.15 |   |
| Exercised                          |   |       | (79,000            | )                                           |   | 5.08 |   |   | —   |   |   |   |   |
| Expired                            |   |       | —   |                                        |   |   |   |   | —   |   |   |   |   |
|                               |   |            |                    |                                        |   |   |   |  |  |   |   |   |   |
| Outstanding   at end of year       |   |       | **400,363**        |                                        |   | 7.75 |   |   | **409,063** |   |   | 6.59 |   |
|                               |   |            |                    |                                        |   |   |   |  |  |   |   |   |   |

-42-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 16 - STOCK COMPENSATION PLAN** - *continued*

The following table summarizes information about stock options outstanding under the Company’s plan at December 31, 2005:

|                              |   | **Outstanding** |    | **Exercisable** |   |
|-----------------------------------|--------|-----------------|---------|-----------------|--------|
|                              |   |                 |         |            |        |  |   |
| Number   of options               |   |            | 400,363 |            |   | 400,363 |   |
| Weighted   average remaining life |   |            | 6.61    |            |   | 6.61 |   |
| Weighted   average exercise price |   | $               | 7.75    |            | $      | 7.75 |   |
| High   exercise price             |   | $               | 11.43   |            | $      | 11.43 |   |
| Low   exercise price              |   | $               | 5.12    |            | $      | 5.12 |   |

**NOTE 17 - REGULATORY MATTERS**

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 possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s and the Bank’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 and the Bank to maintain minimum ratios (set forth in the table below) 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 and the Bank 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 capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.

The Company and the Bank are also required to maintain capital at a minimum level based on average assets (as defined), which is known as the leverage ratio.  Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%.  All others are subject to maintaining ratios 1% to 2% above the minimum.

As of the most recent regulatory examination, the Bank was deemed well-capitalized under the regulatory framework for prompt corrective action.  To be categorized well capitalized, the Bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below.  There are no conditions or events that management believes have changed the Bank’s categories.

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

|                                     |   | **Actual** |       | **Minimum Requirement   For Capital****Adequacy Purposes** |   | **To Be Well-   Capitalized Under   Prompt Corrective****Action Provisions** |   |
|------------------------------------------|--------|------------|------------|------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
|                                     |   |            |       |                                                            |   |                                                                              |   |
|                                     |   | **Amount** |       | **Ratio**                                                  |   | **Amount**                                                                   |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                     |   |            |            |                                                       |        |                                                                              |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **December 31, 2005**                    |   |       |       |                                                       |   |                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **The Company**                          |   |       |       |                                                       |   |                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 43,491,000 |                                                       |   | 13.05                                                                        | %      | $ | 26,670,800 |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
| Tier 1 capital (to risk-weighted assets) |   |       | 40,072,000 |                                                       |   | 12.02                                                                        |   |   | 13,335,400 |   |   | 4.00 |   |   | N/A |   |   | N/A |   |
| Tier 1 capital (to average assets)       |   |       | 40,072,000 |                                                       |   | 10.02                                                                        |   |   | 15,998,080 |   |   | 4.00 |   |   | N/A |   |   | N/A |   |
| **The Bank**                             |   |       |       |                                                       |   |                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 42,199,000 |                                                       |   | 12.68                                                                        | %      | $ | 26,625,200 |   |   | 8.00 | % | $ | 33,281,500 |   |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |   |       | 38,780,000 |                                                       |   | 11.65                                                                        |   |   | 13,312,600 |   |   | 4.00 |   |   | 19,968,900 |   |   | 6.00 |   |
| Tier 1 capital (to average assets)       |   |       | 38,780,000 |                                                       |   | 9.80                                                                         |   |   | 15,832,040 |   |   | 4.00 |   |   | 19,790,050 |   |   | 5.00 |   |

