##### 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 June 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
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)
 10401 Clayton RoadFrontenac, Missouri
    
    63131(Address of Principal Executive Offices)
    
    (Zip Code)
 (314) 569-7200
 
 o þ
  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
    
    
    35Item 6. Exhibits
    
    
    36Signatures
    
    
    36302 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
 
   June 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2006ASSETSCash and due from banks
    
    $
    11,392,861
    
    
    
    10,147,243
    
    
    
    7,975,924Interest-earning deposits in other financial institutions
    
    
    712,869
    
    
    
    25,266
    
    
    
    498,257Federal funds sold
    
    
    6,229,171
    
    
    
    771,491
    
    
    
    Investments in available-for-sale debt and equity securities,
at fair value
    
    
    175,840,325
    
    
    
    205,413,569
    
    
    
    191,866,300Loans
    
    
    763,126,477
    
    
    
    530,495,282
    
    
    
    667,701,639Less  Deferred loan fees/costs
    
    
    (174,024
    )
    
    
    (141,198
    )
    
    
    (282,711
    )Reserve for possible loan losses
    
    
    (7,537,171
    )
    
    
    (6,071,785
    )
    
    
    (7,101,031
    )Net loans
    
    
    755,415,282
    
    
    
    524,282,299
    
    
    
    660,317,897Bank premises and equipment, net
    
    
    39,547,343
    
    
    
    25,802,707
    
    
    
    30,960,372Accrued interest receivable
    
    
    4,559,014
    
    
    
    3,872,468
    
    
    
    4,412,330Identifiable intangible assets, net of accumulated amortization
of $66,509, $50,221 and $58,365 at June 30, 2007 and 2006,
and December 31, 2006, respectively
    
    
    177,810
    
    
    
    192,740
    
    
    
    185,954Goodwill
    
    
    1,149,192
    
    
    
    1,149,192
    
    
    
    1,149,192Other assets
    
    
    4,869,449
    
    
    
    3,748,345
    
    
    
    3,432,983$
    999,893,316
    
    
    
    775,405,320
    
    
    
    900,799,209LIABILITIES AND STOCKHOLDERS EQUITYNon-interest-bearing deposits
    
    $
    47,578,758
    
    
    
    44,531,475
    
    
    
    47,341,090Interest-bearing deposits
    
    
    735,356,546
    
    
    
    585,331,262
    
    
    
    631,255,915Total deposits
    
    
    782,935,304
    
    
    
    629,862,737
    
    
    
    678,597,005Short-term borrowings
    
    
    39,498,316
    
    
    
    17,194,142
    
    
    
    70,462,521Notes payable to Federal Home Loan Bank
    
    
    35,000,000
    
    
    
    14,300,000
    
    
    
    24,300,000Accrued interest payable
    
    
    3,381,756
    
    
    
    2,512,156
    
    
    
    2,739,142Other liabilities
    
    
    2,091,763
    
    
    
    1,598,193
    
    
    
    1,203,949Total liabilities
    
    
    862,907,139
    
    
    
    665,467,228
    
    
    
    777,302,617Commitments and contingenciesStockholders equity:Preferred stock, no par value; 2,000,000 shares authorized,
16,164 shares issued and outstanding at June 30, 2006
    
    
    
    
    
    
    142,895
    
    
    
    Common stock, $0.25 par value; 40,000,000 shares authorized,
20,641,615, 18,779,108 and 19,571,248 shares issued and
outstanding at June 30, 2007 and 2006, and
December 31, 2006, respectively
    
    
    5,160,404
    
    
    
    4,694,777
    
    
    
    4,892,812Surplus
    
    
    122,625,260
    
    
    
    100,627,865
    
    
    
    109,896,794Additional paid-in capital  stock options
    
    
    314,430
    
    
    
    52,873
    
    
    
    145,513Retained earnings
    
    
    10,397,606
    
    
    
    7,322,480
    
    
    
    8,867,359Accumulated other comprehensive income  net unrealized
holding losses on available-for-sale debt securities
    
    
    (1,511,523
    )
    
