**Exhibit 13.1**

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

**Table of Contents**

|                                                                                     |   | **Page** |
|------------------------------------------------------------------------------------------|--------|----------|
|                                                                                     |   |          |
| Selected Financial Data                                                                  |   | 2        |
| Management’s Discussion   and Analysis                                              |   | 3-23     |
| Report of Independent   Registered Public Accounting Firm                                |   | 24       |
| Consolidated Balance   Sheets                                                            |   | 25       |
| Consolidated Statements of   Income                                                      |   | 26       |
| Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income |   | 27       |
| Consolidated Statements of   Cash Flows                                                  |   | 28       |
| Notes to Consolidated   Financial Statements                                             |   | 29-52    |
| Corporate Data                                                                           |   | 53-55    |

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

**Selected Financial Data**

The following selected financial data is derived from the consolidated financial statements and other data of First Reliance Bancshares, Inc. and Subsidiary (the “Company”.)  The selected financial data should be read in conjunction with the consolidated financial statements of the Company, including the accompanying notes, included elsewhere herein.

| ***(Dollars in thousands, except per share)***        |   | **2006** |      | **2005** |   | **2004**  |   | **2003** |      | **2002** |   |
|-------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
|                                                       |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| **Income   Statement Data:**                          |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Interest   income                                     |   | $        | 31,717    |     | $      | 23,131    |   | $        | 13,291    |     | $      | 8,499 |   | $ | 6,932 |   |
| Interest   expense                                    |   |     | 14,214    |     |   | 8,979     |   |     | 4,061     |     |   | 2,460 |   |   | 2,337 |   |
|                                                  |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Net   interest income                                 |   |     | 17,503    |     |   | 14,152    |   |     | 9,230     |     |   | 6,039 |   |   | 4,595 |   |
| Provision   for loan losses                           |   |     | 1,393     |     |   | 1,811     |   |     | 1,362     |     |   | 792 |   |   | 349 |   |
|                                                  |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Net   interest income after provision for loan losses |   |     | 16,110    |     |   | 12,341    |   |     | 7,868     |     |   | 5,247 |   |   | 4,246 |   |
| Noninterest   income                                  |   |     | 4,591     |     |   | 2,871     |   |     | 2,380     |     |   | 2,138 |   |   | 1,734 |   |
| Noninterest   expense                                 |   |     | 16,272    |     |   | 12,475    |   |     | 8,338     |     |   | 5,966 |   |   | 4,680 |   |
|                                                  |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Income   before income taxes                          |   |     | 4,429     |     |   | 2,737     |   |     | 1,910     |     |   | 1,419 |   |   | 1,300 |   |
| Income   tax expense                                  |   |     | 1,183     |     |   | 789       |   |     | 571       |     |   | 403 |   |   | 406 |   |
|                                                  |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Net   income                                          |   | **$**    | **3,246** |     | **$**  | **1,948** |   | **$**    | **1,339** |     | **$**  | **1,016** |   | **$** | **894** |   |
|                                                  |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| **Balance   Sheet Data:**                             |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Assets                                                |   | $        | 456,211   |     | $      | 403,038   |   | $        | 284,971   |     | $      | 180,364 |   | $ | 116,077 |   |
| Earning   assets                                      |   |     | 412,687   |     |   | 381,158   |   |     | 271,020   |     |   | 169,205 |   |   | 108,114 |   |
| Securities   available for sale(1)                    |   |     | 35,931    |     |   | 37,121    |   |     | 28,568    |     |   | 27,689 |   |   | 23,449 |   |
| Loans   (2)                                           |   |     | 360,123   |     |   | 319,539   |   |     | 239,695   |     |   | 140,361 |   |   | 81,559 |   |
| Allowance   for loan losses                           |   |     | 4,002     |     |   | 3,419     |   |     | 2,758     |     |   | 1,752 |   |   | 1,137 |   |
| Deposits                                              |   |     | 372,938   |     |   | 334,437   |   |     | 225,494   |     |   | 139,415 |   |   | 100,323 |   |
| Shareholders’   equity                           |   |     | 34,093    |     |   | 29,651    |   |     | 27,359    |     |   | 17,703 |   |   | 8,644 |   |
| **Per-Share   Data:**(5)                              |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Basic   earnings                                      |   | $        | 0.96      |     | $      | .60       |   | $        | 0.52      |     | $      | 0.48 |   | $ | 0.62 |   |
| Diluted   earnings                                    |   |     | 0.91      |     |   | .57       |   |     | 0.48      |     |   | 0.46 |   |   | 0.59 |   |
| Book   value (period end)                             |   |     | 9.95      |     |   | 8.97      |   |     | 8.54      |     |   | 7.18 |   |   | 5.97 |   |
| **Performance   Ratios:**                             |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Return   on average assets                            |   |     | 0.75      | %        |   | 0.54      | %      |     | 0.59      | %        |   | 0.70 | % |   | 0.86 | % |
| Return   on average equity                            |   |     | 10.19     |     |   | 6.82      |   |     | 7.04      |     |   | 7.07 |   |   | 10.87 |   |
| Net   interest margin (3)                             |   |     | 4.42      |     |   | 4.20      |   |     | 4.41      |     |   | 4.53 |   |   | 4.77 |   |
| Efficiency   (4)                                      |   |     | 73.65     |     |   | 73.28     |   |     | 71.82     |     |   | 72.99 |   |   | 74.89 |   |
| **Capital   and Liquidity Ratios:**                   |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Average   equity to average assets                    |   |     | 7.39      | %        |   | 7.96      | %      |     | 8.43      | %        |   | 9.93 | % |   | 7.92 | % |
| Leverage   (4.00% required minimum)                   |   |     | 9.90      |     |   | 10.02     |   |     | 10.11     |     |   | 10.30 |   |   | 7.48 |   |
| Risk-based   capital                                  |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Tier   1                                              |   |     | 11.42     |     |   | 12.02     |   |     | 11.36     |     |   | 12.60 |   |   | 10.21 |   |
| Total                                                 |   |     | 12.45     |     |   | 13.05     |   |     | 12.52     |     |   | 13.85 |   |   | 11.46 |   |
| Average   loans to average deposits                   |   |     | 96.86     |     |   | 102.07    |   |     | 101.16    |     |   | 94.43 |   |   | 82.51 |   |

|     |
|-----|
| (1) | Securities   available-for-sale are stated at fair value. |
| (2) | Loans are stated at gross   amounts before allowance for loan losses and include loans held for sale. |
| (3) | Tax equivalent net interest   income divided by average earning assets. |
| (4) | Noninterest expense divided   by the sum of net interest income and noninterest income, excluding gains and   losses on sales of assets. |
| (5) | Amounts have been restated   for two for one stock split declared in 2002. |

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

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

**Basis of Presentation**

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

**General**

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

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

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

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

On November 12, 2002, the Company commenced a stock offering whereby a minimum of 125,000 shares and a maximum of 1,250,000 shares of common stock were offered to fund continued expansion through First Reliance Bank. The offering price was $8.00 per share.  This was a best efforts offering and was conducted without an underwriter.  The Company had sold 1,007,430 shares resulting in additional capital of $8,059,439 net of selling expenses of $162,965, at the close of the offering in May 2003.  Also 10,400 stock options were exercised in 2003 for a total amount of $52,000.

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

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

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

**General** - *continued*

On June 30, 2005, the Company formed FirstReliance Capital Trust I (the “Trust”) for the purpose of issuingtrust preferred securities, which enabled the Company to obtain Tier 1 capital ona consolidated basis for regulatory purposes. On July 1, 2005, the Companyclosed a private offering of $10,000,000 of floating rate preferred securitiesoffered and sold by the Trust.  The proceeds from such issuance, togetherwith the proceeds from a related issuance of common securities of the Trustpurchased by the Company in the amount of $310,000, were invested by the Trustin floating rate Junior Subordinated Notes issued by the Company (the“Notes”) totaling $10.3 million.  The Notes are due and payableon November 23, 2035 and may be redeemed by the Company after five years, andsooner in certain specific events, including in the event that certaincircumstances render the Notes ineligible for treatment as Tier 1 capital,subject to prior approval by the Federal Reserve Board, if then required. The Notes presently qualify as Tier 1 capital for regulatory reporting. The sole assets of the Trust are the Notes.  The Company owns 100% of thecommon securities of the Trust.  The Notes are unsecured and rank junior toall senior debt of the Company.  For the quarter ended December 31, 2006,the floating rate preferred securities and the Notes had an annual interest rateof 5.93%.  This interest rate is fixed until August 23, 2010, when theinterest rate will adjust quarterly.  After August 23, 2010, the interestrate will equal three-month LIBOR plus 1.83%.

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

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

Our balanced growth continued during 2006, with increases in assets, deposits, shareholders’ equity, earnings per share and returns on average assets and equity.  The following chart shows our growth in these areas from December 31, 2005 to December 31, 2006:

|                        |   | **December 31,** |   | **Percent   Increase   (Decrease)** |   |
|-----------------------------|--------|------------------|--------|-------------------------------------|--------|
|                        |   |                  |   |                                |
| ***(Dollars in millions)*** |   | **2006**         |   | **2005**                            |   |   |
|                             |   |                  |        |                                |        |  |   |  |  |   |
| Total assets                |   | $                | 456.2  |                                | $      | 403.0 |   |   | 13.19 | % |
| Loans                       |   |             | 353.5  |                                |   | 311.5 |   |   | 13.46 |   |
| Investment securities       |   |             | 38.4   |                                |   | 39.2 |   |   | (1.91 | ) |
| Deposits                    |   |             | 372.9  |                                |   | 334.4 |   |   | 11.51 |   |
| Shareholders’ equity   |   |             | 34.1   |                                |   | 29.7 |   |   | 14.98 |   |

The additional capital increased our legal lending limit, thereby allowing us to extend larger loans to our customers.   Our loan portfolio increased $41.9 million from December 31, 2005 to December 31, 2006.  Our deposit base also increased in 2006 by $38.5 million from $334.4 million in 2005 to $372.9 million in 2006.

The significant increase in average earning assets had a positive impact on our results of operations for 2006.  Average earning assets increased from $341.8 million in 2005 to $401.0 million in 2006.  Our increased volume in deposits also increased our fees from service charges and deposit accounts by approximately $334,699 from 2005 to 2006.  Gains on sales of mortgage loans were also an important source of noninterest income in 2006, increasing $1.0 million, or 116.66% from $877,843 in 2005 to $1.9 million in 2006.

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

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

**Results of Operations**

***Year ended December 31, 2006, compared with year ended December 31, 2005 and December 31, 2004***

Net interest income increased $3,350,453 or 23.67%, to $17,502,886 in 2006 from $14,152,433 in 2005.  The increase in net interest income was due primarily to an increase in average earning assets.  Average earning assets increased $59,839,000 or 17.35%, mainly due to continued growth in the loan portfolio.  The primary components of interest income were interest on loans, including fees, of $29,222,425 and interest on taxable investment securities of $1,029,560. Net interest income increased $4,923,020, or 53.3%, to $14,152,433 in 2005 from $9,229,413 in 2004.  The increase in net interest income was due primarily to an increase in average earning assets.  Average earning assets increased $129,300,000 or 60.86%, mainly due to continued growth in the loan portfolio.  The primary components of interest income were interest on loans, including fees, of $21,236,608, and interest on taxable investment securities of $770,863.

The Company’s net interest spread and net interest margin were 3.96% and 4.42%, respectively, in 2006, compared to 3.78% and 4.20%, respectively, in 2005.  The increase in net interest spread was primarily the result of an increase in average rates on earning assets which outpaced the increase in average rates on paying liabilities.  Yields on loans, our largest category of earnings assets, increased in 2006.  Overall yields on earning assets increased from 6.82% in 2005 to 7.96% in 2006.  Yields on interest-bearing liabilities increased from 3.04% in 2005 to 4.00% in 2006. The Company’s net interest spread and net interest margin were 3.78% and 4.20%, respectively, in 2005, compared to 4.08% and 4.41%, respectively, in 2004.  The decrease in net interest spread was primarily the result of an increase in average rates on paying liabilities which outpaced the increase in average rates on earning assets.  Yields on loans, ourlargest category of earnings assets, increased in 2005.  Overall yields on earning assets increased from 6.32% in 2004 to 6.82% in 2005.  Yields on interest-bearing liabilities increased from 2.24% in 2004 to 3.04% in 2005.

The provision for loan losses was $1,392,491 in 2006 compared to $1,811,317 in 2005.  The allowance for loan losses was 1.13% of total loans at December 31, 2006 as compared to 1.10% of total loans at December 31, 2005.  The Company continues to maintain the allowance for loan losses at a level management believes to be sufficient to cover known and inherent losses in the loan portfolio. The provision for loan losses was $1,811,317 in 2005 compared to $1,361,762 in 2004.  The allowance for loan losses was 1.10% of total loans at December 31, 2005 as compared to 1.16% of total loans at December 31, 2004.  

Noninterest income increased $1,719,406, or 59.88%, to $4,590,693 in 2006 from $2,871,287 in 2005.  The increase is primarily attributable to gain on sale of mortgage loans and increased service charges on deposit accounts.  The gain on sale of mortgage loans increased $1,024,124 or 116.66% to $1,901,967 for the year ended December 31, 2006 as the demand for new mortgage loans and refinancings remained strong. Service charges on deposit accounts increased $334,699, or 24.66% from 2005, to $1,691,913 for the year ended December 31, 2006.  The increase in service charges on deposit accounts was attributable to an overall increase in the number of deposit accounts in 2006. Noninterest income increased $491,764, or 20.67%, to $2,871,287 in 2005 from $2,379,523 in 2004.  The increase is primarily attributable to increased service charges on deposit accounts and other charges and gain on sale of mortgage loans.  Service charges on depositaccounts increased $125,455, or 10.19% from 2004, to $1,357,214 for the year ended December 31, 2005.  The increase in service charges on deposit accounts was attributable to an overall increase in the number of deposit accounts in 2005.  The gain on sale of mortgage loans increased $293,820 or 50.31% to $877,843 for the year ended December 31, 2005 as the demand for new mortgage loans and refinancings remained strong.  Securities and insurance brokerage income increased $28,943, or 21.99% from 2004, to $160,569 for the year ended December 31, 2005.  The increase is primarily attributable to a successful marketing campaign.  

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

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

**Results of Operations** - *continued*

Noninterest expense increased $3,796,944, or 30.44%, to $16,272,385 in 2006 from $12,475,441 in 2005.  Noninterest expenses increased in all categories as a result of our continued growth. The increase is primarily attributable to increased salaries and benefits and other operating expenses.  Salaries and employee benefits increased $2,351,011, or 32.94%, to $9,487,387 in 2006 from $7,136,376 in 2005.  A large portion of the increase in salaries was due to the addition of new staff to facilitate the new branch locations and growth of the Bank. Other operating expenses increased $1,219,663 from 2005 to $4,926,836 for the year ended December 31, 2006.  This increase was due to the expected increases in overhead caused by the growth of the Company.  The Company’s efficiency ratio was 73.65% in 2006, compared to 73.28% in 2005. Noninterest expense increased $4,137,499, or 49.6%, to $12,475,441 in 2005 from $8,337,942 in 2004. Noninterestexpenses increased in all categories as a result of our continued growth. The increase is primarily attributable to increased salaries and benefits and other operating expenses.  Salaries and employee benefits increased $2,262,341, or 46.42%, to $7,136,376 in 2005 from $4,874,035 in 2004.  A large portion of the increase in salaries was due to the addition of new staff to facilitate the new branch locations and growth of the Bank. Other operating expenses increased $1,285,138 from 2004 to $3,707,173 for the year ended December 31, 2005.  This increase was due to the expected increases in overhead caused by the growth of the Company.  The Company’s efficiency ratio was 73.28% in 2005, compared to 71.82% in 2004. 

Net income was $3,245,908 in 2006, compared to $1,947,546 in 2005.  The increase in net income reflects the Company’s continued growth, as average-earning assets increased from $341,757,000 for the year ended December 31, 2005 to $401,035,000 for the year ended December 31, 2006.  Return on average assets during 2006 was 0.75%, compared to 0.54% during 2005, and return on average equity was 10.19% during 2006, compared to 6.82% during 2005. Net income was $1,947,546 in 2005, compared to $1,338,699 in 2004.  The increase in net income reflects the Company’s continued growth, as average-earning assets increased from $212,457,065 for the year ended December 31, 2004 to $341,757,173 for the year ended December 31, 2005.  Return on average assets during 2005 was 0.54%, compared to 0.59% during 2004, and return on average equity was 6.82% during 2005, compared to 7.04% during 2004.

**Net Interest Income**

***General****.*  The largest component of the Company’s net income is its net interest income, which is the difference between the income earned on assets and interest paid on deposits and on borrowings used to support such assets.  Net interest income is determined by the yields earned on the Company’s interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest-earning assets and interest-bearing liabilities.  Total interest earning assets yield less total interest bearing liabilities rate represents the Company’s net interest rate spread.

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

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

**Net Interest Income***- continued*

***Average Balances, Income and Expenses, and Rates****.*  The following table sets forth, for the years indicated, certain information related to the Company’s average balance sheet and its average yields on assets and average costs of liabilities.  Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities.  Average balances have been derived from the daily balances throughout the periods indicated.

**Average Balances, Income and Expenses, and Rates**

|                                                |   | **2006**              |        | **2005**              |   | **2004**          |   |
|-----------------------------------------------------|--------|-----------------------|-------------|-----------------------|--------|-------------------|--------|
|                                                |   |                       |        |                       |   |                   |   |
| **Year ended December 31,*(Dollars in thousands)*** |   | **Average   Balance** |        | **Income/   Expense** |   | **Yield/   Rate** |   | **Average   Balance** |   | **Income/   Expense** |   | **Yield/   Rate** |   | **Average   Balance** |   | **Income/   Expense** |   | **Yield/   Rate** |   |
|                                                     |   |                       |             |                  |        |                   |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **Assets:**                                         |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earning   Assets:                                   |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                         |   | $                     | 348,709     |                  | $      | 29,222            |   |   | 8.38 | % | $ | 294,740 |   | $ | 21,237 |   |   | 7.21 | % | $ | 182,996 |   | $ | 12,094 |   |   | 6.61 | % |
| Securities,   taxable(2)                            |   |                  | 21,891      |                  |   | 1,030             |   |   | 4.70 |   |   | 17,491 |   |   | 771 |   |   | 4.41 |   |   | 17,266 |   |   | 723 |   |   | 4.19 |   |
| Securities,   tax exempt(2)                         |   |                  | 14,820      |                  |   | 857               |   |   | 5.78 |   |   | 13,007 |   |   | 742 |   |   | 5.70 |   |   | 9,958 |   |   | 557 |   |   | 5.59 |   |
| Federal   funds sold and other                      |   |                  | 13,807      |                  |   | 687               |   |   | 4.98 |   |   | 14,462 |   |   | 479 |   |   | 3.31 |   |   | 1,119 |   |   | 17 |   |   | 1.52 |   |
| Nonmarketable   equity securities                   |   |                  | 1,807       |                  |   | 138               |   |   | 7.64 |   |   | 2,057 |   |   | 91 |   |   | 4.42 |   |   | 1,118 |   |   | 41 |   |   | 3.67 |   |
|                                                |   |                       |             |                  |        |                   |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Total   earning assets                              |   |                  | 401,035     |                  |   | 31,934            |   |   | 7.96 |   |   | 341,757 |   |   | 23,320 |   |   | 6.82 |   |   | 212,457 |   |   | 13,432 |   |   | 6.32 |   |
| Cash   and due from banks                           |   |                  | 7,772       |                  |   |              |   |   |   |   |   | 5,316 |   |   |   |   |   |   |   |   | 3,439 |   |   |   |   |   |   |   |
| Premises   and equipment                            |   |                  | 11,445      |                  |   |              |   |   |   |   |   | 7,379 |   |   |   |   |   |   |   |   | 5,862 |   |   |   |   |   |   |   |
| Other   assets                                      |   |                  | 14,757      |                  |   |              |   |   |   |   |   | 7,596 |   |   |   |   |   |   |   |   | 5,799 |   |   |   |   |   |   |   |
| Allowance   for loan losses                         |   |                  | (3,764      | )                     |   |              |   |   |   |   |   | (3,150 | ) |   |   |   |   |   |   |   | (2,110 | ) |   |   |   |   |   |   |
|                                                |   |                       |             |                  |   |              |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Total   assets                                      |   | **$**                 | **431,244** |                  |   |              |   |   |   |   | **$** | **358,898** |   |   |   |   |   |   |   | **$** | **225,447** |   |   |   |   |   |   |   |
|                                                |   |                       |             |                  |   |              |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| **Liabilities:**                                    |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing   liabilities:                     |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing   transaction                      |   |                  |        |                  |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accounts                                            |   | $                     | 27,084      |                  |   | 185               |   |   | 0.68 | % | $ | 20,067 |   | $ | 153 |   |   | 0.76 | % | $ | 15,985 |   | $ | 135 |   |   | 0.84 | % |
| Savings   deposits                                  |   |                  | 85,887      |                  |   | 3,243             |   |   | 3.78 |   |   | 68,499 |   |   | 1,877 |   |   | 2.74 |   |   | 29,544 |   |   | 489 |   |   | 1.66 |   |
| Time   deposits                                     |   |                  | 204,935     |                  |   | 9,068             |   |   | 4.42 |   |   | 166,541 |   |   | 5,552 |   |   | 3.33 |   |   | 110,894 |   |   | 2,874 |   |   | 2.59 |   |
| Junior   subordinated debentures                    |   |                  | 10,310      |                  |   | 618               |   |   | 5.99 |   |   | 4,875 |   |   | 306 |   |   | 6.28 |   |   |   |   |   |   |   |   |   |   |
| Other   borrowings                                  |   |                  | 27,154      |                  |   | 1,100             |   |   | 4.05 |   |   | 35,041 |   |   | 1,090 |   |   | 3.11 |   |   | 24,506 |   |   | 563 |   |   | 2.30 |   |
|                                                |   |                       |             |                  |        |                   |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Total   interest-bearing liabilities                |   |                  | 355,370     |                  |   | 14,214            |   |   | 4.00 |   |   | 295,023 |   |   | 8,978 |   |   | 3.04 |   |   | 180,929 |   |   | 4,061 |   |   | 2.24 |   |
|                                                |   |                       |             |                  |        |                   |   |   |   |   |  |  |   |  |  |   |   |   |   |  |  |   |  |  |   |   |   |   |
| Demand   deposits                                   |   |                  | 42,100      |                  |   |              |   |   |   |   |   | 33,652 |   |   |   |   |   |   |   |   | 24,474 |   |   |   |   |   |   |   |
| Accrued   interest and other liabilities            |   |                  | 1,911       |                  |   |              |   |   |   |   |   | 1,666 |   |   |   |   |   |   |   |   | 1,036 |   |   |   |   |   |   |   |
| Shareholders’   equity                         |   |                  | 31,863      |                  |   |              |   |   |   |   |   | 28,557 |   |   |   |   |   |   |   |   | 19,008 |   |   |   |   |   |   |   |
| Total   liabilities and shareholders’ equity   |   | **$**                 | **431,244** |                  |   |              |   |   |   |   | **$** | **358,898** |   |   |   |   |   |   |   | **$** | **225,447** |   |   |   |   |   |   |   |
|                                                |   |                       |             |                  |   |              |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |
| Net interest spread                                 |   |                  |        |                  |   |              |   |   | 3.96 | % |   |   |   |   |   |   |   | 3.78 | % |   |   |   |   |   |   |   | 4.08 | % |
| Net interest income                                 |   |                  |        |                  | **$**  | **17,720**        |   |   |   |   |   |   |   | **$** | **14,342** |   |   |   |   |   |   |   | **$** | **9,371** |   |   |   |   |
|                                                |   |                  |        |                  |        |                   |   |   |   |   |   |   |   |  |  |   |   |   |   |   |   |   |  |  |   |   |   |   |
| Net interest margin                                 |   |                  |        |                  |   |              |   |   | 4.42 | % |   |   |   |   |   |   |   | 4.20 | % |   |   |   |   |   |   |   | 4.41 | % |

