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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB/A



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(Mark One)



|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



For fiscal year ended December 31, 2003



| ̈ | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------



For the transition period from
 to



Commission file number 000-49757



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FIRST RELIANCE BANCSHARES, INC.

(Name of small business issuer in its charter)



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



|                                                  |  |           
|------------------------------------------------- |  | ----------
|2170 W. Palmetto Street, Florence, South Carolina |  | 29501     
|(Address of Principal Executive Offices)          |  | (Zip Code)



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Securities registered pursuant to Section 12(b) of the Act: None.



Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 Par Value.



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Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.    Yes  x    No ̈



Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this
form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or a information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form
10-KSB.    x



State issuers revenues for its most recent fiscal year: $10,637,696



The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant is $3,403,850 based on a price of $10.00 per share, the price at which the stock was traded on December
31, 2003, which is the last trade management is aware of prior to fiscal year-end.



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 2,504,460 as of March
15, 2004



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Registrants Annual Report to
Shareholders for the fiscal year ended December 31, 2003 are incorporated by reference into Parts I and II.



Portions of the Registrants Proxy Statement for the Annual Meeting of Shareholders, to be held on June 17, 2004, are incorporated by reference into
Part III.



Transitional Small Business Disclosure format (check
one):    Yes ̈No  x



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TABLE OF CONTENTS



|         |  |                                                                                                                 |  |   
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | --
|PART I   |  |                                                                                                                 |  | 1 
|         |  |                                                                                                                
|ITEM 1.  |  | DESCRIPTION OF BUSINESS                                                                                         |  | 1 
|ITEM 2.  |  | DESCRIPTION OF PROPERTIES                                                                                       |  | 13
|ITEM 3.  |  | LEGAL PROCEEDINGS                                                                                               |  | 14
|ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                             |  | 14
|         |  |                                                                                                                
|PART II  |  |                                                                                                                 |  | 14
|         |  |                                                                                                                
|ITEM 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                           |  | 14
|ITEM 6.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                           |  | 14
|ITEM 7.  |  | FINANCIAL STATEMENTS                                                                                            |  | 14
|ITEM 8.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                            |  | 15
|ITEM 8A. |  | CONTROLS AND PROCEDURES                                                                                         |  | 15
|         |  |                                                                                                                
|PART III |  |                                                                                                                 |  | 15
|         |  |                                                                                                                
|ITEM 9.  |  | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT |  | 15
|ITEM 10. |  | EXECUTIVE COMPENSATION                                                                                          |  | 15
|ITEM 11. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                  |  | 16
|ITEM 12. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                  |  | 16
|ITEM 13. |  | EXHIBITS, LISTS AND REPORTS ON FORM 10-KSB                                                                      |  | 16
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                          |  | 18



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PART I



ITEM 1. DESCRIPTION OF BUSINESS



Special Cautionary Notice Regarding Forward-Looking Statements



This Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and the Securities Exchange Act of 1934. Various matters discussed in this
document and in documents incorporated by reference herein, including matters discussed under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking
statements for purposes of the Securities Act and the Securities Exchange Act. These forward-looking statements are based on many assumptions and estimates and are not guarantees of future performance, and may involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance or achievements of First Reliance Bancshares, Inc. (the Company) or its wholly owned subsidiary, First Reliance Bank (the Bank), to be materially
different from future results, performance or achievements expressed or implied by such forward-looking statements. The words expect, anticipate, intend, plan, believe, seek,
estimate, and similar expressions are intended to identify such forward-looking statements. The Companys and the Banks actual results may differ materially from the results anticipated in these forward-looking statements due
to a variety of factors, including, without limitation:



| |  | significant increases in competitive pressure in the banking and financial services industries;
| | - | -----------------------------------------------------------------------------------------------



| |  | changes in the interest rate environment that could reduce anticipated or actual margins;
| | - | -----------------------------------------------------------------------------------------



| |  | changes in political conditions or the legislative or regulatory environment;
| | - | -----------------------------------------------------------------------------



| |  | general economic conditions, either nationally or regionally and especially in our primary service area, becoming less favorable than expected resulting in, among other things, a
deterioration in credit quality;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes occurring in business conditions and inflation;
| | - | -------------------------------------------------------



| |  | changes in technology;
| | - | ----------------------



| |  | changes in monetary and tax policies;
| | - | -------------------------------------



| |  | the level of allowance for loan loss;
| | - | -------------------------------------



| |  | the rate of delinquencies and amounts of charge-offs;
| | - | -----------------------------------------------------



| |  | the rates of loan growth;
| | - | -------------------------



| |  | adverse changes in asset quality and resulting credit risk-related losses and expenses;
| | - | ---------------------------------------------------------------------------------------



| |  | changes in the securities markets; and
| | - | --------------------------------------



| |  | other risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission.
| | - | --------------------------------------------------------------------------------------------------------------------



All written or oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by these cautionary statements.



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PART I



ITEM 1. BUSINESS



General



The Company
was incorporated under the laws of the State of South Carolina on April 12, 2001 to be the holding company for First Reliance Bank (the Bank), and acquired all of the shares of the Bank on April 1, 2002 in a statutory share exchange. The
Bank, a South Carolina banking corporation, is the Companys only subsidiary, and the Company conducts no business other than through its ownership of the Bank. The Company has no indirect subsidiaries or special purpose entities. The Bank
commenced operations in August 1999 and currently operates out of its main office and one branch office. The Bank serves the Florence, South Carolina area as an independent, community-oriented commercial bank emphasizing high-quality, responsive and
personalized service. The Bank announced in 2003 its intentions to open a branch in Lexington, South Carolina. The branch is expected to open for business in the second quarter of 2004. The Bank provides a broad range of consumer and commercial
banking services, concentrating on individuals and small and medium-sized businesses desiring a high level of personalized services.



Marketing Focus



The Bank advertises aggressively, using popular forms of media and direct mail, to target market segments and emphasizes the Banks substantial local
ownership, community bank nature, locally oriented operations and ability to provide prompt, knowledgeable and personalized service.



Location and Service Area



The executive or main office facilities of the Company and the Bank are located at 2170 W. Palmetto Street, Florence, South Carolina 29501. The Bank also
has a branch located at 411 Second Loop Road, Florence, South Carolina. The Banks primary market area is the City of Florence and the surrounding area of Florence County, South Carolina. According to the South Carolina Department of Commerce,
in 2000, Florence County had an estimated population of 125,761. Florence County, which covers approximately 805 square miles, is located in the eastern portion of South Carolina and is bordered by Darlington, Marlboro, Dillon, Williamsburg, Marion,
Clarendon, Sumter and Lee Counties. Florence County has a number of large employers, including, Wellman, Inc., DuPont, Amana, Hoffman-LaRoche Pharmaceuticals and a Honda All-Terrain vehicle plant. The principal components of the economy of Florence
County are the wholesale and retail trade sector, the manufacturing sector, the services sector and the financial, insurance and real estate sector.



