##### Table of Contents



United
States
Securities
and
Exchange
Commission
 Washington, D. C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2007
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission file number: 000-52588
 RELIANCE BANCSHARES, INC.
  Missouri
    
    43-1823071(State or Other Jurisdiction of 
Incorporation or Organization)
    
    (IRS Employer
Identification No.)10401 Clayton Road 
Frontenac, Missouri
    
    63131(Address of Principal Executive Offices)
    
    (Zip Code)
 (314) 569-7200
 
 þ o
  o o þ
 o þ




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##### 



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 PagePART I    FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets (Unaudited)
    
    1Condensed Consolidated Statements of Income (Unaudited)
    
    2Condensed Consolidated Statements of Comprehensive Income (Unaudited)
    
    3Condensed Consolidated Statements of Stockholders Equity (Unaudited)
    
    4Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    5Notes to Unaudited Interim Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    30Item 4T. Controls and Procedures
    
    32PART II    OTHER INFORMATIONItem 1. Legal Proceedings
    
    32Item 1A. Risk Factors
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    33Item 3. Defaults Upon Senior Securities
    
    34Item 4. Submission of Matters to Vote of Security Holders
    
    34Item 5. Other Information
    
    34Item 6. Exhibits
    
    35Signatures302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer




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##### Table of Contents



Part I
 
 Item 1  Financial Statements
 RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
  
 September 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2006ASSETSCash and due from banks
    
    $
    10,836,678
    
    
    
    9,683,082
    
    
    
    7,975,924Interest-earning deposits in other financial institutions
    
    
    98,598
    
    
    
    123,836
    
    
    
    498,257Federal funds sold
    
    
    39,000
    
    
    
    95,000
    
    
    
    Investments in available-for-sale debt and equity securities,
at fair value
    
    
    172,829,382
    
    
    
    208,292,322
    
    
    
    191,866,300Loans
    
    
    839,091,832
    
    
    
    589,109,772
    
    
    
    667,701,639Less -Deferred loan fees/costs
    
    
    (269,909
    )
    
    
    (198,964
    )
    
    
    (282,711
    )Reserve for possible loan losses
    
    
    (8,890,557
    )
    
    
    (6,579,829
    )
    
    
    (7,101,031
    )Net loans
    
    
    829,931,366
    
    
    
    582,330,979
    
    
    
    660,317,897Bank premises and equipment, net
    
    
    41,032,014
    
    
    
    28,570,043
    
    
    
    30,960,372Accrued interest receivable
    
    
    5,179,664
    
    
    
    4,083,270
    
    
    
    4,412,330Identifiable intangible assets, net of accumulated amortization
of $70,581, $55,650 and $58,365 at September 30, 2007 and 2006,
and December 31, 2006, respectively
    
    
    173,738
    
    
    
    188,668
    
    
    
    185,954Goodwill
    
    
    1,149,192
    
    
    
    1,149,192
    
    
    
    1,149,192Other assets
    
    
    4,749,315
    
    
    
    3,028,629
    
    
    
    3,432,983$
    1,066,018,947
    
    
    
    837,545,021
    
    
    
    900,799,209LIABILITIES AND STOCKHOLDERS EQUITYNon-interest-bearing deposits
    
    $
    46,139,342
    
    
    
    35,848,561
    
    
    
    47,341,090Interest-bearing deposits
    
    
    753,325,445
    
    
    
    627,767,243
    
    
    
    631,255,915Total deposits
    
    
    799,464,787
    
    
    
    663,615,804
    
    
    
    678,597,005Short-term borrowings
    
    
    72,320,906
    
    
    
    28,190,482
    
    
    
    70,462,521Notes payable to Federal Home Loan Bank
    
    
    50,000,000
    
    
    
    24,800,000
    
    
    
    24,300,000Accrued interest payable
    
    
    3,122,877
    
    
    
    2,852,726
    
    
    
    2,739,142Other liabilities
    
    
    2,451,928
    
    
    
    1,699,389
    
    
    
    1,203,949Total liabilities
    
    
    927,360,498
    
    
    
    721,158,401
    
    
    
    777,302,617Commitments and contingenciesStockholders equity:Preferred stock, no par value; 2,000,000 shares authorized,
19,388 shares issued and outstanding at September 30, 2006
    
    
    
    
    
    
    180,070
    
    
    
    Common stock, $0.25 par value; 40,000,000 shares authorized,
20,660,116, 19,071,924 and 19,571,248 shares issued and
outstanding at September 30, 2007 and 2006, and
December 31, 2006, respectively
    
    
    5,165,029
    
    
    
    4,767,981
    
    
    
    4,892,812Surplus
    
    
    122,807,634
    
    
    
    104,005,103
    
    
    
    109,896,794Additional paid-in capital  stock options
    
    
    450,910
    
    
    
    88,937
    
    
    
    145,513Treasury stock  9,396 common shares, at cost
    
    
    (112,752
    )
    
    
    
    
    
    
    Retained earnings
    
    
    10,561,804
    
    
    
    8,123,995
    
    
    
    8,867,359Accumulated other comprehensive income  net unrealized
holding losses on available-for-sale debt securities
    
    
    (214,176
    )
    
    
    (779,466
    )
    
    
    (305,886
    )Total stockholders equity
    
    
    138,658,449
    
    
    
    116,386,620
    
    
    
    123,496,592$
    1,066,018,947
    
    
    
    837,545,021
    
    
    
    900,799,209
  1




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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
  
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Interest and fees on loans
    
    $
    14,451,420
    
    
    
    10,141,029
    
    
    
    39,854,890
    
    
    
    27,459,892Interest and dividends on debt and equity securities:Taxable
    
    
    1,636,356
    
    
    
    2,048,753
    
    
    
    5,222,663
    
    
    
    5,808,395Exempt from Federal income taxes
    
    
    392,948
    
    
    
    307,321
    
    
    
    1,135,724
    
    
    
    783,676Interest on short-term investments
    
    
    34,568
    
    
    
    53,296
    
    
    
    464,935
    
    
    
    307,336Total interest income
    
    
    16,515,292
    
    
    
    12,550,399
    
    
    
    46,678,212
    
    
    
    34,359,299Interest expense:Interest on deposits
    
    
    8,536,764
    
    
    
    6,703,607
    
    
    
    24,884,820
    
    
    
    17,509,089Interest on short-term borrowings
    
    
    751,558
    
    
    
    166,734
    
    
    
    1,605,876
    
    
    
    511,482Interest on notes payable to Federal Home Loan Bank
    
    
    486,992
    
    
    
    162,844
    
    
    
    1,057,913
    
    
    
    486,155Total interest expense
    
    
    9,775,314
    
    
    
    7,033,185
    
    
    
    27,548,609
    
    
    
    18,506,726Net interest income
    
    
    6,739,978
    
    
    
    5,517,214
    
    
    
    19,129,603
    
    
    
    15,852,573Provision for possible loan losses
    
    
    1,515,000
    
    
    
    525,000
    
    
    
    2,405,000
    
    
    
    1,475,000Net interest
income after provision for possible loan losses
    
    
    5,224,978
    
    
    
    4,992,214
    
    
    
