##### 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, 2008
 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
(Address of Principal Executive Offices)
    
    63131
(Zip Code)
 (314) 569-7200
 
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer   þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




---



##### 



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Condensed 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
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4T. Controls and Procedures
    
    
    34PART II  OTHER INFORMATION
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37Signatures
    
    
    37EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Part I  Item 1  Financial Statements
 RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   September 30,
    
    
    December 31,2008
    
    
    2007
    
    
    2007ASSETSCash and due from banks
    
    $
    12,717,479
    
    
    
    10,836,678
    
    
    
    13,170,564Interest-earning deposits in other financial institutions
    
    
    2,041,867
    
    
    
    98,598
    
    
    
    89,876Federal funds sold
    
    
    
    
    
    
    39,000
    
    
    
    30,000Investments in available-for-sale debt and equity securities,
at fair value
    
    
    178,331,285
    
    
    
    172,829,382
    
    
    
    163,645,218Loans
    
    
    1,225,166,080
    
    
    
    839,091,832
    
    
    
    911,960,236Less - Deferred loan fees/costs
    
    
    (893,553
    )
    
    
    (269,909
    )
    
    
    (222,226
    )Reserve for possible loan losses
    
    
    (12,398,957
    )
    
    
    (8,890,557
    )
    
    
    (9,685,011
    )Net loans
    
    
    1,211,873,570
    
    
    
    829,931,366
    
    
    
    902,052,999Premises and equipment, net
    
    
    44,491,084
    
    
    
    41,032,014
    
    
    
    42,931,925Accrued interest receivable
    
    
    5,442,661
    
    
    
    5,179,664
    
    
    
    4,959,629Identifiable intangible assets, net of accumulated amortization
of $86,869, $70,581 and $74,653 at September 30, 2008 and 2007,
and December 31, 2007, respectively
    
    
    157,450
    
    
    
    173,738
    
    
    
    169,666Goodwill
    
    
    1,149,192
    
    
    
    1,149,192
    
    
    
    1,149,192Other real estate
    
    
    11,653,385
    
    
    
    1,612,286
    
    
    
    4,937,285Other assets
    
    
    8,271,407
    
    
    
    3,137,029
    
    
    
    3,016,068$
    1,476,129,380
    
    
    
    1,066,018,947
    
    
    
    1,136,152,422LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Non-interest-bearing
    
    $
    54,401,841
    
    
    
    46,139,342
    
    
    
    53,441,589Interest-bearing
    
    
    1,042,132,382
    
    
    
    753,325,445
    
    
    
    781,134,860Total deposits
    
    
    1,096,534,223
    
    
    
    799,464,787
    
    
    
    834,576,449Short-term borrowings
    
    
    86,214,611
    
    
    
    72,320,906
    
    
    
    88,324,915Notes payable to Federal Home Loan Bank
    
    
    149,000,000
    
    
    
    50,000,000
    
    
    
    68,000,000Accrued interest payable
    
    
    4,239,781
    
    
    
    3,122,877
    
    
    
    3,656,113Other liabilities
    
    
    3,581,183
    
    
    
    2,451,928
    
    
    
    1,703,972Total liabilities
    
    
    1,339,569,798
    
    
    
    927,360,498
    
    
    
    996,261,449Commitments and contingenciesStockholders equity:Preferred stock, no par value; 2,000,000 shares authorized
    
    
    
    
    
    
    
    
    
    
    Common stock, $0.25 par value; 40,000,000 shares authorized,
20,770,781, 20,660,116, and 20,682,075 shares issued and
outstanding at September 30, 2008 and 2007, and
December 31, 2007, respectively
    
    
    5,192,695
    
    
    
    5,165,029
    
    
    
    5,170,519Surplus
    
    
    124,315,888
    
    
    
    123,258,544
    
    
    
    123,329,517Retained earnings
    
    
    9,772,943
    
    
    
    10,561,804
    
    
    
    10,982,306Treasury stock, at cost - 76,948 and 9,396 shares at
September 30, 2008 and 2007, respectively
    
    
    (964,488
    )
    
    
    (112,752
    )
    
    
    Accumulated other comprehensive income  net unrealized
holding (losses) gains on available-for-sale debt securities
    
    
    (1,757,456
    )
    
    
    (214,176
    )
    
    
    408,631Total stockholders equity
    
    
    136,559,582
    
    
    
    138,658,449
    
    
    
    139,890,973$
    1,476,129,380
    
    
    
    1,066,018,947
    
    
    
    1,136,152,422
  1




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Interest and fees on loans
    
    $
    18,669,323
    
    
    
    14,451,420
    
    
    
    51,484,539
    
    
    
    39,854,890Interest and dividends on debt and equity securities:Taxable
    
    
    1,636,351
    
    
    
    1,636,356
    
    
    
    4,806,351
    
    
    
    5,222,663Exempt from Federal income taxes
    
    
    387,887
    
    
    
    392,948
    
    
    
    1,176,754
    
    
    
    1,135,724Interest on short-term investments
    
    
    51,471
    
    
    
    34,568
    
    
    
    162,797
    
    
    
    464,935Total interest income
    
    
    20,745,032
    
    
    
    16,515,292
    
    
    
    57,630,441
    
    
    
    46,678,212Interest expense:Interest on deposits
    
    
    8,662,923
    
    
    
    8,536,764
    
    
    
    25,694,396
    
    
    
    24,884,820Interest on short-term borrowings
    
    
    571,906
    
    
    
    751,558
    
    
    
    1,680,996
    
    
    