    
    (2,902,798
    )
    
    
    (305,886
    )Total stockholders equity
    
    
    136,986,177
    
    
    
    109,938,092
    
    
    
    123,496,592$
    999,893,316
    
    
    
    775,405,320
    
    
    
    900,799,209
  1




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Interest income:Interest and fees on loans
    
    $
    13,231,459
    
    
    
    9,130,308
    
    
    
    25,403,470
    
    
    
    17,318,863Interest and dividends on debt and equity securities:Taxable
    
    
    1,759,408
    
    
    
    1,974,773
    
    
    
    3,586,307
    
    
    
    3,759,642Exempt from Federal income taxes
    
    
    382,050
    
    
    
    260,202
    
    
    
    742,776
    
    
    
    476,355Interest on short-term investments
    
    
    227,097
    
    
    
    134,393
    
    
    
    430,367
    
    
    
    254,040Total interest income
    
    
    15,600,014
    
    
    
    11,499,676
    
    
    
    30,162,920
    
    
    
    21,808,900Interest expense:Interest on deposits
    
    
    8,454,275
    
    
    
    5,773,578
    
    
    
    16,348,056
    
    
    
    10,805,482Interest on short-term borrowings
    
    
    361,469
    
    
    
    192,751
    
    
    
    854,318
    
    
    
    344,748Interest on notes payable to Federal Home Loan Bank
    
    
    306,967
    
    
    
    150,294
    
    
    
    570,921
    
    
    
    323,311Total interest expense
    
    
    9,122,711
    
    
    
    6,116,623
    
    
    
    17,773,295
    
    
    
    11,473,541Net interest income
    
    
    6,477,303
    
    
    
    5,383,053
    
    
    
    12,389,625
    
    
    
    10,335,359Provision for possible loan losses
    
    
    500,000
    
    
    
    400,000
    
    
    
    890,000
    
    
    
    950,000Net interest income after provision
for possible loan losses
    
    
    5,977,303
    
    
    
    4,983,053
    
    
    
    11,499,625
    
    
    
    9,385,359Noninterest income:Service charges on deposit accounts
    
    
    130,852
    
    
    
    78,089
    
    
    
    241,083
    
    
    
    174,400Net gains (losses) on sale of debt and equity securities
    
    
    (7,026
    )
    
    
    
    
    
    
    (7,026
    )
    
    
    Other noninterest income
    
    
    350,199
    
    
    
    189,328
    
    
    
    628,665
    
    
    
    268,934Total noninterest income
    
    
    474,025
    
    
    
    267,417
    
    
    
    862,722
    
    
    
    443,334Noninterest expense:Salaries and employee benefits
    
    
    3,019,214
    
    
    
    2,458,368
    
    
    
    6,007,926
    
    
    
    4,576,076Occupancy and equipment expense
    
    
    771,515
    
    
    
    582,883
    
    
    
    1,576,429
    
    
    
    1,047,848Postage, printing and supplies
    
    
    114,208
    
    
    
    106,845
    
    
    
    247,041
    
    
    
    211,489Professional fees
    
    
    116,902
    
    
    
    57,846
    
    
    
    226,045
    
    
    
    114,419Data processing
    
    
    334,616
    
    
    
    259,443
    
    
    
    655,612
    
    
    
    451,937Advertising
    
    
    147,489
    
    
    
    135,548
    
    
    
    299,956
    
    
    
    291,259Amortization of identifiable intangible assets
    
    
    4,072
    
    
    
    5,429
    
    
    
    8,144
    
    
    
    9,501Other noninterest expenses
    
    
    790,844
    
    
    
    521,091
    
    
    
    1,253,757
    
    
    
    1,014,536Total noninterest expense
    
    
    5,298,860
    
    
    
    4,127,453
    
    
    
    10,274,910
    
    
    
    7,717,065Income before applicable income taxes
    
    
    1,152,468
    
    
    
    1,123,017
    
    
    
    2,087,437
    
    
    
    2,111,628Applicable income tax expense
    
    
    317,624
    
    
    
    330,444
    
    
    
    557,190
    
    
    