    16,724,603
    
    
    
    14,377,573Noninterest income:Service charges on deposit accounts
    
    
    120,743
    
    
    
    99,140
    
    
    
    361,826
    
    
    
    273,540Net gains (losses) on sale of debt and equity securities
    
    
    
    
    
    
    
    
    
    
    (7,026
    )
    
    
    Other noninterest income
    
    
    292,871
    
    
    
    296,495
    
    
    
    921,536
    
    
    
    565,429Total noninterest income
    
    
    413,614
    
    
    
    395,635
    
    
    
    1,276,336
    
    
    
    838,969Noninterest expense:Salaries and employee benefits
    
    
    3,258,328
    
    
    
    2,636,020
    
    
    
    9,266,254
    
    
    
    7,212,096Occupancy and equipment expense
    
    
    827,839
    
    
    
    622,467
    
    
    
    2,404,268
    
    
    
    1,670,315Postage, printing and supplies
    
    
    120,988
    
    
    
    113,736
    
    
    
    368,029
    
    
    
    325,225Professional fees
    
    
    121,126
    
    
    
    64,255
    
    
    
    347,171
    
    
    
    178,674Data processing
    
    
    393,291
    
    
    
    281,841
    
    
    
    1,048,903
    
    
    
    733,778Advertising
    
    
    194,365
    
    
    
    191,604
    
    
    
    494,321
    
    
    
    482,863Amortization of identifiable intangible assets
    
    
    4,072
    
    
    
    4,072
    
    
    
    12,216
    
    
    
    13,573Other noninterest expenses
    
    
    627,251
    
    
    
    356,323
    
    
    
    1,881,008
    
    
    
    1,370,859Total noninterest expense
    
    
    5,547,260
    
    
    
    4,270,318
    
    
    
    15,822,170
    
    
    
    11,987,383Income before applicable income taxes
    
    
    91,332
    
    
    
    1,117,531
    
    
    
    2,178,769
    
    
    
    3,229,159Applicable income tax expense (benefit)
    
    
    (72,866
    )
    
    
    316,016
    
    
    
    484,324
    
    
    
    956,258Net income
    
    $
    164,198
    
    
    
    801,515
    
    
    
    1,694,445
    
    
    
    2,272,901Per share amounts:Basic earnings per share
    
    $
    0.01
    
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.12Basic weighted average shares outstanding
    
    
    20,654,884
    
    
    
    18,817,498
    
    
    
    20,238,722
    
    
    
    18,540,270Diluted earnings per share
    
    $
    0.01
    
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.12Diluted weighted average shares outstanding
    
    
    21,704,099
    
    
    
    19,705,210
    
    
    
    21,224,967
    
    
    
    19,392,388
  2




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
  
 2007
    
    
    2006Net income
    
    $
    1,694,445
    
    
    
    2,272,901Other comprehensive income before tax:Net unrealized gains on available-for-sale securities
    
    
    131,929
    
    
    
    1,205,786Reclassification adjustment for losses included in net income
    
    
    7,026
    
    
    
    Other comprehensive income before tax
    
    
    138,955
    
    
    
    1,205,786Income tax related to items of other comprehensive income
    
    
    47,245
    
    
    
    409,967Other comprehensive income, net of tax
    
    
    91,710
    
    
    
    795,819Total comprehensive income
    
    $
    1,786,155
    
    
    
    3,068,720
  3




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
  
 Additionalpaid-in
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totalcapital-
    
    
    
    
    
    
    
    
    
    
    Accumulated other
    
    
    stock-Preferred
    
    
    Common
    
    
    
    
    
    
    Subscriptions
    
    
    stock
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    holdersstock
    
    
    stock
    
    
    Surplus
    
    
    receivable
    
    
    options
    
    
    earnings
    
    
    stock
    
    
    income
    
    
    equityBalance at December 31, 2005
    
    $
    64,369
    
    
    
    4,558,282
    
    
    
    94,439,615
    
    
    
    (11,122,068
    )
    
    
    
    
    
    
    5,851,094
    
    
    
    
    
    
    
    (1,575,285
    )
    
    
    92,216,007Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,272,901
    
    
    
    
    
    
    
    
    
    
    
    2,272,901Payments received for
subscriptions receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,122,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,122,068Issuance of 835,912 shares
of common stock (6,316
shares from treasury)
    
    
    
    
    
    
    207,399
    
    
    
    9,517,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,124
    
    
    
    
    
    
    
    9,794,815Issuance of 11,030 shares of
preferred stock (180 shares
from treasury)
    
    
    115,701
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,070
    
    
    
    
    
    
    
    117,771Purchase of treasury stock:180 preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,070
    )
    
    
    
    
    
    
    (2,070
    )6,316 common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,124
    )
    
    
    
    
    
    
    (70,124
    )Stock options exercised 
8,000 shares
    
    
    
    
    
    
    2,000
    
    
    
    53,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,6251,200 shares of common stock
awarded to directors
    
    
    
    
    
    
    300
    
    
    
    13,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,800Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (18,929
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,929
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,937Change in valuation of
available-for-sale securities,
net of related tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    795,819
    
    
    
    795,819Balance at September 30, 2006
    
    $
    180,070
    
    
    
    4,767,981
    
    
    
    104,005,103
    
    
    
    
    
    
    
    88,937
    
    
    
    8,123,995
    
    
    
    
    
    
    
    (779,466
    )
    
    
    116,386,620Balance at December 31, 2006
    
    $
    
    
    
    
    4,892,812
    
    
    
    109,896,794
    
    
    
    
    
    
    
    145,513
    
    
    
    8,867,359
    
    
    
    
    
    
    
    (305,886
    )
    
    
    123,496,592Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,694,445
    
    
    
    
    
    
    
    
    
    
    
    1,694,445Issuance of 1,071,973 shares
of common stock (91,100
shares from treasury)
    
    
    
    
    
    
    245,218
    
    
    
    12,282,983
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    966,600
    
    
    
    
    
    
    
    13,494,801Stock options exercised 
100,000 shares
    
    
    
    
    
    
    25,000
    
    
    
    563,313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    588,313Treasury stock purchased 
104,128 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,123,461
    )
    
    
    
    
    
    
    (1,123,461
    )Issuance of 10,827 shares of
common stock (3,632 shares
from treasury) in connection
with Employee Stock
Purchase Plan
    
    
    
    
    
    
    1,799
    
    
    
    83,503
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,109
    
    
    
    
    
    
    
    129,411800 shares of common stock
awarded to directors
    
    
    
    
    
    
    200
    
    
    
    9,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (28,759
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,759
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305,397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    305,397Change in valuation of
available -for-sale securities,
net of related tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,710
    
    
    
    91,710Balance at September 30, 2007
    
    $
    
    
    
    
    5,165,029
    
    
    
    122,807,634
    
    
    
    
    
    
    
    450,910
    
    
    
    10,561,804
    
    
    
    (112,752
    )
    
    
    (214,176
    )
    
    
    138,658,449
  4




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
  
 2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    1,694,445
    
    
    
    2,272,901Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,130,140
    
    
    
    679,281Provision for possible loan losses
    
    
    2,405,000
    
    
    