    1,605,876Interest on notes payable to Federal Home Loan Bank
    
    
    1,375,939
    
    
    
    486,992
    
    
    
    3,463,592
    
    
    
    1,057,913Total interest expense
    
    
    10,610,768
    
    
    
    9,775,314
    
    
    
    30,838,984
    
    
    
    27,548,609Net interest income
    
    
    10,134,264
    
    
    
    6,739,978
    
    
    
    26,791,457
    
    
    
    19,129,603Provision for possible loan losses
    
    
    1,800,000
    
    
    
    1,515,000
    
    
    
    8,539,000
    
    
    
    2,405,000Net interest income after provision
for possible loan losses
    
    
    8,334,264
    
    
    
    5,224,978
    
    
    
    18,252,457
    
    
    
    16,724,603Noninterest income:Service charges on deposit accounts
    
    
    209,682
    
    
    
    120,743
    
    
    
    582,678
    
    
    
    361,826Net gains (losses) on sale of debt and equity securities
    
    
    117
    
    
    
    
    
    
    
    312,250
    
    
    
    (7,026
    )Other noninterest income
    
    
    374,521
    
    
    
    292,871
    
    
    
    1,095,250
    
    
    
    921,536Total noninterest income
    
    
    584,320
    
    
    
    413,614
    
    
    
    1,990,178
    
    
    
    1,276,336Noninterest expense:Salaries and employee benefits
    
    
    4,219,635
    
    
    
    3,258,328
    
    
    
    12,628,179
    
    
    
    9,266,254Occupancy and equipment expense
    
    
    1,212,522
    
    
    
    827,839
    
    
    
    3,375,614
    
    
    
    2,404,268Postage, printing and supplies
    
    
    113,098
    
    
    
    120,988
    
    
    
    357,444
    
    
    
    368,029Professional fees
    
    
    124,152
    
    
    
    121,126
    
    
    
    471,245
    
    
    
    347,171Data processing
    
    
    473,512
    
    
    
    393,291
    
    
    
    1,359,070
    
    
    
    1,048,903Advertising
    
    
    289,770
    
    
    
    194,365
    
    
    
    791,351
    
    
    
    494,321Amortization of identifiable intangible assets
    
    
    4,072
    
    
    
    4,072
    
    
    
    12,216
    
    
    
    12,216Other noninterest expenses
    
    
    1,364,110
    
    
    
    627,251
    
    
    
    3,655,767
    
    
    
    1,881,008Total noninterest expense
    
    
    7,800,871
    
    
    
    5,547,260
    
    
    
    22,650,886
    
    
    
    15,822,170Income (loss) before applicable income taxes
    
    
    1,117,713
    
    
    
    91,332
    
    
    
    (2,408,251
    )
    
    
    2,178,769Applicable income tax (benefit) expense
    
    
    266,621
    
    
    
    (72,866
    )
    
    
    (1,198,888
    )
    
    
    484,324Net income (loss)
    
    $
    851,092
    
    
    
    164,198
    
    
    
    (1,209,363
    )
    
    
    1,694,445Per share amounts:Basic earnings (loss) per share
    
    $
    0.04
    
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.08Basic weighted average shares outstanding
    
    
    20,687,321
    
    
    
    20,654,884
    
    
    
    20,656,388
    
    
    
    20,238,722Diluted earnings (loss) per share
    
    $
    0.04
    
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.08Diluted weighted average shares outstanding
    
    
    20,920,384
    
    
    
    21,704,099
    
    
    
    21,048,143
    
    
    
    21,224,967
  2




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   2008
    
    
    2007Net income (loss)
    
    $
    (1,209,363
    )
    
    
    1,694,445Other comprehensive income (loss) before tax:Net unrealized gains (losses) on available-for-sale securities
    
    
    (3,594,200
    )
    
    
    131,929Reclassification adjustment for losses (gains) included in net income
    
    
    (312,250
    )
    
    
    7,026Other comprehensive income (loss) before tax
    
    
    (3,281,950
    )
    
    
    138,955Income tax related to items of other comprehensive income (loss)
    
    
    (1,115,863
    )
    
    
    47,245Other comprehensive income (loss), net of tax
    
    
    (2,166,087
    )
    
    
    91,710Total comprehensive income (loss)
    
    $
    (3,375,450
    )
    
    
    1,786,155
  3




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   Accumulated
    
    
    Totalother
    
    
    stock-Common
    
    
    
    
    
    
    Retained
    
    
    Treasury
    
    
    comprehensive
    
    
    holdersstock
    
    
    Surplus
    
    
    earnings
    
    
    stock
    
    
    income
    
    
    equityBalance at December 31, 2006
    
    $
    4,892,812
    
    
    
    110,042,307
    
    
    
    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
    
    
    
    123,258,544
    
    
    
    10,561,804
    
    
    
    (112,752
    )
    
    
    (214,176
    )
    
    
    138,658,449Balance at December 31, 2007
    
    $
    5,170,519
    
    
    
    123,329,517
    
    
    
    10,982,306
    
    
    
    
    
    
    
    408,631
    
    
    
    139,890,973Net loss
    
    
    
    
    
    
    
    
    
    
    (1,209,363
    )
    
    
    
    
    
    
    
    
    
    
    (1,209,363
    )Issuance of 9,615 shares of
common stock from treasury
    
    
    
    
    
    
    (34,892
    )
    
    
    
    
    
    
    115,380
    
    
    
    
    
    
    
    80,488Stock options exercised -
101,000 shares (12,296
from treasury)
    