    640,242Net income
    
    $
    834,844
    
    
    
    792,573
    
    
    
    1,530,247
    
    
    
    1,471,386Per share amounts:Basic earnings per share
    
    $
    0.04
    
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.08Basic weighted average shares outstanding
    
    
    20,475,731
    
    
    
    18,673,925
    
    
    
    20,027,192
    
    
    
    18,399,359Diluted earnings per share
    
    $
    0.04
    
    
    
    0.04
    
    
    
    0.07
    
    
    
    0.08Diluted weighted average shares outstanding
    
    
    21,496,676
    
    
    
    19,542,228
    
    
    
    20,985,254
    
    
    
    19,233,385
  2




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   2007
    
    
    2006Net income
    
    $
    1,530,247
    
    
    
    1,471,386Other comprehensive loss before tax:Net unrealized losses on available-for-sale securities
    
    
    (1,833,749
    )
    
    
    (2,011,383
    )Reclassification adjustment for losses included in net income
    
    
    7,026
    
    
    
    Other comprehensive loss before tax
    
    
    (1,826,723
    )
    
    
    (2,011,383
    )Income tax related to items of other comprehensive loss
    
    
    (621,086
    )
    
    
    (683,870
    )Other comprehensive loss, net of tax
    
    
    (1,205,637
    )
    
    
    (1,327,513
    )Total comprehensive income
    
    $
    324,610
    
    
    
    143,873
  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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,471,386
    
    
    
    
    
    
    
    
    
    
    
    1,471,386Payments received for
subscriptions receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,122,068
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,122,068Issuance of 545,096 shares
of common stock (6,316
shares from treasury)
    
    
    
    
    
    
    134,695
    
    
    
    6,148,204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70,124
    
    
    
    
    
    
    
    6,353,023Issuance of 7,856 shares of
preferred stock (180 shares
from treasury)
    
    
    78,526
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,070
    
    
    
    
    
    
    
    80,596Purchase of treasury stock:180 preferred shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,070
    )
    
    
    
    
    
    
    (2,070
    )6,316 common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70,124
    )
    
    
    
    
    
    
    (70,124
    )Stock options exercised 
6,000 shares
    
    
    
    
    
    
    1,500
    
    
    
    39,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,1251,200 shares of common stock
awarded to directors
    
    
    
    
    
    
    300
    
    
    
    13,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,800Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (13,079
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,079
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,873Change in valuation of
available-for-sale securities,
net of related tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,327,513
    )
    
    
    (1,327,513
    )Balance at June 30, 2006
    
    $
    142,895
    
    
    
    4,694,777
    
    
    
    100,627,865
    
    
    
    
    
    
    
    52,873
    
    
    
    7,322,480
    
    
    
    
    
    
    
    (2,902,798
    )
    
    
    109,938,092Balance at December 31, 2006
    
    $
    
    
    
    
    4,892,812
    
    
    
    109,896,794
    
    
    
    
    
    
    
    145,513
    
    
    
    8,867,359
    
    
    
    
    
    
    
    (305,886
    )
    
    
    123,496,592Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,530,247
    
    
    
    
    
    
    
    
    
    
    
    1,530,247Issuance of 1,046,372 shares
of common stock (68,000
shares from treasury)
    
    
    
    
    
    
    244,593
    
    
    
    12,176,792
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    689,400
    
    
    
    
    
    
    
    13,110,785Stock options exercised 
84,000 shares
    
    
    
    
    
    
    21,000
    
    
    
    485,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506,500Treasury stock purchased 
68,000 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (689,400
    )
    
    
    
    
    
    
    (689,400
    )Issuance of 7,195 shares of
common stock in connection
with Employee Stock Purchase
Plan
    
    
    
    
    
    
    1,799
    
    
    
    81,304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,103800 shares of common stock
awarded to directors
    
    
    
    
    
    
    200
    
    
    
    9,800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,000Stock issuance costs
    
    
    
    
    
    
    
    
    
    
    (24,930
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,930
    )Stock option expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,917
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    168,917Change in valuation of
available -for-sale securities,
net of related tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,205,637
    )
    