    1,475,000Capitalized interest expense on construction
    
    
    (439,669
    )
    
    
    (126,663
    )Stock option compensation cost
    
    
    305,397
    
    
    
    88,937Common stock awarded to directors
    
    
    10,000
    
    
    
    13,800Losses on sale of other real estate
    
    
    10,389
    
    
    
    Net losses on sale of debt and equity securities
    
    
    7,026
    
    
    
    Increase in accrued interest receivable
    
    
    (767,334
    )
    
    
    (583,845
    )Increase in accrued interest payable
    
    
    383,735
    
    
    
    1,093,353Mortgage loans originated for sale in secondary market
    
    
    (6,915,625
    )
    
    
    Mortgage loans sold in secondary market
    
    
    6,692,500
    
    
    
    Other operating activities, net
    
    
    375,890
    
    
    
    (411,358
    )Net cash provided by operating activities
    
    
    4,891,894
    
    
    
    4,501,406Cash flows from investing activities:Purchase of available-for-sale debt and equity securities
    
    
    (9,952,158
    )
    
    
    (59,128,788
    )Proceeds from maturities and calls of available-for-sale debt securities
    
    
    24,712,652
    
    
    
    41,966,772Proceeds from sales of available-for-sale debt securities
    
    
    4,547,333
    
    
    
    Net increase in loans
    
    
    (175,998,335
    )
    
    
    (116,405,127
    )Proceeds from sale of other real estate owned
    
    
    3,681,227
    
    
    
    381,331Purchase of bank premises and equipment
    
    
    (10,929,789
    )
    
    
    (7,417,160
    )Proceeds from sale of bank premises and equipment
    
    
    60,799
    
    
    
    Net cash used in investing activities
    
    
    (163,878,271
    )
    
    
    (140,602,972
    )Cash flows from financing activities:Net increase in deposits
    
    
    120,867,782
    
    
    
    87,190,964Increase in short-term borrowings
    
    
    1,858,385
    
    
    
    11,343,270Proceeds from notes payable to Federal Home Loan Bank
    
    
    30,000,000
    
    
    
    10,500,000Payments of notes payable to Federal Home Loan Bank
    
    
    (4,300,000
    )
    
    
    Purchase of treasury stock
    
    
    (1,123,461
    )
    
    
    (72,194
    )Stock options exercised
    
    
    588,313
    
    
    
    55,625Issuance of common stock
    
    
    13,624,212
    
    
    
    9,794,815Issuance of preferred stock
    
    
    
    
    
    
    117,771Collection of subscriptions receivable
    
    
    
    
    
    
    11,122,068Payment of stock issuance costs
    
    
    (28,759
    )
    
    
    (18,929
    )Net cash provided by financing activities
    
    
    161,486,472
    
    
    
    130,033,390Net increase (decrease) in cash and cash equivalents
    
    
    2,500,095
    
    
    
    (6,068,176
    )Cash and cash equivalents at beginning of period
    
    
    8,474,181
    
    
    
    15,970,094Cash and cash equivalents at end of period
    
    $
    10,974,276
    
    
    
    9,901,918Supplemental information:Cash paid for interest
    
    $
    27,548,609
    
    
    
    17,545,597Cash paid for income taxes
    
    
    676,000
    
    
    
    1,646,560Noncash transactions:Transfers to other real estate in settlement of loans
    
    
    4,478,902
    
    
    
    Loans made to facilitate the sale of other real estate
    
    
    275,912
    
    
    
    Capitalized interest expense
    
    
    439,669
    
    
    
    126,663Common stock awarded to directors
    
    
    10,000
    
    
    
    13,800Stock option compensation cost
    
    
    305,397
    
    
    
    88,937
  5




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       Principles of Consolidation
  Basis of Accounting
  6




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
  Cash Flow Information
  Stock Issuance Costs
  New Accounting Standards
 Accounting for Uncertainty in Income Taxes, Accounting for Income Taxes
 The
Fair Value Option for Financial Assets and Financial Liabilities
 Fair Value Measurements
 Earnings per Share
  7




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
  Three-Months Ended September 30,
    
    
    Nine-Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006BasicNet income
    
    $
    164,198
    
    
    
    801,515
    
    
    
    1,694,445
    
    
    
    2,272,901Weighted average common
shares outstanding
    
    
    20,654,884
    
    
    
    18,817,498
    
    
    
    20,238,722
    
    
    
    18,540,270Basic earnings per share
    
    $
    0.01
    
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.12DilutedNet income
    
    $
    164,198
    
    
    
    801,515
    
    
    
    1,694,445
    
    
    
    2,272,901Weighted average common
shares outstanding
    
    
    20,654,884
    
    
    
    18,817,498
    
    
    
    20,238,722
    
    
    
    18,540,270Effect of dilutive stock options
    
    
    1,049,215
    
    
    
    887,712
    
    
    
    986,245
    
    
    
    852,118Diluted weighted average common
shares outstanding
    
    
    21,704,099
    
    
    
    19,705,210
    
    
    
    21,224,967
    
    
    
    19,392,388Diluted earnings per share
    
    $
    0.01
    
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.12
 NOTE 2  INTANGIBLE ASSETS
   NOTE 3  STOCK OPTIONS
 Accounting for Stock
Issued to Employees,
 Share-based Payments Accounting for Stock-Based Compensation
  8




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
     Options Granted Under
    
    
    Options Granted to DirectorsIncentive Stock Option Plans
    
    
    Under Nonqualified PlansWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageOption Price
    
    
    Number
    
    
    Option Price
    
    
    Numberper Share
    
    
    of Shares
    
    
    per Share
    
    
    of SharesNine-Months Ended September 30, 2006:Balance at December 31, 2005
    
    $
    6.41
    
    
    
    1,620,200
    
    
    $
    6.14
    
    
    
    543,000Granted
    
    
    11.59
    
    
    
    24,000
    
    
    
    11.89
    
    
    
    38,000Forfeited
    
    
    
    
    
    
    
    
    
    
    7.59
    
    
    
    (14,000
    )Exercised
    
    
    6.85
    
    
    
    (6,000
    )
    
    
    7.25
    
    
    
    (2,000
    )Balance at September 30, 2006
    
    $
    6.49
    
    
    
    1,638,200
    
    
    $
    6.48
    
    
    
    565,000Nine-Months Ended September 30, 2007:Balance at December 31, 2006
    
    $
    6.57
    
    
    
    1,648,200
    
    
    $
    6.63
    
    
    
    576,000Granted
    
    
    13.40
    
    
    
    169,500
    
    
    
    16.38
    
    
    
    125,000Forfeited
    
    
    11.67
    
    
    
    (4,500
    )
    
    
    4.85
    
    
    
    (5,000
    )Exercised
    
    
    5.73
    
    
    
    (90,000
    )
    
    
    7.25
    
    
    
    (10,000
    )Balance at September 30, 2007
    
    $
    7.27
    
    
    
    1,723,200
    
    
    $
    8.41
    
    
    
    686,000
  9




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##### Table of Contents



Part I  Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations
   Forward-Looking Statements
  Overview
   10