    
    22,176
    
    
    
    519,657
    
    
    
    
    
    
    
    147,552
    
    
    
    
    
    
    
    689,385Treasury stock purchased -
105,324 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,305,000
    )
    
    
    
    
    
    
    (1,305,000
    )Issuance of 2,565 shares of
common stock from treasury
as partial payment for certain
operating leases
    
    
    
    
    
    
    (5,771
    )
    
    
    
    
    
    
    30,780
    
    
    
    
    
    
    
    25,0091,400 shares of common stock from
treasury awarded to directors
    
    
    
    
    
    
    (3,449
    )
    
    
    
    
    
    
    16,800
    
    
    
    
    
    
    
    13,351Stock option expense
    
    
    
    
    
    
    421,946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421,946Amortization of restricted stock
    
    
    
    
    
    
    88,880
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    118,880Change in valuation of
available-for-sale securities,
net of related tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,166,087
    )
    
    
    (2,166,087
    )Balance at September 30, 2008
    
    $
    5,192,695
    
    
    
    124,315,888
    
    
    
    9,772,943
    
    
    
    (964,488
    )
    
    
    (1,757,456
    )
    
    
    136,559,582
  4




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   2008
    
    
    2007Cash flows from operating activities:Net (loss) income
    
    $
    (1,209,363
    )
    
    
    1,694,445Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,592,243
    
    
    
    1,130,140Provision for possible loan losses
    
    
    8,539,000
    
    
    
    2,405,000Capitalized interest expense on construction
    
    
    (85,984
    )
    
    
    (439,669
    )Stock option compensation cost
    
    
    421,946
    
    
    
    305,397Common stock awarded to directors
    
    
    13,351
    
    
    
    10,000Amortization of restricted stock expense
    
    
    118,880
    
    
    
    Losses on sale of other real estate
    
    
    38,525
    
    
    
    10,389Net (gains) losses on sale of debt and equity securities
    
    
    (312,250
    )
    
    
    7,026Increase in accrued interest receivable
    
    
    (483,032
    )
    
    
    (767,334
    )Increase in accrued interest payable
    
    
    583,668
    
    
    
    383,735Mortgage loans originated for sale in secondary market
    
    
    (18,076,916
    )
    
    
    (6,915,625
    )Mortgage loans sold in secondary market
    
    
    17,087,483
    
    
    
    6,692,500Other operating activities, net
    
    
    425,966
    
    
    
    375,890Net cash provided by operating activities
    
    
    8,653,517
    
    
    
    4,891,894Cash flows from investing activities:Purchase of available-for-sale debt and equity securities
    
    
    (90,282,122
    )
    
    
    (9,952,158
    )Proceeds from maturities and calls of available-for-sale debt securities
    
    
    45,513,113
    
    
    
    24,712,652Proceeds from sales of available-for-sale debt securities
    
    
    27,252,250
    
    
    
    4,547,333Net increase in loans
    
    
    (325,613,463
    )
    
    
    (175,998,335
    )Proceeds from sale of other real estate owned
    
    
    1,141,834
    
    
    
    3,681,227Construction expenditures to finish other real estate
    
    
    (48,525
    )
    
    
    Purchase of bank premises and equipment
    
    
    (5,565,726
    )
    
    
    (10,929,789
    )Proceeds from sale of bank premises and equipment
    
    
    105,685
    
    
    
    60,799Net cash used in investing activities
    
    
    (347,496,954
    )
    
    
    (163,878,271
    )Cash flows from financing activities:Net increase in deposits
    
    
    261,957,774
    
    
    
    120,867,782(Decrease) increase in short-term borrowings
    
    
    (2,110,304
    )
    
    
    1,858,385Proceeds from notes payable to Federal Home Loan Bank
    
    
    93,000,000
    
    
    
    30,000,000Payments of notes payable to Federal Home Loan Bank
    
    
    (12,000,000
    )
    
    
    (4,300,000
    )Purchase of treasury stock
    
    
    (1,305,000
    )
    
    
    (1,123,461
    )Stock options exercised
    
    
    689,385
    
    
    
    588,313Issuance of common stock
    
    
    80,488
    
    
    
    13,624,212Payment of stock issuance costs
    
    
    
    
    
    
    (28,759
    )Net cash provided by financing activities
    
    
    340,312,343
    
    
    
    161,486,472Net increase in cash and cash equivalents
    
    
    1,468,906
    
    
    
    2,500,095Cash and cash equivalents at beginning of period
    
    
    13,290,440
    
    
    
    8,474,181Cash and cash equivalents at end of period
    
    $
    14,759,346
    
    
    
    10,974,276Supplemental information:Cash paid for interest
    
    $
    30,341,300
    
    
    
    27,548,609Cash paid for income taxes
    
    
    425,000
    
    
    
    676,000Noncash transactions:Transfers to other real estate in settlement of loans
    
    
    8,243,326
    
    
    
    4,478,902Loans made to facilitate the sale of other real estate
    
    
    
    
    
    
    275,912Capitalized interest expense
    
    
    85,984
    
    
    
    439,669Common stock awarded to directors
    
    
    13,350
    
    
    
    10,000Stock option compensation cost
    
    
    421,946
    
    
    
    305,397Amortization of restricted stock expense
    
    
    118,880
    
    
    
    Stock issued for operating lease payments
    
    
    25,009
    
    
    
    
 