Banking Services



The Bank strives to provide its customers with the breadth of products and services comparable to those offered by large regional banks, while maintaining
the quick response and personal service of a locally owned and managed bank. In addition to offering a full range of deposit services and commercial and personal loans, the Bank offers investment services and products such as mortgage loan
origination.



The Bank seeks to promote continuous long-term
relationships. Because management of the Bank is located in Florence, South Carolina, all credit and related decisions are made locally, which facilitates prompt responses by persons familiar with the borrowers local business environment.



Deposit Services. The Bank offers a full
range of deposit services that are typically available in most banks and savings and loan associations, including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from daily money market accounts to
longer-term certificates of deposit. The transaction accounts and time certificates are tailored to the Banks principal market area at rates competitive to those offered by other banks in the area. In addition, the Bank offers certain
retirement account services, such as Individual Retirement Accounts. All deposit accounts are insured by the FDIC up to the maximum amount allowed by law. The Bank solicits these accounts from individuals, businesses, associations and organizations
and governmental authorities.



Loan
Products. The Bank offers a full range of commercial and consumer loans, as well as real estate construction and acquisition loans as discussed below. Commercial loans are extended primarily to small and middle market customers. Such
loans include both secured and unsecured loans for working capital needs (including loans secured by inventory and accounts receivable), business expansion (including acquisition of real



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estate and improvements), asset acquisition and agricultural purposes. Term loans will generally not exceed a five-year
maturity with a ten-year amortization schedule. The extensions of term loans are based upon (1) the ability and stability of current management; (2) stable earnings and upward trends in cash flow to support repayment; (3) earnings projections based
on reasonable assumptions; (4) the financial strength of the industry and the business itself and (5) the value and marketability of the collateral. In considering loans for accounts receivable and inventory, the Bank uses a declining scale for
advances based on an aging report. Loans for inventory are limited to 50% for hard goods, 25% for soft goods and 0% for perishables. With respect to loans for the acquisition of equipment and other assets, the loan terms depend on the economic life
of the respective assets.



As of December 31, 2002, the
classification of the commercial loans of the Bank and the respective percentage of the Banks total loan portfolio of each are as follows:



|                                                              |  |                                          |            |                                   |      |  
|------------------------------------------------------------- |  | ---------------------------------------- | ---------- | --------------------------------- | ---- | -
|Description                                                   |  | Total Outstandingas of December 31, 2003 |            | Percentage ofTotal Loan Portfolio |     
|Loans to finance agricultural production and other farm loans |  | $                                        | 234,171    |                                   | 0.2  | %
|Commercial and industrial loans                               |  | $                                        | 27,893,370 |                                   | 19.9 | %



Commercial loans
involve a substantial amount of risk because there is generally a small market available for an asset that needs to be liquidated. Commercial loans for working capital needs are typically difficult to monitor.



The Bank also offers a large variety of consumer non-real estate loans. Set
forth below are the primary categories of consumer loans offered by the Bank and the respective limits imposed by the Bank:



| |  | Unsecured Loans  Limited to 10% of annual gross income or tangible net worth of the borrower.
| | - | ----------------------------------------------------------------------------------------------



| |  | Vehicles  Loan to value limit depends on borrowers financial strength.
| | - | ------------------------------------------------------------------------



| |  | Boats and Recreational Vehicles  down payment of 25% required.
| | - | ---------------------------------------------------------------



| |  | Cash Value of Life Insurance  advances of up to 75% of cash value.
| | - | -------------------------------------------------------------------



| |  | Stocks  Loan to value limited to 70%.
| | - | --------------------------------------



| |  | OTC Stock  Loan to value limited to 60%.
| | - | -----------------------------------------



| |  | US Government Bonds  Loan to value limited to 90%.
| | - | ---------------------------------------------------



| |  | Municipal Bonds  Loan to value limited to 60%.
| | - | -----------------------------------------------



| |  | Deposit Loans  Loan to value limited to 95%.
| | - | ---------------------------------------------



| |  | Manufactured Housing  must be with real estate (loan to value limit vary with age of manufactured house).
| | - | ----------------------------------------------------------------------------------------------------------



As of December 31, 2002, the classification of the consumer loans of the Bank
and the respective percentage of the Banks total loan portfolio of each are as follows:



|                                                                                |  |                                          |            |                                   |     |  
|------------------------------------------------------------------------------- |  | ---------------------------------------- | ---------- | --------------------------------- | --- | -
|Description                                                                     |  | Total Outstandingas of December 31, 2003 |            | Percentage ofTotal Loan Portfolio |    
|Individuals (household, personal, single pay, installment and other)            |  | $                                        | 12,181,799 |                                   | 8.7 | %
|Individuals (household, family, personal credit cards and overdraft protection) |  | $                                        | 1,018,189  |                                   | 0.7 | %
|All other consumer loans                                                        |  | $                                        | 0          |                                   | 0   | %



The risks associated
with consumer lending are largely related to economic conditions and increase during economic downturns. Other major risk factors relating to consumer loans include high debt to income ratios and poor loan-to-value ratios. The Bank does very little
sub-prime lending. All of the consumer loans set forth above require a debt service income ratio of no greater than 36% based on gross income.



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The Banks lending activities are subject to a variety of lending limits imposed by federal law.
Under South Carolina law, loans by the Bank to a single customer may not exceed 10% of the Banks unimpaired capital, except that by two-thirds vote of the directors of the Bank such limit may be increased to 15% of the Banks unimpaired
capital. The Banks Board of Directors has approved that increase in its lending limit. Based on the Banks unimpaired capital as of December 31, 2003, the Banks lending limit to a single customer is approximately $2.6 million. Even
with the increase, the size of the loans that the Bank is able to offer to potential customers is less than the size of the loans that the Banks competitors with larger lending limits are able to offer. This limit affects the ability of the
Bank to seek relationships with the areas larger businesses. However, the Bank may request other banks to participate in loans to customers when requested loan amounts exceed the Banks legal lending limit.



