FIRST RELIANCE BANK SALARY CONTINUATION AGREEMENT

Exhibit 10.12

F IRST R ELIANCE B ANK
S ALARY C ONTINUATION A GREEMENT

          This S ALARY C ONTINUATION A GREEMENT (this “Agreement”) is entered into as of this              day of                                      , 2006, by and between First Reliance Bank, a South Carolina-chartered bank (the “Bank”), and Jeffrey A. Paolucci, its Senior Vice President and Chief Financial Officer (the “Executive”).

           W HEREAS , the Executive has contributed substantially to the success of the Bank and the Bank desires that the Executive continue in its employ,

           W HEREAS , to encourage the Executive to remain an employee of the Bank, the Bank is willing to provide salary continuation benefits to the Executive, payable from the Bank’s general assets,

           W HEREAS , none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned, and

           W HEREAS , the parties hereto intend that this Agreement shall be considered an unfunded arrangement maintained primarily to provide supplemental retirement benefits for the Executive, and to be considered a non-qualified benefit plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).  The Executive is fully advised of the Bank’s financial status.

           N OW T HEREFORE , in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Executive and the Bank hereby agree as follows.

A RTICLE 1
D EFINITIONS

          The following words and phrases used in this Agreement have the meanings specified.

           1.1           “ Accrual Balance ” means the liability that should be accrued by the Bank under generally accepted accounting principles (“GAAP”) for the Bank’s obligation to the Executive under this Agreement, by applying Accounting Principles Board Opinion No. 12, as amended by Statement of Financial Accounting Standards No. 106.  The Accrual Balance shall be calculated using a discount rate determined by the Plan Administrator, resulting in an Accrual Balance at the Executive’s Normal Retirement Age that is equal to the present value of the normal retirement benefits.  The discount rate means the rate used by the Plan Administrator for determining the Accrual Balance.  In its sole discretion, the Plan Administrator may adjust the discount rate to maintain the rate within reasonable standards according to GAAP.

           1.2           “ Beneficiary ” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive, determined according to Article 4.

           1.3           “ Beneficiary Designation Form ” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

           1.4           “ Change in Control ” shall mean a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including –

           1.5           “ Code ” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued thereunder by the Department of the Treasury.

           1.6           “ Disability ”  means, because of a medically determinable physical or mental impairment that can be expected to result in death or that can be expected to last for a continuous period of at least 12 months, ( x ) the Executive is unable to engage in any substantial gainful activity, or ( y ) the Executive is receiving income replacement benefits for a period of at least three months under an accident and health plan of the employer.  Medical determination of disability may be made either by the Social Security Administration or by the provider of an accident or health plan covering employees of the Bank.  Upon request of the Plan Administrator, the Executive must submit proof to the Plan Administrator of the Social Security Administration’s or provider’s determination.

           1.7           “ Early Termination ” means Separation from Service before Normal Retirement Age for reasons other than death, Disability, Termination for Cause, or after a Change in Control.

           1.8           “ Effective Date ” means January 1, 2006.

           1.9           “ Intentional ,” for purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed to have been intentional if it was due primarily to an error in judgment or negligence.  An act or failure to act on the Executive’s part shall be considered intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interests of the Bank.

           1.10          “ Normal Retirement Age ” means the Executive’s 65th birthday.

           1.11          “ Plan Administrator ” or “ Administrator ” means the plan administrator described in Article 8.

2

           1.12           “ Plan Year ” means a twelve-month period commencing on January 1 and ending on December 31 of each year.  The initial Plan Year shall commence on the effective date of this Agreement.

           1.13           “ Separation from Service ” means the Executive’s service as an executive and independent contractor to the Bank and any member of a controlled group, as defined in Code section 414, terminates for any reason, other than because of a leave of absence approved by the Bank or the Executive’s death.  For purposes of this Agreement, if there is a dispute about the employment status of the Executive or the date of the Executive’s Separation from Service, the Bank shall have the sole and absolute right to decide the dispute unless a Change in Control shall have occurred.

           1.14           “ Termination for Cause ” and “ Cause ” shall have the same meaning specified in any effective severance or employment agreement existing on the date hereof or hereafter entered into between the Executive and the Bank or between the Executive and First Reliance Bancshares, Inc.  If the Executive is not a party to a severance or employment agreement containing a definition of termination for cause, Termination for Cause means the Bank terminates the Executive’s employment for any of the following reasons –

3

A RTICLE 2
L IFETIME B ENEFITS

           2.1            Normal Retirement Benefit .  Unless Separation from Service or a Change in Control occurs before Normal Retirement Age, when the Executive attains the Normal Retirement Age the Bank shall pay to the Executive the benefit described in this section 2.1 instead of any other benefit under this Agreement.  If the Executive’s Separation from Service thereafter is a Termination for Cause or if this Agreement terminates under Article 5, no further benefits shall be paid.

           2.2            Early Termination Benefit .  Unless a Change in Control shall have previously occurred, upon Early Termination the Bank shall pay to the Executive the benefit described in this section 2.2 instead of any other benefit under this Agreement.

           2.3            Disability Benefit .  Unless a Change in Control shall have previously occurred, upon Separation from Service because of Disability before Normal Retirement Age the Bank shall pay to the Executive the benefit described in this section 2.3 instead of any other benefit under this Agreement.