    
    (1,205,637
    )Balance at June 30, 2007
    
    $
    
    
    
    
    5,160,404
    
    
    
    122,625,260
    
    
    
    
    
    
    
    314,430
    
    
    
    10,397,606
    
    
    
    
    
    
    
    (1,511,523
    )
    
    
    136,986,177
  4




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##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    1,530,247
    
    
    
    1,471,386Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    723,738
    
    
    
    414,199Provision for possible loan losses
    
    
    890,000
    
    
    
    950,000Capitalized interest expense on construction
    
    
    (269,184
    )
    
    
    (82,677
    )Stock option compensation cost
    
    
    168,917
    
    
    
    52,873Common stock awarded to directors
    
    
    10,000
    
    
    
    13,800Gains on sale of other real estate
    
    
    (19,972
    )
    
    
    Net losses on sale of debt and equity securities
    
    
    7,026
    
    
    
    Increase in accrued interest receivable
    
    
    (146,684
    )
    
    
    (373,043
    )Increase in accrued interest payable
    
    
    642,614
    
    
    
    752,783Mortgage loans originated for sale in secondary market
    
    
    (4,153,800
    )
    
    
    Mortgage loans sold in secondary market
    
    
    4,089,300
    
    
    
    Other operating activities, net
    
    
    607,984
    
    
    
    (288,681
    )Net cash provided by operating activities
    
    
    4,080,186
    
    
    
    2,910,640Cash flows from investing activities:Purchase of available-for-sale debt and equity securities
    
    
    (6,276,933
    )
    
    
    (48,761,941
    )Proceeds from maturities and calls of available-for-sale debt securities
    
    
    16,057,125
    
    
    
    31,232,525Proceeds from sales of available-for-sale debt securities
    
    
    4,508,333
    
    
    
    Net increase in loans
    
    
    (98,708,131
    )
    
    
    (57,831,447
    )Proceeds from sale of other real estate owned
    
    
    2,273,550
    
    
    
    381,331Purchase of bank premises and equipment
    
    
    (9,170,590
    )
    
    
    (4,253,568
    )Proceeds from sale of bank premises and equipment
    
    
    37,028
    
    
    
    Net cash used in investing activities
    
    
    (91,279,618
    )
    
    
    (79,233,100
    )Cash flows from financing activities:Net increase in deposits
    
    
    104,338,299
    
    
    
    53,437,897Increase (decrease) in short-term borrowings
    
    
    (30,964,205
    )
    
    
    346,930Proceeds from notes payable to Federal Home Loan Bank
    
    
    15,000,000
    
    
    
    Payments of notes payable to Federal Home Loan Bank
    
    
    (4,300,000
    )
    
    
    Purchase of treasury stock
    
    
    (689,400
    )
    
    
    (72,194
    )Stock options exercised
    
    
    506,500
    
    
    
    41,125Issuance of common stock
    
    
    13,193,888
    
    
    
    6,353,023Issuance of preferred stock
    
    
    
    
    
    
    80,596Collection of subscriptions receivable
    
    
    
    
    
    
    11,122,068Payment of stock issuance costs
    
    
    (24,930
    )
    
    
    (13,079
    )Net cash provided by financing activities
    
    
    97,060,152
    
    
    
    71,296,366Net increase (decrease) in cash and cash equivalents
    
    
    9,860,720
    
    
    
    (5,026,094
    )Cash and cash equivalents at beginning of period
    
    
    8,474,181
    
    
    
    15,970,094Cash and cash equivalents at end of period
    
    $
    18,334,901
    
    
    
    10,944,000Supplemental information:Cash paid for interest
    
    $
    17,773,295
    
    
    
    10,808,996Cash paid for income taxes
    
    
    566,000
    
    
    
    1,394,000Noncash transactions:Transfers to other real estate in settlement of loans
    
    
    3,061,158
    
    
    
    Loans made to facilitate the sale of other real estate
    
    
    275,912
    
    
    
    Capitalized interest expense
    
    
    269,184
    
    
    