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

-7-

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

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

**Rate/Volume Analysis**

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

|                              |   | **2006   Compared to 2005   Due to increase (decrease)in** |      |
|-----------------------------------|--------|------------------------------------------------------------|-----------|
|                              |   |                                                            |      |
| ***(Dollars in thousands)***      |   | **Volume**                                                 |      | **Rate** |   | **Total** |   |
|                                   |   |                                                            |           |   |  |  |   |  |  |   |
| Interest income:                  |   |                                                       |      |   |   |   |   |   |   |   |
| Loans                             |   | $                                                          | 4,234     |   | $ | 3,751 |   | $ | 7,985 |   |
| Securities,   taxable             |   |                                                       | 192       |   |   | 67 |   |   | 259 |   |
| Securities,   tax exempt          |   |                                                       | 105       |   |   | 10 |   |   | 115 |   |
| Federal   funds sold and other    |   |                                                       | (23       | ) |   | 231 |   |   | 208 |   |
| Nonmarketable   equity securities |   |                                                       | (2        | ) |   | 49 |   |   | 47 |   |
|                              |   |                                                            |           |   |  |  |   |  |  |   |
| Total   interest income           |   |                                                       | 4,506     |   |   | 4,108 |   |   | 8,614 |   |
|                              |   |                                                            |           |   |  |  |   |  |  |   |
| Interest expense:                 |   |                                                       |      |   |   |   |   |   |   |   |
| Interest-bearing   deposits       |   |                                                       | 49        |   |   | (17 | ) |   | 32 |   |
| Savings   deposits                |   |                                                       | 547       |   |   | 819 |   |   | 1,366 |   |
| Time   deposits                   |   |                                                       | 1,453     |   |   | 2,063 |   |   | 3,516 |   |
| Junior   subordinated debentures  |   |                                                       | 327       |   |   | (15 | ) |   | 312 |   |
| Other   borrowings                |   |                                                       | (277      | ) |   | 287 |   |   | 10 |   |
|                              |   |                                                            |           |   |  |  |   |  |  |   |
| Total   interest expense          |   |                                                       | 2,099     |   |   | 3,137 |   |   | 5,236 |   |
|                              |   |                                                            |           |   |  |  |   |  |  |   |
| Net   interest income             |   | **$**                                                      | **2,407** |   | **$** | **971** |   | **$** | **3,378** |   |
|                              |   |                                                            |           |   |  |  |   |  |  |   |

|                              |   | **2005   Compared to 2004   Due to increase (decrease) in** |      |
|-----------------------------------|--------|-------------------------------------------------------------|-----------|
|                              |   |                                                             |      |
| ***(Dollars in thousands)***      |   | **Volume**                                                  |      | **Rate** |   | **Total** |   |
|                                   |   |                                                             |           |   |  |  |   |  |  |   |
| Interest income:                  |   |                                                        |      |   |   |   |   |   |   |   |
| Loans                             |   | $                                                           | 7,966     |   | $ | 1,177 |   | $ | 9,143 |   |
| Securities,   taxable             |   |                                                        | 9         |   |   | 39 |   |   | 48 |   |
| Securities,   tax exempt          |   |                                                        | 174       |   |   | 11 |   |   | 185 |   |
| Federal   funds sold and other    |   |                                                        | 421       |   |   | 41 |   |   | 452 |   |
| Nonmarketable   equity securities |   |                                                        | 33        |   |   | 17 |   |   | 50 |   |
|                              |   |                                                             |           |   |  |  |   |  |  |   |
| Total   interest income           |   |                                                        | 8,603     |   |   | 1,285 |   |   | 9,888 |   |
|                              |   |                                                             |           |   |  |  |   |  |  |   |
| Interest expense:                 |   |                                                        |      |   |   |   |   |   |   |   |
| Interest-bearing   deposits       |   |                                                        | 32        |   |   | (14 | ) |   | 18 |   |
| Savings   deposits                |   |                                                        | 927       |   |   | 461 |   |   | 1,388 |   |
| Time   deposits                   |   |                                                        | 1,705     |   |   | 973 |   |   | 2,678 |   |
| Junior   subordinated debentures  |   |                                                        | 306       |   |   | —   |   |   | 306 |   |
| Other   borrowings                |   |                                                        | 289       |   |   | 238 |   |   | 527 |   |
|                              |   |                                                             |           |   |  |  |   |  |  |   |
| Total   interest expense          |   |                                                        | 3,259     |   |   | 1,658 |   |   | 4,917 |   |
|                              |   |                                                             |           |   |  |  |   |  |  |   |
| Net   interest income             |   | **$**                                                       | **5,344** |   | **$** | **(373** | **)** | **$** | **4,971** |   |
|                              |   |                                                             |           |   |  |  |   |  |  |   |

-8-

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

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

**Net Interest Income**

***Interest Sensitivity****.*  The Company monitors and manages the pricing and maturity of its assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on its net interest income.  The principal monitoring technique employed by the Company is the measurement of the Company’s interest sensitivity “gap,” which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time.  Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available-for-sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge interest sensitivity and minimize the impact on net interest income of rising orfalling interest rates.

The following table sets forth the Company’s interest rate sensitivity at December 31, 2006.

**Interest Sensitivity Analysis**

| **December 31, 2006*(Dollars in thousands)***     |   | **Within One   Month** |               | **After One   Through   Three Months** |   | **After   Three   Through   Twelve   Months** |   | **Within One   Year** |               | **Greater   Than One   Year or   Non-   Sensitive** |   | **Total**          |   |
|---------------------------------------------------|--------|------------------------|--------------------|----------------------------------------|--------|-----------------------------------------------|--------|-----------------------|--------------------|-----------------------------------------------------|--------|--------------------|--------|
|                                                   |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |  |  |   |
| **Assets**                                        |   |                   |               |                                   |   |                                          |   |                  |               |                                                |   |               |   |   |   |   |   |   |   |
| Interest-earning assets                           |   |                   |               |                                   |   |                                          |   |                  |               |                                                |   |               |   |   |   |   |   |   |   |
| Loans,   including held for sale                  |   | $                      | 229,803            |                                   | $      | 4,381                                         |   | $                     | 16,493             |                                                | $      | 250,677            |   | $ | 109,446 |   | $ | 360,123 |   |
| Securities,   taxable                             |   |                   | 539                |                                   |   | 314                                           |   |                  | 1,336              |                                                |   | 2,189              |   |   | 18,656 |   |   | 20,845 |   |
| Securities,   nontaxable                          |   |                   | —   |                                   |   | —                              |   |                  | —   |                                                |   | —   |   |   | 15,086 |   |   | 15,086 |   |
| Nonmarketable   securities                        |   |                   | 2,188              |                                   |   | —                              |   |                  | —   |                                                |   | 2,188              |   |   | —   |   |   | 2,188 |   |
| Investment   in trust                             |   |                   | —   |                                   |   | —                              |   |                  | —   |                                                |   | —   |   |   | 310 |   |   | 310 |   |
| Federal   funds sold                              |   |                   | 14,135             |                                   |   | —                              |   |                  | —   |                                                |   | 14,135             |   |   | —   |   |   | 14,135 |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Total   earning assets                            |   |                   | 246,665            |                                   |   | 4,695                                         |   |                  | 17,829             |                                                |   | 269,189            |   |   | 143,498 |   |   | 412,687 |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |  |  |   |
| **Liabilities**                                   |   |                   |               |                                   |   |                                          |   |                  |               |                                                |   |               |   |   |   |   |   |   |   |
| Interest-bearing   liabilities:                   |   |                   |               |                                   |   |                                          |   |                  |               |                                                |   |               |   |   |   |   |   |   |   |
| Interest-bearing   deposits:                      |   |                   |               |                                   |   |                                          |   |                  |               |                                                |   |               |   |   |   |   |   |   |   |
| Demand   deposits                                 |   |                   | 33,243             |                                   |   | —                              |   |                  | —   |                                                |   | 33,243             |   |   | —   |   |   | 33,243 |   |
| Savings   deposits                                |   |                   | 78,832             |                                   |   | —                              |   |                  | —   |                                                |   | 78,832             |   |   | —   |   |   | 78,832 |   |
| Time   deposits                                   |   |                   | 16,565             |                                   |   | 53,523                                        |   |                  | 124,049            |                                                |   | 194,137            |   |   | 24,619 |   |   | 218,756 |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Total   interest-bearing deposits                 |   |                   | 128,640            |                                   |   | 53,523                                        |   |                  | 124,049            |                                                |   | 306,212            |   |   | 24,619 |   |   | 330,831 |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Advances   from Federal Home Loan Bank            |   |                   | 10,500             |                                   |   | 9,000                                         |   |                  | 8,000              |                                                |   | 27,500             |   |   | 1,000 |   |   | 28,500 |   |
| Junior   subordinated debentures                  |   |                   | —   |                                   |   | —                              |   |                  | —   |                                                |   | —   |   |   | 10,310 |   |   | 10,310 |   |
| Repurchase   agreements                           |   |                   | 8,120              |                                   |   | —                              |   |                  | —   |                                                |   | 8,120              |   |   | —   |   |   | 8,120 |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Total   interest-bearing liabilities              |   |                   | 147,260            |                                   |   | 62,523                                        |   |                  | 132,049            |                                                |   | 341,832            |   |   | 35,929 |   |   | 377,761 |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |  |  |   |
| Period gap                                        |   | **$**                  | **99,405**         |                                   | **$**  | **(57,828**                                   | **)**  | **$**                 | **(114,220**       | **)**                                               | **$**  | **(72,643**        | **)**  | **$** | **107,569** |   |   |   |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |   |   |   |
| Cumulative gap                                    |   | **$**                  | **99,405**         |                                   | **$**  | **41,577**                                    |   | **$**                 | **(72,643**        | **)**                                               | **$**  | **(72,643**        | **)**  | **$** | **34,926** |   |   |   |   |
|                                              |   |                        |                    |                                   |        |                                               |   |                       |                    |                                                |        |                    |   |  |  |   |   |   |   |
| Ratio of cumulative gap to   total earning assets |   |                   | 24.09              | %                                      |   | 10.07                                         | %      |                  | (17.60             | )%                                                  |   | (17.60             | )%     |   | 8.46 | % |   |   |   |

-9-

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

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

**Net Interest Income***- continued*

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

The Company is in a liability sensitive position (or a negative gap) of $72.6 million over the 12 month time frame.  The gap is negative when interest-bearing liabilities exceed interest sensitive earning assets, as was the case at the end of 2006 with respect to the one-year time horizon. When interest sensitive earning assets exceed interest-bearing liabilities for a specific repricing “horizon”, a positive interest sensitivity gap is the result.

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

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

However, the Company’s gap analysis is not a precise indicator of its interest sensitivity position.  The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally.  For example, rates paid on a substantial portion of core deposits may change contractually within a relatively short time frame, but those rates are viewed by management as significantly less interest-sensitive than market-based rates such as those paid on non-core deposits.  Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities. The Company has positioned itself where there is minimal impact on interest income in a rising or falling rate environment.

-10-

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

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

**Provision and Allowance for Loan Losses**

***General****.*  The Company has developed policies and procedures for evaluating the overall quality of its credit portfolio and the timely identification of potential problem credits.  On a quarterly basis, the Company’s Board of Directors reviews and approves the appropriate level for the Company’s allowance for loan losses based upon management’s recommendations, the results of the internal monitoring and reporting system, and an analysis of economic conditions in its market.  The objective of management has been to fund the allowance for loan losses at a level greater or equal to the Company’s internal risk measurement system for loan risk. The Board maintained an allowance for loan losses level of 1.13% and 1.10% of total loans at December 31, 2006 and 2005, respectively.  Management believes the allowance is adequate to meet any loan losses the Company may experience. 

Additions to the allowance for loan losses, which are expensed as the provision for loan losses on the Company’s income statement, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the potential risk in the loan portfolio.  Loan losses and recoveries are charged or credited directly to the allowance.  The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.

The allowance represents an amount which we believe will be adequate to absorb inherent losses on existing loans that may become uncollectible.  Our judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans, including consideration of factors such as the balance of impaired loans;  the quality, mix and size of our overall loan portfolio; economic conditions that may affect the borrower’s ability to repay the amount and quality of collateral securing the loans; our limited historical loan loss experience and a review of specific problem loans. 

The Company adjusts the amount of the allowance periodically based on changing circumstances as a component of the provision for loan losses.  We charge recognized losses against the allowance and add subsequent recoveries back to the allowance.  We do not allocate the allowance for loan losses to specific categories of loans (i.e., real estate, consumer, commercial and mortgage), but evaluate the adequacy on an overall portfolio basis utilizing our credit grading system which we apply to each loan.  We combine our estimates of the reserves needed for each component of the portfolio, including loans analyzed on a pool basis and loans analyzed individually.  The allowance is divided into two portions: (1) an amount for specific allocations on significant individual credits and (2) a general reserve amount.  We analyze individual loans within the portfolio and make allocations to the allowance based on each individual loan’s specificfactors and other circumstances that affect the collectibility of the credit.  Significant, individual credits classified as doubtful or substandard/special mention within our credit grading system require both individual analysis and specific allocation.  Loans in the substandard category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action such as declining or negative earnings trends and declining or inadequate liquidity.  Loans in the doubtful category exhibit the same weaknesses found in the substandard loan; however, the weaknesses are more pronounced.  However, these loans are not yet rated as loss because certain events may occur which could salvage the debt such as injection of capital, alternative financing or liquidation of assets.  As of December 31, 2006 and 2005, the Company had no specific allocations on its significant credits in its calculation of the allowance for loan losses.

-11-

----

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

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

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

The Company calculates its general reserve based on percentages tied to our credit grading system.  Each loan is assigned one of eight loan risk ratings, based on the loan’s specific characteristics.  Any loan assigned an adverse ranking is specifically allocated a loss.  For all remaining loans, the general reserve amount is calculated based upon a reserve percentage for each risk rating.  The Company may adjust these percentages as appropriate given consideration of local economic conditions, exposure concentration that may exist in the portfolio, changes in trends of past due loans, problem loans and charge-offs and anticipated loan growth.

The Bank has developed a loan risk monitoring system that assesses the potential risk the Bank may have in its loan portfolio.  This system is monitored monthly by management to insure that adequate provisions and loan allowances are maintained.  In addition, various regulatory agencies review our allowance for loan losses through their periodic examinations, and they may require us to record additions to the allowance for loan losses based on their judgment about information available to them at the time of their examinations. Our losses will undoubtedly vary from our estimates, and it is possible that charge-offs in future periods will exceed the allowance for loan losses as estimated at any point in time. As of December 31, 2006, the Company’s general reserves totaled $4,001,881, an increase of $582,513 from 2005.  As of December 31, 2005, the Company’s general reserves totaled $3,419,368, an increase of $661,143 from 2004.  Thecategories and concentrations of loans have been consistent between the past two years.

The following table sets forth certain information with respect to the Company’s allowance for loan losses and the composition of chargeoffs and recoveries for the years ended December 31, 2006, 2005, 2004, 2003 and 2002.

**Allowance for Loan Losses**

| ***(Dollars in thousands)***                                |   | **2006** |               | **2005** |   | **2004**           |   | **2003** |               | **2002** |   |
|-------------------------------------------------------------|--------|----------|--------------------|----------|--------|--------------------|--------|----------|--------------------|----------|--------|
|                                                             |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Total loans outstanding at   end of year                    |   | **$**    | **353,491**        |     | **$**  | **311,544**        |   | **$**    | **238,362**        |     | **$**  | **139,389** |   | **$** | **81,558** |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Average loans outstanding                                   |   | **$**    | **348,709**        |     | **$**  | **294,740**        |   | **$**    | **182,996**        |     | **$**  | **100,051** |   | **$** | **73,777** |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Balance of allowance for   loan losses at beginning of year |   | $        | 3,419              |     | $      | 2,758              |   | $        | 1,752              |     | $      | 1,137 |   | $ | 1,045 |   |
| Loans charged off:                                          |   |     |               |     |   |               |   |     |               |     |   |   |   |   |   |   |
| Real   estate - construction                                |   |     | 17                 |     |   | 142                |   |     | —   |     |   | —   |   |   | —   |   |
| Real   estate - mortgage                                    |   |     | 718                |     |   | 472                |   |     | 166                |     |   | 47 |   |   | 32 |   |
| Commercial   and industrial                                 |   |     | 170                |     |   | 317                |   |     | 44                 |     |   | 42 |   |   | 78 |   |
| Consumer   and other                                        |   |     | 151                |     |   | 300                |   |     | 181                |     |   | 106 |   |   | 185 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Total   loan losses                                         |   |     | 1,056              |     |   | 1,231              |   |     | 391                |     |   | 195 |   |   | 295 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Recoveries of previous loan   losses:                       |   |     |               |     |   |               |   |     |               |     |   |   |   |   |   |   |
| Real   estate - construction                                |   |     | —   |     |   | —   |   |     | —   |     |   | —   |   |   | —   |   |
| Real   estate - mortgage                                    |   |     | 105                |     |   | 38                 |   |     | —   |     |   | —   |   |   | 2 |   |
| Commercial   and industrial                                 |   |     | 111                |     |   | 12                 |   |     | —   |     |   | —   |   |   | —   |   |
| Consumer   and other                                        |   |     | 31                 |     |   | 31                 |   |     | 35                 |     |   | 18 |   |   | 36 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Total   recoveries                                          |   |     | 247                |     |   | 81                 |   |     | 35                 |     |   | 18 |   |   | 38 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Net charge-offs                                             |   |     | 809                |     |   | 1,150              |   |     | 356                |     |   | 177 |   |   | 257 |   |
| Provision for loan losses                                   |   |     | 1,392              |     |   | 1,811              |   |     | 1,362              |     |   | 792 |   |   | 349 |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Balance of allowance for   loan losses at end of year       |   | **$**    | **4,002**          |     | **$**  | **3,419**          |   | **$**    | **2,758**          |     | **$**  | **1,752** |   | **$** | **1,137** |   |
|                                                        |   |          |                    |     |        |                    |   |          |                    |     |        |  |   |  |  |   |
| Ratios:                                                     |   |     |               |     |   |               |   |     |               |     |   |   |   |   |   |   |
| Net charge-offs to average   loans outstanding              |   |     | 0.23               | %        |   | 0.39               | %      |     | 0.20               | %        |   | 0.18 | % |   | 0.35 | % |
| Net charge-offs to loans at   end of year                   |   |     | 0.23               |     |   | 0.37               |   |     | 0.15               |     |   | 0.13 |   |   | 0.32 |   |
| Allowance for loan losses to   average loans                |   |     | 1.15               |     |   | 1.16               |   |     | 1.51               |     |   | 1.75 |   |   | 1.54 |   |
| Allowance for loan losses to   loans at end of year         |   |     | 1.13               |     |   | 1.10               |   |     | 1.16               |     |   | 1.26 |   |   | 1.39 |   |
| Net charge-offs to allowance   for loan losses              |   |     | 20.21              |     |   | 33.64              |   |     | 12.90              |     |   | 10.10 |   |   | 22.60 |   |
| Net charge-offs to   provisions for loan losses             |   |     | 58.11              |     |   | 63.50              |   |     | 26.13              |     |   | 22.35 |   |   | 73.64 |   |

-12-

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

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

**Nonperforming Assets**

***Nonperforming Assets****.* There were $670,650 and $1,792,702 loans in nonaccrual status at December 31, 2006 and 2005, respectively.  There were $463,991 and $704,800 in loans ninety days or more overdue and still accruing interest at December 31, 2006 and 2005, respectively.  There were $137,421 and $285,000 in restructured loans at December 31, 2006 and 2005, respectively.

The following table shows the nonperforming assets, percentages of net charge-offs, and the related percentage of allowance for loan losses for the five years ended December 31, 2006.  All loans over 90 days past due are on and included in loans on nonaccrual.

| ***(Dollars in thousands)***                                  |   | **2006** |      | **2005** |   | **2004**  |   | **2003** |      | **2002** |   |
|---------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|----------|-----------|----------|--------|
|                                                               |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Loans over 90 days past due   and still accruing              |   | $        | 464       |     | $      | 705       |   | $        | 59        |     | $      | 460 |   | $ | 585 |   |
|                                                          |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Loans on nonaccrual:                                          |   |     |      |     |   |      |   |     |      |     |   |   |   |   |   |   |
| Mortgage                                                      |   |     | 637       |     |   | 1,619     |   |     | 1,078     |     |   | —   |   |   | 90 |   |
| Commercial                                                    |   |     | 0         |     |   | 95        |   |     | 17        |     |   | —   |   |   | 155 |   |
| Consumer                                                      |   |     | 34        |     |   | 78        |   |     | 91        |     |   | —   |   |   | 47 |   |
|                                                          |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Total   nonaccrual loans                                      |   |     | 671       |     |   | 1,792     |   |     | 1,186     |     |   | —   |   |   | 292 |   |
|                                                          |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Total   of nonperforming loans                                |   |     | 1,135     |     |   | 2,497     |   |     | 1,245     |     |   | 460 |   |   | 877 |   |
| Other nonperforming assets                                    |   |     | 1,386     |     |   | 346       |   |     | 321       |     |   | 279 |   |   | 121 |   |
|                                                          |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Total   nonperforming assets                                  |   | **$**    | **2,521** |     | **$**  | **2,843** |   | **$**    | **1,566** |     | **$**  | **739** |   | **$** | **998** |   |
|                                                          |   |          |           |     |        |           |   |          |           |     |        |  |   |  |  |   |
| Percentage of total assets                                    |   |     | 0.55      | %        |   | 0.71      | %      |     | 0.55      | %        |   | 0.41 | % |   | 0.86 | % |
| Percentage of nonperforming   loans and assets to gross loans |   |     | 0.71      | %        |   | 0.91      | %      |     | 0.66      | %        |   | 0.53 | % |   | 1.25 | % |
| Allowance for loan losses to   gross loans                    |   |     | 1.13      | %        |   | 1.10      | %      |     | 1.16      | %        |   | 1.26 | % |   | 1.39 | % |
| Net charge-offs to average   loans                            |   |     | 0.23      | %        |   | 0.39      | %      |     | 0.19      | %        |   | 0.18 | % |   | 0.35 | % |

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

***Potential Problem Loans*****.**  At December 31, 2006, the Company had classified loans totaling $2,697,063 as compared to $3,767,776 at December 31, 2005.  Classified loans as a percentage of total loans was 0.76% at December 31, 2006 as compared to 1.21% at December 31, 2005.  The loan portfolio increased 13.46% during the same period.  