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11




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##### Table of Contents



As of and for the
    
    As of and for theNine Months Ended
    
    Three Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Percentage of net income to:Average total assets
    
    
    0.23
    %
    
    
    0.40
    %
    
    
    0.06
    %
    
    
    0.39
    %Average stockholders equity
    
    
    1.71
    %
    
    
    2.84
    %
    
    
    0.47
    %
    
    
    2.85
    %Percentage of common dividends
declared to net income per
common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percentage of average
stockholders equity to
average total assets
    
    
    13.52
    %
    
    
    13.94
    %
    
    
    13.35
    %
    
    
    13.79
    %
 12




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##### Table of Contents



Critical Accounting Policies
  Results of Operations for the Three and Nine-Month Periods Ended September 30, 2007 and 2006
      13




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14




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Average deposits:Noninterest-bearing
    
    
    5.36
    %
    
    
    5.40
    %
    
    
    5.14
    %
    
    
    5.07
    %Interest-bearing:Transaction accounts
    
    
    19.66
    
    
    
    12.10
    
    
    
    18.34
    
    
    
    9.65Savings
    
    
    6.72
    
    
    
    13.15
    
    
    
    7.37
    
    
    
    18.83Time deposits of $100,000 or more
    
    
    23.86
    
    
    
    22.29
    
    
    
    26.60
    
    
    
    21.08Other time deposits
    
    
    33.14
    
    
    
    41.91
    
    
    
    33.70
    
    
    
    40.70Total average interest-bearing deposits
    
    
    83.38
    
    
    
    89.45
    
    
    
    86.01
    
    
    
    90.26Total average deposits
    
    
    88.74
    
    
    
    94.85
    
    
    
    91.15
    
    
    
    95.33Average short-term borrowings:Sweep repurchase agreements
    
    
    3.15
    
    
    
    3.00
    
    
    
    3.27
    
    
    
    2.45Daily/overnight funds purchased
    
    
    3.34
    
    
    
    0.08
    
    
    
    1.83
    
    
    
    0.04Total average short-term borrowings
    
    
    6.49
    
    
    
    3.08
    
    
    
    5.10
    
    
    
    2.49Average longer-term advances from Federal Home Loan
Bank
    
    
    4.77
    
    
    
    2.07
    
    
    
    3.75
    
    
    
    2.18100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
   Amount of Increase (Decrease)Change From Third Quarter of 2006
    
    
    Change from First Nine Months of 2006to Third Quarter of 2007 Due to
    
    
    to First Nine Months of 2007 Due toVolume
    
    
    Yield/
    
    
    
    
    
    
    Volume
    
    
    Yield/(1)
    
    
    Rate (2)
    
    
    Total
    
    
    (1)
    
    
    Rate (2)
    
    
    TotalInterest income:Loans
    
    $
    4,357,887
    
    
    
    (56,848
    )
    
    
    4,301,039
    
    
    
    11,587,284
    
    
    
    801,483
    
    
    
    12,388,767Investment securities:Taxable
    
    
    (485,583
    )
    
    
    73,186
    
    
    
    (412,397
    )
    
    
    (1,056,078
    )
    
    
    470,346
    
    
    
    (585,732
    )Exempt from Federal taxes
    
    
    102,214
    
    
    
    (54,129
    )
    
    
    48,085
    
    
    
    431,897
    
    
    
    18,095
    
    
    
    449,992Short-term investments
    
    
    (35,119
    )
    
    
    16,391
    
    
    
    (18,728
    )
    
    
    73,763
    
    
    
    83,836
    
    
    
    157,599Total interest income
    
    
    3,939,399
    
    
    
    (21,400
    )
    
    
    3,917,999
    
    
    
    11,036,866
    
    
    
    1,373,760
    
    
    
    12,410,626Interest expense:Interest bearing transaction accounts
    
    
    1,003,639
    
    
    
    32,681
    
    
    
    1,036,320
    
    
    
    2,870,353
    
    
    
    617,485
    
    
    
    3,487,838Savings accounts
    
    
    (261,249
    )
    
    
    (184,637
    )
    
    
    (445,886
    )
    
    
    (1,461,641
    )
    
    
    (333,790
    )
    
    
    (1,795,431
    )Time deposits of $100,000 or more
    
    
    792,246
    
    
    
    (506,519
    )
    
    
    285,727
    
    
    
    3,240,001
    
    
    
    203,472
    
    
    
    3,443,473Other time deposits
    
    
    42,525
    
    
    
    914,471
    
    
    
    956,996
    
    
    
    504,038
    
    
    
    1,735,813
    
    
    
    2,239,851Total deposits
    
    
    1,577,161
    
    
    
    255,996
    
    
    
    1,833,157
    
    
    
    5,152,751
    
    
    
    2,222,980
    
    
    
    7,375,731Federal funds purchased and repurchase agreements
    
    
    420,844
    
    
    
    163,980
    
    
    
    584,824
    
    
    
    977,084
    
    
    
    117,310
    
    
    
    1,094,394Long-term borrowings
    
    
    323,059
    
    
    
    1,089
    
    
    
    324,148
    
    
    
    578,249
    
    
    
    (6,491
    )
    
    
    571,758Total interest expense
    
    
    2,321,064
    
    
    
    421,065
    
    
    
    2,742,129
    
    
    
    6,708,084
    
    
    
    2,333,799
    
    
    
    9,041,883Net interest income
    
    $
    1,618,335
    
    
    
    (442,465
    )
    
    
    1,175,870
    
    
    
    4,328,782
    
    
    
    (960,039
    )
    
    
    3,368,743
 15




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##### Table of Contents



(1)
    
    Change in volume multiplied by yield/rate of prior year.(2)
    
    Change in yield/rate multiplied by volume of prior year. NOTE:
    
    The change in interest due to both rate and volume has been allocated to volume and rate
changes in proportion to the relationship of the absolute dollar amounts of the change in
each.
        16




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##### Table of Contents



Financial Condition
      17




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##### Table of Contents



Nine Months Ended September 30, 2007Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    736,408,179
    
    
    
    75.22
    %
    
    $
    39,871,198
    
    
    
    7.24
    %Investment securities:Taxable
    
    
    145,699,487
    
    
    
    14.88
    
    
    
    5,222,663
    
    
    
    4.79Exempt from Federal income taxes (3)
    
    
    37,132,129
    
    
    
    3.79
    
    
    
    1,502,981
    
    
    
    5.41Short-term investments
    
    
    11,330,034
    
    
    
    1.16
    
    
    
    464,935
    
    
    
    5.49Total earning assets
    
    
    930,569,829
    
    
    
    95.05
    
    
    
    47,061,777
    
    
    
    6.76Nonearning assets:Cash and due from banks
    
    
    9,806,640
    
    
    
    1.01Reserve for possible loan losses
    
    
    (7,411,018
    )
    
    
    (0.76
    )Premises and equipment
    
    
    36,260,504
    
    
    
    3.70Other assets
    
    
    10,780,453
    
    
    
    1.10Available-for-sale investment market valuation
    
    
    (991,940
    )
    
    
    (0.10
    )Total nonearning assets
    
    
    48,444,639
    
    
    
    4.95Total assets
    
    $
    979,014,468
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    154,148,693
    