-43-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 17 - REGULATORY MATTERS** - *continued*

|                                     |   | **Actual** |       | **Minimum Requirement   For Capital   Adequacy Purposes** |   | **To Be Well-****Capitalized Under   Prompt Corrective   Action Provisions** |   |
|------------------------------------------|--------|------------|------------|-----------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|
|                                     |   |            |       |                                                           |   |                                                                              |   |
|                                     |   | **Amount** |       | **Ratio**                                                 |   | **Amount**                                                                   |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                     |   |            |            |                                                      |        |                                                                              |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **December 31, 2004**                    |   |       |       |                                                      |   |                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **The Company**                          |   |       |       |                                                      |   |                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 29,875,000 |                                                      |   | 12.52                                                                        | %      | $ | 19,093,680 |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
| Tier 1 capital (to risk-weighted assets) |   |       | 27,117,000 |                                                      |   | 11.36                                                                        |   |   | 9,546,840 |   |   | 4.00 |   |   | N/A |   |   | N/A |   |
| Tier 1 capital (to average assets)       |   |       | 27,117,000 |                                                      |   | 10.11                                                                        |   |   | 10,729,280 |   |   | 4.00 |   |   | N/A |   |   | N/A |   |
| **The Bank**                             |   |       |       |                                                      |   |                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 24,392,000 |                                                      |   | 10.23                                                                        | %      | $ | 19,084,000 |   |   | 8.00 | % | $ | 23,855,000 |   |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |   |       | 21,634,000 |                                                      |   | 9.07                                                                         |   |   | 9,542,000 |   |   | 4.00 |   |   | 14,313,000 |   |   | 6.00 |   |
| Tier 1 capital (to average assets)       |   |       | 21,634,000 |                                                      |   | 8.07                                                                         |   |   | 10,729,280 |   |   | 4.00 |   |   | 13,411,600 |   |   | 5.00 |   |

**NOTE 18 - UNUSED LINES OF CREDIT**

As of December 31, 2005, the Company had unused lines of credit to purchase federal funds from unrelated companies totaling $33,500,000.  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 of up to $121,044,000.  As of December 31, 2005 and 2004, the Company had borrowed $23,500,000 and $27,900,000, respectively, on this line. Additionally, the Company has the ability to buy brokered time deposits at December 31, 2005.

**NOTE 19 - 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 and Purchased***- Federal funds sold and purchased 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.

***Nonmarketable Equity Securities -*** The carrying amount of nonmarketable equity securities is a reasonable estimate of fair value since no ready market exists for these securities.

***Loans Held-for-Sale*** - The carrying amount of loans held for sale is a reasonable estimate of fair value.

***Loans Receivable***- 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.

-44-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS** - *continued*

***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.

***Securities Sold Under Agreements to Repurchase***- The carrying amount is a reasonable estimate of fair value because these instruments typically have terms of one day.

***Advances From Federal Home Loan Bank****-*The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank.  The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently.

***Junior Subordinated Debentures*** - The carrying value of junior subordinated debentures approximates its fair value since the debentures were issued at a floating rate.

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

***Off-Balance-Sheet Financial Instruments***- Fair values of off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

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

|                                                                 |   | **December 31,**      |        |
|----------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                 |   |                       |        |
|                                                                 |   | **2005**              |        | **2004** |   |
|                                                                 |   |                       |        |  |   |
|                                                                 |   | **Carrying   Amount** |        | **Estimated Fair   Value** |   | **Carrying   Amount** |   | **Estimated Fair   Value** |   |
|                                                                 |   |                       |             |   |  |  |   |  |  |   |  |  |   |
| **Financial Assets:**                                                |   |                  |        |   |   |   |   |   |   |   |   |   |   |
| Cash   and due from banks                                            |   | $                     | 7,264,897   |   | $ | 7,264,897 |   | $ | 3,803,535 |   | $ | 3,803,535 |   |
| Federal   funds sold                                                 |   |                  | 22,442,000  |   |   | 22,442,000 |   |   | 1,042,000 |   |   | 1,042,000 |   |
| Securities   available-for-sale                                      |   |                  | 37,121,479  |   |   | 37,121,479 |   |   | 28,567,666 |   |   | 28,567,666 |   |
| Nonmarketable   equity securities                                    |   |                  | 1,745,850   |   |   | 1,745,850 |   |   | 1,714,700 |   |   | 1,714,700 |   |
| Loans,   including loans held for sale                               |   |                  | 319,538,988 |   |   | 314,694,000 |   |   | 239,694,982 |   |   | 236,534,744 |   |
| Accrued   interest receivable                                        |   |                  | 2,189,742   |   |   | 2,189,742 |   |   | 1,458,673 |   |   | 1,458,673 |   |
| **Financial Liabilities:**                                           |   |                  |        |   |   |   |   |   |   |   |   |   |   |
| Demand   deposit, interest-bearing transaction, and savings accounts |   | $                     | 148,322,856 |   | $ | 148,322,856 |   | $ | 89,385,369 |   | $ | 89,385,369 |   |
| Certificates   of deposit                                            |   |                  | 186,114,042 |   |   | 186,472,000 |   |   | 136,108,458 |   |   | 136,642,893 |   |
| Securities   sold under agreements to repurchase                     |   |                  | 3,859,904   |   |   | 3,859,904 |   |   | 3,061,903 |   |   | 3,061,903 |   |
| Advances   from Federal Home                                         |   |                  |        |   |   |   |   |   |   |   |   |   |   |
| Loan   Bank                                                          |   |                  | 23,500,000  |   |   | 23,372,000 |   |   | 27,900,000 |   |   | 26,834,409 |   |
| Junior   subordinated debentures                                     |   |                  | 10,310,000  |   |   | 10,310,000 |   |   | —   |   |   | —   |   |
| Accrued   interest payable                                           |   |                  | 446,303     |   |   | 446,303 |   |   | 742,017 |   |   | 742,017 |   |