Mortgage Loan Division. The Bank has established a mortgage
loan division through which it has broadened the range of services that it offers to its customers. The mortgage loan division originates secured real estate loans to purchase existing or to construct new homes and to refinance existing mortgages.
The following are the types of real estate loans originated by the Bank and the general loan-to-value limits set by the Bank with respect to each type.



|  |  |                                                               |  |              
|- |  | ------------------------------------------------------------- |  | -------------
| |  | Raw Land                                                      |  | 65%          
| |  | Land Development                                              |  | 75%          
| |  | Commercial, multifamily and other nonresidential construction |  | 80%          
| |  | One to four family residential construction                   |  | 85%          
| |  | Improved property                                             |  | 85%          
| |  | Owner occupied, one to four family and home equity            |  | 90% (or less)
| |  | Commercial property                                           |  | 80% (or less)



As of December 31,
2003, the classification of the mortgage loans of the Bank and the respective percentage of the Banks total loan portfolio of each are as follows:



|                                                                                   |  |                                     |            |                                   |      |  
|---------------------------------------------------------------------------------- |  | ----------------------------------- | ---------- | --------------------------------- | ---- | -
|Description                                                                        |  | Total Amountas of December 31, 2003 |            | Percentage ofTotal Loan Portfolio |     
|Secured by non-farm, non-residential properties                                    |  | $                                   | 32,826,091 |                                   | 23.4 | %
|Construction and land development                                                  |  |                                     | 18,343,137 |                                   | 13.1 | %
|Farmland (including farm residential and other improvements)                       |  |                                     | 1,319,864  |                                   | 0.9  | %
|Revolving, open end loans secured by 1-4 family extended under line of credit      |  |                                     | 5,799,778  |                                   | 4.1  | %
|All other loans secured by 1-4 family residential (1stlien)                        |  |                                     | 32,314,646 |                                   | 23.0 | %
|All other loans secured by 1-4 family residential (junior lien)                    |  |                                     | 5,124,025  |                                   | 3.7  | %
|Secured by multi-family (5 or more) residential properties  condos and apartments |  |                                     | 2,911,953  |                                   | 2.1  | %



Of the loan types
listed above, commercial real estate loans are generally the most risky because they are the most difficult to liquidate and often involve environmental issues that must be resolved before closing. Construction loans also involve risks due to
weather delays and cost overruns.



The Bank generates
additional fee income by selling most of its mortgage loans in the secondary market and cross-selling its other products and services to its mortgage customers. In 2003, the Bank sold mortgage loans in a total amount of approximately $42,670,090
million or 64% of the total number of mortgage loans originated by the Bank.



All FHA, VA and State Housing loans sold by the Bank involve the right to recourse. The FHA and VA loans are subject to recourse if the loan shows 60 days or more past due in the first 4 months or goes in to
foreclosure within the first 12 months. The State Housing loans are subject to recourse if the loan becomes delinquent prior to purchase by State Housing or if final documentation is not delivered within 90 days of purchase.



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All investors have a right to require the Bank to repurchase a loan in the event the loan involved fraud. In 2003, of the
388 loans sold by the Bank, 45 were FHA or VA loans and 86 were State Housing loans. Such loans represented 26.7% of the dollar volume or 33.8% of the total number of loans sold by the Bank in 2003.



In addition, an increase in interest rates may decrease the demand for
consumer and commercial credit, including real estate loans. Interest rates have been at historically low levels in recent years, and the Mortgage Bankers Association of America has predicted that residential mortgage loan originations will decrease
in 2004 and 2005 primarily due to an anticipated decrease in refinancings of mortgages. Residential mortgage originations generated $789,943.55, or 7.44%, of our gross revenue in 2003. We expect to originate fewer real estate loans. Accordingly, a
period of rising interest rates could negatively affect our residential mortgage origination business.



Other Banking Services.The Bank offers drive-through banking facilities. In 2001, the Bank implemented 24 Hour Telephone Banking and
Online Banking, each of which allows the Banks customers access to account information 24 hours a day, seven days a week. Other Bank services include cash management services, safe deposit boxes, travelers checks, direct deposit of payroll and
social security checks and automatic drafts for various accounts. The Bank is associated with a shared network of automated teller machines that may be used by the Banks customers throughout South Carolina and other regions. The Bank also
offers MasterCard®and VISA®credit card services through a correspondent bank as an agent for the Bank. Management of the Bank has established and intends to
maintain relationships with correspondent banks and other financial institutions to provide other services requested by its customers. The Bank does not provide trust services. Although the Bank may operate a trust department in the future, it
cannot do so without first obtaining regulatory approval.



Investments. In addition to its loan operations, the Bank makes other investments primarily in obligations of the United States or obligations guaranteed as to principal and interest by the United States and other taxable
securities. The Bank also invests in certificates of deposits in other financial institutions. The amount invested in such time deposits, as viewed on an institution by institution basis, does not exceed $100,000. Therefore, the amounts invested in
certificates of deposit are fully insured by the FDIC. No investment held by the Bank exceeds any applicable limitation imposed by law or regulation. Our asset and liability management committee reviews the investment portfolio on an ongoing basis
to ascertain investment profitability and to verify compliance with the Banks investment policies.



Other Services.In addition to its banking services, the Bank offers securities brokerage services and life insurance products to its
customers through a financial services division of the Bank. The Bank obtained an insurance agency license under South Carolina law to sell life insurance and has relationships with brokers and carriers. The Banks financial services division
uses professional money managers who diversify a clients portfolio into several different asset classes. Some of the products offered are mutual funds, annuities, stocks, bonds, insurance, IRAs and 401(k) rollovers.



Competition



The Bank faces strong competition for deposits, loans and other financial services from numerous other banks, thrifts,
credit unions, other financial institutions and other entities that provide financial services, some of which are not subject to the same degree of regulation as the Bank. Because South Carolina law permits statewide branching by banks and savings
and loan associations, many financial institutions in the state have branch networks. In addition, subject to certain conditions, South Carolina law permits interstate banking. Reflecting this opportunity provided by law plus the growth prospects of
the Florence market, all of the four largest (in terms of local deposits) commercial banks in the City of Florence are branches of or affiliated with regional or super-regional banks.



As of December 31, 2003, 16 banks and three savings institutions operated 34 offices within the city limits of Florence.
Most of those institutions also have other branch offices in Florence County, as do some other banks that do not have branches in the City of Florence. All of these institutions aggressively compete for business in the Banks market area. Most
of these competitors have been in business for many years, have established customer bases, are substantially larger than the Bank, have substantially higher lending limits than the Bank has and are able to offer certain services, including trust
and international banking services, that the Bank is able to offer only through correspondents, if at all.



The Bank attempts to compete by providing its customers with high-quality, prompt and knowledgeable personalized service at competitive rates, which is a
combination that the Bank believes customers generally find lacking at larger institutions. The Bank also attempts to offer a wide variety of financial products and services at fees that are competitive with other financial institutions.



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Employees



The Bank currently has 72 full-time employees and one part-time employee. The executive officers of the Company are the only officers of the Company, but
they receive no compensation from the Company. The Company has no employees.



Supervision and Regulation



Both the Company and the Bank are subject to extensive state and federal banking regulations that impose restrictions on and provide for general regulatory oversight of their operations. These laws are generally intended to protect
depositors and not shareholders. The following discussion describes the material elements of the regulatory framework that applies to us.



First Reliance Bancshares, Inc.