    
    
    15.74
    %
    
    
    5,075,113
    
    
    
    4.40
    %Savings
    
    
    61,939,351
    
    
    
    6.33
    
    
    
    1,445,951
    
    
    
    3.12Time deposits of $100,000 or more
    
    
    223,509,035
    
    
    
    22.83
    
    
    
    8,478,971
    
    
    
    5.07Other time deposits
    
    
    283,195,864
    
    
    
    28.93
    
    
    
    9,884,785
    
    
    
    4.67Total interest -bearing deposits
    
    
    722,792,943
    
    
    
    73.83
    
    
    
    24,884,820
    
    
    
    4.60Long-term borrowings
    
    
    31,489,377
    
    
    
    3.22
    
    
    
    1,057,913
    
    
    
    4.49Federal funds purchased and securities sold
under repurchase agreements
    
    
    42,884,853
    
    
    
    4.38
    
    
    
    1,605,876
    
    
    
    5.01Total interest -bearing liabilities
    
    
    797,167,173
    
    
    
    81.43
    
    
    
    27,548,609
    
    
    
    4.62Noninterest-bearing deposits
    
    
    43,199,115
    
    
    
    4.41Other liabilities
    
    
    6,243,834
    
    
    
    0.64Total liabilities
    
    
    846,610,122
    
    
    
    86.48STOCKHOLDERS EQUITY
    
    
    132,404,346
    
    
    
    13.52Total liabilities and stockholders equity
    
    $
    979,014,468
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    19,513,168Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.80
    %
  18




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##### Table of Contents



Nine Months Ended September 30, 2006Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    522,009,079
    
    
    
    68.08
    %
    
    $
    27,482,431
    
    
    
    7.04
    %Investment securities:Taxable
    
    
    175,923,893
    
    
    
    22.94
    
    
    
    5,808,395
    
    
    
    4.41Exempt from Federal income taxes (3)
    
    
    26,451,195
    
    
    
    3.45
    
    
    
    1,052,989
    
    
    
    5.32Short-term investments
    
    
    9,321,493
    
    
    
    1.21
    
    
    
    307,336
    
    
    
    4.41Total earning assets
    
    
    733,705,660
    
    
    
    95.68
    
    
    
    34,651,151
    
    
    
    6.31Nonearning assets:Cash and due from banks
    
    
    7,932,820
    
    
    
    1.03Reserve for possible loan losses
    
    
    (5,860,838
    )
    
    
    (0.76
    )Premises and equipment
    
    
    25,113,669
    
    
    
    3.28Other assets
    
    
    8,727,133
    
    
    
    1.14Available-for-sale investment market valuation
    
    
    (2,816,008
    )
    
    
    (0.37
    )Total nonearning assets
    
    
    33,096,776
    
    
    
    4.32Total assets
    
    $
    766,802,436
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    63,206,588
    
    
    
    8.24
    %
    
    
    1,587,275
    
    
    
    3.36
    %Savings
    
    
    123,288,245
    
    
    
    16.08
    
    
    
    3,241,382
    
    
    
    3.52Time deposits of $100,000 or more
    
    
    137,970,766
    
    
    
    17.99
    
    
    
    5,035,498
    
    
    
    4.88Other time deposits
    
    
    266,471,189
    
    
    
    34.76
    
    
    
    7,644,934
    
    
    
    3.84Total interest -bearing deposits
    
    
    590,936,788
    
    
    
    77.07
    
    
    
    17,509,089
    
    
    
    3.96Long-term borrowings
    
    
    14,300,000
    
    
    
    1.86
    
    
    
    486,155
    
    
    
    4.55Federal funds purchased and securities sold
under repurchase agreements
    
    
    16,305,829
    
    
    
    2.13
    
    
    
    511,482
    
    
    
    4.19Total interest -bearing liabilities
    
    
    621,542,617
    
    
    
    81.06
    
    
    
    18,506,726
    
    
    
    3.98Noninterest-bearing deposits
    
    
    33,146,060
    
    
    
    4.32Other liabilities
    
    
    5,203,751
    
    
    
    0.68Total liabilities
    
    
    659,892,428
    
    
    
    86.06STOCKHOLDERS EQUITY
    
    
    106,910,008
    
    
    
    13.94Total liabilities and stockholders equity
    
    $
    766,802,436
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    16,144,425
    
    
    
    2.94
    %
  19




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##### Table of Contents



Three Months Ended September 30, 2007Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    803,079,558
    
    
    
    77.76
    %
    
    $
    14,454,674
    
    
    
    7.14
    %Investment securities:Taxable
    
    
    136,710,657
    
    
    
    13.24
    
    
    
    1,636,356
    
    
    
    4.75Exempt from Federal income taxes (3)
    
    
    38,543,387
    
    
    
    3.73
    
    
    
    472,241
    
    
    
    4.86Short-term investments
    
    
    1,869,221
    
    
    
    0.19
    
    
    
    34,568
    
    
    
    7.34Total earning assets
    
    
    980,202,823
    
    
    
    94.92
    
    
    
    16,597,839
    
    
    
    6.72Nonearning assets:Cash and due from banks
    
    
    10,721,633
    
    
    
    1.04Reserve for possible loan losses
    
    
    (7,738,045
    )
    
    
    (0.75
    )Premises and equipment
    
    
    40,360,578
    
    
    
    3.91Other assets
    
    
    10,841,953
    
    
    
    1.04Available-for-sale investment market valuation
    
    
    (1,684,677
    )
    
    
    (0.16
    )Total nonearning assets
    
    
    52,501,442
    
    
    
    5.08Total assets
    
    $
    1,032,704,265
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    174,639,435
    
    
    
    16.91
    %
    
    
    1,926,818
    
    
    
    4.38
    %Savings
    
    
    59,654,478
    
    
    
    5.78
    
    
    
    439,850
    
    
    
    2.93Time deposits of $100,000 or more
    
    
    211,946,138
    
    
    
    20.52
    
    
    
    2,693,732
    
    
    
    5.04Other time deposits
    
    
    294,446,320
    
    
    
    28.51
    
    
    
    3,476,364
    
    
    
    4.68Total interest  bearing deposits
    
    
    740,686,371
    
    
    
    71.72
    
    
    
    8,536,764
    
    
    
    4.57Long-term borrowings
    
    
    42,445,652
    
    
    
    4.11
    
    
    
    486,992
    
    
    
    4.55Federal funds purchased and securities sold
under repurchase agreements
    
    
    57,607,906
    
    
    
    5.58
    
    
    
    751,558
    
    
    
    5.18Total interest -bearing liabilities
    
    
    840,739,929
    
    
    
    81.41
    
    
    
    9,775,314
    
    
    
    4.61Noninterest-bearing deposits
    
    
    47,582,506
    
    
    
    4.61Other liabilities
    
    
    6,487,530
    
    
    
    0.63Total liabilities
    
    
    894,809,965
    
    
    
    86.65STOCKHOLDERS EQUITY
    
    
    137,894,300
    
    
    
    13.35Total liabilities and stockholders equity
    
    $
    1,032,704,265
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    6,822,525Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.76
    %
  20