-13-

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

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

**Noninterest Income and Expense**

***Noninterest Income****.*  Noninterest income for year ended December 31, 2006 was $4,590,693, an increase of $1,719,406 from $2,871,287 in 2005.  The increase is primarily attributable to increased service charges on deposit accounts and gain on sale of mortgage loans.  Deposit service charges increased $334,699 or 24.66% from 2005, to $1,691,913 for the year ended December 31, 2006.  The increase in service charges on deposit accounts was attributable to an overall increase in the number of deposit accounts in 2006.  This increase is attributable to market conditions and a successful marketing campaign.  The gain on sale of mortgage loans increased $1,024,124 or 116.67% to $1,901,967 in 2006, from $877,843 in 2005.  Noninterest income for year ended December 31, 2005 was $2,871,287, an increase of $491,764 from $2,379,523 in 2004.  The increase is primarily attributable to increased service charges ondeposit accounts and gain on sale of mortgage loans.  Service charges increased $125,455, or 10.19% from 2004, to $1,357,214 for the year ended December 31, 2005.  The increase in service charges on deposit accounts was attributable to an overall increase in the number of deposit accounts in 2005.  This increase is attributable to market conditions and a successful marketing campaign.  The gain on sale of mortgage loans increased $293,820, or 50.31%, to $877,843 in 2005, from $584,023 in 2004.  Securities and brokerage commissions increased $28,943, or 21.99%, to $160,569 in 2005 from $131,626 in 2004.

The following table sets forth the principal components of noninterest income for the years ended December 31, 2006, 2005 and 2004.

| ***(Dollars in thousands)***                     |   | **2006** |      | **2005** |   | **2004**  |   |
|--------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                                  |   |          |           |     |        |           |   |  |  |   |
| Service charges on deposit   accounts            |   | $        | 1,692     |     | $      | 1,357     |   | $ | 1,232 |   |
| Credit life insurance   commissions              |   |     | 23        |     |   | 33        |   |   | 82 |   |
| Gain on sale of mortgage   loans                 |   |     | 1,902     |     |   | 878       |   |   | 584 |   |
| Securities and insurance   brokerage commissions |   |     | 138       |     |   | 161       |   |   | 132 |   |
| Other income                                     |   |     | 836       |     |   | 442       |   |   | 350 |   |
|                                             |   |          |           |     |        |           |   |  |  |   |
| Total   noninterest income                       |   | **$**    | **4,591** |     | **$**  | **2,871** |   | **$** | **2,380** |   |
|                                             |   |          |           |     |        |           |   |  |  |   |

***Noninterest Expense****. *Noninterest expense increased $3,796,943 or 30.44%, to $16,272,384 for year ended December 31, 2006 as compared to 2005.  Of this total, other operating expenses increased $1,219,663 or 32.90%, to $4,926,835 in 2006 from $3,707,173 in 2005.  Salaries and employee benefits increased $2,351,011 or 32.94%, to $9,487,387 in 2006 from $7,136,376 in 2005.  This increase is primarily attributable to new hire employee compensation as the Bank expands into different markets.  Net occupancy and equipment expense increased $226,270 or 13.87%, to $1,858,162 in 2006 largely due to operating costs associated with the Bank’s branch expansion effort in 2006. Noninterest expense increased $4,137,499, or 49.62%, to $12,475,441 for year ended December 31, 2005 as compared to 2004.  Of this total, other operating expenses increased $1,285,138, or 53.06%, to $3,707,173 in 2005 from $2,422,035 in2004.  Salaries and employee benefits increased $2,262,341, or 46.42%, to $7,136,376 in 2005 from $4,874,035 in 2004.  This increase is primarily attributable to new hire employee compensation as the Bank expands into different markets.  Net occupancy and equipment expense increased $590,020, or 56.63%, to $1,631,892 in 2005 largely due to operating costs associated with the Bank’s branch expansion effort in 2005.

-14-

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

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

**Noninterest Income and Expense** - *continued*

The following table sets forth the primary components of noninterest expense for the years ended December 31, 2006, 2005 and 2004.

| ***(Dollars in thousands)***                |   | **2006** |       | **2005** |   | **2004**   |   |
|---------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
|                                        |   |          |            |     |        |            |   |  |  |   |
| Salaries and employee   benefits            |   | $        | 9,487      |     | $      | 7,136      |   | $ | 4,874 |   |
| Net occupancy                               |   |     | 1,131      |     |   | 920        |   |   | 426 |   |
| Furniture and equipment                     |   |     | 727        |     |   | 712        |   |   | 616 |   |
| Advertising and public   relations          |   |     | 373        |     |   | 292        |   |   | 101 |   |
| Office supplies,   stationery, and printing |   |     | 275        |     |   | 224        |   |   | 145 |   |
| Data processing and   supplies              |   |     | 32         |     |   | 21         |   |   | 13 |   |
| Computer and software                       |   |     | 441        |     |   | 483        |   |   | 342 |   |
| Professional fees and   services            |   |     | 471        |     |   | 431        |   |   | 193 |   |
| Employee education and   conventions        |   |     | 65         |     |   | 60         |   |   | 49 |   |
| Loan origination costs                      |   |     | 208        |     |   | 106        |   |   | 103 |   |
| Other                                       |   |     | 3,062      |     |   | 2,090      |   |   | 1,476 |   |
|                                        |   |          |            |     |        |            |   |  |  |   |
| Total   noninterest expense                 |   | **$**    | **16,272** |     | **$**  | **12,475** |   | **$** | **8,338** |   |
|                                        |   |          |            |     |        |            |   |  |  |   |
| Efficiency ratio                            |   |     | 73.65      | %        |   | 73.28      | %      |   | 71.82 | % |

**Earning Assets**

***Loans****.*Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets.  Associated with the higher loan yields are the inherent credit and liquidity risks which management attempts to control and counterbalance.  Loans averaged $348,709,226 in 2006 compared to $294,740,266 in 2005, an increase of $53,968,960 or 18.31%.  At December 31, 2006, total loans were $353,491,036 compared to $311,544,385 at December 31, 2005, an increase of $41,946,651 or 13.46%.

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

**Composition of Loan Portfolio**

|                                     |   | **2006**   |        | **2005**               |   | **2004**   |   |
|------------------------------------------|--------|------------|-------------|------------------------|--------|------------|--------|
|                                     |   |            |        |                        |   |            |   |
| **December 31,*(Dollars in thousands)*** |   | **Amount** |        | **Percent   of Total** |   | **Amount** |   | **Percent   of Total** |   | **Amount** |   | **Percent   of Total** |   |
|                                          |   |            |             |                   |        |            |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Commercial and industrial                |   | $          | 51,710      |                   |   | 14.63      | %      | $ | 50,320 |   |   | 16.15 |   | $ | 47,890 |   |   | 20.09 | % |
| Real estate                              |   |       |        |                   |   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction                             |   |       | 64,118      |                   |   | 18.14      |   |   | 52,268 |   |   | 16.78 |   |   | 39,023 |   |   | 16.37 |   |
| Mortgage-residential                     |   |       | 91,039      |                   |   | 25.75      |   |   | 86,716 |   |   | 27.83 |   |   | 69,921 |   |   | 29.33 |   |
| Mortgage-nonresidential                  |   |       | 127,214     |                   |   | 35.99      |   |   | 106,125 |   |   | 34.06 |   |   | 63,189 |   |   | 26.51 |   |
| Consumer                                 |   |       | 12,729      |                   |   | 3.60       |   |   | 13,953 |   |   | 4.48 |   |   | 13,931 |   |   | 5.84 |   |
| Other                                    |   |       | 6,681       |                   |   | 1.89       |   |   | 2,162 |   |   | 0.70 |   |   | 4,408 |   |   | 1.86 |   |
|                                     |   |            |             |                   |        |            |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total   loans                            |   |       | 353,491     |                   |   | 100.00     | %      |   | 311,544 |   |   | **100.00** | % |   | 238,362 |   |   | **100.00** | **%** |
| Allowance for loan losses                |   |       | (4,002      | )                      |   |       |   |   | (3,419 | ) |   |   |   |   | (2,758 | ) |   |   |   |
|                                     |   |            |             |                   |   |       |   |  |  |   |   |   |   |  |  |   |   |   |   |
| Net   loans                              |   | **$**      | **349,489** |                   |   |       |   | **$** | **308,125** |   |   |   |   | **$** | **235,604** |   |   |   |   |
|                                     |   |            |             |                   |   |       |   |  |  |   |   |   |   |  |  |   |   |   |   |

-15-

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

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

**Earning Assets***- continued*

**Composition of Loan Portfolio** - *continued*

|                                     |   | **2003**   |        | **2002**                |   |
|------------------------------------------|--------|------------|-------------|-------------------------|--------|
|                                     |   |            |        |                         |   |
| **December 31,*(Dollars in thousands)*** |   | **Amount** |        | **Percent    of Total** |   | **Amount** |   | **Percent   of Total** |   |
|                                          |   |            |             |                    |        |  |   |  |  |   |  |  |   |
| Commercial and industrial                |   | $          | 27,893      |                    |   | 20.00 | % | $ | 15,628 |   |   | 19.16 | % |
| Real estate                              |   |       |        |                    |   |   |   |   |   |   |   |   |   |
| Construction                             |   |       | 18,343      |                    |   | 13.16 |   |   | 9,799 |   |   | 12.01 |   |
| Mortgage-residential                     |   |       | 42,267      |                    |   | 30.32 |   |   | 24,994 |   |   | 30.65 |   |
| Mortgage-nonresidential                  |   |       | 32,826      |                    |   | 23.56 |   |   | 20,632 |   |   | 25.30 |   |
| Consumer                                 |   |       | 13,200      |                    |   | 9.47 |   |   | 9,944 |   |   | 12.19 |   |
| Other                                    |   |       | 4,860       |                    |   | 3.49 |   |   | 561 |   |   | 0.69 |   |
|                                     |   |            |             |                    |        |  |   |  |  |   |  |  |   |
| Total   loans                            |   |       | 139,389     |                    |   | **100.00** | **%** |   | 81,558 |   |   | **100.00** | **%** |
| Allowance for loan losses                |   |       | (1,752      | )                       |   |   |   |   | (1,137 | ) |   |   |   |
|                                     |   |            |             |                    |   |   |   |  |  |   |   |   |   |
| Net   loans                              |   | **$**      | **137,637** |                    |   |   |   | **$** | **80,421** |   |   |   |   |
|                                     |   |            |             |                    |   |   |   |  |  |   |   |   |   |

In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan.  It is common practice for financial institutions in the Company’s market area to obtain a mortgage on real estate whenever possible, in addition to any other available collateral.  This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase management’s willingness to make real estate loans and, to that extent, also tends to increase the magnitude of the real estate loan portfolio component.

The largest component of the Company’s loan portfolio is real estate mortgage loans.  At December 31, 2006, real estate mortgage loans totaled $218,252,208 and represented 61.74% of the total loan portfolio, compared to $192,840,976 or 61.90%, at December 31, 2005.

Residential mortgage loans totaled $91,038,240 at December 31, 2006, and represented 25.75% of the total loan portfolio, compared to $86,715,873 at December 31, 2005 or 27.83%.  Residential real estate loans consist of first and second mortgages on single or multi-family residential dwellings.  Nonresidential mortgage loans, which include commercial loans and other loans secured by multi-family properties and farmland, totaled $127,213,968 at December 31, 2006, compared to $106,125,103 at December 31, 2005.  This represents an increase of $21,088,865, or 5.97%, from the December 31, 2005 balance.  Construction loans increased $11,850,339, or 22.67%, from $52,267,759 at December 31, 2005 to $64,118,098 at December 31, 2006.  The demand for residential and commercial real estate loans in the Bank’s market area remained strong.

Commercial and industrial loans increased $1,389,816 or 2.76%, to $51,710,250 at December 31, 2006, from $50,320,434 at December 31, 2005.

The Company’s loan portfolio is also comprised of consumer loans.  Consumer loans decreased $1,225,274, or 8.78%, to $12,728,353 at December 31, 2006, from $13,953,632 at December 31, 2005.

The Company’s loan portfolio reflects the diversity of its markets.  The economies of the Company’s markets contains elements of medium and light manufacturing, higher education, regional health care, and distribution facilities. Management expects the area to remain stable with continued growth in the near future.  The diversity of the economy creates opportunities for all types of lending.  The Company does not engage in foreign lending.

-16-

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

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

**Earning Assets***- continued*

The repayment of loans in the loan portfolio as they mature is also a source of liquidity for the Company.  The following table sets forth the Company’s loans maturing within specified intervals at December 31, 2006.

Loan Maturity Schedule and Sensitivity to Changes in Interest Rates

| **December 31, 2006*(Dollars in thousands)*** |   | **One Year   or   Less** |        | **Over One   Year   Through   Five Years** |   | **Over Five   Years** |   | **Total** |       |
|-----------------------------------------------|--------|--------------------------|-------------|--------------------------------------------|--------|-----------------------|--------|-----------|------------|
|                                               |   |                          |             |                                       |        |                       |   |           |            |   |  |  |   |
| Commercial and industrial                     |   | $                        | 15,920      |                                       | $      | 32,996                |   | $         | 2,791      |   | $ | 51,707 |   |
| Real estate                                   |   |                     | 81,908      |                                       |   | 166,411               |   |      | 33,720     |   |   | 282,039 |   |
| Consumer and other                            |   |                     | 6,544       |                                       |   | 12,460                |   |      | 741        |   |   | 19,745 |   |
|                                          |   |                          |             |                                       |        |                       |   |           |            |   |  |  |   |
|                                          |   | **$**                    | **104,372** |                                       | **$**  | **211,867**           |   | **$**     | **37,252** |   | **$** | **353,491** |   |
|                                          |   |                          |             |                                       |        |                       |   |           |            |   |  |  |   |
| Loans maturing after one   year with:         |   |                     |        |                                       |   |                  |   |      |       |   |   |   |   |
| Fixed   interest rates                        |   |                     |        |                                       |   |                  |   |      |       |   | $ | 108,299 |   |
| Floating   interest rates                     |   |                     |        |                                       |   |                  |   |      |       |   |   | 140,820 |   |
|                                          |   |                     |        |                                       |   |                  |   |      |       |   |  |  |   |
|                                          |   |                     |        |                                       |   |                  |   |      |       |   | **$** | **249,119** |   |
|                                          |   |                     |        |                                       |   |                  |   |      |       |   |  |  |   |

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity.  Renewal of such loans is subject to review and credit approval as well as modification of terms upon maturity.  Consequently, management believes this treatment presents fairly the maturity and repricing structure of the loan portfolio shown in the above table.

***Investment Securities****.* The investment securities portfolio is also a component of the Company’s total earning assets. Total securities available-for-sale averaged $36,711,400 in 2006, compared to $30,497,571 in 2005. Investment securities also contains Federal Home Loan Bank stock and the stock of several unrelated financial institutions.  These stocks are recorded at their original cost and totaled $2,187,600 and $1,627,100 at December 31, 2006 and 2005, respectively.

The following table sets forth the fair market value of the securities available-for-sale held by the Bank at December 31, 2006, 2005 and 2004.

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

| **December 31,*(Dollars in thousands)***    |   | **2006** |       | **2005** |   | **2004**   |   |
|---------------------------------------------|--------|----------|------------|----------|--------|------------|--------|
|                                             |   |          |            |     |        |            |   |  |  |   |
| Government sponsored   enterprises          |   | $        | 4,950      |     | $      | 4,921      |   | $ | —   |   |
| U.S. government agencies   and corporations |   |     | 381        |     |   | 536        |   |   | 2,410 |   |
| Municipals                                  |   |     | 15,086     |     |   | 14,252     |   |   | 11,311 |   |
| Mortgage-backed securities                  |   |     | 15,202     |     |   | 17,412     |   |   | 14,783 |   |
| Other Securities                            |   |     | 312        |     |   | 119        |   |   | 64 |   |
|                                        |   |          |            |     |        |            |   |  |  |   |
| Total   securities available-for-sale       |   | **$**    | **35,931** |     | **$**  | **37,240** |   | **$** | **28,568** |   |
|                                        |   |          |            |     |        |            |   |  |  |   |

-17-

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

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

**Earning Assets***- continued*

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

**Investment Securities Maturity Distribution and Yields**

| **December 31, 2006*(Dollars in thousands)*** |       | **Within One   Year** |                   | **After One   But   Within Five Years** |       | **After Five   But   Within Ten Years** |      | **After Ten   Years** |       | **Total** |      |
|-----------------------------------------------|------------|-----------------------|------------------------|-----------------------------------------|------------|-----------------------------------------|-----------|-----------------------|------------|-----------|-----------|
|                                          |            |                  |                        |                                    |            |                                    |           |                  |            |      |
|                                          | **Amount** |                  | **Yield**              |                                    | **Amount** |                                    | **Yield** |                  | **Amount** |      | **Yield** |   | **Amount** |   | **Yield** |   | **Amount** |   | **Yield** |   |
|                                               |       |                       |                        |                                    |            |                                         |      |                       |            |      |           |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Government sponsored   enterprises            |       | $                     | —       |                                    |       | —                        | %         | $                     | 4,950      |      |      | 5.08 | % | $ | —   |   |   | —   | % | $ | —   |   |   | —   | % | $ | 4,950 |   |   | 5.08 | % |
| U.S. government agencies and   corporations   |       |                  | —       |                                    |       | —                        |      |                  |       |      |      | —   |   |   | —   |   |   | —   |   |   | —   |   |   | —   |   |   | 381 |   |   | 5.85 |   |
| Municipals(2)                                 |       |                  | —       |                                    |       | —                        |      |                  | 762        |      |      | 5.40 |   |   | 596 |   |   | 5.34 |   |   | 13,728 |   |   | 6.59 |   |   | 15,086 |   |   | 6.40 |   |
|                                          |       |                       |                        |                                    |       |                                    |      |                       |            |      |      |   |   |  |  |   |   |   |   |  |  |   |   |   |   |  |  |   |   |   |   |
| Total   securities(1)                         |       | **$**                 | **—  ** |                                    |       | **—  **                  | **%**     | **$**                 |       |      |      | **5.17** | **%** | **$** | **596** |   |   | **5.34** | **%** | **$** | **17,565** |   |   | **6.32** | **%** | **$** | **20,417** |   |   | **6.13** | **%** |
|                                          |       |                       |                        |                                    |       |                                    |      |                       |            |      |      |   |   |  |  |   |   |   |   |  |  |   |   |   |   |  |  |   |   |   |   |

|     |
|-----|
| (1) | Excludes mortgage-backed   securities totaling $15,202,326 with a yield of 4.63% and other and   non-marketable equity securities totaling $312,000. |
| (2) | Yields are based on a tax   equivalent basis of 34%. |

Other attributes of the securities portfolio, including yields and maturities, are discussed above in “Net Interest Income-Interest Sensitivity Analysis.”

***Federal Funds Sold and Other***.  Federal funds sold and other, which consists of federal funds sold, interest earning deposits and an investment in trust, averaged $13,806,773 in 2006 compared to $14,461,843 in 2005.  At December 31, 2006 and 2005, federal funds sold totaled $14,135,000 and $22,442,000. The investment in trust totaled $310,000 at December 31, 2006 and 2005.

**Deposits and Other Interest-Bearing Liabilities**

Average interest-bearing liabilities increased $60,347,474, or 20.46%, to $355,370,474 in 2006, from $295,023,000 in 2005.  The increase is primarily a result of the continued growth of the Company.

***Deposits****.*  Average total deposits increased $71,247,501, or 24.67%, to $360,006,622 in 2006, from $288,759,121 in 2005. At December 31, 2006, total deposits were $372,938,083 compared to $334,436,898 a year earlier, an increase of 11.51%.

-18-

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

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

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

The following table sets forth the average balance amounts and the average rates paid on deposits of the Company by category at December 31, 2006, 2005 and 2004.

**Deposits**

| **December 31,*(Dollars in thousands)*** |                 | **2006** |                      | **2005** |                 | **2004**           |                      |
|------------------------------------------|----------------------|----------|---------------------------|----------|----------------------|--------------------|---------------------------|
|                                     |                      |     |                           |     |                      |               |
|                                     | **Average   Amount** |     | **Average   Rate   Paid** |     | **Average   Amount** |               | **Average   Rate   Paid** |   | **Average   Amount** |   | **Average   Rate   Paid** |   |
|                                          |                 |          |                           |     |                      |                    |                      |  |  |   |  |  |   |  |  |   |  |  |   |
| Demand deposit accounts                  |                 | $        | 42,100                    |     |                 | —   | %                         | $ | 33,652 |   |   | —   | % | $ | 24,474 |   |   | —   | % |
| NOW accounts                             |                 |     | 27,084                    |     |                 | 0.68               |                      |   | 20,067 |   |   | 0.76 |   |   | 15,985 |   |   | 1.66 |   |
| Savings accounts                         |                 |     | 85,887                    |     |                 | 3.78               |                      |   | 68,499 |   |   | 2.74 |   |   | 29,544 |   |   | 2.59 |   |
| Time deposits $100,000 and   over        |                 |     | 112,132                   |     |                 | 4.23               |                      |   | 105,628 |   |   | 3.30 |   |   | 73,472 |   |   | 2.55 |   |
| Other time deposits                      |                 |     | 92,803                    |     |                 | 4.66               |                      |   | 60,913 |   |   | 3.39 |   |   | 37,422 |   |   | 2.68 |   |
|                                     |                 |          |                           |     |                      |                    |                      |  |  |   |  |  |   |  |  |   |  |  |   |
| Total   deposits                         |                 | **$**    | **360,006**               |     |                 | **3.47**           | **%**                     | **$** | **288,759** |   |   | **2.63** | **%** | **$** | **180,897** |   |   | **1.93** | **%** |
|                                     |                 |          |                           |     |                      |                    |                      |  |  |   |  |  |   |  |  |   |  |  |   |

Core deposits, which exclude time deposits of $100,000 or more, provide a relatively stable funding source for the Company’s loan portfolio and other earning assets.  The Company’s core deposits were $260,946,219 and $221,167,977 at December 31, 2006 and 2005, respectively.  Included in time deposits at December 31, 2006 and 2005 are brokered time deposits of $29,515,694 and $39,213,743, respectively.