Since the Company owns all of the capital stock of the Bank, it is a bank holding company under the federal Bank Holding Company Act of 1956. As a
result, the Company is primarily subject to the supervision, examination, and reporting requirements of the Bank Holding Company Act and the regulations of the Federal Reserve.



Acquisitions of Banks.The Bank Holding Company Act requires every bank holding company to
obtain the Federal Reserves prior approval before:



| |  | acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control
more than 5% of the banks voting shares;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | acquiring all or substantially all of the assets of any bank; or
| | - | ----------------------------------------------------------------



| |  | merging or consolidating with any other bank holding company.
| | - | -------------------------------------------------------------



Additionally, the Bank Holding Company Act provides that the Federal Reserve may not approve any of these transactions if it would result in or tend to
create a monopoly or, substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be
served. The Federal Reserves consideration of financial resources generally focuses on capital adequacy, which is discussed below.



Under the Bank Holding Company Act, if adequately capitalized and adequately managed, the Company or any other bank holding company located in South
Carolina may purchase a bank located outside of South Carolina. Conversely, an adequately capitalized and adequately managed bank holding company located outside of South Carolina may purchase a bank located inside South Carolina. In each case,
however, restrictions may be placed on the acquisition of a bank that has only been in existence for a limited amount of time or will result in specified concentrations of deposits. For example, South Carolina law prohibits a bank holding company
from acquiring control of a financial institution until the target financial institution has been incorporated for five years. As a result, no bank holding company may acquire control of the Company until after the fifth anniversary date of the
Banks incorporation. Because the Bank has not been incorporated for more than five years, this limitation does apply to the Bank and the Company.



Additionally, In July 1994, South Carolina enacted legislation which effectively provided that, after June 30, 1996, out-of-state bank holding companies
may acquire other banks or bank holding companies in South Carolina, subject to certain conditions. Accordingly, effective July 1, 1996, South Carolina law was amended to permit interstate branching but not de novo branching by an out-of-state bank.
The Company believes that the foregoing legislation has increased takeover activity of South Carolina financial institutions by out-of-state financial institutions.



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Change in Bank Control.Subject to various exceptions, the Bank Holding Company Act
and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring control of a bank holding company. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is refutably presumed to exist if a person or company acquires 10% or more, but less than 25%, of any class of voting securities and
either:



| |  | the bank holding company has registered securities under Section 12 of the Securities Act of 1934; or
| | - | -----------------------------------------------------------------------------------------------------



| |  | no other person owns a greater percentage of that class of voting securities immediately after the transaction.
| | - | ---------------------------------------------------------------------------------------------------------------



Our common stock is registered under the Securities Exchange Act of 1934. The regulations
provide a procedure for challenging any rebuttable presumption of control.



Permitted Activities. A bank holding company is generally permitted under the Bank Holding Company Act, to engage in or acquire direct or indirect control of more than 5% of the voting shares of
any company engaged in the following activities:



| |  | Banking or managing or controlling banks; and
| | - | ---------------------------------------------



| |  | Any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



Activities that the Federal Reserve has found to be so closely related to
banking as to be a proper incident to the business of banking include:



| |  | Factoring accounts receivable;
| | - | ------------------------------



| |  | Making, acquiring, brokering or servicing loans and usual related activities;
| | - | -----------------------------------------------------------------------------



| |  | Leasing personal or real property;
| | - | ----------------------------------



| |  | Operating a non-bank depository institution, such as a savings association;
| | - | ---------------------------------------------------------------------------



| |  | Trust company functions;
| | - | ------------------------



| |  | Financial and investment advisory activities;
| | - | ---------------------------------------------



| |  | Conducting discount securities brokerage activities;
| | - | ----------------------------------------------------



| |  | Underwriting and dealing in government obligations and money market instruments;
| | - | --------------------------------------------------------------------------------



| |  | Providing specified management consulting and counseling activities;
| | - | --------------------------------------------------------------------



| |  | Performing selected data processing services and support services;
| | - | ------------------------------------------------------------------



| |  | Acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | Performing selected insurance underwriting activities.
| | - | ------------------------------------------------------



Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding companys continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of
its bank subsidiaries.



In addition to the permissible bank
holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, permitting the bank holding company to engage in additional activities that are financial in nature or incidental or
complementary to financial activity. The Bank Holding Company Act expressly lists the following activities as financial in nature:



| |  | Lending, trust and other banking activities;
| | - | --------------------------------------------



| |  | Insuring, guaranteeing, or indemnifying against loss or harm, or providing and issuing annuities, and acting as principal, agent, or broker for these purposes, in any state;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Providing financial, investment, or advisory services;
| | - | ------------------------------------------------------



| |  | Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly;
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | Underwriting, dealing in or making a market in securities;
| | - | ----------------------------------------------------------



| |  | Other activities that the Federal Reserve may determine to be so closely related to banking or managing or controlling banks as to be a proper incident to managing or controlling
banks;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Foreign activities permitted outside of the United States if the Federal Reserve has determined them to be usual in connection with banking operations abroad;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Merchant banking through securities or insurance affiliates; and
| | - | ----------------------------------------------------------------



| |  | Insurance company portfolio investments.
| | - | ----------------------------------------



To qualify to become a financial holding company, the Bank and any other depository institution subsidiary of the Company must be well capitalized and
well managed and must have a Community Reinvestment Act rating of at least satisfactory. Additionally, the Company must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve
with 30 days written notice prior to engaging in a permitted financial activity. While the Company meets the qualification standards applicable to financial holding companies, the Company has not elected to become a financial holding company
at this time.



Support of Subsidiary
Institutions. Under Federal Reserve policy, the Company is expected to act as a source of financial strength for the Bank and to commit resources to support the Bank. This support may be required at times when, without this Federal Reserve
policy, the Company might not be inclined to provide it. In addition, any capital loans made by the Company to the Bank will be repaid only after its deposits and various other obligations are repaid in full. In the unlikely event of the
Companys bankruptcy, any commitment by it to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.



South Carolina Law.As a bank holding company with its
principal offices in South Carolina, the Company is subject to limitations on sale or merger and to regulation by the South Carolina State Board of Financial Institutions (the State Board). The Company must receive the approval of the
State Board prior to acquiring control of a bank or bank holding company or all or substantially all of the assets of a bank or a bank holding company. The Company also must file with the State Board periodic reports with respect to its financial
condition, operations and management, and the intercompany relationships between the Company and its subsidiaries.



First Reliance Bank



The Bank is a state chartered bank insured by the FDIC and not a member of the Federal Reserve. As such, the Bank is subject to supervision and regulation
by the FDIC and the State Board. Supervision, regulation and examination of banks by regulatory agencies are intended primarily for the protection of depositors rather than stockholders of the banks.