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##### Table of Contents



Three Months Ended September 30, 2006Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    561,092,490
    
    
    
    69.38
    %
    
    $
    10,153,635
    
    
    
    7.18
    %Investment securities:Taxable
    
    
    177,288,658
    
    
    
    21.92
    
    
    
    2,048,753
    
    
    
    4.58Exempt from Federal income taxes (3)
    
    
    30,522,354
    
    
    
    3.77
    
    
    
    424,156
    
    
    
    5.51Short-term investments
    
    
    4,030,401
    
    
    
    0.50
    
    
    
    53,296
    
    
    
    5.25Total earning assets
    
    
    772,933,903
    
    
    
    95.57
    
    
    
    12,679,840
    
    
    
    6.51Nonearning assets:Cash and due from banks
    
    
    7,880,252
    
    
    
    0.97Reserve for possible loan losses
    
    
    (6,284,168
    )
    
    
    (0.78
    )Premises and equipment
    
    
    27,301,364
    
    
    
    3.38Other assets
    
    
    10,098,531
    
    
    
    1.25Available-for-sale investment market valuation
    
    
    (3,183,032
    )
    
    
    (0.39
    )Total nonearning assets
    
    
    35,812,947
    
    
    
    4.43Total assets
    
    $
    808,746,850
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    83,598,534
    
    
    
    10.34
    %
    
    
    890,498
    
    
    
    4.23
    %Savings
    
    
    90,892,125
    
    
    
    11.24
    
    
    
    885,736
    
    
    
    3.87Time deposits of $100,000 or more
    
    
    154,025,494
    
    
    
    19.04
    
    
    
    2,408,005
    
    
    
    6.20Other time deposits
    
    
    289,644,289
    
    
    
    35.81
    
    
    
    2,519,368
    
    
    
    3.45Total interest  bearing deposits
    
    
    618,160,442
    
    
    
    76.43
    
    
    
    6,703,607
    
    
    
    4.30Long-term borrowings
    
    
    14,300,000
    
    
    
    1.77
    
    
    
    162,844
    
    
    
    4.52Federal funds purchased and securities sold
under repurchase agreements
    
    
    21,271,565
    
    
    
    2.63
    
    
    
    166,734
    
    
    
    3.11Total interest -bearing liabilities
    
    
    653,732,007
    
    
    
    80.83
    
    
    
    7,033,185
    
    
    
    4.27Noninterest-bearing deposits
    
    
    37,327,553
    
    
    
    4.62Other liabilities
    
    
    6,149,514
    
    
    
    0.76Total liabilities
    
    
    697,209,074
    
    
    
    86.21STOCKHOLDERS EQUITY
    
    
    111,537,776
    
    
    
    13.79Total liabilities and stockholders equity
    
    $
    808,746,850
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    5,646,655Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.90
    %
 
 (1)
    
    Interest includes loan fees, recorded as discussed in Note 1 to our consolidated financial
statements for the year ended December 31, 2006, included in our Form 10, which was effective
June 27, 2007.(2)
    
    Average balances include nonaccrual loans. The income on such loans is included in interest,
but is recognized only upon receipt.(3)
    
    Interest yields are presented on a tax-equivalent basis. Nontaxable income has been adjusted
upward by the amount of Federal income tax that would have been paid if the income had been
taxed at a rate of 34%, adjusted downward by the disallowance of the interest cost to carry
nontaxable loans and securities. 21




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##### Table of Contents



Risk Management
          22




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##### Table of Contents



Nine-Month Periods Ended September 30,2007
    
    
    2006(in thousands of dollars)Average loans outstanding
    
    $
    736,408
    
    
    
    522,009Reserve at beginning of year
    
    
    7,101
    
    
    
    5,213Provision for possible loan losses
    
    
    2,405
    
    
    
    1,4759,506
    
    
    
    6,688Charge-offs:Commercial loans:Real estate
    
    
    (317
    )
    
    
    Other
    
    
    (36
    )
    
    
    (19
    )Real estate:Construction
    
    
    
    
    
    
    (3
    )Residential
    
    
    (280
    )
    
    
    (73
    )Consumer
    
    
    (24
    )
    
    
    (26
    )Overdrafts
    
    
    (1
    )
    
    
    Total charge-offs
    
    
    (658
    )
    
    
    (121
    )Recoveries:Commercial loans:Real estate
    
    
    10
    
    
    
    Other
    
    
    19
    
    
    
    Real estate:Construction
    
    
    
    
    
    
    Residential
    
    
    13
    
    
    
    9Consumer
    
    
    
    
    
    
    4Overdrafts
    
    
    1
    
    
    
    Total recoveries
    
    
    43
    
    
    
    13Reserve at end of period
    
    $
    8,891
    
    
    
    6,580Net charge-offs to average loans
    
    
    0.11
    %
    
    
    0.03
    %Ending reserve to net outstanding loans at end of period
    
    
    1.06
    %
    
    
    1.12
    %
    
    
    delinquency of a scheduled loan payment;
    
    deterioration in the borrowers financial condition identified in a review of periodic
financial statements;
 23




---



##### Table of Contents




    
    decrease in the value of collateral securing the loan; or
    
    change in the economic environment in which the borrower operates.
    
    
    specific allocations based upon probable losses identified during a quarterly review of the
loan portfolio;
    
    allocations based principally on the Companys risk rating formulas; and
    
    an unallocated allowance based on subjective factors.
    
    
    general economic and business conditions affecting our key lending areas;
    
    credit quality trends (including trends in nonperforming loans expected to result from
existing conditions);
    
    collateral values;
    
    loan volumes and concentrations;
    
    competitive factors resulting in shifts in underwriting criteria;
    
    specific industry conditions within portfolio segments;
    
    recent loss experience in particular segments of the portfolio;
    
    bank regulatory examination results; and
    
    findings of our internal loan review department.
  24




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##### Table of Contents




    
    There is a level of imprecision necessarily inherent in the estimates of expected loan
losses, and the unallocated reserve gives reasonable assurance that this level of imprecision
in our formula methodologies is adequately provided for.
    
    Pressures to maintain and grow the loan portfolio with increasing competition from de novo
institutions and larger competitors have to some degree affected credit granting criteria
adversely. The Company monitors the disposition of all credits, which have been approved
through its Executive Loan Committee in order to better understand competitive shifts in
underwriting criteria.
  25




---



##### Table of Contents




    
    Commercial and residential real estate loans totaling approximately $1.2 million to a small
business owner whose various businesses had been struggling for some time. Additional
nonaccrual loans related to this borrower of $1.4 million were added to the Companys
nonperforming loans in the fourth quarter of 2006. The Company foreclosed on the various
properties during the first quarter of 2007 and incurred charge-offs of $274,740 on this
relationship.
    
    A construction loan in the amount of $1.775 million collateralized by construction property
and other properties pledged as collateral by the borrower. This loan was paid off in the
fourth quarter of 2006.
  
    
    Commercial and residential real estate loans totaling approximately $2.6 million to the
aforementioned small business owner whose various businesses had been struggling for some
time. As noted above, the Company foreclosed on these properties in the first quarter of
2007.
    