4

           2.4            Change-in-Control Benefit .  If a Change in Control occurs after the date of this Agreement but before Normal Retirement Age and before Separation from Service, the Bank shall pay to the Executive the benefit described in this section 2.4 instead of any other benefit under this Agreement.

           2.5            Lump-sum Payment of Normal Retirement Benefit, Early Termination Benefit, or Disability Benefit Being Paid to the Executive when a Change in Control Occurs .  If a Change in Control occurs at any time during the salary continuation benefit payment period and if when the Change in Control occurs the Executive is receiving or is entitled to receive at Normal Retirement Age the benefit under sections 2.1.2, 2.2.2, or 2.3.2, the Bank shall pay the remaining salary continuation benefits to the Executive in a single lump sum within three days after the Change in Control.  The lump-sum payment due to the Executive as a result of a Change in Control shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when the Change in Control occurs.

           2.6            Contradiction Between the Agreement and Schedule A .  If there is a contradiction between this Agreement and Schedule A attached hereto concerning the amount of a particular benefit due to the Executive under sections 2.1, 2.2, 2.3, or 2.4 hereof, then the amount of the benefit determined under the Agreement shall control.  If the Plan Administrator changes the discount rate employed for purposes of calculating the Accrual Balance, the Plan Administrator shall prepare or cause to be prepared a revised Schedule A, which shall supersede and replace any and all Schedules A previously prepared under or attached to this Agreement.

           2.7            Savings Clause Relating to Compliance with Code Section 409A .  Despite any contrary provision of this Agreement, if when the Executive’s employment terminates the Executive is a specified employee, as defined in Code section 409A, and if any payments under Article 2 of this Agreement will result in additional tax or interest to the Executive because of section 409A, the Executive will not be entitled to the payments under Article 2 until the earliest of ( x ) the date that is at least six months after termination of the Executive’s employment for reasons other than the Executive’s death, ( y ) the date of the Executive’s death, or ( z ) any earlier date that does not result in additional tax or interest to the Executive under section 409A.  If any provision of this Agreement would subject the Executive to additional tax or interest under section 409A, the Bank shall reform the provision.  However, the Bank shall maintain to the maximum extent practicable the original intent of the applicable provision without subjecting the Executive to additional tax or interest, and the Bank shall not be required to incur any additional compensation expense as a result of the reformed provision.

           2.8            One Benefit Only .  Despite anything to the contrary in this Agreement, the Executive and Beneficiary are entitled to one benefit only under this Agreement, which shall be determined by the first event to occur that is dealt with by this Agreement.  Except as provided in section 2.5 or Article 3, subsequent occurrence of events dealt with by this Agreement shall not entitle the Executive or Beneficiary to other or additional benefits under this Agreement.

5

A RTICLE 3
D EATH B ENEFITS

           3.1            Death Before Separation from Service .  Except as provided in section 5.2, if the Executive dies before Separation from Service, the Executive’s Beneficiary shall be entitled to ( x ) an amount in cash equal to the Accrual Balance existing at the Executive’s death, unless the Change-in-Control benefit shall have previously been paid to the Executive under sections 2.4 or 2.5, and ( y ) the benefit described in the Endorsement Split Dollar Agreement attached to this Agreement as Addendum A.  No benefit shall be paid under clause ( x ) if the Change-in-Control benefit shall have previously been paid to the Executive under sections 2.4 or 2.5.  If a benefit is payable to the Executive’s Beneficiary under clause ( x ), the benefit shall be paid in a single lump sum 90 days after the Executive’s death.  However, no benefits under this Agreement or under the Endorsement Split Dollar Agreement shall be paid or payable to the Executive or the Executive’s Beneficiary if this Agreement is terminated under Article 5.

           3.2            Death after Separation from Service .  If the Executive dies after Separation from Service and if Separation from Service was not a Termination for Cause, at the Executive’s death the Executive’s Beneficiary shall be entitled to an amount in cash equal to the Accrual Balance remaining at the Executive’s death, unless the Change-in-Control benefit shall have previously been paid to the Executive under sections 2.4 or 2.5.  If a benefit is payable to the Executive’s Beneficiary under this section 3.2, the benefit shall be paid in a single lump sum 90 days after the Executive’s death.  However, no benefits under this Agreement shall be paid or payable to the Executive or the Executive’s Beneficiary if this Agreement is terminated under Article 5.

A RTICLE 4
B ENEFICIARIES

           4.1            Beneficiary Designations .  The Executive shall have the right to designate at any time a Beneficiary to receive any benefits payable under this Agreement upon the death of the Executive.  The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other benefit plan of the Bank in which the Executive participates.

           4.2            Beneficiary Designation: Change .  The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form and delivering it to the Plan Administrator or its designated agent.  The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.  The Executive shall have the right to change a Beneficiary by completing, signing, and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time.  Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled.  The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator before the Executive’s death.

           4.3            Acknowledgment .  No designation or change in designation of a Beneficiary shall be effective until received, accepted, and acknowledged in writing by the Plan Administrator or its designated agent.

           4.4            No Beneficiary Designation .  If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary.  If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive’s estate.

6

           4.5            Facility of Payment . If a benefit is payable to a minor, to a person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care o