South Carolina Law. Commercial banks chartered in South
Carolina have only those powers granted by law or the regulations of the State Board. State law sets specific requirements for bank capital and regulates deposits in and loans and investments by banks, including the amounts, types and, in some
cases, rates. In addition, the State Board regulates, among other activities, the payment of dividends, the opening of branches, loans to officers and directors, record keeping and the use of automated teller machines. The State Board periodically
examines state banks to determine their compliance with the law and regulations, and state banks must make periodic reports of their condition to the State Board.



Prompt Corrective Action.The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes
a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other
discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking
regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.



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An institution that is categorized as undercapitalized, significantly undercapitalized, or critically
undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to
various limitations. The controlling holding companys obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiarys assets at the time it became undercapitalized or the amount required to
meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an
accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.



FDIC Insurance Assessments.The FDIC has adopted a
risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the undercapitalized category
including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a
supervisory evaluation that the institutions primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institutions financial condition and the risk posed to the deposit insurance
funds. Assessments range from 0 to 27 cents per $100 of deposits, depending on the institutions capital group and supervisory subgroup. In addition, the FDIC imposes assessments to help pay off the $780 million in annual interest payments on
the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry.



The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.



Community Reinvestment Act. The Bank is subject to evaluation by the FDIC under the Community Reinvestment Act of 1977
(CRA). The Bank is evaluated under guidelines established for small banks. These guidelines call for an evaluation of an institutions performance in meeting the credit needs of its entire community, including low- and
moderate-income areas, consistent with the safe and sound operation of the institution. The relevant factors under these small bank guidelines include the banks loan-to-deposit ratio within its community, the banks percentage
of loans and other lending activities within its community, the banks record of lending to and engaging in other lending-related activities for borrowers of different income levels and businesses and farms of different sizes, the geographic
distribution of the banks loans and the banks record of acting, if warranted, in response to written complaints about its performance in helping to meet credit needs in its community. The FDIC takes a banks CRA performance into
account in considering applications for approval of deposit insurance, establishment or relocation of branches and business combinations. Accordingly, failure to adequately meet these criteria could impose additional requirements and limitations on
the Bank. Since our aggregate assets are not more than $250 million, under the Gramm-Leach-Bliley Act, we are generally subject to a Community Reinvestment Act examination only once every 60 months if we receive an outstanding rating,
once every 48 months if we receive a satisfactory rating and as needed if our rating is less than satisfactory.Additionally, we must publicly disclose the terms of various Community Reinvestment Act-related
agreements.



Other Regulations. Interest
and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. For example, under the Soldiers and Sailors Civil Relief Act of 1940, a lender is generally prohibited
from charging an annual interest rate in excess of 6% on any obligation for which the borrower is a person on active duty with the United States military.



The Banks loan operations are also subject to federal laws applicable to credit transactions, such as the:



| |  | federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
| | - | ------------------------------------------------------------------------------------------



| |  | Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution
is fulfilling its obligation to help meet the housing needs of the community it serves;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



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| |  | Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | Soldiers and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
| | - | -----------------------------------------------------------------------------------------------------------------------------



The deposit operations of the Bank are subject to:



| |  | The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative
subpoenas of financial records; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and
customers rights and liabilities arising from the use of automated teller machines and other electronic banking services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Capital Adequacy



The Company and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve, in the case of the Company, and
the FDIC, in the case of the Bank. The Federal Reserve has established a risk-based and a leverage measure of capital adequacy for bank holding companies. The Bank is also subject to risk-based and leverage capital requirements adopted by the FDIC,
which are substantially similar to those adopted by the Federal Reserve for bank holding companies.



The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance-sheet items, such as letters of credit and unfunded loan commitments, are assigned to broad risk
categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance-sheet items.



The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. Total capital consists of two
components, Tier 1 Capital and Tier 2 Capital. Tier 1 Capital generally consists of common stock, minority interests in the equity accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of qualifying
cumulative perpetual preferred stock, less goodwill and other specified intangible assets. Tier 1 Capital must equal at least 4% of risk-weighted assets. Tier 2 Capital generally consists of subordinated debt, other preferred stock, and a limited
amount of loan loss reserves. The total amount of Tier 2 Capital is limited to 100% of Tier 1 Capital. At December 31, 2003, our ratio of total capital to risk-weighted assets was 13.9% and our ratio of Tier 1 Capital to risk-weighted assets was
12.6%.



In addition, the Federal Reserve has established
minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and other specified intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the Federal Reserves risk-based capital measure for market risk. All other bank holding companies generally are required to maintain a leverage ratio of at least 4%. At
December 31, 2003, our leverage ratio was 10.3%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory levels without reliance on intangible assets. The Federal Reserve considers the leverage ratio and other indicators of capital strength in evaluating proposals for expansion or new activities.



Failure to meet capital guidelines could subject a bank or bank holding
company to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits, and certain other restrictions on its business. As described
above, significant additional restrictions can be imposed on FDIC-insured depository institutions that fail to meet applicable capital requirements.



10



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Payment of Dividends



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.



Under South Carolina law, the
Bank is authorized to upstream to the Company, by way of a cash dividend, up to 100% of the Banks 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.



The payment of dividends by the Company and the Bank may also be affected by other factors, such as the requirement to
maintain adequate capital above regulatory guidelines. If, in the opinion of the FDIC, the Bank were engaged in or about to engage in an unsafe or unsound practice, the FDIC could require, after notice and a hearing, that the Bank stop or refrain
engaging in the practice. The federal banking agencies have indicated that paying dividends that deplete a depository institutions capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements
that provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.



Restrictions on Transactions with Affiliates



The Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on the amount of:



| |  | a banks loans or extensions of credit to affiliates;
| | - | -----------------------------------------------------



| |  | a banks investment in affiliates;
| | - | ----------------------------------



| |  | assets a bank may purchase from affiliates, except for real and personal property exempted by the Federal Reserve;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
| | - | -----------------------------------------------------------------------------------------------------------------



| |  | a banks guarantee, acceptance or letter of credit issued on behalf of an affiliate.
| | - | ------------------------------------------------------------------------------------



The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a banks capital
and surplus and, as to all affiliates combined, to 20% of a banks capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank
must also comply with other provisions designed to avoid the taking of low-quality assets.



The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit an institution from engaging in the above transactions with affiliates unless
the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.



The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.



Privacy



Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial
information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service



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with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account
numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.



Consumer Credit Reporting



On December 4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the FAIR Act), amending the federal Fair Credit Reporting Act
(the FCRA). These amendments to the FCRA (the FCRA Amendments) will become effective as early as February 2004, but more likely in the third or fourth quarter of 2004, depending on implementing regulations to be issued by the Federal Trade
Commission and the federal bank regulatory agencies.