    82,677Common stock awarded to directors
    
    
    10,000
    
    
    
    13,800Stock option compensation cost
    
    
    168,917
    
    
    
    52,873
  5




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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 June 30,
    
    
    Six-Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006BasicNet income
    
    $
    834,844
    
    
    
    792,573
    
    
    
    1,530,247
    
    
    
    1,471,386Weighted average common
shares outstanding
    
    
    20,475,731
    
    
    
    18,673,925
    
    
    
    20,027,192
    
    
    
    18,399,359Basic earnings per share
    
    $
    0.04
    
    
    
    0.04
    
    
    
    0.08
    
    
    
    0.08DilutedNet income
    
    $
    834,844
    
    
    
    792,573
    
    
    
    1,530,247
    
    
    
    1,471,386Weighted average common
shares outstanding
    
    
    20,475,731
    
    
    
    18,673,925
    
    
    
    20,027,192
    
    
    
    18,399,359Effect of dilutive stock options
    
    
    1,020,945
    
    
    
    868,303
    
    
    
    958,062
    
    
    
    834,026Diluted weighted average common
shares outstanding
    
    
    21,496,676
    
    
    
    19,542,228
    
    
    
    20,985,254
    
    
    
    19,233,385Diluted earnings per share
    
    $
    0.04
    
    
    
    0.04
    
    
    
    0.07
    
    
    
    0.08
 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 SharesSix-Months Ended June 30, 2006:Balance at December 31, 2005
    
    $
    6.41
    
    
    
    1,620,200
    
    
    $
    6.14
    
    
    
    543,000Granted
    
    
    11.53
    
    
    
    17,000
    
    
    
    11.88
    
    
    
    37,000Forfeited
    
    
    
    
    
    
    
    
    
    
    7.59
    
    
    
    (14,000
    )Exercised
    
    
    6.85
    
    
    
    (6,000
    )
    
    
    
    
    
    
    Balance at June 30, 2006
    
    $
    6.46
    
    
    
    1,631,200
    
    
    $
    6.47
    
    
    
    566,000Six-Months Ended June 30, 2007:Balance at December 31, 2006
    
    $
    6.57
    
    
    
    1,648,200
    
    
    $
    6.63
    
    
    
    576,000Granted
    
    
    12.94
    
    
    
    131,500
    
    
    
    16.38
    
    
    
    125,000Forfeited
    
    
    11.67
    
    
    
    (4,500
    )
    
    
    4.85
    
    
    
    (5,000
    )Exercised
    
    
    5.86
    
    
    
    (74,000
    )
    
    
    7.25
    
    
    
    (10,000
    )Balance at June 30, 2007
    
    $
    7.08
    
    
    
    1,701,200
    
    
    $
    8.41
    
    
    
    686,000
 9




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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
   10




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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
    11




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12




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##### Table of Contents



As of and for theAs of and for the
    
    Three-Month PeriodsSix Months Ended June 30,
    
    Ended June 30,2007
    
    2006
    
    2007
    
    2006Percentage of net income to:Average total assets
    
    
    0.32
    %
    
    
    0.40
    %
    
    
    0.34
    %
    
    
    0.42
    %Average stockholders equity
    
    
    2.38
    %
    
    
    2.84
    %
    
    
    2.47
    %
    
    
    2.92
    %Percentage of common dividends
declared to net income per
common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percentage of average
stockholders equity to
average total assets
    
    
    13.62
    %
    
    
    14.03
    %
    
    
    13.88
    %
    
    
    14.26
    %
 13




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##### Table of Contents



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




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14




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##### Table of Contents



Six-Month PeriodThree Months Ended June 30,
    
    
    Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Average deposits:Noninterest-bearings
    
    
    5.19
    %
    
    
    4.53
    %
    
    
    5.02
    %
    
    
    4.88
    %Interest-bearing:Transaction accounts
    
    
    18.30
    
    
    
    8.21
    
    
    
    17.61
    
    
    
    8.31Savings
    
    
    7.36
    
    
    
    19.58
    
    
    
    7.73
    
    
    