 5




---



##### Table of Contents



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




---



##### 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
 Fair Value Measurements The
Fair Value Option for Financial Assets and Financial Liabilities Effective Date of SFAS No. 157
  Investments in Available-For-Sale Debt Securities
 Obligations of U.S. Government agencies
and corporations
    
    $
    66,847,242Obligations of state and political subdivisions
    
    
    33,615,128Other debt securities
    
    
    4,831,760Mortgage-backed securities
    
    
    62,488,281$
    167,782,411
 Loans Accounting by Creditors for
Impairment of a Loan.
 7




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
   Earnings per Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007BasicNet income (loss)
    
    $
    851,092
    
    
    
    164,198
    
    
    
    (1,209,363
    )
    
    
    1,694,445Weighted average common
shares outstanding
    
    
    20,687,321
    
    
    
    20,654,884
    
    
    
    20,656,388
    
    
    
    20,238,722Basic earnings (loss) per share
    
    $
    0.04
    
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.08DilutedNet income (loss)
    
    $
    851,092
    
    
    
    164,198
    
    
    
    (1,209,363
    )
    
    
    1,694,445Weighted average common
shares outstanding
    
    
    20,687,321
    
    
    
    20,654,884
    
    
    
    20,656,388
    
    
    
    20,238,722Effect of dilutive stock options
    
    
    233,063
    
    
    
    1,049,215
    
    
    
    391,755
    
    
    
    986,245Diluted weighted average common
shares outstanding
    
    
    20,920,384
    
    
    
    21,704,099
    
    
    
    21,048,143
    
    
    
    21,224,967Diluted earnings (loss) per share
    
    $
    0.04
    
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    0.08
 NOTE 2  INTANGIBLE ASSETS
   NOTE 3  STOCK OPTIONS
 Accounting for Stock
Issued to Employees,
 8




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
   Share-based Payments Accounting for
Stock-Based Compensation
   9




---



##### 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, 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
    
    
    
    686,000Nine Months Ended September 30, 2008:Balance at December 31, 2007
    
    $
    7.31
    
    
    
    1,648,200
    
    
    $
    8.41
    
    
    
    701,000Granted
    
    
    12.89
    
    
    
    91,000
    
    
    
    11.58
    
    
    
    16,000Forfeited
    
    
    13.87
    
    
    
    (27,250
    )
    
    
    9.14
    
    
    
    (41,500
    )Exercised
    
    
    6.83
    
    
    
    (101,000
    )
    
    
    
    
    
    
    Balance at September 30, 2008
    
    $
    7.54
    
    
    
    1,610,950
    
    
    $
    8.44
    
    
    
    675,500
  NOTE 4  DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
   Financial instruments for which
contractual amounts represent:Commitments to extend credit
    
    $
    288,866,860Standby letters of credit
    
    
    23,174,333$
    312,041,193
  10




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
    11




---



##### Table of Contents



Part I  Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations
   Forward-Looking Statements
  Overview
    12




---



##### Table of Contents



13




---



##### Table of Contents



As of and for the
    
    
    As of and for theNine Months Ended Sept. 30,
    
    
    Quarters Ended Sept. 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Percentage of net income to:Average total assets
    
    
    (0.12
    )%
    
    
    0.23
    %
    
    
    0.23
    %
    
    
    0.06
    %Average stockholders equity
    
    
    (1.16
    )%
    
    
    1.71
    %
    
    
    2.47
    %
    
    
    0.47
    %Percentage of common dividends declared
to net income per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percentage of average stockholders equity
to average total assets
    
    
    10.60
    %
    
    
    13.52
    %
    
    
    9.43
    %
    
    
    13.35
    %
 14




---



##### Table of Contents



Critical Accounting Policies
  Results of Operations for the Three and Nine-Month Periods Ended September 30, 2008 and 2007
       15




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Average deposits:Noninterest-bearing
    
    
    4.47
    %
    
    
    5.36
    %
    
    
    4.71
    %
    
    
    5.14
    %Interest-bearing:Transaction accounts
    
    
    12.33
    
    
    
    19.66
    
    
    
    14.14
    
    
    
    18.34Savings
    
    
    3.64
    
    
    
    6.72
    
    
    
    4.19
    
    
    
    7.37
 16




---



##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Time deposits of $100,000 or more
    
    
    28.75
    
    
    
    23.86
    
    
    
    28.58
    
    
    
    26.60Other time deposits
    
    
    32.86
    
    
    
    33.14
    
    
    
    31.11
    
    
    
    33.70Total average interest-bearing deposits
    
    
    77.58
    
    
    
    83.38
    
    
    
    78.02
    
    
    
    86.01Total average deposits
    
    
    82.05
    
    
    
    88.74
    
    
    
    82.73
    
    
    
    91.15Average short-term borrowings:Sweep repurchase agreements
    
    
    2.93
    
    
    
    3.25
    
    
    
    3.46
    
    
    
    3.30Daily/overnight funds purchased
    
    
    3.93
    
    
    
    3.24
    
    
    
    3.52
    
    
    
    1.80Total average short-term borrowings
    
    
    6.86
    
    
    
    6.49
    
    
    
    6.98
    
    
    
    5.10Average longer-term advances from Federal Home Loan Bank
    
    
    11.09
    
    
    
    4.77
    
    
    
    10.29
    
    
    
    3.75100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
   Amount of Increase (Decrease)Third Quarter
    
    
    
    
    
    
    
    
    
    
    First Nine MonthsChange From 2007 to 2008 Due toYield/
    
    
    
    
    
    
    
    
    
    
    Yield/Volume (1)
    
    
    Rate (2)
    