    Loans totaling approximately $764,000 to an Illinois real estate investor for several single
family residential rental properties. This real estate investor declared bankruptcy in
November 2006 after several properties incurred significant storm damage. The Company charged
off $100,000 on this credit relationship in the fourth quarter of 2006 and foreclosed on these
properties in 2007. Prior to foreclosure, the Company incurred an additional $64,000
charge-off on these loans.
  
    
    Loans totaling approximately $5.6 million to entities controlled by a Florida real estate
investor that were in default and for which foreclosure proceedings have commenced. These
loans are secured by commercial real estate properties in southwestern Florida for which the
values have declined. The Company has allocated $280,000 of the reserve for possible loan
losses for these loans, based on current appraisals of the properties.
    
    Three loans to a Florida-based home builder totaling approximately $781,000, originally to
fund the construction of three homes for re-sale. These loans are in process of foreclosure,
and the Company has allocated $80,000 of the reserve for possible loan losses for these loans,
based on current appraisals of the properties.
   26




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##### Table of Contents



Liquidity and Capital Resources
      To Be a WellCapitalized BankUnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(in thousands of dollars)Total capital (to risk-weighted assets)Consolidated
    
    $
    146,440
    
    
    
    15.16
    %
    
    $
    77,281
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    N/AReliance Bank
    
    
    107,114
    
    
    
    11.98
    %
    
    
    71,508
    
    
    
    8.00
    %
    
    $
    89,386
    
    
    
    10.00
    %Reliance Bank, FSB
    
    
    20,521
    
    
    
    25.08
    %
    
    
    6,545
    
    
    
    8.00
    %
    
    
    8,182
    
    
    
    10.00
    %Tier 1 capital (to risk-weighted assets)Consolidated
    
    $
    137,549
    
    
    
    14.24
    %
    
    $
    38,641
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AReliance Bank
    
    
    99,459
    
    
    
    11.13
    %
    
    
    35,754
    
    
    
    4.00
    %
    
    $
    53,631
    
    
    
    6.00
    %
 27




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##### Table of Contents



To Be a WellCapitalized BankUnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(in thousands of dollars)Reliance Bank, FSB
    
    
    19,496
    
    
    
    23.83
    %
    
    
    3,273
    
    
    
    4.00
    %
    
    
    4,909
    
    
    
    6.00
    %Tier 1 capital (to average assets)Consolidated
    
    $
    137,549
    
    
    
    13.34
    %
    
    $
    41,255
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    N/AReliance Bank
    
    
    99,459
    
    
    
    10.39
    %
    
    
    38,292
    
    
    
    4.00
    %
    
    $
    47,864
    
    
    
    5.00
    %Reliance Bank, FSB
    
    
    19,496
    
    
    
    23.08
    %
    
    
    3,378
    
    
    
    4.00
    %
    
    
    4,223
    
    
    
    5.00
    %
  Minimum Capital RatiosTotal
    
    Tier 1
    
    Tier 2Risk-Based
    
    Risk-Based
    
    LeverageRatio
    
    Ratio
    
    RatioWell capitalized
    
    
    10
    %
    
    
    6
    %
    
    
    5
    %Adequately capitalized
    
    
    8
    
    
    
    4
    
    
    
    4Undercapitalized
    
    
    <8
    
    
    
    <4
    
    
    
    <4Significantly undercapitalized
    
    
    <6
    
    
    
    <3
    
    
    
    <3Critically undercapitalized
    
    
    *
    
    
    
    *
    
    
    
    *
 
 *
    
    A critically undercapitalized institution is defined as having a tangible equity to total
assets ratio of 2% or less.  Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
   Over 1 YearTotal Cash
    
    Less Than 1
    
    Less than 5
    
    Over 5Commitment
    
    Year
    
    Years
    
    YearsOperating leases
    
    $
    9,499,259
    
    
    
    638,828
    
    
    
    2,103,300
    
    
    
    6,757,131Time deposits
    
    
    552,419,377
    
    
    
    492,223,079
    
    
    
    60,154,105
    
    
    
    42,193Federal Home Loan Bank borrowings
(including overnight advances)
    
    
    67,500,000
    
    
    
    17,500,000
    
    
    
    35,000,000
    
    
    
    15,000,000Commitments to extend credit
    
    
    310,739,977
    
    
    
    65,381,992
    
    
    
    192,662,481
    
    
    
    52,695,504Standby letters of credit
    
    
    6,606,423
    
    
    
    5,832,193
    
    
    
    474,230
    
    
    
    300,000
 Accounting Pronouncements
  28




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##### Table of Contents




    
    The Company maintains various stock option plans, which are discussed in more detail in Note
11 to the Companys 2006 consolidated financial statements (included in our Form 10, effective
June 27, 2007). Prior to 2006, the Company applied the intrinsic value-based method, as
outlined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees(APB 25), and related interpretations, in accounting for stock options granted
under these plans. Under the intrinsic value-based method, no compensation expense was
recognized if the exercise price of the Companys employee stock options was equal to or
greater than the market price of the underlying stock on the date of the grant. Accordingly,
prior to 2006, no compensation cost was recognized in the consolidated statements of income on
stock options granted to employees, since all options granted under the Companys stock option
plans had an exercise price equal to or greater than the market value of the underlying Common
Stock on the date of the grant. The Board of Directors accelerated the vesting of
substantially all of the Companys outstanding stock options during the fourth quarter of
2005.Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123 (Revised) Share-based Payments(FAS 123R). This statement replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB 25. FAS 123R requires that all
stock-based compensation be recognized as an expense in the financial statements and that such cost
be measured at the grant date fair value for all equity classified awards. The Company adopted this
statement using the modified prospective method, which requires the Company to recognize
compensation expense on a prospective basis for all outstanding unvested awards. Therefore, prior
period financial statements have not been restated. Under this method, in addition to reflecting
compensation expense for share-based awards granted after the adoption date, expense is also
recognized to reflect the remaining service period of awards that had been included in pro forma
disclosures in prior periods.Based on the valuation and accounting uncertainties that outstanding options presented under the
proposed accounting treatment at the time, the Board of Directors accelerated the vesting of
substantially all of the Companys outstanding stock options during the fourth quarter of 2005.
This action resulted in the remaining fair value of substantially all of the outstanding stock
options being recognized in 2005 on a pro forma basis only.The weighted average fair values of options granted thusfar in 2007 was $3.87 for an option to
purchase one share of Company Common Stock; however, the Company has only been in existence since
July 24, 1998, and the Companys Common Stock is not actively traded on any exchange. Accordingly,
the availability of fair value information for the Companys Common Stock is limited. In using the
Black-Scholes option pricing model to value the options, several assumptions have been made in
arriving at the estimated fair value of the options granted thus far in 2007, including 0-20%
volatility in the Companys Common Stock, no dividends paid on the Common Stock, an expected
weighted average option life of six years, and a risk-free interest rate approximating the
five-year Treasury rate. Any change in these assumptions could have a significant impact on the
effects of determining compensation costs.
    
    In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes,an Interpretation of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes(FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes in financial statements and prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax position taken or
expected to be taken. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company has evaluated the
requirements of FIN 48 and determined that FIN 48 will not have a material impact on its
financial condition and results of operations for 2007.
    