    21.97Time deposits of $100,000 or more
    
    
    27.94
    
    
    
    21.10
    
    
    
    28.11
    
    
    
    20.40Other time deposits
    
    
    34.30
    
    
    
    42.02
    
    
    
    34.00
    
    
    
    40.03Total average interest-bearing deposits
    
    
    87.90
    
    
    
    90.91
    
    
    
    87.45
    
    
    
    90.71Total average deposits
    
    
    93.09
    
    
    
    95.44
    
    
    
    92.47
    
    
    
    95.59Average short-term borrowings:Sweep repurchase agreements
    
    
    2.89
    
    
    
    2.34
    
    
    
    3.33
    
    
    
    2.15Daily/overnight funds purchased
    
    
    0.73
    
    
    
    0.02
    
    
    
    1.01
    
    
    
    0.02Total average short-term borrowings
    
    
    3.62
    
    
    
    2.36
    
    
    
    4.34
    
    
    
    2.17Average longer-term advances from Federal
Home Loan Bank
    
    
    3.29
    
    
    
    2.20
    
    
    
    3.19
    
    
    
    2.24100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
  15




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##### Table of Contents



Amount of Increase (Decrease)Change From Second Quarter of 2006
    
    
    Change from First Six Months of 2006to Second Quarter of 2007 Due to
    
    
    to First Six Months of 2007 Due toVolume
    
    
    Yield/
    
    
    
    
    
    
    Volume
    
    
    Yield/(1)
    
    
    Rate (2)
    
    
    Total
    
    
    (1)
    
    
    Rate (2)
    
    
    TotalInterest income:Loans
    
    $
    3,852,235
    
    
    
    250,215
    
    
    
    4,102,450
    
    
    
    7,205,619
    
    
    
    882,109
    
    
    
    8,087,728Investment securities:Taxable
    
    
    (364,732
    )
    
    
    149,367
    
    
    
    (215,365
    )
    
    
    (566,602
    )
    
    
    393,267
    
    
    
    (173,335
    )Exempt from Federal income taxes
    
    
    154,583
    
    
    
    29,305
    
    
    
    183,888
    
    
    
    335,277
    
    
    
    66,630
    
    
    
    401,907Short-term investments
    
    
    80,436
    
    
    
    12,268
    
    
    
    92,704
    
    
    
    100,393
    
    
    
    75,934
    
    
    
    176,327Total interest income
    
    
    3,722,522
    
    
    
    441,155
    
    
    
    4,163,677
    
    
    
    7,074,687
    
    
    
    1,417,940
    
    
    
    8,492,627Interest expense:Interest bearing transaction accounts
    
    
    1,059,228
    
    
    
    166,151
    
    
    
    1,225,379
    
    
    
    1,770,478
    
    
    
    681,040
    
    
    
    2,451,518Savings accounts
    
    
    (510,239
    )
    
    
    (59,745
    )
    
    
    (569,984
    )
    
    
    (1,230,750
    )
    
    
    (118,795)
    
    
    
    (1,349,545
    )Time deposits of $100,000 or more
    
    
    1,180,308
    
    
    
    299,881
    
    
    
    1,480,189
    
    
    
    2,387,326
    
    
    
    770,420
    
    
    
    3,157,746Other time deposits
    
    
    147,286
    
    
    
    397,827
    
    
    
    545,113
    
    
    
    483,741
    
    
    
    799,114
    
    
    
    1,282,855Total deposits
    
    
    1,876,583
    
    
    
    804,114
    
    
    
    2,680,697
    
    
    
    3,410,795
    
    
    
    2,131,779
    
    
    
    5,542,574Federal funds purchased and securities
sold under repurchase agreements
    
    
    179,524
    
    
    
    (10,806
    )
    
    
    168,718
    
    
    
    521,591
    
    
    
    (12,021
    )
    
    
    509,570Long-term borrowings
    
    
    146,853
    
    
    
    9,820
    
    
    
    156,673
    
    
    
    256,328
    
    
    
    (8,718
    )
    
    
    247,610Total interest expense
    
    
    2,202,960
    
    
    