Deposits, and particularly core deposits, have been the Company’s primary source of funding and have enabled the Company to meet successfully both its short-term and long-term liquidity needs.  Management anticipates that such deposits will continue to be the Company’s primary source of funding in the future.  However, advances from the Federal Home Loan Bank are being used as an alternative source of funds.  The Company’s loan-to-deposit ratio was 94.79 % at December 31, 2006, and 93.15% at December 31, 2005.  The maturity distribution of the Company’s time deposits over $100,000 at December 31, 2006, is set forth in the following table:

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

| ***(Dollars in thousands)***                  |   | **Within Three   Months** |       | **After Three   Through Six   Months** |   | **After Six   Through   Twelve   Months** |   | **After Twelve   Months** |       | **Total** |   |
|-----------------------------------------------|--------|---------------------------|------------|----------------------------------------|--------|-------------------------------------------|--------|---------------------------|------------|-----------|--------|
|                                               |   |                           |            |                                   |        |                                           |   |                           |            |      |        |  |   |  |  |   |
| Certificates of deposit of   $100,000 or more |   | **$**                     | **30,320** |                                   | **$**  | **22,574**                                |   | **$**                     | **39,902** |      | **$**  | **19,196** |   | **$** | **111,992** |   |
|                                          |   |                           |            |                                   |        |                                           |   |                           |            |      |        |  |   |  |  |   |

Approximately 27.07% of the Company’s time deposits of $100,000 or more had scheduled maturities within three months, and 20.16% had maturities within three to six months.  Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits.  The current interest rate environment has led depositors to invest in short term deposit accounts.  The Company expects most certificates of deposits with maturities less than twelve months to be renewed upon maturity. However, there is the possibility that some certificates may not be renewed.  Management believes that, should that occur, the impact would be minimal on the Company’s operations and liquidity due to the availability of other funding sources.  The Company has an available line to borrow funds from the Federal Home Loan Bank up to 30% of theBank’s total assets which provided additional available funds of $136,496,975 at December 31, 2006 and available lines to purchase federal funds with various financial institutions up to $ 32,500,000 at December 31, 2006.  Management believes that these funds would be sufficient to meet future liquidity needs.

-19-

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

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

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

***Other Borrowings***.  Thefollowing table summarizes the Company’s borrowings for the years endedDecember 31, 2006, 2005 and 2004  These borrowings consist of securities soldunder agreements to repurchase, advances from the Federal Home Loan Bank,federal funds purchased and junior subordinated debentures.  Securitiessold under agreements to repurchase mature on a one to seven day basis. These agreements are secured by U.S. government agencies.  Advances fromFederal Home Loan Bank mature at different periods as discussed in the footnotesto the financial statements and are secured by the Company’s one to fourfamily residential mortgage loans and the Company’s investment in FederalHome Loan Bank stock.  Federal funds purchased are short-term borrowingsfrom other financial institutions that mature daily.

| ***(Dollars in thousands)***                    |   | **Maximum   Outstanding   at any   Month End** |               | **Average   Balance** |   | **Weighted   Average   Interest Rate** |   | **Balance   December 31,** |               | **Interest   Rate at   December 31,** |   |
|-------------------------------------------------|--------|------------------------------------------------|--------------------|-----------------------|--------|----------------------------------------|--------|----------------------------|--------------------|---------------------------------------|--------|
|                                                 |   |                                                |                    |                  |        |                                        |   |                            |                    |                                  |        |  |   |  |  |   |
| **December 31, 2006**                           |   |                                           |               |                  |   |                                   |   |                       |               |                                  |   |   |   |   |   |   |
| Securities sold under   agreement to repurchase |   | $                                              | 8,190              |                  | $      | 6,065                                  |   |                       | 4.27               | %                                     | $      | 8,120 |   |   | 6.02 | % |
| Advances from Federal Home   Loan Bank          |   |                                           | 29,800             |                  |   | 21,028                                 |   |                       | 4.24               |                                  |   | 28,500 |   |   | 3.81 |   |
| Federal funds purchased                         |   |                                           | 955                |                  |   | 61                                     |   |                       | 3.72               |                                  |   | —   |   |   | —   |   |
| Junior subordinated   debentures                |   |                                           | 10,310             |                  |   | 10,310                                 |   |                       | 5.99               |                                  |   | 10,310 |   |   | 5.93 |   |
| **December   31, 2005**                         |   |                                           |               |                  |   |                                   |   |                       |               |                                  |   |   |   |   |   |   |
| Securities sold under   agreement to repurchase |   | $                                              | 4,223              |                  | $      | 3,600                                  |   |                       | 2.54               | %                                     | $      | 3,860 |   |   | 3.88 | % |
| Advances from Federal Home   Loan Bank          |   |                                           | 36,000             |                  |   | 31,301                                 |   |                       | 3.28               |                                  |   | 23,500 |   |   | 3.28 |   |
| Federal funds purchased                         |   |                                           | —   |                  |   | —                       |   |                       | —   |                                  |   | —   |   |   | —   |   |
| Junior subordinated   debentures                |   |                                           | 10,310             |                  |   | 4,875                                  |   |                       | 6.28               |                                  |   | 10,310 |   |   | 5.93 |   |
| **December   31, 2004**                         |   |                                           |               |                  |   |                                   |   |                       |               |                                  |   |   |   |   |   |   |
| Securities sold under   agreement to repurchase |   | $                                              | 3,062              |                  | $      | 2,460                                  |   |                       | 0.83               | %                                     | $      | 3,062 |   |   | 1.86 | % |
| Advances from Federal Home   Loan Bank          |   |                                           | 27,900             |                  |   | 21,106                                 |   |                       | 2.53               |                                  |   | 27,900 |   |   | 2.44 |   |
| Federal funds purchased                         |   |                                           | 3,960              |                  |   | 922                                    |   |                       | 1.01               |                                  |   | —   |   |   | 2.44 |   |

**Capital**

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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

-20-

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

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

**Capital***- continued*

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

The Company and the Bank exceeded the regulatory capital requirements at December 31, 2006  The following table shows the Company’s and the Bank’s ratios at December 31, 2006

**Analysis of Capital and Capital Ratios**

| ***(Dollars in thousands)***                                         |   | **Company** |        | **Bank** |   |
|----------------------------------------------------------------------|--------|-------------|-------------|----------|--------|
|                                                                      |   |             |             |     |        |  |   |
| Tier 1 capital                                                       |   | $           | 44,456      |     | $      | 42,442 |   |
| Tier 2 capital                                                       |   |        | 4,002       |     |   | 4,002 |   |
|                                                                 |   |             |             |     |        |  |   |
| Total   qualifying capital                                           |   | **$**       | **48,458**  |     | **$**  | **46,444** |   |
|                                                                 |   |             |             |     |        |  |   |
| Risk-adjusted total assets   (including off-balance-sheet exposures) |   | **$**       | **333,378** |     | **$**  | **332,815** |   |
|                                                                 |   |             |             |     |        |  |   |
| Risk-based capital ratios:                                           |   |        |        |     |   |   |   |
| Tier   1 risk-based capital ratio                                    |   |        | 11.42       | %        |   | 10.84 | % |
| Total   risk-based capital ratio                                     |   |        | 12.45       | %        |   | 11.86 | % |
| Tier   1 leverage ratio                                              |   |        | 9.90        | %        |   | 9.45 | % |

**Impact of Off-Balance Sheet Instruments**

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

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

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

As of December 31, 2006, commitments to extend credit totaled $67,370,404 and its standby letters of credit totaled $3,543,270.

-21-

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

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

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

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at December 31, 2006.

| ***(Dollars in thousands)***          |   | **Within One   Month** |      | **After One   Through   Three   Months** |   | **After Three   Through   Twelve   Months** |   | **Within One   Year** |       | **Greater   Than   One Year** |   | **Total**  |   |
|---------------------------------------|--------|------------------------|-----------|------------------------------------------|--------|---------------------------------------------|--------|-----------------------|------------|-------------------------------|--------|------------|--------|
|                                       |   |                        |           |                                     |        |                                             |   |                       |            |                          |        |            |   |  |  |   |  |  |   |
| Unused commitments to   extend credit |   | $                      | 3,062     |                                     | $      | 235                                         |   | $                     | 21,873     |                          | $      | 25,170     |   | $ | 42,200 |   | $ | 67,370 |   |
| Standby letters of credit             |   |                   | 32        |                                     |   | 727                                         |   |                  | 2,645      |                          |   | 3,404      |   |   | 139 |   |   | 3,543 |   |
|                                  |   |                        |           |                                     |        |                                             |   |                       |            |                          |        |            |   |  |  |   |  |  |   |
| Totals                                |   | **$**                  | **3,094** |                                     | **$**  | **962**                                     |   | **$**                 | **24,518** |                          | **$**  | **28,574** |   | **$** | **42,339** |   | **$** | **70,913** |   |
|                                  |   |                        |           |                                     |        |                                             |   |                       |            |                          |        |            |   |  |  |   |  |  |   |

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

**Liquidity Management and Capital Resources**

Liquidity is the ability to meet currentand future obligations through liquidation or maturity of existing assets or theacquisition of additional liabilities.  Adequate liquidity is necessary tomeet the requirements of customers for loans and deposit withdrawals in the mosttimely and economical manner.  Some liquidity is ensured by maintainingassets that may be immediately converted into cash at minimal cost (amounts duefrom banks and federal funds sold).  However, the most manageable sourcesof liquidity are composed of liabilities, with the primary focus on liquiditymanagement being on the ability to obtain deposits within the Company’sservice area.  Core deposits (total deposits less time deposits greaterthan $100,000) provide a relatively stable funding base, and were equal to57.20% of total assets at December 31, 2006.  Asset liquidity is providedfrom several sources, including amounts due from banks, federal funds sold,securities available for sale, and funds from maturing loans. The Company had$31,463,075 in cash and cash equivalents and $35,931,271 in securities availablefor sale at December 31, 2006.  The Company has $32,500,000 availablethrough a line of credit with other banks as an additional source of liquidityfunding.  The Company also has a line of credit to borrow funds from theFederal Home Loan Bank up to $136,496,975 of which $107,996,975 is available atDecember 31, 2006.

During 2006, the Company's primary sources of cash were $38,501,185 fromdeposits. The Company's primary uses of cash resources were to fund loans ofapproximately $45,103,300. These trends are consistent with those of a growingbank operation and consistent with past cash uses and sources. Managementbelieves that the Company's overall liquidity sources are adequate to meet itsoperating needs in the ordinary course of its business. Accordingly, the Companydoes not expect to have to raise additional funds in 2007 to meet either shortor long-term needs.

**Contractual Obligations**

The following table provides payments due by period for various contractual obligations as of December 31, 2006:

| ***(Dollars in thousands)***      |   | **Within One   Year** |               | **Over One   to Two   Years** |   | **Over Two   to Three   Years** |   | **Over Three   to Five   Years** |               | **After   Five   Years** |   | **Total**          |   |
|-----------------------------------|--------|-----------------------|--------------------|-------------------------------|--------|---------------------------------|--------|----------------------------------|--------------------|--------------------------|--------|--------------------|--------|
|                                   |   |                       |                    |                          |        |                                 |   |                                  |                    |                     |        |                    |   |  |  |   |  |  |   |
| Certificate accounts (1)          |   | $                     | 194,137            |                          | $      | 17,677                          |   | $                                | 4,568              |                     | $      | 2,374              |   | $ | —   |   | $ | 218,756 |   |
| Short-term borrowings (2)         |   |                  | 8,120              |                          |   | —                |   |                             | —   |                     |   | —   |   |   | —   |   |   | 8,120 |   |
| Long-term debt (3)                |   |                  | 12,500             |                          |   | 1,000                           |   |                             | 8,000              |                     |   | —   |   |   | 17,310 |   |   | 38,810 |   |
| Purchases                         |   |                  | —   |                          |   | —                |   |                             | —   |                     |   | —   |   |   | —   |   |   | —   |   |
| Operating lease obligations   (4) |   |                  | 500                |                          |   | 476                             |   |                             | 443                |                     |   | 441                |   |   | 421 |   |   | 2,281 |   |
|                              |   |                       |                    |                          |        |                                 |   |                                  |                    |                     |        |                    |   |  |  |   |  |  |   |
| Totals                            |   | **$**                 | **212,257**        |                          | **$**  | **19,153**                      |   | **$**                            | **13,011**         |                     | **$**  | **2,815**          |   | **$** | **17,731** |   | **$** | **267,967** |   |
|                              |   |                       |                    |                          |        |                                 |   |                                  |                    |                     |        |                    |   |  |  |   |  |  |   |

|     |
|-----|
| (1) | Certificates of deposit   give customers rights to early withdrawal.    Early withdrawals may be subject to penalties. The penalty amount   depends on the remaining time to maturity at the time of early withdrawal. |
| (2) | Short-term borrowings   consist of securities sold under agreements to repurchase.  We expect securities repurchase agreements   to be re-issued and, as such, do not necessarily represent an immediate need   for cash. |
| (3) | Long term debt consists of   FHLB borrowings and junior subordinated debentures. |
| (4) | Operating lease obligations   include existing and future property and equipment non-cancelable lease   commitments. |

-22-

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

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

**Impact of Inflation**

Unlike most industrial companies, theassets and liabilities of financial institutions such as the Company areprimarily monetary in nature.  Therefore, interest rates have a moresignificant effect on the Company’s performance than do the general rate ofinflation and of goods and services.  In addition, interest rates do notnecessarily move in the same direction or in the same magnitude as the prices ofgoods and services.  As discussed previously, management seeks to managethe relationships between interest sensitive assets and liabilities in order toprotect against wide interest rate fluctuations, including those resulting frominflation.

**Accounting and Financial Reporting Issues**

The Company has adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements.  The significant accounting policies are described in the footnotes to the financial statements at December 31, 2006 as filed on the annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities.  The Company considers these accounting policies to be critical accounting policies.  The judgments and assumptions used are based on historical experience and other factors, which management believes to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions made, actual results could differ from these judgments and estimates which could have a material impact on the carrying values ofassets and liabilities and the results of operations.

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

**Industry Developments**

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

-23-

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

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

We have audited the accompanying consolidated balance sheets of First Reliance Bancshares, Inc. and subsidiary as of December 31, 2006 and 2005, and the related consolidated statements of income, changes in shareholders’ equity and comprehensive income**,** and cash flows for each of the three years in the period ended December 31, 2006.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Reliance Bancshares, Inc. and subsidiary as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.

Elliott Davis, LLC Columbia, South Carolina March 21, 2007

-24-

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

**Consolidated Balance Sheets**

|                                                                                                                                                               |   | **December 31,** |               |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------------------|
|                                                                                                                                                               |   |                  |               |
|                                                                                                                                                               |   | **2006**         |               | **2005** |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| **Assets:**                                                                                                                                                        |   |             |               |   |   |   |   |
| Cash and cash equivalents:                                                                                                                                         |   |             |               |   |   |   |   |
| Cash and due from banks                                                                                                                                            |   | $                | 17,328,075         |   | $ | 7,264,897 |   |
| Federal funds sold                                                                                                                                                 |   |             | 14,135,000         |   |   | 22,442,000 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Total cash and cash equivalents                                                                                                                                    |   |             | 31,463,075         |   |   | 29,706,897 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Investment securities:                                                                                                                                             |   |             |               |   |   |   |   |
| Securities available-for-sale                                                                                                                                      |   |             | 35,931,271         |   |   | 37,240,229 |   |
| Nonmarketable equity securities                                                                                                                                    |   |             | 2,187,600          |   |   | 1,627,100 |   |
| Investment in trust                                                                                                                                                |   |             | 310,000            |   |   | 310,000 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Total investment securities                                                                                                                                        |   |             | 38,428,871         |   |   | 39,177,329 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Mortgage loans held for sale                                                                                                                                       |   |             | 6,632,010          |   |   | 7,994,603 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Loans receivable                                                                                                                                                   |   |             | 353,491,036        |   |   | 311,544,385 |   |
| Less allowance for loan losses                                                                                                                                     |   |             | (4,001,881         | ) |   | (3,419,368 | ) |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Loans, net                                                                                                                                                         |   |             | 349,489,155        |   |   | 308,125,017 |   |
| Premises, furniture and equipment, net                                                                                                                             |   |             | 13,770,135         |   |   | 10,020,537 |   |
| Accrued interest receivable                                                                                                                                        |   |             | 2,464,531          |   |   | 2,189,742 |   |
| Other real estate owned                                                                                                                                            |   |             | 1,386,380          |   |   | 345,550 |   |
| Cash surrender value of life insurance                                                                                                                             |   |             | 10,134,036         |   |   | 3,752,165 |   |
| Other assets                                                                                                                                                       |   |             | 2,442,529          |   |   | 1,726,044 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Total assets                                                                                                                                                       |   | **$**            | **456,210,722**    |   | **$** | **403,037,884** |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| **Liabilities:**                                                                                                                                                   |   |             |               |   |   |   |   |
| Deposits:                                                                                                                                                          |   |             |               |   |   |   |   |
| Noninterest-bearing transaction accounts                                                                                                                           |   | $                | 42,107,434         |   | $ | 39,222,574 |   |
| Interest-bearing transaction accounts                                                                                                                              |   |             | 33,243,099         |   |   | 29,437,107 |   |
| Savings                                                                                                                                                            |   |             | 78,831,730         |   |   | 79,663,175 |   |
| Time deposits $100,000 and over                                                                                                                                    |   |             | 111,991,864        |   |   | 113,268,921 |   |
| Other time deposits                                                                                                                                                |   |             | 106,763,956        |   |   | 72,845,121 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Total deposits                                                                                                                                                     |   |             | 372,938,083        |   |   | 334,436,898 |   |
| Securities sold under agreements to repurchase                                                                                                                     |   |             | 8,120,014          |   |   | 3,859,904 |   |
| Advances from Federal Home Loan Bank                                                                                                                               |   |             | 28,500,000         |   |   | 23,500,000 |   |
| Junior subordinated debentures                                                                                                                                     |   |             | 10,310,000         |   |   | 10,310,000 |   |
| Accrued interest payable                                                                                                                                           |   |             | 766,276            |   |   | 446,303 |   |
| Other liabilities                                                                                                                                                  |   |             | 1,483,086          |   |   | 834,144 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Total liabilities                                                                                                                                                  |   |             | 422,117,459        |   |   | 373,387,249 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Commitments   and contingencies (Notes 4, and 14)                                                                                                                  |   |             |               |   |   |   |   |
| **Shareholders’ Equity:**                                                                                                                                     |   |             |               |   |   |   |   |
| Common stock, $0.01 par value, 20,000,000 shares   authorized; 3,424,878 and 3,306,117 shares issued and outstanding at December   31, 2006 and 2005, respectively |   |             | 34,249             |   |   | 33,061 |   |
| Nonvested restricted stock                                                                                                                                         |   |             | (66,131            | ) |   | —   |   |
| Capital surplus                                                                                                                                                    |   |             | 25,257,814         |   |   | 24,127,329 |   |
| Treasury stock                                                                                                                                                     |   |             | —   |   |   | (9,896 | ) |
| Retained earnings                                                                                                                                                  |   |             | 8,857,755          |   |   | 5,611,847 |   |
| Accumulated other comprehensive income (loss)                                                                                                                      |   |             | 9,576              |   |   | (111,706 | ) |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Total shareholders’ equity                                                                                                                                    |   |             | 34,093,263         |   |   | 29,650,635 |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |
| Total liabilities and shareholders’ equity                                                                                                                    |   | **$**            | **456,210,722**    |   | **$** | **403,037,884** |   |
|                                                                                                                                                               |   |                  |                    |   |  |  |   |

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

-25-

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

**Consolidated Statements of Income**

|                                                    |   | **For the   years ended December 31,** |               |
|---------------------------------------------------------|--------|----------------------------------------|--------------------|
|                                                    |   |                                        |               |
|                                                    |   | **2006**                               |               | **2005** |   | **2004** |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Interest income:**                                    |   |                                   |               |   |   |   |   |   |   |   |
| Loans, including fees                                   |   | $                                      | 29,222,425         |   | $ | 21,236,608 |   | $ | 12,094,388 |   |
| Investment securities:                                  |   |                                   |               |   |   |   |   |   |   |   |
| Taxable                                                 |   |                                   | 1,029,560          |   |   | 770,863 |   |   | 723,439 |   |
| Tax exempt                                              |   |                                   | 639,710            |   |   | 553,993 |   |   | 415,347 |   |
| Federal funds sold                                      |   |                                   | 687,352            |   |   | 478,597 |   |   | 16,942 |   |
| Other interest income                                   |   |                                   | 137,538            |   |   | 91,051 |   |   | 40,365 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| Total                                                   |   |                                   | 31,716,585         |   |   | 23,131,112 |   |   | 13,290,481 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Interest expense:**                                   |   |                                   |               |   |   |   |   |   |   |   |
| Time deposits $100,000 and over                         |   |                                   | 4,747,647          |   |   | 3,485,397 |   |   | 1,870,930 |   |
| Other deposits                                          |   |                                   | 7,748,192          |   |   | 4,097,836 |   |   | 1,627,009 |   |
| Other interest expense                                  |   |                                   | 1,717,860          |   |   | 1,395,446 |   |   | 563,129 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| Total                                                   |   |                                   | 14,213,699         |   |   | 8,978,679 |   |   | 4,061,068 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Net interest income**                                 |   |                                   | 17,502,886         |   |   | 14,152,433 |   |   | 9,229,413 |   |
| Provision   for loan losses                             |   |                                   | 1,392,491          |   |   | 1,811,317 |   |   | 1,361,762 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Net interest income after provision for loan losses** |   |                                   | 16,110,395         |   |   | 12,341,116 |   |   | 7,867,651 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Noninterest income:**                                 |   |                                   |               |   |   |   |   |   |   |   |
| Service charges on deposit accounts                     |   |                                   | 1,691,913          |   |   | 1,357,214 |   |   | 1,231,759 |   |
| Gain on sale of mortgage loans                          |   |                                   | 1,901,967          |   |   | 877,843 |   |   | 584,023 |   |
| Brokerage fees                                          |   |                                   | 138,340            |   |   | 160,569 |   |   | 131,626 |   |
| Credit life insurance commissions                       |   |                                   | 23,173             |   |   | 32,606 |   |   | 82,090 |   |
| Other service charges, commissions, and fees            |   |                                   | 263,610            |   |   | 206,783 |   |   | 145,403 |   |
| Gain on sale of securities available-for-sale           |   |                                   | —   |   |   | —   |   |   | 5,971 |   |
| Gain (loss) on sale of other real estate                |   |                                   | 7,387              |   |   | (66,815 | ) |   | (55,966 | ) |
| Loss on sale of fixed assets                            |   |                                   | (13                | ) |   | (287 | ) |   | (20,000 | ) |
| Other                                                   |   |                                   | 564,316            |   |   | 303,374 |   |   | 274,617 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| Total                                                   |   |                                   | 4,590,693          |   |   | 2,871,287 |   |   | 2,379,523 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Noninterest expenses:**                               |   |                                   |               |   |   |   |   |   |   |   |
| Salaries and benefits                                   |   |                                   | 9,487,387          |   |   | 7,136,376 |   |   | 4,874,035 |   |
| Occupancy                                               |   |                                   | 1,130,705          |   |   | 919,584 |   |   | 425,686 |   |
| Furniture and equipment related expenses                |   |                                   | 727,457            |   |   | 712,308 |   |   | 616,186 |   |
| Other operating                                         |   |                                   | 4,926,835          |   |   | 3,707,173 |   |   | 2,422,035 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| Total                                                   |   |                                   | 16,272,384         |   |   | 12,475,441 |   |   | 8,337,942 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Income before income taxes**                          |   |                                   | 4,428,704          |   |   | 2,736,962 |   |   | 1,909,232 |   |
| Income   tax expense                                    |   |                                   | 1,182,796          |   |   | 789,416 |   |   | 570,533 |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Net income**                                          |   | **$**                                  | **3,245,908**      |   | **$** | **1,947,546** |   | **$** | **1,338,699** |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| **Earnings per share:**                                 |   |                                   |               |   |   |   |   |   |   |   |
| Basic                                                   |   | **$**                                  | **0.96**           |   | **$** | **0.60** |   | **$** | **0.52** |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |
| Diluted                                                 |   | **$**                                  | **0.91**           |   | **$** | **0.57** |   | **$** | **0.48** |   |
|                                                    |   |                                        |                    |   |  |  |   |  |  |   |