The FCRA
Amendments include, among other things:



| |  | new requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the
consumers credit file stating that the consumer may be the victim of identity theft or other fraud;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | new consumer notice requirements for lenders that use consumer report information in connection with risk-based credit pricing programs;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | for entities that furnish information to consumer reporting agencies (which would include the Bank, new requirements to implement procedures and policies regarding the accuracy and
integrity of the furnished information, and regarding the correction of previously furnished information that is later determined to be inaccurate; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a new requirement for mortgage lenders to disclose credit scores to consumers.
| | - | ------------------------------------------------------------------------------



Prior to the effective date of the FCRA Amendments, the Company and its affected subsidiaries will implement policies and procedures to comply with the new rules.



The FCRA Amendments also will prohibit a business that
receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the
opt-out), subject to certain exceptions. The Company and its subsidiaries also will implement procedures to comply with these new rules prior to the effective date of the rules. We do not plan to share consumer information among our
affiliated companies for marketing purposes, except as may be allowed under exceptions to the notice and opt-out requirements. Because no affiliate of the Company is currently sharing consumer information with any other affiliate of the Company for
marketing purposes, the new limitations on sharing of information for marketing purposes will not have a significant impact on the Company.



Anti-Terrorism Legislation



The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, signed by the
President on October 26, 2001, imposed new requirements and limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism. Most of these requirements and limitations took effect
in 2002. Additional know your customer rules became effective in June 2003, requiring the Bank to establish a customer identification program under Section 326 of the USA PATRIOT Act. The Company and its subsidiaries implemented
procedures and policies to comply with those rules prior to the effective date of each of the rules.



Enforcement Powers



The
Financial Institutions Reform, Recovery and Enforcement Act expanded and increased civil and criminal penalties available for use by the federal regulatory agencies against depository institutions and certain institution-affiliated
parties. Institution-affiliated parties primarily include management, employees and agents of a financial institution, as well as independent contractors and consultants such as attorneys and accountants and others who participate in the
conduct of the financial institutions affairs. These practices can include the failure of



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an institution to timely file required reports or the filing of false or misleading information or the submission of
inaccurate reports. For such violations, civil penalties may be as high as the lesser of $1,000,000 a day or $5,000,000. Criminal penalties for some financial institution crimes have been increased to 20 years. In addition, regulators are provided
with greater flexibility to commence enforcement actions against institutions and institution-affiliated parties. Possible enforcement actions include the termination of deposit insurance. Furthermore, banking agencies power to issue
cease-and-desist orders were expanded. Such orders may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnification or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions as determined by the ordering agency to be appropriate.



Proposed Legislation and Regulatory Action



New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute
will be adopted or the extent to which our business may be affected by any new regulation or statute.



Effect of Governmental Monetary Polices



Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Banks monetary policies have had, and are
likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the
Federal Reserve affect the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks and its influence over reserve
requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.



In addition to the federal and state laws noted above, South Carolina has adopted, effective January 1, 2004, laws imposing restrictions and procedural
requirements on mortgage loans classified as high-cost home loans and on the flipping of consumer home loans. As drafted, these laws generally apply to most mortgage loans made in South Carolina. The Bank has implemented
procedures necessary to comply with these new laws.



Selected
Statistical Information



The selected statistical
information required by Item 1 is included in the Companys 2003 Annual Report to Shareholders, which is Exhibit 13.1 to this Report, under the heading Managements Discussion and Analysis of Financial Condition and Results of
Operations and is incorporated herein by reference.



ITEM 2. DESCRIPTION OF PROPERTIES



The executive and main offices of the Company and the Bank are located at 2170 W. Palmetto Street in downtown Florence, South Carolina. The facility at that location is owned by the Bank. The Bank also owns an adjacent lot that is used as a
parking lot. The headquarters building is a two-story building having approximately 12,000 square feet. The building has six inside teller stations, two teller stations servicing four drive-through lanes and a night depository and automated teller
machine drive-through lane that is accessible after the Banks normal business hours.



On April 26, 2000, the Bank opened a branch at 411 Second Loop Road in Florence, South Carolina. The Second Loop branch facility, which is owned by the Bank, is located on approximately one acre of land and contains
approximately 3,000 square feet.



On May 15, 2002, the Bank
purchased an additional facility located at 2145 Fernleaf Drive in Florence, South Carolina. The Fernleaf Drive site contains approximately 0.5 acres of land and includes a 7,500 square feet building. The facility will serve as additional space for
the operational activities of the Bank, including data processing and auditing. No customer services will be conducted in this facility.



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The Bank announced in 2003 its intentions to open a branch in Lexington, South Carolina. As of January 1,
2004, the Bank had leased a parcel of land in which it plans to locate a temporary facility. The Lexington branch is expected to open for business in the second quarter of 2004.



Other than the Bank facilities described in the preceding paragraphs and the real estate-related loans funded by the Bank
previously described in Item 1. Description of BusinessFirst Reliance Bank, the Company does not invest in real estate, interests in real estate, real estate mortgages, or securities of or interests in persons primarily engaged in
real estate activities.



ITEM 3. LEGAL PROCEEDINGS



None.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS



(a) The response to this Item 5(a) is included in the Companys 2003 Annual Report to Shareholders under the heading, Market for First Reliance
Bancshares, Inc.s Common Stock; Payment of Dividends, and is incorporated herein by reference. Pursuant to Section 4(2) of the Securities Act of 1933, the Company issued derivative securities to certain employees in connection with its
qualified retirement plan(s) during 2003.



(b) In May 2003, the
Company completed a secondary offering of its common stock to the public. This secondary offering was registered under the Securities Act of 1933, and raised $7,896,474 in net proceeds through the sale of 1,007,430 shares of common stock. Out of the
net proceeds of the offering, $8,000,000 was used as a contribution to the Bank to fund its operations and growth, leaving $103,526 to be used for general corporate purposes of the Company.



ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The response to this Item is included in the Companys 2003 Annual Report to Shareholders under the heading Managements Discussion and
Analysis of Financial Condition and Results of Operations and is incorporated herein by reference.



ITEM 7. FINANCIAL STATEMENTS



The
following financial statements are included in the Companys 2003 Annual Report to Shareholders, and are incorporated herein by reference:



| |  | Report of Independent Certified Public Accountants
| | - | --------------------------------------------------



| |  | Financial Statements:
| | - | ---------------------



| | 1. | Consolidated Balance Sheets dated as of December 31, 2003 and 2002.
| | -- | -------------------------------------------------------------------



| | 2. | Consolidated Statements of Income for the Years Ended December 31, 2003, 2002 and 2001.
| | -- | ---------------------------------------------------------------------------------------



| | 3. | Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income for the Years Ended December 31, 2003, 2002 and 2001.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.
| | -- | -------------------------------------------------------------------------------------------



| | 6. | Notes to Consolidated Financial Statements.
| | -- | -------------------------------------------



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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



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



Tourville, Simpson & Caskey, L.L.P.s reports on the Companys financial statements for the years ended December 31, 2002 and 2001 neither
contained an adverse opinion or disclaimer of opinion, nor was modified as to uncertainty, audit scope, or accounting principles. There were no disagreements with Tourville, Simpson & Caskey, L.L.P. on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to Tourville, Simpson & Caskey, L.L.P.s satisfaction, would have caused it to make reference to the subject matter of the disagreement in
this annual report on Form 10-KSB.