    
    Total
    
    
    Volume (1)
    
    
    Rate (2)
    
    
    TotalInterest income:Loans
    
    $
    6,249,348
    
    
    
    (2,028,919
    )
    
    
    4,220,429
    
    
    $
    16,492,495
    
    
    
    (4,862,334
    )
    
    
    11,630,161Investment securities:Taxable
    
    
    89,866
    
    
    
    (89,871
    )
    
    
    (5
    )
    
    
    (340,830
    )
    
    
    (75,482
    )
    
    
    (416,312
    )Exempt from Federal income taxes
    
    
    (8,413
    )
    
    
    66,392
    
    
    
    57,979
    
    
    
    45,155
    
    
    
    (11,276
    )
    
    
    33,879Short-term investments
    
    
    52,736
    
    
    
    (35,833
    )
    
    
    16,903
    
    
    
    (162,547
    )
    
    
    (139,591
    )
    
    
    (302,138
    )Total interest income
    
    
    6,383,537
    
    
    
    (2,088,231
    )
    
    
    4,295,306
    
    
    
    16,034,273
    
    
    
    (5,088,683
    )
    
    
    10,945,590Interest expense:Interest bearing transaction accounts
    
    
    (138,771
    )
    
    
    (912,850
    )
    
    
    (1,051,621
    )
    
    
    341,814
    
    
    
    (2,388,991
    )
    
    
    (2,047,177
    )Savings accounts
    
    
    (76,487
    )
    
    
    (181,376
    )
    
    
    (257,863
    )
    
    
    (260,113
    )
    
    
    (564,290
    )
    
    
    (824,403
    )Time deposits of $100,000 or more
    
    
    1,658,870
    
    
    
    (864,209
    )
    
    
    794,661
    
    
    
    3,659,489
    
    
    
    (1,698,420
    )
    
    
    1,961,069Other time deposits
    
    
    1,373,309
    
    
    
    (732,327
    )
    
    
    640,982
    
    
    
    2,641,415
    
    
    
    (921,328
    )
    
    
    1,720,087Total deposits
    
    
    2,816,921
    
    
    
    (2,690,762
    )
    
    
    126,159
    
    
    
    6,382,605
    
    
    
    (5,573,029
    )
    
    
    809,576Funds purchased and securities sold
under repurchase agreements
    
    
    305,360
    
    
    
    (485,012
    )
    
    
    (179,652
    )
    
    
    1,017,529
    
    
    
    (942,409
    )
    
    
    75,120Long-term borrowings
    
    
    985,483
    
    
    
    (96,536
    )
    
    
    888,947
    
    
    
    2,577,181
    
    
    
    (171,502
    )
    
    
    2,405,679Total interest expense
    
    
    4,107,764
    
    
    
    (3,272,310
    )
    
    
    835,454
    
    
    
    9,977,315
    
    
    
    (6,686,940
    )
    
    
    3,290,375Net interest income
    
    $
    2,275,773
    
    
    
    1,184,079
    
    
    
    3,459,852
    
    
    $
    6,056,958
    
    
    
    1,598,257
    
    
    
    7,655,215
 
 (1)
    
    Change in volume multiplied by yield/rate of prior year. 17




---



##### Table of Contents



(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.
        18




---



##### Table of Contents



Financial Condition
  19




---



##### Table of Contents



20




---



##### Table of Contents



Nine Months Ended September 30, 2008Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    1,070,366,888
    
    
    
    81.48
    %
    
    $
    51,501,359
    
    
    
    6.43
    %Investment securities:Taxable
    
    
    136,085,251
    
    
    
    10.36
    
    
    
    4,806,351
    
    
    
    4.72Exempt from Federal income taxes (3)
    
    
    38,262,929
    
    
    
    2.91
    
    
    
    1,536,860
    
    
    
    5.37Short-term investments
    
    
    6,355,548
    
    
    
    0.48
    
    
    
    162,797
    
    
    
    3.42Total earning assets
    
    
    1,251,070,616
    
    
    
    95.23
    
    
    
    58,007,367
    
    
    
    6.19Nonearning assets:Cash and due from banks
    
    
    10,950,903
    
    
    
    0.83Reserve for possible loan losses
    
    
    (11,406,428
    )
    
    
    (0.87
    )Premises and equipment
    
    
    43,961,674
    
    
    
    3.35Other assets
    
    
    18,810,531
    
    
    
    1.44Available-for-sale investment market valuation
    
    
    314,438
    
    
    
    0.02Total nonearning assets
    
    
    62,631,118
    
    
    
    4.77Total assets
    
    $
    1,313,701,734
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilitiesInterest-bearing transaction accounts
    
    $
    165,207,045
    
    
    
    12.58
    %
    
    
    3,027,936
    
    
    
    2.45
    %Savings
    
    
    48,944,845
    
    
    
    3.73
    
    
    
    621,548
    
    
    
    1.70Time deposits of $100,000 or more
    
    
    334,052,847
    
    
    
    25.43
    
    
    
    10,440,040
    
    
    
    4.17Other time deposits
    
    
    363,564,437
    
    
    
    27.67
    
    
    
    11,604,872
    
    
    
    4.26Total interest-bearing deposits
    
    
    911,769,174
    
    
    
    69.41
    
    
    
    25,694,396
    
    
    
    3.76Long-term borrowings
    
    
    120,302,920
    
    
    
    9.16
    
    
    
    3,463,592
    
    
    
    3.85Funds purchased and securities sold under
repurchase agreements
    
    
    81,577,258
    
    
    