|                                         |   | **Notional****Amount** |       | **Estimated Fair****Value** |   | **Notional****Amount** |   | **Estimated Fair****Value** |       |
|----------------------------------------------|--------|------------------------|------------|-----------------------------|--------|------------------------|--------|-----------------------------|------------|
|                                         |   |                        |            |                        |        |                        |   |                             |            |   |  |  |   |
| **Off-Balance-Sheet Financial Instruments:** |   |                   |       |                        |   |                   |   |                        |       |   |   |   |   |
| Commitments   to extend credit               |   | $                      | 59,195,691 |                        | $      | —       |   | $                           | 31,702,000 |   | $ | —   |   |
| Standby   letters of credit                  |   |                   | 1,699,307  |                        |   | —       |   |                        | 720,000    |   |   | —   |   |

-45-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 20 - FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY ONLY)**

**Condensed Balance Sheets**

|                                              |   | **December   31,** |           |
|---------------------------------------------------|--------|--------------------|----------------|
|                                              |   |                    |           |
|                                              |   | **2005**           |           | **2004** |   |
|                                              |   |                    |                |   |  |  |   |
| **Assets**                                        |   |               |           |   |   |   |   |
| Cash                                              |   | $                  | 739,230        |   | $ | 5,325,224 |   |
| Investment   in banking subsidiary                |   |               | 38,668,573     |   |   | 21,875,795 |   |
| Nonmarketable   equity securities                 |   |               | 118,750        |   |   | 100,000 |   |
| Investment   in trust                             |   |               | 310,000        |   |   | —   |   |
| Other   assets                                    |   |               | 188,876        |   |   | 57,630 |   |
|                                              |   |                    |                |   |  |  |   |
| Total   assets                                    |   | **$**              | **40,025,429** |   | **$** | **27,358,649** |   |
|                                              |   |                    |                |   |  |  |   |
| **Liabilities**                                   |   |               |           |   |   |   |   |
| Accounts   payable                                |   | $                  | 64,794         |   | $ | —   |   |
| Junior   subordinated debentures                  |   |               | 10,310,000     |   |   | —   |   |
|                                              |   |                    |                |   |  |  |   |
| Total   liabilities                               |   |               | 10,374,794     |   |   | —   |   |
|                                              |   |                    |                |   |  |  |   |
| **Shareholders’ equity**                     |   |               | 29,650,635     |   |   | 27,358,649 |   |
|                                              |   |                    |                |   |  |  |   |
| Total   liabilities and shareholders’ equity |   | **$**              | **40,025,429** |   | **$** | **27,358,649** |   |
|                                              |   |                    |                |   |  |  |   |

**Condensed Statements of Income**

|                                                                                               |   | **December   31,** |          |
|----------------------------------------------------------------------------------------------------|--------|--------------------|---------------|
|                                                                                               |   |                    |          |
|                                                                                               |   | **2005**           |          | **2004** |   |
|                                                                                               |   |                    |               |   |  |  |   |
| **Income**                                                                                         |   |               | 7,264         |   | $ | —   |   |
| **Expenses**                                                                                       |   |               | 367,981       |   |   | 54,783 |   |
|                                                                                               |   |                    |               |   |  |  |   |
| **Income (loss) before income taxes and equity in   undistributed earnings of banking subsidiary** |   |               | (360,717      | ) |   | (54,783 | ) |
| Income tax benefit                                                                                 |   |               | 136,148       |   |   | 20,270 |   |
|                                                                                               |   |                    |               |   |  |  |   |
| Income before equity in   undistributed earning of banking subsidiary                              |   |               | (224,569      | ) |   | (34,513 | ) |
| Equity in undistributed   earnings of banking subsidiary                                           |   |               | 2,172,115     |   |   | 1,373,212 |   |
|                                                                                               |   |                    |               |   |  |  |   |
| **Net income**                                                                                     |   | **$**              | **1,947,546** |   | **$** | **1,338,699** |   |
|                                                                                               |   |                    |               |   |  |  |   |