ITEM 8A. CONTROLS AND PROCEDURES



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



PART III



ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT



The Company has adopted a Code of Ethics that applies to its principal executive, financial and accounting officers. The Code of Ethics has been
posted to the Companys website at www.firstreliance.com. A copy may also be obtained, without charge, upon written request addressed to First Reliance Bancshares, Inc., 2170 W. Palmetto Street, P. O. Box 4250, Florence, South Carolina 29501,
Attention: Corporate Secretary. The request may be delivered by letter to the address set forth above or by fax to the attention of the Companys Corporate Secretary at 843-656-2099.



The remaining information for this Item is included in the Companys Proxy Statement for the Annual Meeting of
Shareholders to be held on June 17, 2004, under the headings Proposal: Election of Directors, Security Ownership of Certain Beneficial Owners and Management and Section 16(a) Beneficial Ownership Reporting
Compliance and are incorporated herein by reference.



ITEM 10. EXECUTIVE COMPENSATION



The responses to this Item are included in the Companys Proxy Statement for the Annual Meeting of Shareholders to be held on June 17, 2004, under the heading Compensation of Executive Officers and Directors and are
incorporated herein by reference.



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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table provides information regarding compensation plans under which equity securities of the Company are authorized for issuance. All data
is presented as of December 31, 2003.



Equity Compensation Plan
Table



|                                                           |  |                                                                                          |  |                                                                           |  |                                                                                                                                         
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|                                                           |  | (a)                                                                                      |  | (b)                                                                       |  | (c)                                                                                                                                     
|Plan category                                              |  | Number of securities to beissued upon exercise ofoutstanding options, warrantsand
rights |  | Weighted-average exerciseprice of outstanding options,warrants and rights |  | Number of securities remaining available for futureissuance under equitycompensation plans (excluding securities
reflectedin column (a))
|Equity compensation plans approved by security holders     |  | 378,118                                                                                  |  | $6.32                                                                     |  | 93,682                                                                                                                                  
|Equity compensation plans not approved by security holders |  | N/A                                                                                      |  | N/A                                                                       |  | N/A                                                                                                                                     
|Total                                                      |  | 378,118                                                                                  |  | $6.32                                                                     |  | 93,682                                                                                                                                  



The additional
responses to this Item are included in the Companys Proxy Statement for the Annual Meeting of Shareholders to be held on June 17, 2004, under the heading Security Ownership of Certain Beneficial Owners and Management and are
incorporated herein by reference.



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The responses to this Item are included in the Companys Proxy Statement for the Annual Meeting of Shareholders held on June 17, 2004, under the headings Related Party Transactions and
Compensation of Executive Officers and Directors and are incorporated herein by reference.



ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 10-KSB



|(a) | Exhibits
|--- | --------



|               |  |                                                                                                                                                                                                                               
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                                                                                                                                                       
|2.1            |  | Plan of Reorganization and Exchange between First Reliance Bancshares, Inc. and First Reliance Bank (incorporated by reference to the Registrants current report on Form 8-K dated April
1, 2002).                           
|               | 
|3.1            |  | Articles of Incorporation (incorporated by reference to the Registrants current report on Form 8-K dated April 1, 2002).                                                                                                     
|               | 
|3.2            |  | Bylaws (incorporated by reference to the Registrants current report on Form 8-K dated April 1, 2002).                                                                                                                        
|               | 
|4.1            |  | See Articles of Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto.                                                                                                                                         
|               | 
|10.1(a)        |  | Executive Employment Agreement dated August 21, 2001 - F. R. Saunders, Jr. (incorporated by reference to Exhibit 10.4 to the Registrants quarterly report on Form 10-QSB for the quarter
ended March 31, 2002).              
|               | 
|10.1(b)        |  | Amendment 1 to Executive Employment Agreement dated June 1, 2002 - F. R. Saunders, Jr. (incorporated by reference to Exhibit 10.5(b) to the Registrants quarterly report On Form 10-QSB
for the quarter ended June 30, 2002).
|               | 
|10.2(a)        |  | Executive Employment Agreement dated August 21, 2001 - A. Dale Porter (incorporated by reference to Exhibit 10.5 to the Registrants quarterly report on Form 10-QSB for the quarter ended
March 31, 2002).                   
|               | 
|10.2(b)        |  | Amendment 1 to Executive Employment Agreement dated June 1, 2002 - A. Dale Porter (incorporated by reference to Exhibit 10.6(b) to the Registrants quarterly report On Form 10-QSB for
the quarter ended June 30, 2002).     



16



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                      
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3(a) |  | Executive Employment Agreement dated August 21, 2001 - Paul C. Saunders (incorporated by reference to Exhibit 10.6 to the Registrants quarterly report on Form 10-QSB for the quarter
ended March 31, 2002).                                                        
|        | 
|10.3(b) |  | Amendment 1 to Executive Employment Agreement dated June 1, 2002 - Paul C. Saunders (incorporated by reference to Exhibit 10.7(b) to the Registrants quarterly report On Form 10-QSB for
the quarter ended June 30, 2002).                                          
|        | 
|10.4(a) |  | 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrants quarterly report on Form 10-QSB for the quarter ended March 31,
2002).                                                                            
|        | 
|10.4(b) |  | Amendment No. 1 to 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrants quarterly report on Form 10-QSB for the quarter
ended March 31, 2002).                                                         
|        | 
|10.4(c) |  | Amendment No. 2 to 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Registrants quarterly report on Form 10-QSB for the quarter
ended June 30, 2002).                                                          
|        | 
|10.5    |  | Employment Agreement dated September 27, 2002 - Jeffrey A. Paolucci (incorporated by reference to Exhibit 10.5 to the Registrants annual report on Form 10-KSB for the year ended
December 31, 2002).                                                               
|        | 
|10.6    |  | First Reliance Bancshares, Inc. 2003 Stock Incentive Plan                                                                                                                                                                                                            
|        | 
|10.7    |  | Employment Agreement dated April 23, 2003, by and between First Reliance Bank and Thomas C. Ewart, Sr.                                                                                                                                                               
|        | 
|13.1    |  | First Reliance Bancshares, Inc. 2003 Annual Report to Shareholders. Except with respect to those portions specifically incorporated by reference into this Report, the Companys 2003
Annual Report to Shareholders is not deemed to be filed as part of this Report.
|        | 
|21.1    |  | Subsidiaries of First Reliance Bancshares, Inc.                                                                                                                                                                                                                      
|        | 
|23.1    |  | Consent of Elliott Davis, LLC                                                                                                                                                                                                                                        
|        | 
|24.1    |  | Power of Attorney (appears on the signature pages to this Annual Report on Form 10-KSB).                                                                                                                                                                             
|        | 
|31.1    |  | Certification of Chief Executive Officer                                                                                                                                                                                                                             
|        | 
|31.2    |  | Certification of Chief Financial Officer                                                                                                                                                                                                                             
|        | 
|32.1    |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              



|(b) | Reports on Form 8-K filed in the fourth quarter of 2003: The Company filed a Form 8-K on October 20, 2003 in connection with its third quarter 2003 earnings press release, which was
disclosed under item 12.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table shows the amounts paid by the Company to its independent auditors for the last two fiscal years.