    6.21
    
    
    
    1,680,996
    
    
    
    2.75Total interest-bearing liabilities
    
    
    1,113,649,352
    
    
    
    84.78
    
    
    
    30,838,984
    
    
    
    3.70Noninterest-bearing deposits
    
    
    55,075,699
    
    
    
    4.19Other liabilities
    
    
    5,684,111
    
    
    
    0.43Total liabilities
    
    
    1,174,409,162
    
    
    
    89.40STOCKHOLDERS EQUITY
    
    
    139,292,572
    
    
    
    10.60Total liabilities and stockholders equity
    
    $
    1,313,701,734
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    27,168,383Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.90
    %
  21




---



##### 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 liabilitiesInterest-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
    
    
    
    4.49Funds 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
    %
  22




---



##### Table of Contents



Quarter Ended September 30, 2008Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    1,191,904,958
    
    
    
    82.24
    %
    
    $
    18,675,103
    
    
    
    6.23
    %Investment securities:Taxable
    
    
    144,600,823
    
    
    
    9.98
    
    
    
    1,636,351
    
    
    
    4.50Exempt from Federal income taxes (3)
    
    
    37,877,908
    
    
    
    2.61
    
    
    
    530,220
    
    
    
    5.57Short-term investments
    
    
    8,358,876
    
    
    
    0.58
    
    
    
    51,471
    
    
    
    2.45Total earning assets
    
    
    1,382,742,565
    
    
    
    95.41
    
    
    
    20,893,145
    
    
    
    6.01Nonearning assets:Cash and due from banks
    
    
    13,045,160
    
    
    
    0.90Reserve for possible loan losses
    
    
    (13,092,284
    )
    
    
    (0.90
    )Premises and equipment
    
    
    44,776,852
    
    
    
    3.09Other assets
    
    
    24,132,986
    
    
    
    1.66Available-for-sale investment market valuation
    
    
    (2,318,941
    )
    
    
    (0.16
    )Total nonearning assets
    
    
    66,543,773
    
    
    
    4.59Total assets
    
    $
    1,449,286,338
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilitiesInterest-bearing transaction accounts
    
    $
    161,183,261
    
    
    
    11.12
    %
    
    
    875,197
    
    
    
    2.16
    %Savings
    
    
    47,548,423
    
    
    
    3.28
    
    
    
    181,987
    
    
    
    1.52Time deposits of $100,000 or more
    
    
    375,945,922
    
    
    
    25.94
    
    
    
    3,488,393
    
    
    
    3.69Other time deposits
    
    
    429,763,468
    
    
    
    29.65
    
    
    
    4,117,346
    
    
    
    3.81Total interest-bearing deposits
    
    
    1,014,441,074
    
    
    
    69.99
    
    
    
    8,662,923
    
    
    
    3.40Long-term borrowings
    
    
    145,021,740
    
    
    
    10.01
    
    
    
    1,375,939
    
    
    
    3.77Funds purchased and securities sold under
repurchase agreements
    
    
    89,676,651
    
    
    
    6.19
    
    
    
    571,906
    
    
    
    2.54Total interest-bearing liabilities
    
    
    1,249,139,465
    
    
    
    86.19
    
    
    
    10,610,768
    
    
    
    3.38Noninterest-bearing deposits
    
    
    58,414,574
    
    
    
    4.03Other liabilities
    
    
    5,012,265
    
    
    
    0.35Total liabilities
    
    
    1,312,566,304
    
    
    
    90.57STOCKHOLDERS EQUITY
    
    
    136,720,034
    
    
    
    9.43Total liabilities and stockholders equity
    
    $
    1,449,286,338
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    10,282,377Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.96
    %
  23




---



##### Table of Contents



Quarter  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 liabilitiesInterest-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
    
    
    
    4.55Funds 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
    %
 
 (1)
    
    Interest includes loan fees, recorded as discussed in Note 1 to our consolidated financial
statements for the year ended December 31, 2007, included in our Form 10-K, which was filed
March 28, 2008.(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. Risk Management
   24




---



##### Table of Contents




    
    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 continued to decline. During the quarter ended June 30, 2008, the Company wrote
down these loans to liquidation value by charging the reserve for possible loan losses in the
amount of $2,403,173 and transferring $3,108,000 to other real estate owned. During
 25




---



##### Table of Contents



the quarter ended September 30, 2008 the one remaining property with a value of $232,000 was
transferred to other real estate owned.
    
    Approximately $1.7 million of loans categorized as restructured debt were carried as
nonperforming loans during the quarter ended June 30, 2008. These loans are collateralized by
three single family residences located in southwestern Florida. During the quarter ended June
30, 2008, the Company wrote down the value of these loans to 90% of appraised value by
charging the reserve for possible loan losses in the amount of $560,908, based on current
appraisals of the properties. The Company is working with the borrower to move these
properties as quickly as possible. During the quarter ended September 30, 2008, the Company
entered into a forbearance agreement with the borrowers of these properties and transferred
$1.2 million to other real estate owned.
    
    A loan totaling $6.4 million representing a participation purchased is in the process of
foreclosure. The loan is collateralized by a construction condominium development in
southwestern Florida. During the quarter ended September 30, 2008, the company wrote down the
value of this loan by charging $1,546,372 to the reserve for possible loan losses. Based on
an internal review of the costs and status of the development, the Company has allocated an
additional $232,000 of the reserve for possible loan losses for this loan relationship; which
represents approximately thirty percent of the principal balance.
    