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

-26-

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

**Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income For the years ended December 31, 2006, 2005 and 2004**

|                                                                          |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   | **Accumulated   Other   Compre-   hensive   Income (Loss)** |      |   |   |           |
|-------------------------------------------------------------------------------|--------|--------------------|---------------|-----------------------|--------|----------------------|--------|--------|-------------------------|------------------------------------|-----------|------------------------|--------|--------|--------------------|--------|--------|---------------|--------|-------------------------------------------------------------|-----------|--------|--------|----------------|
|                                                                          |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   |
|                                                                          |   | **Common   Stock** |          |                  |   |                 |   |   |                    | **Nonvested   Restricted   Stock** |      |                   |   |   |               |   |   |          |
|                                                                          |   |                    |          | **Capital   Surplus** |   | **Treasury   Stock** |   |   | **Retained   Earnings** |                               |      |                   |   |   |
|                                                                          |   | **Shares**         |          | **Amount**            |   |                 |   |   |                    |                               | **Total** |                   |
|                                                                          |   |                    |               |                  |        |                      |   |        |                         |                               |           |                        |   |        |                    |   |        |               |   |                                                             |           |   |        |                |   |
| **Balance, December 31, 2003**                                                |   |               | 2,466,660     |                  | $      | 24,667               |   | $      | 15,106,070              |                               | $         | —       |   | $      | —   |   | $      | 2,325,602     |   | $                                                           | 246,300   |   | $      | 17,702,639     |   |
|                                                                          |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |        |                |   |
| Net   income                                                                  |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   | 1,338,699     |   |                                                        |      |   |   | 1,338,699      |   |
| Other   comprehensive loss, net of tax benefit of $2,384                      |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        | (4,629    | )      |   | (4,629         | ) |
|                                                                          |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |        |                |   |
| Comprehensive   income                                                        |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 1,334,070      |   |
| Proceeds   from stock issuance                                                |   |               | 700,000       |                  |   | 7,000                |   |   | 8,043,000               |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 8,050,000      |   |
| Costs   associated with                                                       |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   |           |   |
| Stock   offering                                                              |   |               |          |                  |   |                 |   |   | (75,960                 | )                                  |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | (75,960        | ) |
| Issuance of shares to 404(c) plan                                             |   |               | 37,282        |                  |   | 372                  |   |   | 354,924                 |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 355,296        |   |
| Purchase   of treasury stock                                                  |   |               |          |                  |   |                 |   |   |                    |                               |      | (7,396                 | )      |   |               |   |   |          |   |                                                        |      |   |   | (7,396         | ) |
|                                                                          |   |                    |               |                  |        |                      |   |        |                         |                               |           |                        |   |        |                    |   |        |               |   |                                                             |           |   |        |                |   |
| **Balance, December 31, 2004**                                                |   |               | 3,203,942     |                  |   | 32,039               |   |   | 23,428,034              |                               |      | (7,396                 | )      |   | —   |   |   | 3,664,301     |   |                                                        | 241,671   |   |   | 27,358,649     |   |
| Net   income                                                                  |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   | 1,947,546     |   |                                                        |      |   |   | 1,947,546      |   |
| Other   comprehensive loss, net of tax benefit of $182,043                    |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        | (353,377  | )      |   | (353,377       | ) |
|                                                                          |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |        |                |   |
| Comprehensive   income                                                        |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 1,594,169      |   |
| Purchase   of treasury stock                                                  |   |               |          |                  |   |                 |   |   |                    |                               |      | (2,500                 | )      |   |               |   |   |          |   |                                                        |      |   |   | (2,500         | ) |
| Issuance   of shares to 404(c) plan                                           |   |               | 23,175        |                  |   | 232                  |   |   | 298,725                 |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 298,957        |   |
| Exercise   of stock options                                                   |   |               | 79,000        |                  |   | 790                  |   |   | 400,570                 |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 401,360        |   |
|                                                                          |   |                    |               |                  |        |                      |   |        |                         |                               |           |                        |   |        |                    |   |        |               |   |                                                             |           |   |        |                |   |
| **Balance, December 31, 2005**                                                |   |               | 3,306,117     |                  |   | 33,061               |   |   | 24,127,329              |                               |      | (9,896                 | )      |   | —   |   |   | 5,611,847     |   |                                                        | (111,706  | )      |   | 29,650,635     |   |
| Net   income                                                                  |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   | 3,245,908     |   |                                                        |      |   |   | 3,245,908      |   |
| Other   comprehensive unrealized holding gains, net of tax expense of $63,441 |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        | 121,282   |   |   | 121,282        |   |
|                                                                          |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |        |                |   |
| Comprehensive   income                                                        |   |               |          |                  |   |                 |   |   |                    |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 3,367,190      |   |
| Sale   of treasury stock                                                      |   |               |          |                  |   |                 |   |   |                    |                               |      | 9,896                  |   |   |               |   |   |          |   |                                                        |      |   |   | 9,896          |   |
| Issuance   of advisory board shares                                           |   |               | 945           |                  |   | 9                    |   |   | 15,016                  |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 15,025         |   |
| Restricted   stock issuance                                                   |   |               | 6,771         |                  |   | 68                   |   |   | 99,695                  |                               |      |                   |   |   | (66,131            | )      |   |          |   |                                                        |      |   |   | 33,632         |   |
| Issuance   of shares to 404(c) plan                                           |   |               | 32,674        |                  |   | 327                  |   |   | 472,420                 |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 472,747        |   |
| Exercise   of stock options                                                   |   |               | 78,371        |                  |   | 784                  |   |   | 543,354                 |                               |      |                   |   |   |               |   |   |          |   |                                                        |      |   |   | 544,138        |   |
|                                                                          |   |                    |               |                  |        |                      |   |        |                         |                               |           |                        |   |        |                    |   |        |               |   |                                                             |           |   |        |                |   |
| **Balance, December 31, 2006**                                                |   |               | **3,424,878** |                  | **$**  | **34,249**           |   | **$**  | **25,257,814**          |                               | **$**     | **—  ** |   | **$**  | **(66,131**        | **)**  | **$**  | **8,857,755** |   | **$**                                                       | **9,576** |   | **$**  | **34,093,263** |   |
|                                                                          |   |                    |               |                  |        |                      |   |        |                         |                               |           |                        |   |        |                    |   |        |               |   |                                                             |           |   |        |                |   |

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

-27-

----

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

**Consolidated Statements of Cash Flows**

|                                                                                          |   | **For the   years ended   December 31,** |               |
|-----------------------------------------------------------------------------------------------|--------|------------------------------------------|--------------------|
|                                                                                          |   |                                          |               |
|                                                                                          |   | **2006**                                 |               | **2005** |   | **2004** |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| **Cash flows from operating activities:**                                                     |   |                                     |               |   |   |   |   |   |   |   |
| Net income                                                                                    |   | $                                        | 3,245,908          |   | $ | 1,947,546 |   | $ | 1,338,699 |   |
| Adjustments   to reconcile net income to net cash provided (used) by operating activities:    |   |                                     |               |   |   |   |   |   |   |   |
| Provision for loan losses                                                                     |   |                                     | 1,392,491          |   |   | 1,811,317 |   |   | 1,361,762 |   |
| Depreciation and amortization expense                                                         |   |                                     | 904,367            |   |   | 658,255 |   |   | 548,822 |   |
| Gain on sales of securities available-for-sales                                               |   |                                     | —   |   |   | —   |   |   | (5,971 | ) |
| Discount accretion and premium amortization                                                   |   |                                     | 62,497             |   |   | 86,839 |   |   | 108,066 |   |
| Disbursements for mortgages held for sale                                                     |   |                                     | (129,199,377       | ) |   | (74,459,914 | ) |   | (25,160,598 | ) |
| Proceeds from sales of mortgages held for sale                                                |   |                                     | 130,561,970        |   |   | 67,798,201 |   |   | 24,799,335 |   |
| Writedown of other real estate owned                                                          |   |                                     | 169,146            |   |   | 45,750 |   |   | 58,000 |   |
| (Gain) loss on sale of other real estate owned                                                |   |                                     | (7,387             | ) |   | (8,735 | ) |   | 18,815 |   |
| Deferred income tax (benefit)                                                                 |   |                                     | (276,141           | ) |   | (136,148 | ) |   | (50,801 | ) |
| Increase in interest receivable                                                               |   |                                     | (274,789           | ) |   | (774,975 | ) |   | (509,010 | ) |
| Decrease in interest payable                                                                  |   |                                     | 319,973            |   |   | (251,808 | ) |   | 299,784 |   |
| (Increase) decrease in other assets and cash surrender   value of life insurance              |   |                                     | (7,211,901         | ) |   | 75,534 |   |   | (3,989,862 | ) |
| Increase in other liabilities                                                                 |   |                                     | 648,942            |   |   | 419,657 |   |   | 116,997 |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| Net cash provided (used) by operating activities                                              |   |                                     | 335,699            |   |   | (2,788,481 | ) |   | (1,065,962 | ) |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| **Cash flows from investing activities:**                                                     |   |                                     |               |   |   |   |   |   |   |   |
| Purchases of securities available-for-sale                                                    |   |                                     | (1,521,226         | ) |   | (13,757,943 | ) |   | (11,232,623 | ) |
| Maturities of securities available-for-sale                                                   |   |                                     | 2,952,409          |   |   | 4,581,871 |   |   | 4,268,455 |   |
| Proceeds from sales of nonmarketable equity securities                                        |   |                                     | 711,000            |   |   | 1,629,000 |   |   | 5,976,385 |   |
| Purchases of nonmarketable equity securities                                                  |   |                                     | (1,271,500         | ) |   | (1,660,150 | ) |   | (839,700 | ) |
| Purchase of junior subordinated debentures                                                    |   |                                     | —   |   |   | (310,000 | ) |   | —   |   |
| Proceeds from the sales of nonmarketable equity   securities                                  |   |                                     | —   |   |   | —   |   |   | 180,000 |   |
| Net increase in loans receivable                                                              |   |                                     | (45,103,300        | ) |   | (74,687,811 | ) |   | (99,855,322 | ) |
| Purchases of premises, furniture and equipment                                                |   |                                     | (4,347,627         | ) |   | (4,815,411 | ) |   | (643,405 | ) |
| Proceeds from disposal of premises, furniture and   equipment                                 |   |                                     | 19,908             |   |   | 28,021 |   |   | —   |   |
| Proceeds from sale of other real estate owned                                                 |   |                                     | 1,144,082          |   |   | 293,377 |   |   | 408,455 |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| Net cash used by investing activities                                                         |   |                                     | (47,416,254        | ) |   | (88,699,046 | ) |   | (101,737,755 | ) |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| **Cash flows from financing activities:**                                                     |   |                                     |               |   |   |   |   |   |   |   |
| Net increase in demand deposits, interest-bearing   transaction accounts and savings accounts |   |                                     | 5,859,407          |   |   | 58,937,487 |   |   | 36,217,217 |   |
| Net increase in certificates of deposit and other time   deposits                             |   |                                     | 32,641,778         |   |   | 50,005,584 |   |   | 49,861,660 |   |
| Increase (decrease) in advances from Federal Home Loan   Bank                                 |   |                                     | 5,000,000          |   |   | (4,400,000 | ) |   | 8,800,000 |   |
| Increase (decrease) in federal funds purchased                                                |   |                                     | —   |   |   | —   |   |   | (1,043,000 | ) |
| Net increase (decrease) in securities sold under   agreements to repurchase                   |   |                                     | 4,260,110          |   |   | 798,001 |   |   | 698,333 |   |
| Proceeds from junior subordinated debentures                                                  |   |                                     | —   |   |   | 10,310,000 |   |   | —   |   |
| Stock issuance costs                                                                          |   |                                     | —   |   |   | —   |   |   | (75,960 | ) |
| Exercise of stock options                                                                     |   |                                     | 544,138            |   |   | 401,360 |   |   | —   |   |
| Proceeds from stock issuance                                                                  |   |                                     | —   |   |   | —   |   |   | 8,050,000 |   |
| Advisory board stock                                                                          |   |                                     | 15,025             |   |   | —   |   |   | —   |   |
| 401(k) purchase                                                                               |   |                                     | 472,747            |   |   | 298,957 |   |   | 355,296 |   |
| Restricted stock                                                                              |   |                                     | 33,632             |   |   | —   |   |   | —   |   |
| Purchase of treasury stock                                                                    |   |                                     | 9,896              |   |   | (2,500 | ) |   | (7,396 | ) |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| Net cash provided by financing activities                                                     |   |                                     | 48,836,733         |   |   | 116,348,889 |   |   | 102,856,150 |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| **Net increase (decrease) in cash and cash equivalents**                                      |   |                                     | 1,756,178          |   |   | 24,861,362 |   |   | 52,433 |   |
| **Cash and cash equivalents, beginning of year**                                              |   |                                     | 29,706,897         |   |   | 4,845,535 |   |   | 4,793,102 |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| **Cash and cash equivalents, end of year**                                                    |   | **$**                                    | **31,463,075**     |   | **$** | **29,706,897** |   | **$** | **4,845,535** |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| **Cash paid during the year for:**                                                            |   |                                     |               |   |   |   |   |   |   |   |
| Income taxes                                                                                  |   | **$**                                    | **1,475,090**      |   | **$** | **763,000** |   | **$** | **658,331** |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| Interest                                                                                      |   | **$**                                    | **13,893,726**     |   | **$** | **9,274,393** |   | **$** | **3,761,284** |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| **Supplemental noncash investing and   financing activities:**                                |   |                                     |               |   |   |   |   |   |   |   |
| Foreclosures on loans                                                                         |   | **$**                                    | **2,346,671**      |   | **$** | **355,344** |   | **$** | **526,475** |   |
|                                                                                          |   |                                          |                    |   |  |  |   |  |  |   |

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

-28-

----

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

**Notes to Consolidated Financial Statements**

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

**Organization** - First Reliance Bancshares, Inc. (the Company) was incorporated to serve as a bank holding company for its subsidiary, First Reliance Bank (the Bank).  First Reliance Bank was incorporated on August 9, 1999 and commenced business on August 16, 1999.  The principal business activity of the Bank is to provide banking services to domestic markets, principally in Florence, Lexington, and Charleston Counties in South Carolina.  The Bank is a state-chartered commercial Bank, and its deposits are insured by the Federal Deposit Insurance Corporation.  The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.  In 2005, the Company formed First Reliance Capital Trust I (the “Trust”) for the purpose of issuing trust preferred securities.  In accordance with current accountingguidance, the Trust is not consolidated in these financial statements.

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

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

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

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

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in Florence, Lexington, Charleston and Mount Pleasant, South Carolina.  At December 31, 2006, the majority of the total loan portfolio was to borrowers from within these areas.

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

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

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

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

-29-

----

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

**Notes to Consolidated Financial Statements**

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

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

**Nonmarketable Equity Securities** - Nonmarketable equity securities include the cost of the Company’s investment in the stock of Federal Home Loan Bank and the stock of another community bank holding company.  The stock has no quoted market value and no ready market exists.  Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings.  At December 31, 2006 and 2005, the Company’s investment in Federal Home Loan Bank stock was $2,087,600 and $1,627,100, respectively. Dividends received on this stock are included as a separate component of interest income.  In 2006, the Company purchased $100,000 of common stock in Harbor Bank Group, Inc.

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

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

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

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

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

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

**Other Real Estate Owned** - Other real estate owned includes real estate acquired through foreclosure.  Other real estate owned is carried at the lower of cost (principal balance at the date of foreclosure) or fair value minus estimated costs to sell.  Any write-downs at the date of foreclosure are charged to the allowance for loan losses.  Expenses to maintain such assets, subsequent changes in the valuation allowance, and gains and losses on disposal are included in other expenses.

-30-

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

**Notes to Consolidated Financial Statements**

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

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

**Cash Surrender Value of Life Insurance** - Cash surrender value of life insurance represents the cash value of policies on certain officers of the Bank.

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

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

**Advertising Expense** - Advertising and public relations costs are generally expensed as incurred.  External costs incurred in producing media advertising are expensed the first time the advertising takes place.  External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent.  Advertising and public relations costs of $373,005, $291,903 and $124,448 were included in the Company’s results of operations for 2006, 2005 and 2004.

**Retirement Benefits** - Atrusteed retirement savings plan is sponsored by the Company and providesretirement benefits to substantially all officers and employees who meet certainage and service requirements.  The plan includes a “salaryreduction” feature pursuant to Section 401(k) of the Internal RevenueCode.  In 2004, the Company converted the 401(k) plan to a 404(c)plan.  The 404 (c) plan changes investment alternatives to include theCompany’s stock.  Under the plan and present policies, participantsare permitted to make contributions up to 15% of their annualcompensation.  At its discretion, the Company can make matchingcontributions up to 6% of the participants’ compensation.  The Companycharged $229,032, $169,112 and $112,636 to earnings for the retirement savingsplan in 2006, 2005 and 2004, respectively.

 During 2006, the Board of Directorsapproved a supplemental retirement plan for the directors and certain officers.These benefits are not qualified under the Internal Revenue Code and they arenot funded. However, certain funding is provided informally and indirectly bylife insurance policies. The cash surrender value of the life insurance policiesare recorded as a separate line item in the accompanying balances sheets at$3,424,586 and $3,301,417 at December 31, 2006 and 2005, respectively. Incomeearned on these policies is reflected as a separate line item in theConsolidated Statements of Income. The Company recorded expense related to thesebenefits of $151,631 in 2006.

**Equity Incentive Plan** - On January 19, 2006, the Company approved the 2006 Equity Incentive Plan.  This plan provides for the granting of dividend equivalent rights, options, performance unit awards, phantom shares, stock appreciation rights and stock awards, each of which shall be subject to such conditions based upon continued employment, passage of time or satisfaction of performance criteria or other criteria as permitted by the plan.  The plan allows granting up to 350,000 shares of stock, to officers, employees, and directors, consultants and service providers of the Company or its affiliates.  Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, our Board of Directors has sole discretion as to the exercise date of any awards granted.  The per-share exercise price of incentive stock options may not be less than the market value of a share of common stock on the date theoption is granted.  Any options that expire unexercised or are canceled become available for re-issuance.  No awards may be made on or after January 19, 2016.  The Company’s equity incentive plan is further described in Note 16.

**Stock-Based Compensation** - On January 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” (“SFAS 123(R)”) to account for compensation costs under its stock option and other equity incentive plans.  The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (as amended) (“APB 25”).  Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Company’s stock options because the option exercise price in its plans equals the market price on the date of grant.  Prior to January 1, 2006, the Company only disclosed the pro forma effects on net income and earnings per share as if the fair valuerecognition provisions of SFAS 123(R) had been utilized.

-31-

----

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

**Notes to Consolidated Financial Statements**

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

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

During the second quarter of 2005, the Company accelerated the vesting of all options outstanding under the plan established in 2003 and no options have been granted since June 2005.  The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.  For 2005 and 2004, pro forma compensation expense is attributed to the 2003 plan.  The stock-based compensation expense for 2006 results from the issuance of stock appreciation rights and restricted stock under the 2006 Equity Incentive Plan.  The Company’s 2006 Equity Incentive Plan is further described in Note 16.  The Company’s 2003 plan is further described in Note 17.

|                                                                                                                                                  |   | **For the   years ended   December 31,** |          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------------|
|                                                                                                                                                  |   |                                          |          |
|                                                                                                                                                  |   | **2006**                                 |          | **2005** |   | **2004** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |  |  |   |
| Net income, as reported                                                                                                                               |   | $                                        | 3,245,908     |   | $ | 1,947,546 |   | $ | 1,338,699 |   |
| Add:  Stock-based compensation expense included   in reported net income, net of related tax effects                                             |   |                                     | 61,037        |   |   | —   |   |   | —   |   |
| Deduct:  Total stock-based employee compensation   expense determined under fair value based method for all awards, net of   related tax effects |   |                                     | (61,037       | ) |   | (767,326 | ) |   | (234,770 | ) |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |  |  |   |
| Pro forma net income                                                                                                                                  |   | **$**                                    | **3,245,908** |   | **$** | **1,180,220** |   | **$** | **1,103,929** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |  |  |   |
| Earnings per share:                                                                                                                                   |   |                                     |          |   |   |   |   |   |   |   |
| Basic   - as reported                                                                                                                                 |   | **$**                                    | **0.96**      |   | **$** | **0.60** |   | **$** | **0.52** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |  |  |   |
| Basic   - pro forma                                                                                                                                   |   | **$**                                    | **0.96**      |   | **$** | **0.36** |   | **$** | **0.43** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |  |  |   |
| Diluted   - as reported                                                                                                                               |   | **$**                                    | **0.91**      |   | **$** | **0.57** |   | **$** | **0.48** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |  |  |   |
| Diluted   - pro forma                                                                                                                                 |   | **$**                                    | **0.91**      |   | **$** | **0.34** |   | **$** | **0.40** |   |
|                                                                                                                                                  |   |                                          |               |   |  |  |   |  |  |   |

In calculating the pro forma disclosures for 2005 and 2004, and the stock appreciation rights granted in 2006, the fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions:

|                      |   | **2006** |     | **2005** |   | **2004** |   |
|---------------------------|--------|----------|----------|----------|--------|----------|--------|
|                      |   |          |          |     |        |          |   |  |  |   |
| Dividend   yield          |   |     | 0.00     | %        |   | 0.00     | %      |   | 0.00 | % |
| Expected   volatility     |   |     | 20.0     | %        |   | 38.22    | %      |   | 44.47 | % |
| Risk-free   interest rate |   |     | 4.38     | %        |   | 4.17     | %      |   | 4.38 | % |
| Expected   life           |   |     | 10 years |     |   | 8 years  |   |   | 10 years |   |

The decision to accelerate vesting in 2005 of the 2003 plan-related options avoided recognition of pre-tax compensation expense by the Company upon the adoption of SFAS 123(R).  In the Company’s view, the future compensation expense could outweigh the incentive and retention value associated with the stock options.  The future pre-tax compensation expense that was or will be avoided, based upon the effective date of January 1, 2006, is approximately $419,263 and $108,981 in fiscal years 2006 and 2007, respectively.  The Company believes that the acceleration of vesting stock options meets the criteria for variable accounting under FIN No. 44.  Based upon past experience, the Company believes the grantees of these stock options will remain as a director or employee of the Company.