|                      |  |      |        |      |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------
|Category              |  | 2003 |        | 2002
|Audit Fees(1)         |  | $    | 33,925 |      | $ | 31,690
|Audit Related Fees(2) |  |      | 5,090  |      |   | 27,970
|Tax Fees(3)           |  |      | 4,065  |      |   | 6,025 
|All Other Fees(4)     |  |      | 4,325  |      |   | 19,940
|                      |  |      |        |      |   |       
|Total                 |  | $    | 47,405 |      | $ | 85,625
|                      |  |      |        |      |   |       

---

|(1) | Audit fees consisted primarily of the audit of the Companys annual financial statements and for reviews of the financial statements included in the
Companys reports on Form 10-QSB. These fees include amounts paid or expected to be paid for each respective years audit.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Professional services related to the review of managements discussion and analysis and Form 10-KSB and review of Regulation Statement on Form S-2 in 2002.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Preparation of Federal and State corporate income tax returns and assistance with tax estimates.
|--- | ------------------------------------------------------------------------------------------------

|(4) | All other fees include assistance with the preparation of Form 5500, agreed upon procedures for Federal Home Loan Bank and in 2002 operational and EDP internal
audits.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



18



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##### Table of Contents

SIGNATURES



In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized.



FIRST RELIANCE BANCSHARES, INC.By:

/s/ F. R. Saunders, Jr.F. R. Saunders, Jr.President and Chief Executive OfficerDate:

May 11, 2004




19



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##### Table of Contents

EXHIBIT INDEX





|               |  |                                                                                                                                                                                                                               
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit                                                                                                                                                                                                                       
|2.1            |  | Plan of Reorganization and Exchange between First Reliance Bancshares, Inc. and First Reliance Bank (incorporated by reference to the Registrants current report on Form 8-K dated April
1, 2002).                           
|               | 
|3.1            |  | Articles of Incorporation (incorporated by reference to the Registrants current report on Form 8-K dated April 1, 2002).                                                                                                     
|               | 
|3.2            |  | Bylaws (incorporated by reference to the Registrants current report on Form 8-K dated April 1, 2002).                                                                                                                        
|               | 
|4.1            |  | See Articles of Incorporation at Exhibit 3.1 hereto and Bylaws at Exhibit 3.2 hereto.                                                                                                                                         
|               | 
|10.1(a)        |  | Executive Employment Agreement dated August 21, 2001 - F. R. Saunders, Jr. (incorporated by reference to Exhibit 10.4 to the Registrants quarterly report on Form 10-QSB for the quarter
ended March 31, 2002).              
|               | 
|10.1(b)        |  | Amendment 1 to Executive Employment Agreement dated June 1, 2002 - F. R. Saunders, Jr. (incorporated by reference to Exhibit 10.5(b) to the Registrants quarterly report On Form 10-QSB
for the quarter ended June 30, 2002).
|               | 
|10.2(a)        |  | Executive Employment Agreement dated August 21, 2001- A. Dale Porter (incorporated by reference to Exhibit 10.5 to the Registrants quarterly report on Form 10-QSB for the quarter ended
March 31, 2002).                    
|               | 
|10.2(b)        |  | Amendment 1 to Executive Employment Agreement dated June 1, 2002 - A. Dale Porter (incorporated by reference to Exhibit 10.6(b) to the Registrants quarterly report On Form 10-QSB for
the quarter ended June 30, 2002).     
|               | 
|10.3(a)        |  | Executive Employment Agreement dated August 21, 2001 - Paul C. Saunders (incorporated by reference to Exhibit 10.6 to the Registrants quarterly report on Form 10-QSB for the quarter
ended March 31, 2002).                 
|               | 
|10.3(b)        |  | Amendment 1 to Executive Employment Agreement dated June 1, 2002 - Paul C. Saunders (incorporated by reference to Exhibit 10.7(b) to the Registrants quarterly report On Form 10-QSB for
the quarter ended June 30, 2002).   
|               | 
|10.4(a)        |  | 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Registrants quarterly report on Form 10-QSB for the quarter ended March 31,
2002).                                     
|               | 
|10.4(b)        |  | Amendment No. 1 to 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.2 to the Registrants quarterly report on Form 10-QSB for the quarter
ended March 31, 2002).                  
|               | 
|10.4(c)        |  | Amendment No. 2 to 1999 First Reliance Bank Employee Stock Option Plan (incorporated by reference to Exhibit 10.3 to the Registrants quarterly report on Form 10-QSB for the quarter
ended June 30, 2002).                   
|               | 
|10.5           |  | Employment Agreement dated September 27, 2002 - Jeffrey A. Paolucci (incorporated by reference to Exhibit 10.5 to the Registrants annual report on Form 10-KSB for the year ended
December 31, 2002).                        
|               | 
|10.6           |  | First Reliance Bancshares, Inc. 2003 Stock Incentive Plan                                                                                                                                                                     
|               | 
|10.7           |  | Employment Agreement dated April 23, 2003, by and between First Reliance Bank and Thomas C. Ewart, Sr.                                                                                                                        



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##### Table of Contents

|     |  |                                                                                                                                                                                                                                                                      
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|13.1 |  | First Reliance Bancshares, Inc. 2003 Annual Report to Shareholders. Except with respect to those portions specifically incorporated by reference into this Report, the Companys 2003
Annual Report to Shareholders is not deemed to be filed as part of this Report.
|     | 
|21.1 |  | Subsidiaries of First Reliance Bancshares, Inc.                                                                                                                                                                                                                      
|     | 
|23.1 |  | Consent of Elliott Davis, LLC                                                                                                                                                                                                                                        
|     | 
|24.1 |  | Power of Attorney (appears on the signature pages to this Annual Report on Form 10-KSB).                                                                                                                                                                             
|     | 
|31.1 |  | Certification of Chief Executive Officer                                                                                                                                                                                                                             
|     | 
|31.2 |  | Certification of Chief Financial Officer                                                                                                                                                                                                                             
|     | 
|32.1 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.