    During the quarter ended March 31, 2008, the Company accepted a deed in lieu of foreclosure
from a southwestern Florida home builder to settle loans outstanding. As part of this
transaction, $667,000 was transferred to other real estate owned and a charge-off to the
reserve for loan losses was taken in the amount of $211,000. Property transferred to other
real estate owned included three single family residences and eight residential lots, all
located in southwestern Florida. During the quarter ended June 30, 2008, the Company wrote
down the value of these properties to 90% of appraised value resulting in an $189,050 charge
to operations.
      26




---



##### Table of Contents




    
    Delinquency of a scheduled loan payment;
    
    Deterioration in the borrowers financial condition identified in a review of periodic
financial statements;
    
    Decrease in the value of collateral securing the loan; or
    
    Change in the economic environment in which the borrower operates.
      27




---



##### Table of Contents



Nine-Month PeriodsEnded September 30,(in thousands of dollars)
    
    2008
    
    
    2007Average loans outstanding
    
    $
    1,070,367
    
    
    $
    736,408Reserve at beginning of year
    
    $
    9,685
    
    
    $
    7,101Provision for possible loan losses
    
    
    8,539
    
    
    
    2,40518,224
    
    
    
    9,506Charge-offs:Commercial loans:Real estate
    
    
    (2,710
    )
    
    
    (317
    )Other
    
    
    (30
    )
    
    
    (36
    )Real estate:Construction
    
    
    (1,758
    )
    
    
    Residential
    
    
    (1,291
    )
    
    
    (280
    )Consumer
    
    
    (19
    )
    
    
    (24
    )Overdrafts
    
    
    (38
    )
    
    
    (1
    )Total charge-offs
    
    
    (5,846
    )
    
    
    (658
    )Recoveries:Commercial loans:Real estate
    
    
    1
    
    
    
    10Other
    
    
    9
    
    
    
    19Real estate:Construction
    
    
    
    
    
    
    Residential
    
    
    
    
    
    
    13Consumer
    
    
    3
    
    
    
    Overdrafts
    
    
    8
    
    
    
    1Total recoveries
    
    
    21
    
    
    
    43Reserve at end of period
    
    $
    12,399
    
    
    $
    8,891Net charge-offs to average loans
    
    
    0.54
    %
    
    
    0.08
    %Ending
reserve to net outstanding loans at end of period
    
    
    1.01
    %
    
    
    1.06
    %
   
    
    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.
    28




---



##### Table of Contents




    
    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.
        29




---



##### 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.
   Liquidity and Capital Resources
    30




---



##### Table of Contents



To Be a WellCapitalized Bank UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action Provision(in thousands of dollars)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk-weighted assets)Consolidated
    
    $
    149,410
    
    
    
    10.75
    %
    
    $
    111,239
    
    
    
    38.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    129,975
    
    
    
    10.06
    %
    
    
    103,365
    
    
    
    38.0
    %
    
    
    129,207
    
    
    
    310.0
    %Reliance Bank, FSB
    
    
    23,256
    
    
    
    24.03
    %
    
    
    7,742
    
    
    
    38.0
    %
    
    
    9,678
    
    
    
    310.0
    %Tier 1 capital (to risk-weighted assets)Consolidated
    
    $
    137,011
    
    
    
    9.85
    %
    
    $
    55,620
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    118,675
    
    
    
    9.18
    %
    
    
    51,683
    
    
    
    34.0
    %
    
    
    77,524
    
    
    
    36.0
    %Reliance Bank, FSB
    
    
    22,443
    
    
    
    23.19
    %
    
    
    3,871
    
    
    
    34.0
    %
    
    
    5,807
    
    
    
    36.0
    %Tier 1 capital (to average assets)Consolidated
    
    $
    137,011
    
    
    
    9.44
    %
    
    $
    58,079
    
    
    
    34.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    118,675
    
    
    
    8.78
    %
    
    
    54,097
    
    
    
    34.0
    %
    
    
    67,621
    
    
    
    35.0
    %Reliance Bank, FSB
    
    
    22,443
    
    
    
    20.06
    %
    
    
    4,409
    
    
    
    34.0
    %
    
    
    5,511
    
    
    
    35.0
    %
  Total
    
    Tier 1
    
    Tier 1Risk-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
  31




---



##### Table of Contents



Over 1 YearTotal Cash
    
    Less Than 1
    
    Less Than 5
    
    Over 5Commitment
    
    Year
    
    Years
    
    YearsOperating leases
    
    $
    6,732,964
    
    
    $
    152,687
    
    
    $
    2,369,369
    
    
    $
    4,210,908Time deposits
    
    
    834,548,844
    
    
    
    609,662,277
    
    
    
    194,632,525
    
    
    
    30,254,042Federal Home
Loan Bank borrowings
    
    
    149,000,000
    
    
    
    19,000,000
    
    
    
    60,000,000
    
    
    
    70,000,000Commitments to extend credit
    
    
    288,866,860
    
    
    
    106,272,766
    
    
    
    104,354,362
    
    
    
    78,239,732Standby letters of credit
    
    
    23,174,333
    
    
    
    14,983,086
    
    
    
    7,891,247
    
    
    
    300,000
 Accounting Pronouncements
  
    
    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
became effective and was implemented in 2007 by the Company; however, Company management
believes that the Company maintains no uncertain tax positions for tax reporting purposes and
accordingly, no FIN 48 liability is required to be recorded.
    