-32-

----

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

**Notes to Consolidated Financial Statements**

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

**Common Stock Owned by the 401(k) Plan and Employee Stock Ownership Plan (ESOP)** - All shares held by the 401(k) and ESOP Plans, collectively referred to as the “404(c),” are treated as outstanding for purposes of computing earnings per share. 404(c) purchases and redemptions of the Company’s common stock are at estimated fair value as determined by independent valuations.  Dividends on 404 (c) shares are charged to retained earnings.  At December 31, 2006, the 404 (c) owned 107,445 shares of the Company’s common stock with an estimated value of $1,676,142.  All of these shares were allocated.  At December 31, 2005, the 404 (c) owned 66,991 shares of the Company’s common stock with an estimated value of $1,038,361.  Contributions to the 404 (c) in 2006, 2005 and 2004 were $229,032, $169,112 and $112,636, respectively.

**Earnings Per Share** - Basic earnings per share represents income available to shareholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method (see Note 15).

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

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

|                                                          |   | **For the   years ended   December 31,** |               |
|---------------------------------------------------------------|--------|------------------------------------------|--------------------|
|                                                          |   |                                          |               |
|                                                          |   | **2006**                                 |               | **2005** |   | **2004** |   |
|                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| Unrealized   gains (losses) on securities available-for-sale: |   | $                                        | 184,723            |   | $ | (535,420 | ) | $ | (7,014 | ) |
| Reclassification adjustment for gains realized in net income  |   |                                     | —   |   |   | —   |   |   | (5,971 | ) |
|                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| Net   unrealized gains (losses) on securities                 |   |                                     | 184,723            |   |   | (535,420 | ) |   | (12,985 | ) |
| Tax   effect                                                  |   |                                     | (63,441            | ) |   | 182,043 |   |   | 8,356 |   |
|                                                          |   |                                          |                    |   |  |  |   |  |  |   |
| Net-of-tax amount                                             |   | **$**                                    | **121,282**        |   | **$** | **(353,377** | **)** | **$** | **(4,629** | **)** |
|                                                          |   |                                          |                    |   |  |  |   |  |  |   |

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

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

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

-33-

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

**Notes to Consolidated Financial Statements**

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

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

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting (“SFAS”) No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140.”  This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”  This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.”  FAS 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest only-strips and principal-only strips are not subject to the requirements of Statement 133,establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.  SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006.  The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations or cash flows. 

In March 2006, the FASB issued SFAS No. 156, “*Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140.” *This Statement amends FASB No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities.  SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securitiesto trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006.  The Company does not believe the adoption of SFAS No. 156 will have a material impact on its financial position, results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.  FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently analyzing the effects of FIN 48 on its financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  This standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company’s financial statements.

-34-

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

**Notes to Consolidated Financial Statements**

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

**Recent AccountingPronouncements***(continued)* - In September 2006, the FASB issuedSFAS No. 158, “Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans” (“SFAS 158”), which amends SFAS 87 andSFAS 106 to require recognition of the overfunded or underfunded status ofpension and other postretirement benefit plans on the balance sheet.  UnderSFAS 158, gains and losses, prior service costs and credits, and any remainingtransition amounts under SFAS 87 and SFAS 106 that have not yet been recognizedthrough net periodic benefit cost will be recognized in accumulated othercomprehensive income, net of tax effects, until they are amortized as acomponent of net periodic cost.  The measurement date - the date at whichthe benefit obligation and plan assets are measured - is required to be thecompany’s fiscal year end. SFAS 158 is effective for publicly-heldcompanies for fiscal years ending after December 15, 2006, except for themeasurement date provisions, which are effective for fiscal years ending afterDecember 15, 2008.  The Company does not have a defined benefit pensionplan.  Therefore, SFAS 158 will not impact  the Company’sfinancial conditions or results of operations.

In September, 2006, The FASB ratifiedthe consensuses reached by the FASB’s Emerging Issues Task Force(“EITF”) relating to EITF 06-4 “Accounting for the DeferredCompensation and Postretirement Benefit Aspects of Endorsement Split-Dollar LifeInsurance Arrangements”.  EITF 06-4 addresses employer accounting forendorsement split-dollar life insurance arrangements that provide a benefit toan employee that extends to postretirement periods should recognize a liabilityfor future benefits in accordance with SFAS No. 106, “*Employers’Accounting for Postretirement Benefits Other Than Pensions”*, orAccounting Principles Board (“APB”) Opinion No. 12, “*OmnibusOpinion-1967”*.  EITF 06-4 is effective for fiscal years beginningafter December 15, 2007. Entities should recognize the effects of applying thisIssue through either (a) a change in accounting principle through acumulative-effect adjustment to retained earnings or to other components ofequity or net assets in the statement of financial position as of the beginningof the year of adoption or (b) a change in accounting principle throughretrospective application to all prior periods.  The Company does notbelieve the adoption of EITF 06-4 will have a material impact on its financialposition, results of operations or cash flows. 

In September 2006, the FASB ratified the consensus reached related to EITF 06-5,“Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance.”  EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract.  EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy).  EITF 06-5 is effective for fiscal years beginning after December 15, 2006.  The Company does not believe the adoption of EITF 06-5 will have a material impact on its financialposition, results of operations or cash flows.  

In September 2006, the SEC issued Staff Accounting Bulleting No. 108 (“SAB 108”).  SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement.  Prior to SAB 108, Companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company’s balance sheet.  Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected.  SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balancesheet approach.  The Company has analyzed SAB 108 and determined that upon adoption it will have no impact on the reported results of operations or financial condition.

-35-

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

**Notes to Consolidated Financial Statements**

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

**Recent Accounting Pronouncements***(continued)* - In December 2006, the FASB issued a Staff Position (“FSP”) on EITF 00-19-2, “Accounting for Registration Payment Arrangements (“FSP EITF 00-19-2”).  This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” If the transfer of consideration under a registration payment arrangement is probable and can be reasonably estimated at inception, the contingent liability under the registration payment arrangement is included in the allocation of proceeds from the related financing transaction (or recorded subsequent to the inception of a prior financingtransaction) using the measurement guidance in SFAS No. 5.  This FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the issuance of the FSP.  For prior arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006 and interim periods within those years.  The Company does not believe the adoption of this FSP will have a material impact on its financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.”  This statement permits, but does not require, entities to measure many financial instruments at fair value.  The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement (1) applies to all entities, (2) specifies certain election dates, (3) can be applied on an instrument-by-instrument basis with some exceptions, (4) is irrevocable, and (5) applies only to entire instruments.  One exception is demanddeposit liabilities which are explicitly excluded as qualifying for fair value.  With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date.  If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities.  SFAS 159 is effective for the Company on January 1, 2008.  Earlier adoption is permitted in 2007 if the Company also elects to apply the provisions of SFAS 157, “Fair Value Measurement.”  The Company is currently analyzing the fair value option provided under SFAS 159. 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

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

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

**Reclassifications** - Certain captions and amounts in the 2005 and 2004 consolidated financial statements were reclassified to conform with the 2006 presentation.

-36-

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

**Notes to Consolidated Financial Statements**

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

The Company is required to maintain balances with The Federal Reserve computed as a percentage of deposits.  At December 31, 2006 and 2005, this requirement was $1,389,000 and $1,205,000, respectively.  This requirement was met by vault cash and balances on deposit with the Federal Reserve.

**NOTE 3 - INVESTMENT SECURITIES**

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

|                               |   |                 |           |   | **Gross Unrealized** |                       |   |   |               |
|------------------------------------|--------|----------------------|----------------|--------|----------------------|----------------------------|--------|--------|--------------------|
|                               |   | **Amortized   Cost** |           |        |                 | **Estimated   Fair Value** |   |
|                               |   |                 | **Gains**      |   | **Losses**           |                       |   |
|                               |   |                      |                |   |                      |                            |   |        |                    |   |  |  |   |
| **December 31, 2006**              |   |                 |           |   |                 |                       |   |   |               |   |   |   |   |
| Government   sponsored enterprises |   | $                    | 4,990,352      |   | $                    | —           |   | $      | 40,039             |   | $ | 4,950,313 |   |
| U.S.   Government agencies         |   |                 | 380,315        |   |                 | 1,226                      |   |   | 321                |   |   | 381,220 |   |
| Mortgage-backed   securities       |   |                 | 15,521,860     |   |                 | 20,151                     |   |   | 339,685            |   |   | 15,202,326 |   |
| Municipals                         |   |                 | 14,805,485     |   |                 | 281,449                    |   |   | 1,027              |   |   | 15,085,907 |   |
| Other                              |   |                 | 218,750        |   |                 | 92,755                     |   |   | —   |   |   | 311,505 |   |
|                               |   |                      |                |   |                      |                            |   |        |                    |   |  |  |   |
|                               |   | **$**                | **35,916,762** |   | **$**                | **395,581**                |   | **$**  | **381,072**        |   | **$** | **35,931,271** |   |
|                               |   |                      |                |   |                      |                            |   |        |                    |   |  |  |   |
| **December 31, 2005**              |   |                 |           |   |                 |                       |   |   |               |   |   |   |   |
| Government   sponsored enterprises |   | $                    | 4,985,506      |   | $                    | —           |   | $      | 64,160             |   | $ | 4,921,346 |   |
| U.S.   Government agencies         |   |                 | 549,485        |   |                 | —           |   |   | 13,748             |   |   | 535,737 |   |
| Mortgage-backed   securities       |   |                 | 17,809,080     |   |                 | 17,682                     |   |   | 414,987            |   |   | 17,411,775 |   |
| Municipals                         |   |                 | 13,947,622     |   |                 | 327,337                    |   |   | 22,338             |   |   | 14,252,621 |   |
| Other                              |   |                 | 118,750        |   |                 | —           |   |   | —   |   |   | 118,750 |   |
|                               |   |                      |                |   |                      |                            |   |        |                    |   |  |  |   |
|                               |   | **$**                | **37,410,443** |   | **$**                | **345,019**                |   | **$**  | **515,233**        |   | **$** | **37,240,229** |   |
|                               |   |                      |                |   |                      |                            |   |        |                    |   |  |  |   |

The following is a summary of maturities of securities available-for-sale as of December 31, 2006.  The amortized cost and estimated fair values are based on the contractual maturity dates.  Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.

|                                        |   | **Securities   Available-For-Sale** |               |
|---------------------------------------------|--------|-------------------------------------|--------------------|
|                                        |   |                                     |               |
|                                        |   | **Amortized Cost**                  |               | **Estimated   Fair Value** |   |
|                                        |   |                                     |               |  |   |
| Due   within one year                       |   | $                                   | —   |   | $ | —   |   |
| Due   after one year but within five years  |   |                                | 6,131,364          |   |   | 6,093,861 |   |
| Due   after five years but within ten years |   |                                | 595,577            |   |   | 596,262 |   |
| Due   after ten years                       |   |                                | 13,449,211         |   |   | 13,727,317 |   |
|                                        |   |                                     |                    |   |  |  |   |
|                                        |   |                                | 20,176,152         |   |   | 20,417,440 |   |
| Mortgage-backed   securities                |   |                                | 15,521,860         |   |   | 15,202,326 |   |
| Other                                       |   |                                | 218,750            |   |   | 311,505 |   |
|                                        |   |                                     |                    |   |  |  |   |
| Total                                       |   | **$**                               | **35,916,762**     |   | **$** | **35,931,271** |   |
|                                        |   |                                     |                    |   |  |  |   |

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

**Notes to Consolidated Financial Statements**

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

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2006 and 2005.

**Securities Available for Sale**

|                               |   | **Less than   twelve months** |               | **Twelve   months   or more** |   | **Total**          |   |
|------------------------------------|--------|-------------------------------|--------------------|-------------------------------|--------|--------------------|--------|
|                               |   |                               |               |                               |   |                    |   |
|                               |   | **Fair value**                |               | **Unrealized   losses**       |   | **Fair value**     |   | **Unrealized   losses** |   | **Fair value** |   | **Unrealized   losses** |   |
|                               |   |                               |                    |                          |        |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **December 31, 2006**              |   |                          |               |                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government sponsored   enterprises |   | $                             | —   |                          | $      | —   |   | $ | 4,950,313 |   | $ | (40,039 | ) | $ | 4,950,313 |   | $ | (40,039 | ) |
| U.S. government agencies           |   |                          | —   |                          |   | —   |   |   | 69,742 |   |   | (321 | ) |   | 69,742 |   |   | (321 | ) |
| Municipals                         |   |                          | 2,035,393          |                          |   | (1,027             | )      |   | —   |   |   | —   |   |   | 2,035,393 |   |   | (1,027 | ) |
| Mortgage-backed securities         |   |                          | —   |                          |   | —   |   |   | 11,363,211 |   |   | (339,685 | ) |   | 11,363,211 |   |   | (339,685 | ) |
|                               |   |                               |                    |                          |        |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total                              |   | **$**                         | **2,035,393**      |                          | **$**  | **(1,027**         | **)**  | **$** | **16,383,266** |   | **$** | **(380,045** | **)** | **$** | **18,418,659** |   | **$** | **(381,072** | **)** |
|                               |   |                               |                    |                          |        |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **December 31, 2005**              |   |                          |               |                          |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Government sponsored   enterprises |   | $                             | 4,921,346          |                          | $      | 64,160             |   | $ | —   |   | $ | —   |   | $ | 4,921,346 |   | $ | 64,160 |   |
| U.S. government agencies           |   |                          | 535,736            |                          |   | 13,748             |   |   | —   |   |   | —   |   |   | 535,736 |   |   | 13,748 |   |
| Municipals                         |   |                          | 2,298,360          |                          |   | 22,338             |   |   | —   |   |   | —   |   |   | 2,298,360 |   |   | 22,338 |   |
| Mortgage-backed securities         |   |                          | 5,223,283          |                          |   | 53,361             |   |   | 10,232,228 |   |   | 361,626 |   |   | 15,455,511 |   |   | 414,987 |   |
|                               |   |                               |                    |                          |        |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Total                              |   | **$**                         | **12,978,725**     |                          | **$**  | **153,607**        |   | **$** | **10,232,228** |   | **$** | **361,626** |   | **$** | **23,210,953** |   | **$** | **515,233** |   |
|                               |   |                               |                    |                          |        |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |

Securities classified as available-for-sale are recorded at fair market value.  Approximately 99.73% of the unrealized losses, or 14 individual securities, consisted of securities in a continuous loss position for twelve months or more.  The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

At December 31, 2006 and 2005, securities with amortized costs of $6,224,406 and $6,249,272 and estimated fair values of $6,272,303 and $6,197,692 , respectively, were pledged to secure public deposits and for other purposes as required and permitted by law.

**NOTE 4 - LOANS RECEIVABLE**

Major classifications of loans receivable are summarized as follows:

|                             |   | **December 31,** |            |
|----------------------------------|--------|------------------|-----------------|
|                             |   |                  |            |
|                             |   | **2006**         |            | **2005** |   |
|                             |   |                  |                 |   |  |  |   |
| Mortgage   loans on real estate: |   |             |            |   |   |   |   |
| Residential 1-4 family           |   | $                | 50,844,955      |   | $ | 50,937,658 |   |
| Multifamily                      |   |             | 7,826,863       |   |   | 6,322,957 |   |
| Commercial                       |   |             | 127,213,968     |   |   | 106,125,103 |   |
| Construction                     |   |             | 64,118,098      |   |   | 52,267,759 |   |
| Second mortgages                 |   |             | 4,513,048       |   |   | 4,885,095 |   |
| Equity lines of credit           |   |             | 27,853,374      |   |   | 24,570,163 |   |
|                             |   |                  |                 |   |  |  |   |
|                             |   |             | 282,370,306     |   |   | 245,108,735 |   |
| Commercial   and industrial      |   |             | 51,710,250      |   |   | 50,320,434 |   |
| Consumer                         |   |             | 12,728,353      |   |   | 13,953,632 |   |
| Other                            |   |             | 6,682,127       |   |   | 2,161,584 |   |
|                             |   |                  |                 |   |  |  |   |
| Total gross loans                |   | **$**            | **353,491,036** |   | **$** | **311,544,385** |   |
|                             |   |                  |                 |   |  |  |   |

The Company has pledged certain loans as collateral to secure its borrowings from the Federal Home Loan Bank.  The total of loans pledged was $158,978,811 at December 31, 2006.

-38-

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

**Notes to Consolidated Financial Statements**

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

The  Company  identifies  impaired loansthrough its normal internal loan review process.  Loans on theCompany’s problem loan watch list are considered potentially impairedloans.  These loans are evaluated in determining whether all outstandingprincipal and interest are expected to be collected.  Loans are notconsidered impaired if a minimal delay occurs and all amounts due includingaccrued interest at the contractual interest rate for the period of delay areexpected to be collected.  At December 31, 2006, impaired loans totaled$1,313,993, and specific collected write downs on these loans totaled$189,992.  Accrued interest related to these loans totaled$6,115.

Transactions in the allowance for loan losses are summarized below:

|                                         |   | **For the   years ended   December 31,** |          |
|----------------------------------------------|--------|------------------------------------------|---------------|
|                                         |   |                                          |          |
|                                         |   | **2006**                                 |          | **2005** |   | **2004** |   |
|                                         |   |                                          |               |   |  |  |   |  |  |   |
| Balance,   beginning of year                 |   | $                                        | 3,419,368     |   | $ | 2,758,225 |   | $ | 1,752,282 |   |
| Provision   charged to operations            |   |                                     | 1,392,491     |   |   | 1,811,317 |   |   | 1,361,762 |   |
| Recoveries   on loans previously charged-off |   |                                     | 246,600       |   |   | 81,813 |   |   | 35,156 |   |
| Loans   charged-off                          |   |                                     | (1,056,578    | ) |   | (1,231,987 | ) |   | (390,975 | ) |
|                                         |   |                                          |               |   |  |  |   |  |  |   |
| Balance, end of year                         |   | **$**                                    | **4,001,881** |   | **$** | **3,419,368** |   | **$** | **2,758,225** |   |
|                                         |   |                                          |               |   |  |  |   |  |  |   |

There were $463,991 in loans past due ninety days or more and still accruing interest and $670,650 in loans in nonaccrual status at December 31, 2006.  As of December 31, 2005, there were $704,800 in loans past due ninety days or more and still accruing interest and $1,792,702 in loans on nonaccrual status.

Loans sold with limited recourse are 1-4 family residential mortgages originated by the Company and sold to various other financial institutions.  These loans are sold with the agreement that a loan may be returned to the Company at any time in the event the Company fails to provide necessary documents related to the mortgages to the buyers, or if it makes false representations or warranties to the buyers.  Loans sold under these agreements in 2006 total $3,036,057.  The Company uses the same credit policies in making loans held for sale as it does for on-balance-sheet instruments.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments consist of commitments to extend credit and standby letters of credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do notnecessarily represent future cash requirements.  The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments.  Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities.

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

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

|                           |   | **December 31,** |       |
|--------------------------------|--------|------------------|------------|
|                           |   |                  |       |
|                           |   | **2006**         |       | **2005** |   |
|                           |   |                  |            |   |  |  |   |
| Commitments   to extend credit |   | $                | 67,370,404 |   | $ | 59,196,000 |   |
| Standby   letters of credit    |   |             | 3,543,270  |   |   | 1,699,000 |   |

-39-

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

**Notes to Consolidated Financial Statements**

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

Premises, furniture and equipment consisted of the following:

|                             |   | **December 31,** |           |
|----------------------------------|--------|------------------|----------------|
|                             |   |                  |           |
|                             |   | **2006**         |           | **2005** |   |
|                             |   |                  |                |   |  |  |   |
| Land                             |   | $                | 4,835,609      |   | $ | 4,655,609 |   |
| Building                         |   |             | 4,349,778      |   |   | 4,066,613 |   |
| Leasehold   improvements         |   |             | 141,517        |   |   | 117,197 |   |
| Furniture   and equipment        |   |             | 2,676,121      |   |   | 2,262,900 |   |
| Construction   in progress       |   |             | 4,425,102      |   |   | 1,017,947 |   |
|                             |   |                  |                |   |  |  |   |
| Total                            |   |             | 16,428,127     |   |   | 12,120,266 |   |
| Less,   accumulated depreciation |   |             | 2,657,992      |   |   | 2,099,729 |   |
|                             |   |                  |                |   |  |  |   |
| Premises and equipment, net      |   | **$**            | **13,770,135** |   | **$** | **10,020,537** |   |
|                             |   |                  |                |   |  |  |   |

Depreciation expense for the years ended December 31, 2006, 2005 and 2004 amounted to $558,262, $658,255 and $548,822, respectively.

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

**NOTE 6 - DEPOSITS**

At December 31, 2006, the scheduled maturities of time deposits were as follows:

| **Maturing In**                    |   | **Amount** |            |
|------------------------------------|--------|------------|-----------------|
|                                    |   |            |            |
|      2007 |   | $          | 194,136,765     |   |
|      2008 |   |       | 17,676,538      |   |
|      2009 |   |       | 4,568,315       |   |
|      2010 |   |       | 561,608         |   |
|      2011 |   |       | 1,812,594       |   |
|                               |   |            |                 |   |
| Total                              |   | **$**      | **218,755,820** |   |
|                               |   |            |                 |   |

Included in total time deposits at December 31, 2006 and 2005 were brokered time deposits of $29,515,694 and $39,213,743, respectively.