-46-

----

**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Notes to Consolidated Financial Statements**

**NOTE 20 - FIRST RELIANCE BANCSHARES, INC. (PARENT COMPANY ONLY)***- continued*

**Condensed Statements of Cash Flows**

|                                                                                |   | **December   31,** |               |
|-------------------------------------------------------------------------------------|--------|--------------------|--------------------|
|                                                                                |   |                    |               |
|                                                                                |   | **2005**           |               | **2004** |   |
|                                                                                |   |                    |                    |   |  |  |   |
| **Cash flows from operating activities**                                            |   |               |               |   |   |   |   |
| Net   income                                                                        |   | $                  | 1,947,546          |   | $ | 1,338,699 |   |
| Adjustments   to reconcile net income to net cash provided by operating activities: |   |               |               |   |   |   |   |
| Increase   in other assets                                                          |   |               | (131,246           | ) |   | (6,175 | ) |
| Increase   in other liabilities                                                     |   |               | 64,794             |   |   | —   |   |
| Equity   in undistributed earnings of banking subsidiary                            |   |               | (2,172,115         | ) |   | (1,373,212 | ) |
|                                                                                |   |                    |                    |   |  |  |   |
| Net   cash used by operating activities                                             |   |               | (291,021           | ) |   | (40,688 | ) |
|                                                                                |   |                    |                    |   |  |  |   |
| **Cash flows from investing activities**                                            |   |               |               |   |   |   |   |
| Purchase   of nonmarketable equity securities                                       |   |               | (18,750            | ) |   | —   |   |
| Investment   in trust                                                               |   |               | (310,000           | ) |   | —   |   |
|                                                                                |   |                    |                    |   |  |  |   |
| Net   cash used by investing activities                                             |   |               | (328,750           | ) |   | —   |   |
|                                                                                |   |                    |                    |   |  |  |   |
| **Cash flows from financing activities**                                            |   |               |               |   |   |   |   |
| Stock   issuance costs                                                              |   |               | —   |   |   | (75,960 | ) |
| Proceeds   from exercise of stock options                                           |   |               | 401,360            |   |   | —   |   |
| Proceeds   from stock issuance                                                      |   |               | —   |   |   | 8,050,000 |   |
| Issuance   of shares to ESOP                                                        |   |               | 298,957            |   |   | 355,296 |   |
| Purchase   of treasury stock                                                        |   |               | (2,500             | ) |   | (7,396 | ) |
| Proceeds   from issuance of junior subordinated debentures                          |   |               | 10,310,000         |   |   | —   |   |
| Transfer   of capital to the Bank                                                   |   |               | (14,974,040        | ) |   | (3,000,000 | ) |
|                                                                                |   |                    |                    |   |  |  |   |
| Net   cash provided (used) by financing activities                                  |   |               | (3,966,223         | ) |   | 5,321,940 |   |
|                                                                                |   |                    |                    |   |  |  |   |
| **(Decrease) increase in cash**                                                     |   |               | (4,585,994         | ) |   | 5,281,252 |   |
| **Cash and cash equivalents, beginning of year**                                    |   |               | 5,325,224          |   |   | 43,972 |   |
|                                                                                |   |                    |                    |   |  |  |   |
| **Cash and cash equivalents, ending of year**                                       |   | **$**              | **739,230**        |   | **$** | **5,325,224** |   |
|                                                                                |   |                    |                    |   |  |  |   |

-47-

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Corporate Data**

**ANNUAL MEETING:**

The annual meeting of Shareholders of First Reliance Bancshares, Inc. and Subsidiary will be held at First Reliance Bank on June 15, 2006.