    In September 2006, the FASB issued FAS 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. Effective January 1, 2008, the Company adopted FAS No. 157. In accordance with the
FASB Staff Position 157-2, Effective Date of SFAS No. 157, the Company has not applied the
provisions of FAS No. 157 to nonfinancial assets and nonfinancial liabilities such as other
real estate owned and goodwill. The Company uses fair value measurements to determine fair
value disclosures. The following is a description of valuation methodologies used for assets
recorded at fair value:
 Investments in Available-For-Sale Debt Securities
 Obligations of U.S. Government agencies
and corporations
    
    $
    66,847,242Obligations of state and political subdivisions
    
    
    33,615,128Other debt securities
    
    
    4,831,760Mortgage-backed securities
    
    
    62,488,281$
    167,782,411
 Loans Accounting by Creditors for Impairment of a Loan.
 32




---



##### Table of Contents



Part I  Item 3  Quantitative and Qualitative Disclosures About Market Risk
   Remaining Maturity if Fixed Rate;Earliest Possible Repricing Interval if Floating Rate3
    
    
    Over 3
    
    
    Over 1months
    
    
    months
    
    
    yearor
    
    
    through
    
    
    through
    
    
    Overless
    
    
    12 months
    
    
    5 years
    
    
    5 years
    
    
    TotalInterest-earning assetsLoans
    
    $
    422,578,720
    
    
    $
    118,042,538
    
    
    $
    611,326,331
    
    
    $
    73,218,491
    
    
    $
    1,225,166,080Investment securities, at amortized cost
    
    
    24,422,227
    
    
    
    42,294,394
    
    
    
    90,747,565
    
    
    
    23,529,911
    
    
    
    180,994,097Other interest-earning assets
    
    
    2,041,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,041,867Total interest-earning assets
    
    $
    449,042,814
    
    
    $
    160,336,932
    
    
    $
    702,073,896
    
    
    $
    96,748,402
    
    
    $
    1,408,202,044Interest bearing-liabilitiesSavings and interest bearing transaction accounts
    
    $
    207,571,700
    
    
    $
    11,838
    
    
    $
    
    
    
    $
    
    
    
    $
    207,583,538Time certificates of deposit of $100,00 or more
    
    
    129,860,277
    
    
    
    182,432,236
    
    
    
    61,277,925
    
    
    
    
    
    
    
    373,570,438All other time deposits
    
    
    94,674,907
    
    
    
    202,694,857
    
    
    
    133,354,600
    
    
    
    30,254,042
    
    
    
    460,978,406Nondeposit interest-bearing liabilities
    
    
    80,560,040
    
    
    
    24,654,571
    
    
    
    60,000,000
    
    
    
    70,000,000
    
    
    
    235,214,611Total interest-bearing liabilities
    
    $
    512,666,924
    
    
    $
    409,793,502
    
    
    $
    254,632,525
    
    
    $
    100,254,042
    
    
    $
    1,277,346,993Gap by period
    
    $
    (63,624,110
    )
    
    $
    (249,456,570
    )
    
    $
    447,441,371
    
    
    $
    (3,505,640
    )
    
    $
    130,855,051Cumulative gap
    
    $
    (63,624,110
    )
    
    $
    (313,080,680
    )
    
    $
    134,360,691
    
    
    $
    130,855,051
    
    
    $
    130,855,051Ratio of interest-sensitive assets to interest-
sensitive liabilities
    
    
    0.88
    x
    
    
    0.39
    x
    
    
    2.76
    x
    
    
    0.97
    x
    
    
    1.10
    xCumulative ratio of interest-sensitive assets to
interest-sensitive liabilities
    
    
    0.88
    x
    
    
    0.66
    x
    
    
    1.11
    x
    
    
    1.10
    x
    
    
    1.10
    x
   33




---



##### Table of Contents



Part I  Item 4T  Controls and Procedures
     34




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Part II  Item 1  Legal Proceedings
  
 Part II  Item 1A  Risk Factors
  Our wholesale funding sources may prove insufficient to replace deposits at maturity and support
our future growth.
  35




---



##### Table of Contents



Part II  Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  Number of Shares IssuedDate
    
    Upon Exercise
    
    Exercise Price
    
    ProceedsAugust 11, 2008
    
    
    10,000
    
    
    $
    2.50
    
    
    $
    25,000
  Number of
    
    Exercise
    
    Date Exercisable/Date
    
    Options
    
    Price
    
    Vested
    
    Expiration DateAugust 5, 2008
    
    10,000 Incentive
    
    $7.50
    
    August 5, 2009-1,667;
    
    November 16, 2015Stock Options
    
    
    
    August 5, 2010-3,334;August 5, 2011-3,333;August 5, 2012-1,666September 16, 2008
    
    500 Non-Qualified
    
    $9.05
    
    September 16,2009-250;
    
    November 16, 2015Stock Options
    
    
    
    September 16, 2010-250September 16, 2008
    
    5,000 Incentive
    
    $8.30
    
    Sept. 16, 2009-1,667;
    
    November 16, 2015Stock Options
    
    
    
    Sept. 16, 2010-1,667;Sept. 16, 2011-1,666
   36




---



##### Table of Contents



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
 (a)
    
    None.
 (b)
    
    There have been no material changes to the procedures by which security holders may recommend
nominees to the Companys Board of Directors implemented since the filing of the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2008.
 
 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.
 
 SIGNATURES
  RELIANCE BANCSHARES, INC.By:
    /s/ Jerry S. Von RohrJerry S. Von RohrChief Executive OfficerBy:
    /s/ Dale E. OberkfellDale E. OberkfellChief Financial Officer  37