    In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB No. 108) to
clarify consideration of the effects of prior year errors when quantifying misstatements in
current year financial statements for the purpose of quantifying materiality. SAB No. 108
requires issuers to quantify
 29




---



##### Table of Contents



misstatements using both the rollover and iron curtain approaches and requires an adjustment to
the current year financial statements in the event that after the application of either approach
and consideration of all relevant quantitative and qualitative factors, a misstatement is
determined to be material. SAB No. 108 is effective for fiscal years beginning after November 15,
2006. The Company has determined that SAB No. 108 will not have a material impact on its
consolidated financial position or results of operations.
    
    In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements(FAS No. 157). FAS
No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting standards, and expands disclosures about fair value measurements. FAS No.
157 is effective for financial statements issued for fiscal years beginning after November 15,
2007.
    
    In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities(FAS 159). This statement permits entities to choose to measure
many financial instruments and certain other items at fair value. The fair value option
established by FAS 159 permits all entities to choose to measure eligible items at fair value
at specified election dates. A business entity shall report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option (1) may be applied instrument by instrument, with a few
exceptions; (2) is irrevocable (unless a new election date occurs); and (3) is applied only to
entire instruments and not to portions of instruments.FAS 159 is effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the provisions of FAS No.
157. No entity is permitted to apply FAS 159 retrospectively to fiscal year preceding the
effective date unless the entity chooses early adoption. The choice to adopt early should be made
after issuance of FAS 159 but within 120 days of the beginning of the fiscal year of adoption,
provided the entity has not yet issued financial statements for any interim period of the fiscal
year of adoption. The Company has no plans to adopt FAS 159 in 2007 or 2008.
 
 Part I  Item 3  Quantitative and Qualitative Disclosures About Market Risk
   30




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##### Table of Contents



Remaining Maturity if Fixed Rate,Earliest Possible Repricing Interval if Floating Rate3
    
    
    Over 3
    
    
    Over 1months
    
    
    months
    
    
    yearor
    
    
    through
    
    
    through
    
    
    Over 5less
    
    
    12 months
    
    
    5 years
    
    
    years
    
    
    TotalInterest-earning assetsLoans
    
    $
    204,596
    
    
    $
    130,918
    
    
    $
    466,779
    
    
    $
    36,799
    
    
    $
    839,092Investment securities, at fair value
    
    
    29,334
    
    
    
    23,285
    
    
    
    89,433
    
    
    
    30,777
    
    
    
    172,829Other interest-earning assets
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138Total interest-earning assets
    
    $
    234,068
    
    
    $
    154,203
    
    
    $
    556,212
    
    
    $
    67,576
    
    
    $
    1,012,059Interest-bearing liabilitiesSavings and interest-bearing
transaction accounts
    
    $
    234,628
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    234,628Time deposits of $100,000 or more
    
    
    59,078
    
    
    
    133,789
    
    
    
    18,243
    
    
    
    
    
    
    
    211,110All other time deposits
    
    
    61,155
    
    
    
    207,693
    
    
    
    38,697
    
    
    
    42
    
    
    
    307,587Nondeposit interest-bearing liabilities
    
    
    66,667
    
    
    
    5,654
    
    
    
    35,000
    
    
    
    15,000
    
    
    
    122,321Total interest-bearing liabilities
    
    $
    421,528
    
    
    $
    347,136
    
    
    $
    91,940
    
    
    $
    15,042
    
    
    $
    875,646Gap by period
    
    $
    (187,460
    )
    
    $
    (192,933
    )
    
    $
    464,272
    
    
    $
    52,534
    
    
    $
    136,413Cumulative gap
    
    $
    (187,460
    )
    
    $
    (380,393
    )
    
    $
    83,879
    
    
    $
    136,413
    
    
    $
    136,413Ratio of interest-sensitive assets
to interest-sensitive liabilities
    
    
    0.56
    
    
    
    0.44
    
    
    
    6.05
    
    
    
    4.49
    
    
    
    1.16Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities
    
    
    0.56
    
    
    
    0.50
    
    
    
    1.10
    
    
    
    1.16
    
    
    
    1.16
   31




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##### Table of Contents



Part I  Item 4T  Controls and Procedures
     
 PART II
 
 Part II  Item 1  Legal Proceedings
  
 Part II  Item 1A  Risk Factors
  32




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##### Table of Contents



Part II  Item 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Date
    
    Price
    
    Number of Shares
    
    ProceedsJuly 1, 2007 to
September 30, 2007
    
    $
    15.00
    
    
    
    25,601
    
    
    $
    384,015
  Number of SharesDate
    

Issued Upon Exercise
    
    Exercise Price
    
    ProceedsJuly 16, 2007
    
    
    5,000
    
    
    $
    4.6875
    
    
    $
    22,000July 16, 2007
    
    
    1,000
    
    
    $
    9.50
    
    
    $
    9,500July 26, 2007
    
    
    6,000
    
    
    $
    5.375
    
    
    $
    38,500August 17, 2007
    
    
    2,000
    
    
    $
    3.50
    
    
    $
    49,500August 17, 2007
    
    
    2,000
    
    
    $
    4.8125
    
    
    $
    34,000
  Number of
    
    ExerciseDate
    
    Options
    
    Price
    
    Date Exercisable
    
    Expiration DateJuly 18, 2007
    
    38,000 Incentive
    
    $
    15.00
    
    
    July 18, 2008  12,664;
    
    November 16,Stock Options
    
    
    
    
    
    July 18, 2009  12,664;
    
    2015July 18, 2010  12,672
  33




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##### Table of Contents



MaximumNumber ofTotal Number of
    
    Shares that MayShares
    
    Yet bePurchased as
    
    Purchased underPart of Publicly
    
    PubliclyTotal Number of
    
    
    
    
    
    Announced
    
    AnnouncedShares
    
    Average Price
    
    Plans or
    
    Plans orPeriod
    
    Purchased
    
    Paid per Share
    
    Programs
    
    ProgramsJuly 1, 2007 to
July 31, 2007
    
    
    12,000
    
    
    $
    12.00
    
    
    
    0
    
    
    
    0August 1, 2007
through August 31,
2007
    
    
    4,000
    
    
    $
    12.00
    
    
    
    0
    
    
    
    0September 1, 2007
through September
30, 2007
    
    
    19,428
700
    
    
    $
$
    12.00
12.75
    
    
    
    0
    
    
    
    0
 
 Part II  Item 3  Defaults Upon Senior Securities
  
 Part II  Item 4  Submission of Matters to Vote of Security Holders
  
 Part II  Item 5  Other Information
  34




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##### Table of Contents



Part II  Item 6  Exhibits
 ExhibitNumber
    
    Description31.1
    
    Chief Executive Officers Certification pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Chief Financial Officers Certification pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Chief Executive Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Chief Financial Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 35




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##### Table of Contents



SIGNATURES
  RELIANCE BANCSHARES, INC.By:
    /s/ Jerry S. Von RohrJerry S. Von RohrChief Executive Officer By:
    /s/ James W. SullivanJames W. SullivanChief Financial Officer  36