| **CORPORATE OFFICE:**          |                            | **INDEPENDENT AUDITORS:**    |
|--------------------------------|---------------------------------|------------------------------|
|                           |                            |                         |
| 2170 West Palmetto Street      |                            | Elliott Davis, LLC           |
| Florence, South Carolina 29501 |                            | 1901 Main Street, Suite 1650 |
| Phone (843) 656-5000           |                            | P.O. Box 2227                |
| Fax (843) 656-2099             |                            | Columbia, S.C. 29202         |
|                           |                            |                         |
|                           | **STOCK TRANSFER DEPARTMENT:**  |
|                           |                            |                         |
|                           | Registrar and Transfer Company  |
|                           | 10 Commerce Drive               |
|                           | Cranford, New Jersey 07016-3572 |

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

On March 30, 2004, the Company’s common stock became listed on the Over The Counter Bulletin Board.  Arms-length transactions in the common stock are anticipated to be infrequent and negotiated privately between the persons involved in those transactions.  

| **High and   Low Stock Price Information for First Reliance Bancshares, Inc. and   Subsidiary** |   |
|-------------------------------------------------------------------------------------------------|--------|
|                                                                                            |   |   |   |   |   |
|                                                                                            |   | **2005** |   | **2004** |   |
|                                                                                            |   |  |   |  |   |
| **Applicable Period**                                                                           |   | **High** |   | **Low** |   | **High** |   | **Low** |   |
|                                                                                                 |   |  |  |   |  |  |   |  |  |   |  |  |   |
| First Quarter                                                                                   |   | $ | 14.25 |   | $ | 12.51 |   | $ | 12.71 |   | $ | 11.75 |   |
| Second Quarter                                                                                  |   | $ | 14.00 |   | $ | 12.00 |   | $ | 11.85 |   | $ | 9.50 |   |
| Third Quarter                                                                                   |   | $ | 14.25 |   | $ | 13.10 |   | $ | 21.00 |   | $ | 10.85 |   |
| Fourth Quarter                                                                                  |   | $ | 16.00 |   | $ | 13.00 |   | $ | 14.25 |   | $ | 11.50 |   |

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Corporate Data***- continued*

As of March 8, 2004, the Company’s common stock began trading in the over-the-counter market under the symbol FSRL. The development of an active secondary market requires the existence of an adequate number of willing buyers and sellers. The Company’s current reported average daily trading volume is approximately 3,000 shares.  This level of trading volume in the secondary market for the Company’s common stock may materially impact a shareholder’s ability to promptly sell a large block of the Company’s common stock at a price acceptable to the selling shareholder.  According to the Company’s transfer agent, there are approximately 1,349 shareholders of record as of January 1, 2006. 

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 policystatements 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, 2005.  Written requests should be addressed to Jeffrey A. Paolucci, 2170 W. Palmetto Street, Florence, South Carolina 29501.

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**FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**Corporate Data***- continued*

**EXECUTIVE OFFICERS OF FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**F. R. Saunders, Jr.**President and Chief Executive Officer

**Jeffrey A. Paolucci**Senior Vice President, Chief Financial Officer and Secretary

**Thomas C. Ewart**Senior Vice President and Chief Banking Officer

**Jess Nance**Senior Vice President and Chief Credit Officer

**Paul C. Saunders**Senior Vice President and Senior Retail Banking Officer

**DIRECTORS OF FIRST RELIANCE BANCSHARES, INC. AND SUBSIDIARY**

**F. R. Saunders, Jr.**President and Chief Executive Officer of First Reliance Bancshares, Inc. and First Reliance Bank

**Jeffrey A. Paolucci**Senior Vice President, Chief Financial Officer and Secretary of First Reliance Bancshares, Inc. and First Reliance Bank

**Paul C. Saunders**Senior Vice President of First Reliance Bancshares, Inc. and First Reliance Bank

**A. Dale Porter**Senior Branch Administration Manager, First Reliance Bank

**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**Owner and President of Jebaily Properties, Inc, a real estate agency

**Andrew G. Kampiziones**Owner, President and Treasurer of Fairfax Development Corporation, a real estate development corporation; Professor, Florence-Darlington Technical College and Francis Marion University

**C. Dale Lusk, MD**Physician and Owner/Partner of Advanced Women’s Care

**T. Daniel Turner**Owner and President of Turner’s Custom Auto Glass Inc.; Owner of Glass Connection USA, a billing service company

**A. Joe Willis, DC**Retired and former President of Willis Chiromed, a chiropractic practice

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