**NOTE 7 - SHORT-TERM BORROWINGS**

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

|                                        |   | **For the years   ended   December 31,** |      |
|---------------------------------------------|--------|------------------------------------------|-----------|
|                                        |   |                                          |      |
|                                        |   | **2006**                                 |      | **2005** |   |
|                                        |   |                                          |           |   |  |  |   |
| Balance   at end of the year                |   | $                                        | 8,120,014 |   | $ | 3,859,904 |   |
| Average   balance during the year           |   |                                     | 6,064,366 |   |   | 3,599,716 |   |
| Average   interest rate during the year     |   |                                     | 4.27      | % |   | 2.54 | % |
| Maximum   month-end balance during the year |   |                                     | 8,190,397 |   |   | 4,223,149 |   |

Under the terms of the repurchase agreement, the Company sells an interest in securities issued by United States Government agencies and agrees to repurchase the same securities the following business day.  As of December 31, 2006 and 2005, the par value and market value of the securities held by the third-party for the underlying agreements were $6,087,273 and $4,818,637, respectively, and $6,148,139 and $4,791,987, respectively.

-40-

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

**Notes to Consolidated Financial Statements**

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

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

|                                       |   |                |     |     | **December   31,** |               |
|--------------------------------------------|--------|---------------------|----------|----------|--------------------|--------------------|
|                                       |   |                |     |     |                    |               |
| **Description**                            |   | **Interest   Rate** |     | **2006** |               | **2005**           |   |
|                                            |   |                     |     |          |               |                    |   |
| **Fixed rate advances maturing:**          |   |                |     |     |               |               |   |   |   |   |
| February   3, 2006                         |   |                | 3.40     | %        | $                  | —   |   | $ | 5,000,000 |   |
| April   10, 2006                           |   |                | 2.60     | %        |               | —   |   |   | 1,000,000 |   |
| December   19, 2006                        |   |                | 2.87     | %        |               | —   |   |   | 1,500,000 |   |
| January   12, 2007                         |   |                | 3.72     | %        |               | 2,000,000          |   |   | 2,000,000 |   |
| April   9, 2007                            |   |                | 3.13     | %        |               | 1,000,000          |   |   | 1,000,000 |   |
| July   2, 2007                             |   |                | 3.56     | %        |               | 500,000            |   |   | 500,000 |   |
| December   19, 2007                        |   |                | 3.44     | %        |               | 1,500,000          |   |   | 1,500,000 |   |
| April   8, 2008                            |   |                | 3.46     | %        |               | 1,000,000          |   |   | 1,000,000 |   |
| **Variable rate advances maturing:**       |   |                |     |     |               |               |   |   |   |   |
| March   19, 2009                           |   |                | 2.48     | %        |               | 3,000,000          |   |   | 3,000,000 |   |
| June   29, 2009                            |   |                | 5.30     | %        |               | 5,000,000          |   |   | —   |   |
| July   5, 2012                             |   |                | 4.08     | %        |               | 1,000,000          |   |   | 1,000,000 |   |
| March   10, 2015                           |   |                | 3.44     | %        |               | 6,000,000          |   |   | 6,000,000 |   |
| **Daily variable rate advances maturing:** |   |                |     |     |               |               |   |   |   |   |
| Daily                                      |   |                | Variable |     |               | 7,500,000          |   |   | —   |   |
|                                       |   |                |     |     |                    |                    |   |  |  |   |
|                                       |   |                |     |     |               | **$28,500,000**    |   | **$** | **23,500,000** |   |
|                                       |   |                |     |     |                    |                    |   |  |  |   |

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

|       |   | **Amount** |               |
|------------|--------|------------|--------------------|
|       |   |            |               |
| 2007       |   | $          | 12,500,000         |   |
| 2008       |   |       | 1,000,000          |   |
| 2009       |   |       | 8,000,000          |   |
| 2010       |   |       | —   |   |
| 2011       |   |       | —   |   |
| Thereafter |   |       | 7,000,000          |   |
|       |   |            |                    |   |
| Total      |   | **$**      | **28,500,000**     |   |
|       |   |            |                    |   |

-41-

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

**Notes to Consolidated Financial Statements**

**NOTE 9 - JUNIOR SUBORDINATED DEBENTURES**

On June 30, 2005 the Company formed FirstReliance Capital Trust I (the “Trust”) for the purpose of issuingtrust preferred securities, which enabled the Company to obtain Tier 1 capital ona consolidated basis for regulatory purposes. On July 1, 2005, the Companyclosed a private offering of $10,000,000 of floating rate preferred securitiesoffered and sold by the Trust.  The proceeds from such issuance, togetherwith the proceeds from a related issuance of common securities of the Trustpurchased by the Company in the amount of $310,000, were invested by the Trustin floating rate Junior Subordinated Debentures issued by the Company (the“Debentures”) totaling $10,310,000.  The Debentures are due andpayable on November 23, 2035 and may be redeemed by the Company after fiveyears, and sooner in certain specific events, including in the event thatcertain circumstances render the Debentures ineligible for treatment as Tier 1capital, subject to prior approval by the Federal Reserve Board, if thenrequired.  The Debentures presently qualify as Tier 1 capital forregulatory reporting.  The sole assets of the Trust are theDebentures.  The Company owns 100% of the common securities of theTrust.  The Debentures are unsecured and rank junior to all senior debt ofthe Company.  At December 31, 2006, the floating rate preferred securitiesand the Debentures had an annual interest rate of 5.93%.  This interestrate is fixed until August 23, 2010, when the interest rate will adjustquarterly.  After August 23, 2010, the interest rate will equal three-monthLIBOR plus 1.83%.

**NOTE 10 - RESTRICTIONS ON SHAREHOLDERS’ EQUITY**

South Carolina banking regulationsrestrict the amount of dividends that can be paid to shareholders.  All ofthe Bank’s dividends to First Reliance Bancshares, Inc. are payable onlyfrom the undivided profits of the Bank.  At December 31, 2006, the Bank hadundivided profits of $9,284,761.  The Bank is authorized to upstream 100%of net income in any calendar year without obtaining the prior approval of theCommissioner of Banking provided that the Bank received a composite rating ofone or two at the last Federal or State regulatory examination.  UnderFederal Reserve Board regulations, the amounts of loans or advances from theBank to the parent company are also restricted.

**NOTE 11 - OTHER OPERATING EXPENSE**

Other operating expenses are summarized below:

|                                          |   | **For the   years ended   December 31,** |          |
|-----------------------------------------------|--------|------------------------------------------|---------------|
|                                          |   |                                          |          |
|                                          |   | **2006**                                 |          | **2005** |   | **2004** |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
| Professional   fees                           |   | $                                        | 470,927       |   | $ | 431,305 |   | $ | 193,094 |   |
| Office   supplies, forms, and stationery      |   |                                     | 275,028       |   |   | 224,235 |   |   | 144,798 |   |
| Advertising                                   |   |                                     | 373,005       |   |   | 291,903 |   |   | 124,448 |   |
| Data   processing and supplies                |   |                                     | 32,067        |   |   | 20,616 |   |   | 12,597 |   |
| Employee   education and conventions          |   |                                     | 65,239        |   |   | 60,015 |   |   | 48,502 |   |
| Computer   supplies and software amortization |   |                                     | 441,276       |   |   | 483,168 |   |   | 342,487 |   |
| Telephone                                     |   |                                     | 197,085       |   |   | 153,922 |   |   | 121,249 |   |
| Directors   fees                              |   |                                     | 172,426       |   |   | 138,600 |   |   | 91,100 |   |
| Other                                         |   |                                     | 2,899,782     |   |   | 1,903,409 |   |   | 1,343,760 |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
| Total                                         |   | **$**                                    | **4,926,835** |   | **$** | **3,707,173** |   | **$** | **2,422,035** |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |

-42-

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

**Notes to Consolidated Financial Statements**

**NOTE 12 - INCOME TAXES**

Income tax expense is summarized as follows:

|                                          |   | **For the   years ended   December 31,** |          |
|-----------------------------------------------|--------|------------------------------------------|---------------|
|                                          |   |                                          |          |
|                                          |   | **2006**                                 |          | **2005** |   | **2004** |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
| Currently   payable                           |   |                                     |          |   |   |   |   |   |   |   |
| Federal                                       |   | $                                        | 1,294,202     |   | $ | 828,285 |   | $ | 707,796 |   |
| State                                         |   |                                     | 164,735       |   |   | 97,745 |   |   | 66,667 |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
| Total current                                 |   |                                     | 1,458,937     |   |   | 926,030 |   |   | 774,463 |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
| Deferred   income taxes                       |   |                                     | (212,700      | ) |   | (318,657 | ) |   | (206,314 | ) |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
| Total income tax expense                      |   | **$**                                    | **1,246,237** |   | **$** | **607,373** |   | **$** | **568,149** |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
| Income tax expense is   allocated as follows: |   |                                     |          |   |   |   |   |   |   |   |
| To continuing operations                      |   | $                                        | 1,182,796     |   | $ | 789,416 |   | $ | 570,533 |   |
| To shareholders’ equity                  |   |                                     | 63,441        |   |   | (182,043 | ) |   | (2,384 | ) |
|                                          |   |                                          |               |   |  |  |   |  |  |   |
|                                          |   | **$**                                    | **1,246,237** |   | **$** | **607,373** |   | **$** | **568,149** |   |
|                                          |   |                                          |               |   |  |  |   |  |  |   |

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

|                                             |   | **December 31,** |               |
|--------------------------------------------------|--------|------------------|--------------------|
|                                             |   |                  |               |
|                                             |   | **2006**         |               | **2005** |   | **2004** |   |
|                                             |   |                  |                    |   |  |  |   |  |  |   |
| Deferred   tax assets:                           |   |             |               |   |   |   |   |   |   |   |
| Allowance for loan losses                        |   | $                | 1,072,758          |   | $ | 914,956 |   | $ | 814,656 |   |
| Organizational costs                             |   |             | 1,202              |   |   | 6,013 |   |   | 15,349 |   |
| Non-accrual interest                             |   |             | 44,645             |   |   | 65,027 |   |   | —   |   |
| Unrealized loss on securities available for sale |   |             | 26,604             |   |   | 58,508 |   |   | —   |   |
| Deferred compensation                            |   |             | 51,555             |   |   | —   |   |   | —   |   |
| Other                                            |   |             | 86,410             |   |   | 35,882 |   |   | 26,996 |   |
|                                             |   |                  |                    |   |  |  |   |  |  |   |
| Total gross deferred tax assets                  |   |             | 1,256,570          |   |   | 1,080,386 |   |   | 857,001 |   |
| Deferred   tax liabilities:                      |   |             |               |   |   |   |   |   |   |   |
| Unrealized gain on securities available-for-sale |   |             | —   |   |   | —   |   |   | 123,535 |   |
| Accumulated depreciation                         |   |             | 106,937            |   |   | 180,792 |   |   | 241,387 |   |
| Prepaid expenses                                 |   |             | 67,603             |   |   | 57,232 |   |   | —   |   |
| Other                                            |   |             | 53,661             |   |   | 31,626 |   |   | —   |   |
|                                             |   |                  |                    |   |  |  |   |  |  |   |
| Total gross deferred tax liabilities             |   |             | 233,134            |   |   | 269,650 |   |   | 364,922 |   |
|                                             |   |                  |                    |   |  |  |   |  |  |   |
| Net deferred tax asset recognized                |   | **$**            | **1,023,436**      |   | **$** | **810,736** |   | **$** | **492,079** |   |
|                                             |   |                  |                    |   |  |  |   |  |  |   |

Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value.  As of December 31, 2006, management has determined that it is more likely than not that the total deferred tax asset will be realized and, accordingly, has not established a valuation allowance.  Net deferred tax assets are included in other assets at December 31, 2006 and 2005.

-43-

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

**Notes to Consolidated Financial Statements**

**NOTE 12 - INCOME TAXES** - *continued*

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

|                                                  |   | **For the   years ended   December 31,** |          |
|-------------------------------------------------------|--------|------------------------------------------|---------------|
|                                                  |   |                                          |          |
|                                                  |   | **2006**                                 |          | **2005** |   | **2004** |   |
|                                                  |   |                                          |               |   |  |  |   |  |  |   |
| Tax   expense at statutory rate                       |   | $                                        | 1,505,759     |   | $ | 930,567 |   | $ | 649,139 |   |
| State   income tax, net of federal income tax benefit |   |                                     | 108,725       |   |   | 64,512 |   |   | 40,785 |   |
| Tax-exempt   interest income                          |   |                                     | (217,501      | ) |   | (188,419 | ) |   | (141,973 | ) |
| Disallowed   interest expense                         |   |                                     | 31,004        |   |   | 21,503 |   |   | 11,918 |   |
| Life   insurance surrender value                      |   |                                     | (129,836      | ) |   | —   |   |   | —   |   |
| Stock   based compensation                            |   |                                     | (94,477       | ) |   | —   |   |   | —   |   |
| Other,   net                                          |   |                                     | (20,878       | ) |   | (38,747 | ) |   | 10,664 |   |
|                                                  |   |                                          |               |   |  |  |   |  |  |   |
|                                                  |   | **$**                                    | **1,182,796** |   | **$** | **789,416** |   | **$** | **570,533** |   |
|                                                  |   |                                          |               |   |  |  |   |  |  |   |

**NOTE 13 - RELATED PARTY TRANSACTIONS**

Certain parties (principally certain directors and executive officers of the Company, their immediate families and business interests) were loan customers of and had other transactions in the normal course of business with the Company.  Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility.  As of December 31, 2006 and 2005, the Company had related party loans totaling $2,929,127 and $2,506,020, respectively. During 2006, $1,454,904 of advances were made to related parties and repayments totaled $1,031,797.  During 2005, $457,195 of advances were made to related parties and repayments totaled $704,942.

At December 31, 2006 and 2005, the Company had securities sold under agreements to repurchase with related parties of $0 and $2,740,443, respectively.

Deposits from directors and executive officers and their related interests totaled $4,324,992 and $4,663,922 at December 31, 2006 and 2005, respectively.

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

**NOTE 14 - COMMITMENTS AND CONTINGENCIES**

In the ordinary course of business, the Company may, from time to time, become a party to legal claims and disputes.  At December 31, 2006, management and legal counsel are not aware of any pending or threatened litigation or unasserted claims or assessments that could result in losses, if any, that would be material to the consolidated financial statements.

The Company has entered into six separate lease agreements for properties in Florence, Charleston, Mount Pleasant and Lexington, South Carolina for branch banking and mortgage operations.  The leases have various initial terms and expire on various dates. The lease agreements generally provide that the Bank is responsible for ongoing repairs and maintenance, insurance and real estate taxes.  The leases also provide for renewal options and certain scheduled increases in monthly lease payments. Rental expenses recorded under leases for the years ended December 31, 2006, 2005 and 2004 were $528,230, $341,339 and $33,000, respectively.

-44-

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

**Notes to Consolidated Financial Statements**

**NOTE 14 - COMMITMENTS AND Contingencies** - *continued*

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

| 2007   |   | $      | 500,068       |   |
|--------|--------|--------|---------------|--------|
| 2008   |   |   | 476,021       |   |
| 2009   |   |   | 442,747       |   |
| 2010   |   |   | 441,432       |   |
| 2011   |   |   | 421,081       |   |
|   |   |        |               |   |
|   |   | **$**  | **2,281,349** |   |
|   |   |        |               |   |

**NOTE 15 - EARNINGS PER SHARE**

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

|                                                          |   | **For the   years ended   December 31,** |          |
|---------------------------------------------------------------|--------|------------------------------------------|---------------|
|                                                          |   |                                          |          |
|                                                          |   | **2006**                                 |          | **2005** |   | **2004** |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |
| **Basic earnings per share:**                                 |   |                                     |          |   |   |   |   |   |   |   |
| Net   income available to common shareholders                 |   | **$**                                    | **3,245,908** |   | **$** | **1,947,546** |   | **$** | **1,338,699** |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |
| Average   common shares outstanding - basic                   |   |                                     | **3,388,457** |   |   | **3,251,457** |   |   | **2,580,251** |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |
| Basic   earnings per share                                    |   | **$**                                    | **0.96**      |   | **$** | **0.60** |   | **$** | **0.52** |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |
| **Diluted earnings per share:**                               |   |                                     |          |   |   |   |   |   |   |   |
| Net   income available to common shareholders                 |   | **$**                                    | **3,245,908** |   | **$** | **1,947,546** |   | **$** | **1,338,699** |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |
| Average   common shares outstanding - basic                   |   |                                     | 3,388,457     |   |   | 3,251,457 |   |   | 2,580,251 |   |
| Incremental   shares from assumed conversion of stock options |   |                                     | 171,100       |   |   | 185,293 |   |   | 182,636 |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |
| Average   common shares outstanding - diluted                 |   |                                     | **3,559,557** |   |   | **3,436,750** |   |   | **2,762,887** |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |
| Diluted   earnings per share                                  |   | **$**                                    | **0.91**      |   | **$** | **0.57** |   | **$** | **0.48** |   |
|                                                          |   |                                          |               |   |  |  |   |  |  |   |

**NOTE 16 - EQUITY INCENTIVE PLAN**

The 2006 Equity Incentive Plan provides for the granting of dividend equivalent rights options, performance unit awards, phantom shares, stock appreciation rights and stock awards, each of which shall be subject to such conditions based upon continued employment, passage of time or satisfaction of performance criteria or other criteria as permitted by the plan.  The plan allows granting up to 350,000 shares of stock, to officers, employees, and directors, consultants and service providers of the Company or its affiliates.  Awards may be granted for a term of up to ten years from the effective date of grant. Under this Plan, our Board of Directors has sole discretion as to the exercise date of any awards granted.  The per-share exercise price of incentive stock options may not be less than the market value of a share of common stock on the date the option is granted.  Any options that expire unexercised or are canceled become available forre-issuance.  No awards may be made on or after January 19, 2016.

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

**Notes to Consolidated Financial Statements**

**NOTE 16 - EQUITY INCENTIVE PLAN** - *continued*

The Company can issue the restricted shares as of the grant date either by the issuance of share certificate(s) evidencing restricted shares or by documenting the issuance in uncertificated or book entry form on the Company’s stock records. Except as provided by the Plan, the employee does not have the right to make or permit to exist any transfer or hypothecation of any restricted shares.  When restricted shares vest the employee must either pay the Company within two business days the amount of all tax withholding obligations imposed on the Company or make an election pursuant to Section 83(b) of the Internal Revenue Code to pay taxes at grant date.

Restricted shares may be subject to one or more objective employment, performance or other forfeiture conditions as established by the Plan Committee at the time of grant.  Any shares of restricted stock that are forfeited will again become available for issuance under the Plan.  An employee or director has the right to vote the shares of restricted stock after grant until they are forfeited or vested.  Compensation cost for restricted stock is equal to the market value of the shares at the date of the award and is amortized to compensation expense over the vesting period.  Dividends, if any, will be paid on awarded but unvested stock.

During 2006 we issued 6,771 shares ofrestricted stock pursuant to the 2006 Equity Incentive Plan.  The sharescliff vest in three years and are fully vested on January 19, 2009.  Theweighted-average market value of restricted stock issued during 2006 was$14.87.  Compensation cost associated with this issuance was $100,549 forthe year ended December 31, 2006.  There was $34,418 compensation expenserecognized in 2006 and $66,131 of total unrecognized compensation cost relatedto nonvested share based compensation.  The remaining cost is expected tobe recognized over a weighted-average period of 2.1 years.  During 2006there were 25 restricted shares forfeited. At December 31, 2006, we had 296,539stock awards available for grant under the 2006 Equity IncentivePlan.

During 2006 we also granted 45,501shares of Stock Appreciation Rights (“SARs”) under the 2006 EquityIncentive Plan.  The SARs entitle the participant to receive the excess of(1) the market value of a specified or determinable number of shares of thestock at the exercise date over the fair value at grant date or (2) a specifiedor determinable price which may not in any event be less than the fair marketvalue of the stock at the time of the award.  Upon exercise, the Companycan elect to settle the award using either Company stock or cash. Thecompensation cost are classified as liabilities .  The shares start vestingafter five years and vest at 20% per year until fully vested.  A summary ofthe status of the Company’s SARs as of December 31, 2006 is presentedbelow:

|                             |   | **December 31, 2006** |               |
|----------------------------------|--------|-----------------------|--------------------|
|                             |   |                       |               |
|                             |   | **Shares**            |               | **Weighted-   Average   Exercise   Price** |   |
|                             |   |                       |               |  |   |
| Outstanding at January 1         |   |                  | —   |   | $ | —   |   |
| Granted                          |   |                  | 45,774             |   |   | 14.87 |   |
| Exercised                        |   |                  | —   |   |   | —   |   |
| Forfeited                        |   |                  | (273               | ) |   | 14.85 |   |
|                             |   |                       |                    |   |   |   |   |
| Outstanding at December 31, 2006 |   |                  | **45,501**         |   |   | **14.87** |   |
|                             |   |                       |                    |   |   |   |   |

The Company measures compensation cost based on the fair value of SARs awards on the date of grant using the Black-Scholes option pricing model using the following assumptions:  the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company’s dividend yield at the time of the grant subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the options; the volatility factor is based on the historical volatility of the Company’s stock (subject to adjustment if historical volatility is reasonably expected to differ from the past); the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.  These assumptions are summarized in the table appearing in Note 1 to these financial statements.

Compensation expense associated with the SARs grant was $27,404 for the year ended December 31, 2006.  The grant date per share weighted average fair value of the SARs granted during 2006 was $6.32.  As of December 31, 2006, there was $261,382 of total unrecognized compensation cost related to nonvested SARs.  The cost is expected to be recognized over a weighted-average period of 9.1 years.

-46-

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

**Notes to Consolidated Financial Statements**

**NOTE 17 - STOCK COMPENSATION PLAN**

On June 19, 2003, the Company established the 2003 First Reliance Bank Employee Stock Option Plan (Stock Plan) that provides for the granting of options to purchase up to 250,000 shares of the Company’s common stock to directors, officers, or employees of the Company.  This plan was preceded by the 1999 First Reliance Bank Employee Stock Option Plan, which provided for the granting of options to purchase up to 238,000 shares of the Company’s common stock to directors, officers, or employees of the Company.  The per-share exercise price of incentive stock options granted under the Stock Plan may not be less than the fair market value of a share on the date of grant.  The per-share exercise price of stock options granted is determined by the Board of Directors.  The expiration date of any option may not be greater than ten years from the date of grant.  Options that expire unexercised or are canceled become available forreissuance.  At December 31, 2006, there were no options available for grant under the 2003 plan and no options available for grant under the 1999 plan.

A summary of the status of the Company’s 2003 stock option plan as of December 31, 2006, 2005 and 2004, and changes during the period is presented below:

|                             |   | **2006**   |               | **2005**                                   |   | **2004**           |   |
|----------------------------------|--------|------------|--------------------|--------------------------------------------|--------|--------------------|--------|
|                             |   |            |               |                                            |   |                    |   |
|                             |   | **Shares** |               | **Weighted-   Average   Exercise   Price** |   | **Shares**         |   | **Weighted-   Average   Exercise   Price** |   | **Shares** |   | **Weighted-   Average   Exercise   Price** |   |
|                             |   |            |                    |                                       |        |                    |   |  |  |   |  |  |   |  |  |   |  |  |   |
| Outstanding at beginning of year |   |       | 400,363            |                                       | $      | 7.75               |   |   | 409,063 |   | $ | 6.59 |   |   | 390,918 |   | $ | 6.38 |   |
| Granted                          |   |       | —   |                                       |   | 70,300             |   |   | 11.51 |   |   | 18,145 |   |   | 11.15 |   |   |   |   |
| Exercised                        |   |       | (78,371            | )                                          |   | 6.94               |   |   | (79,000 | ) |   | 5.08 |   |   | —   |   |   |   |   |
| Expired                          |   |       | —   |                                       |   | —   |   |   | —   |   |   |   |   |   |   |   |   |   |   |
|                             |   |            |                    |                                       |   |               |   |  |  |   |   |   |   |  |  |   |   |   |   |
| Outstanding at end of year       |   |       | **321,992**        |                                       |   | **7.95**           |   |   | **400,363** |   |   | **7.75** |   |   | **409,063** |   |   | **6.59** |   |
|                             |   |            |                    |                                       |   |               |   |  |  |   |   |   |   |  |  |   |   |   |   |

The total intrinsic value of options exercised during December 31, 2006 and 2005 was $678,693 and $823,180, respectively. There were no options exercised during 2004.

The following table summarizes information about stock options outstanding under the Company’s plan at December 31, 2006:

|                              |   | **Outstanding** |    | **Exercisable** |   |
|-----------------------------------|--------|-----------------|---------|-----------------|--------|
|                              |   |                 |         |            |        |  |   |
| Number   of options               |   |            | 321,992 |            |   | 321,992 |   |
| Weighted   average remaining life |   |            | 5.71    |            |   | 5.71 |   |
| Weighted   average exercise price |   | $               | 7.95    |            | $      | 7.95 |   |

The aggregate intrinsic value of options outstanding at December 31, 2006 was $2,463,239.

The Company measures the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following assumptions:  the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company’s dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the options); the volatility factor is based on the historical volatility of the Company’s stock (subject to adjustment if historical volatility is reasonably expected to differ from the past); the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations.  These assumptions are summarized in a table appearing in Note 1 to these financial statements.

The per share weighted average fair value of options granted during 2005 and 2004 was $6.91 and $6.99, respectively. The total fair value of shares vested during the years ended December 31, 2005 and 2004 was $1,137,566 and $181,839, respectively.

There were no stock options granted in 2006.  The Company received $543,354 and $400,570 as a result of stock option exercises during the years ended December 31, 2006 and 2005, respectively.  In accordance with SFAS 123(R), the amounts received upon exercise will be included as a financing activity in the accompanying statements of cash flows for the period subsequent to the adoption of SFAS 123(R), and is reported as an operating activity in periods prior to its adoption.

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

**Notes to Consolidated Financial Statements**

**NOTE 18 - REGULATORY MATTERS**

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk-weights ranging from 0% to 100%.  Tier 1 capital of the Company and the Bank consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets.  Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital.

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

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

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

|                                     |   | **Actual** |   | **Minimum Requirement   For Capital   Adequacy Purposes** |   | **To Be   Well-   Capitalized Under   Prompt Corrective   Action Provisions** |   |
|------------------------------------------|--------|------------|--------|-----------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|
|                                     |   |            |   |                                                           |   |                                                                               |   |
| **(Dollars in thousands)**               |   | **Amount** |   | **Ratio**                                                 |   | **Amount**                                                                    |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
|                                          |   |            |        |                                                      |        |                                                                               |   |  |  |   |  |  |   |  |  |   |  |  |   |
| **December 31, 2006**                    |   |       |   |                                                      |   |                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **The Company**                          |   |       |   |                                                      |   |                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 48,458 |                                                      |   | 12.45                                                                         | %      |   | 31,149 |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
| Tier 1 capital (to risk-weighted assets) |   |       | 44,456 |                                                      |   | 11.42                                                                         | %      |   | 15,575 |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
| Tier 1 capital (to average assets)       |   |       | 44,456 |                                                      |   | 9.90                                                                          | %      |   | 17,968 |   |   | 4.00 | % |   | N/A |   |   | N/A |   |
| **The Bank**                             |   |       |   |                                                      |   |                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 46,444 |                                                      |   | 11.86                                                                         | %      |   | 31,333 |   |   | 8.00 | % |   | 39,166 |   |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |   |       | 42,442 |                                                      |   | 10.84                                                                         | %      |   | 15,666 |   |   | 4.00 | % |   | 23,500 |   |   | 6.00 | % |
| Tier 1 capital (to average assets)       |   |       | 42,442 |                                                      |   | 9.45                                                                          | %      |   | 17,968 |   |   | 4.00 | % |   | 22,460 |   |   | 5.00 | % |
| **December 31, 2005**                    |   |       |   |                                                      |   |                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **The Company**                          |   |       |   |                                                      |   |                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 43,491 |                                                      |   | 13.05                                                                         | %      | $ | 26,670 |   |   | 8.00 | % |   | N/A |   |   | N/A |   |
| Tier 1 capital (to risk-weighted assets) |   |       | 40,072 |                                                      |   | 12.02                                                                         |   |   | 13,335 |   |   | 4.00 |   |   | N/A |   |   | N/A |   |
| Tier 1 capital (to average assets)       |   |       | 40,072 |                                                      |   | 10.02                                                                         |   |   | 15,998 |   |   | 4.00 |   |   | N/A |   |   | N/A |   |
| **The Bank**                             |   |       |   |                                                      |   |                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 42,199 |                                                      |   | 12.68                                                                         | %      | $ | 26,625 |   |   | 8.00 | % | $ | 33,282 |   |   | 10.00 | % |
| Tier 1 capital (to risk-weighted assets) |   |       | 38,780 |                                                      |   | 11.65                                                                         |   |   | 13,312 |   |   | 4.00 |   |   | 19,969 |   |   | 6.00 |   |
| Tier 1 capital (to average assets)       |   |       | 38,780 |                                                      |   | 9.80                                                                          |   |   | 15,832 |   |   | 4.00 |   |   | 19,790 |   |   | 5.00 |   |

-48-

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

**Notes to Consolidated Financial Statements**

**NOTE 19 - UNUSED LINES OF CREDIT**

As of December 31, 2006, the Company had unused lines of credit to purchase federal funds from unrelated companies totaling $32,500,000.  These lines of credit are available on a one to fourteen day basis for general corporate purposes. The Company also has a line of credit to borrow funds from the Federal Home Loan Bank of up to $136,496,975.  As of December 31, 2006 and 2005, the Company had borrowed $28,500,000 and $23,500,000, respectively, on this line. Additionally, the Company has the ability to buy brokered time deposits at December 31, 2006.

**NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

The fair value of a financial instrument is the amount for which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments.  Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

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

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

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

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

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

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

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

***Deposits***- The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date.  The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

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

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

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

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

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

-49-

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

**Notes to Consolidated Financial Statements**

**NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS** - *continued*

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

|                                                                 |   | **December 31,**      |        |
|----------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                 |   |                       |        |
|                                                                 |   | **2006**              |        | **2005** |   |
|                                                                 |   |                       |        |  |   |
|                                                                 |   | **Carrying   Amount** |        | **Estimated Fair   Value** |   | **Carrying   Amount** |   | **Estimated   Fair   Value** |   |
|                                                                 |   |                       |             |   |  |  |   |  |  |   |  |  |   |
| **Financial Assets:**                                                |   |                  |        |   |   |   |   |   |   |   |   |   |   |
| Cash   and due from banks                                            |   | $                     | 17,328,075  |   | $ | 17,328,075 |   | $ | 7,264,897 |   | $ | 7,264,897 |   |
| Federal   funds sold                                                 |   |                  | 14,135,000  |   |   | 14,135,000 |   |   | 22,442,000 |   |   | 22,442,000 |   |
| Securities   available-for-sale                                      |   |                  | 35,931,271  |   |   | 35,931,271 |   |   | 37,240,229 |   |   | 37,240,229 |   |
| Nonmarketable   equity securities                                    |   |                  | 2,187,600   |   |   | 2,187,600 |   |   | 1,627,100 |   |   | 1,627,100 |   |
| Loans,   including loans held for sale                               |   |                  | 360,123,046 |   |   | 350,547,000 |   |   | 319,538,988 |   |   | 314,694,000 |   |
| Accrued   interest receivable                                        |   |                  | 2,464,531   |   |   | 2,464,531 |   |   | 2,189,742 |   |   | 2,189,742 |   |
| **Financial Liabilities:**                                           |   |                  |        |   |   |   |   |   |   |   |   |   |   |
| Demand   deposit, interest-bearing transaction, and savings accounts |   | $                     | 154,182,263 |   | $ | 154,182,263 |   | $ | 148,322,856 |   | $ | 148,322,856 |   |
| Certificates   of deposit                                            |   |                  | 218,755,820 |   |   | 219,450,000 |   |   | 186,114,042 |   |   | 186,472,000 |   |
| Securities   sold under agreements to repurchase                     |   |                  | 8,120,014   |   |   | 8,120,014 |   |   | 3,859,904 |   |   | 3,859,904 |   |
| Advances   from Federal Home Loan Bank                               |   |                  | 28,500,000  |   |   | 28,465,000 |   |   | 23,500,000 |   |   | 23,372,000 |   |
| Junior   subordinated debentures                                     |   |                  | 10,310,000  |   |   | 10,310,000 |   |   | 10,310,000 |   |   | 10,310,000 |   |
| Accrued   interest payable                                           |   |                  | 766,276     |   |   | 766,276 |   |   | 446,303 |   |   | 446,303 |   |

|                                         |   | **Notional   Amount** |       | **Estimated Fair   Value** |   | **Notional   Amount** |   | **Estimated   Fair   Value** |       |
|----------------------------------------------|--------|-----------------------|------------|----------------------------|--------|-----------------------|--------|------------------------------|------------|
|                                         |   |                       |            |                       |        |                       |   |                              |            |   |  |  |   |
| **Off-Balance-Sheet Financial Instruments:** |   |                  |       |                       |   |                  |   |                         |       |   |   |   |   |
| Commitments   to extend credit               |   | $                     | 67,370,404 |                       | $      | —      |   | $                            | 59,196,000 |   | $ | —   |   |
| Standby   letters of credit                  |   |                  | 3,543,270  |                       |   | —      |   |                         | 1,699,000  |   |   | —   |   |

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

**Condensed Balance Sheets**

|                                              |   | **December   31,** |           |
|---------------------------------------------------|--------|--------------------|----------------|
|                                              |   |                    |           |
|                                              |   | **2006**           |           | **2005** |   |
|                                              |   |                    |                |   |  |  |   |
| **Assets**                                        |   |               |           |   |   |   |   |
| Cash                                              |   | $                  | 923,308        |   | $ | 739,230 |   |
| Investment   in banking subsidiary                |   |               | 42,389,421     |   |   | 38,668,573 |   |
| Marketable   Investments                          |   |               | 311,505        |   |   | —   |   |
| Nonmarketable   equity securities                 |   |               | 100,000        |   |   | 118,750 |   |
| Investment   in trust                             |   |               | 310,000        |   |   | 310,000 |   |
| Other   assets                                    |   |               | 499,301        |   |   | 188,876 |   |
|                                              |   |                    |                |   |  |  |   |
| Total   assets                                    |   | **$**              | **44,533,535** |   | **$** | **40,025,429** |   |
|                                              |   |                    |                |   |  |  |   |
| **Liabilities**                                   |   |               |           |   |   |   |   |
| Accounts   payable                                |   | $                  | 130,272        |   | $ | 64,794 |   |
| Junior   subordinated debentures                  |   |               | 10,310,000     |   |   | 10,310,000 |   |
|                                              |   |                    |                |   |  |  |   |
| Total   liabilities                               |   |               | 10,440,272     |   |   | 10,374,794 |   |
|                                              |   |                    |                |   |  |  |   |
| **Shareholders’ equity**                     |   |               | 34,093,263     |   |   | 29,650,635 |   |
|                                              |   |                    |                |   |  |  |   |
| Total   liabilities and shareholders’ equity |   | **$**              | **44,533,535** |   | **$** | **40,025,429** |   |
|                                              |   |                    |                |   |  |  |   |

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

**Notes to Consolidated Financial Statements**

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

**Condensed Statements of Income**

|                                                                                                 |   | **December   31,** |          |
|------------------------------------------------------------------------------------------------------|--------|--------------------|---------------|
|                                                                                                 |   |                    |          |
|                                                                                                 |   | **2006**           |          | **2005** |   | **2004** |   |
|                                                                                                 |   |                    |               |   |  |  |   |  |  |   |
| **Income**                                                                                           |   | $                  | 24,623        |   | $ | 7,264 |   | $ | —   |   |
| **Expenses**                                                                                         |   |               | 755,001       |   |   | 367,981 |   |   | 54,783 |   |
|                                                                                                 |   |                    |               |   |  |  |   |  |  |   |
| **Income   (loss) before income taxes and equity in undistributed earnings of banking   subsidiary** |   |               | (730,378      | ) |   | (360,717 | ) |   | (54,783 | ) |
| Income tax benefit                                                                                   |   |               | 315,501       |   |   | 136,148 |   |   | 20,270 |   |
|                                                                                                 |   |                    |               |   |  |  |   |  |  |   |
| Income before equity in   undistributed earning of banking subsidiary                                |   |               | (414,877      | ) |   | (224,569 | ) |   | (34,513 | ) |
| Equity in undistributed   earnings of banking subsidiary                                             |   |               | 3,660,785     |   |   | 2,172,115 |   |   | 1,373,212 |   |
|                                                                                                 |   |                    |               |   |  |  |   |  |  |   |
| **Net income**                                                                                       |   | **$**              | **3,245,908** |   | **$** | **1,947,546** |   | **$** | **1,338,699** |   |
|                                                                                                 |   |                    |               |   |  |  |   |  |  |   |

**Condensed Statements of Cash Flows**

|                                                                                |   | **December   31,** |               |
|-------------------------------------------------------------------------------------|--------|--------------------|--------------------|
|                                                                                |   |                    |               |
|                                                                                |   | **2006**           |               | **2005** |   | **2004** |   |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| **Cash flows from operating activities**                                            |   |               |               |   |   |   |   |   |   |   |
| Net   income                                                                        |   | $                  | 3,245,908          |   | $ | 1,947,546 |   | $ | 1,338,699 |   |
| Adjustments   to reconcile net income to net cash provided by operating activities: |   |               |               |   |   |   |   |   |   |   |
| Increase   in other assets                                                          |   |               | (441,960           | ) |   | (131,246 | ) |   | (6,175 | ) |
| Increase   in other liabilities                                                     |   |               | 65,476             |   |   | 64,794 |   |   | —   |   |
| Equity   in undistributed earnings of banking subsidiary                            |   |               | (3,660,785         | ) |   | (2,172,115 | ) |   | (1,373,212 | ) |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| Net   cash used by operating activities                                             |   |               | (791,361           | ) |   | (291,021 | ) |   | (40,688 | ) |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| **Cash flows from investing activities**                                            |   |               |               |   |   |   |   |   |   |   |
| Purchase   of nonmarketable equity securities                                       |   |               | (100,000           | ) |   | (18,750 | ) |   | —   |   |
| Investment   in trust                                                               |   |               | —   |   |   | (310,000 | ) |   | —   |   |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| Net   cash used by investing activities                                             |   |               | (100,000           | ) |   | (328,750 | ) |   | —   |   |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| **Cash flows from financing activities**                                            |   |               |               |   |   |   |   |   |   |   |
| Stock   issuance costs                                                              |   |               | —   |   |   | —   |   |   | (75,960 | ) |
| Proceeds   from exercise of stock options                                           |   |               | 544,138            |   |   | 401,360 |   |   | —   |   |
| Proceeds   from stock issuance                                                      |   |               | —   |   |   | —   |   |   | 8,050,000 |   |
| Issuance   of shares to ESOP                                                        |   |               | 472,747            |   |   | 298,957 |   |   | 355,296 |   |
| Sale   of treasury stock                                                            |   |               | 9,896              |   |   | (2,500 | ) |   | (7,396 | ) |
| Issuance   of restricted stock                                                      |   |               | 33,632             |   |   | —   |   |   | —   |   |
| Issuance   of shares to Advisory Board                                              |   |               | 15,026             |   |   | —   |   |   | —   |   |
| Proceeds   from issuance of junior subordinated debentures                          |   |               | —   |   |   | 10,310,000 |   |   | —   |   |
| Transfer   of capital to the Bank                                                   |   |               | —   |   |   | (14,974,040 | ) |   | (3,000,000 | ) |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| Net   cash provided (used) by financing activities                                  |   |               | 1,075,439          |   |   | (3,966,223 | ) |   | 5,321,940 |   |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| **(Decrease) increase in cash**                                                     |   |               | 184,078            |   |   | (4,585,994 | ) |   | 5,281,252 |   |
| **Cash and cash equivalents, beginning of year**                                    |   |               | 739,230            |   |   | 5,325,224 |   |   | 43,972 |   |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |
| **Cash and cash equivalents, ending of year**                                       |   | **$**              | **923,308**        |   | **$** | **739,230** |   | **$** | **5,325,224** |   |
|                                                                                |   |                    |                    |   |  |  |   |  |  |   |

-51-

----

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

**Notes to Consolidated Financial Statements**

**NOTE 22 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)**

The tables below represent the quarterly results of operations for the years ended December 31, 2006 and 2005, respectively:

|                                                   |   | **December   31, 2006** |        |
|--------------------------------------------------------|--------|-------------------------|-------------|
|                                                   |   |                         |        |
|                                                   |   | **Fourth**              |        | **Third** |   | **Second** |   | **First** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Total interest and fee income                          |   | $                       | 8,571,562   |   | $ | 8,484,778 |   | $ | 7,635,918 |   | $ | 7,024,327 |   |
| Total interest expense                                 |   |                    | 4,001,265   |   |   | 3,938,100 |   |   | 3,258,676 |   |   | 3,015,658 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Net interest income                                    |   |                    | 4,570,297   |   |   | 4,546,678 |   |   | 4,377,242 |   |   | 4,008,669 |   |
| Provision for loan losses                              |   |                    | 224,500     |   |   | 477,205 |   |   | 440,501 |   |   | 250,285 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Net interest income after   provisions for loan losses |   |                    | 4,345,797   |   |   | 4,069,473 |   |   | 3,936,741 |   |   | 3,758,384 |   |
| Other income                                           |   |                    | 1,166,574   |   |   | 1,232,896 |   |   | 1,252,768 |   |   | 938,455 |   |
| Other expense                                          |   |                    | 4,340,612   |   |   | 4,024,389 |   |   | 4,022,098 |   |   | 3,885,285 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Income before income tax   expense                     |   |                    | 1,171,759   |   |   | 1,277,980 |   |   | 1,167,411 |   |   | 811,554 |   |
| Income tax expense                                     |   |                    | 187,382     |   |   | 413,068 |   |   | 344,495 |   |   | 237,851 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Net income                                             |   | **$**                   | **984,377** |   | **$** | **864,912** |   | **$** | **822,916** |   | **$** | **573,703** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Basic income per common   share                        |   | **$**                   | **.30**     |   | **$** | **.25** |   | **$** | **.24** |   | **$** | **.17** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Diluted income per common   share                      |   | **$**                   | **.27**     |   | **$** | **.25** |   | **$** | **.23** |   | **$** | **.16** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |

|                                                   |   | **December   31, 2005** |        |
|--------------------------------------------------------|--------|-------------------------|-------------|
|                                                   |   |                         |        |
|                                                   |   | **Fourth**              |        | **Third** |   | **Second** |   | **First** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Total interest and fee   income                        |   | $                       | 6,648,481   |   | $ | 6,229,357 |   | $ | 5,620,304 |   | $ | 4,632,970 |   |
| Total interest expense                                 |   |                    | 2,885,292   |   |   | 2,359,451 |   |   | 2,141,474 |   |   | 1,592,462 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Net interest income                                    |   |                    | 3,763,189   |   |   | 3,869,906 |   |   | 3,478,830 |   |   | 3,040,508 |   |
| Provision for loan losses                              |   |                    | 794,772     |   |   | 450,393 |   |   | 393,600 |   |   | 172,552 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Net interest income after   provisions for loan losses |   |                    | 2,968,417   |   |   | 3,419,513 |   |   | 3,085,230 |   |   | 2,867,956 |   |
| Other income                                           |   |                    | 558,597     |   |   | 926,281 |   |   | 780,899 |   |   | 605,510 |   |
| Other expense                                          |   |                    | 2,633,386   |   |   | 3,649,041 |   |   | 3,278,056 |   |   | 2,914,958 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Income before income tax   expense                     |   |                    | 893,628     |   |   | 696,753 |   |   | 588,073 |   |   | 558,508 |   |
| Income tax expense                                     |   |                    | 251,512     |   |   | 206,325 |   |   | 158,670 |   |   | 172,909 |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Net income                                             |   | **$**                   | **642,116** |   | **$** | **490,428** |   | **$** | **429,403** |   | **$** | **385,599** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Basic income per common   share                        |   | **$**                   | **.20**     |   | **$** | **.15** |   | **$** | **.13** |   | **$** | **.12** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |
| Diluted income per common   share                      |   | **$**                   | **.19**     |   | **$** | **.14** |   | **$** | **.13** |   | **$** | **.11** |   |
|                                                   |   |                         |             |   |  |  |   |  |  |   |  |  |   |

-52-

----

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

**Corporate Data**

**ANNUAL MEETING:**

The annual meeting of Shareholders of First Reliance Bancshares, Inc. and Subsidiary will be held at First Reliance Bank on June 21, 2007.

| **CORPORATE OFFICE:**          | **INDEPENDENT AUDITORS:**    |
|--------------------------------|------------------------------|
|                           |                         |
| 2170 West Palmetto Street      | Elliott Davis, LLC           |
| Florence, South Carolina 29501 | 1901 Main Street, Suite 1650 |
| Phone (843) 662-8802           | P.O. Box 2227                |
| Fax (843) 662-8373             | Columbia, S.C. 29202         |