    803,128
    
    
    
    3,006,088
    
    
    
    4,188,714
    
    
    
    2,111,040
    
    
    
    6,299,754Net interest income
    
    $
    1,519,562
    
    
    
    (361,973
    )
    
    
    1,157,589
    
    
    
    2,885,973
    
    
    
    (693,100
    )
    
    
    2,192,873
 
 (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



17




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##### Table of Contents



Financial Condition
       18




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##### Table of Contents



Six Months Ended June 30, 2007Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    702,519,964
    
    
    
    73.82
    %
    
    $
    25,416,524
    
    
    
    7.30
    %Investment securities:Taxable
    
    
    150,268,395
    
    
    
    15.79
    
    
    
    3,586,307
    
    
    
    4.81Exempt from Federal income taxes (3)
    
    
    36,414,804
    
    
    
    3.82
    
    
    
    1,030,740
    
    
    
    5.71Short-term investments
    
    
    16,138,845
    
    
    
    1.70
    
    
    
    430,367
    
    
    
    5.38Total earning assets
    
    
    905,342,008
    
    
    
    95.13
    
    
    
    30,463,938
    
    
    
    6.79Nonearning assets:Cash and due from banks
    
    
    9,341,561
    
    
    
    0.98Reserve for possible loan losses
    
    
    (7,244,794
    )
    
    
    (0.76
    )Premises and equipment
    
    
    34,176,489
    
    
    
    3.59Other assets
    
    
    10,749,194
    
    
    
    1.13Available-for-sale investment market valuation
    
    
    (639,830
    )
    
    
    (0.07
    )Total nonearning assets
    
    
    46,382,620
    
    
    
    4.87Total assets
    
    $
    951,724,628
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    143,733,509
    
    
    
    15.10
    %
    
    
    3,148,295
    
    
    
    4.42
    %Savings
    
    
    63,100,723
    
    
    
    6.63
    
    
    
    1,006,101
    
    
    
    3.22Time deposits of $100,000 or more
    
    
    229,386,309
    
    
    
    24.10
    
    
    
    5,785,239
    
    
    
    5.09Other time deposits
    
    
    277,477,400
    
    
    
    29.16
    
    
    
    6,408,421
    
    
    
    4.66Total interest -bearing deposits
    
    
    713,697,941
    
    
    
    74.99
    
    
    
    16,348,056
    
    
    
    4.62Long-term borrowings
    
    
    25,920,442
    
    
    
    2.72
    
    
    
    570,921
    
    
    
    4.44Federal funds purchased and securities sold
under repurchase agreements
    
    
    35,401,312
    
    
    
    3.72
    
    
    
    854,318
    
    
    
    4.87Total interest -bearing liabilities
    
    
    775,019,695
    
    
    
    81.43
    
    
    
    17,773,295
    
    
    
    4.62Noninterest-bearing deposits
    
    
    40,971,093
    
    
    
    4.30Other liabilities
    
    
    6,119,968
    
    
    
    0.65Total liabilities
    
    
    822,110,756
    
    
    
    86.38STOCKHOLDERS EQUITY
    
    
    129,613,872
    
    
    
    13.62Total liabilities and stockholders equity
    
    $
    951,724,628
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    12,690,643Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.83
    %
 19




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##### Table of Contents



Six Months Ended June 30, 2006Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    502,143,478
    
    
    
    67.36
    %
    
    $
    17,328,796
    
    
    
    6.96
    %Investment securities:Taxable
    
    
    175,230,201
    
    
    
    23.51
    
    
    
    3,759,642
    
    
    
    4.33Exempt from Federal income taxes (3)
    
    
    24,381,877
    
    
    
    3.27
    
    
    
    628,833
    
    
    
    5.20Short-term investments
    
    
    12,010,886
    
    
    
    1.61
    
    
    
    254,040
    
    
    
    4.27Total earning assets
    
    
    713,766,442
    
    
    
    95.75
    
    
    
    21,971,311
    
    
    
    6.21Nonearning assets:Cash and due from banks
    
    
    7,959,540
    
    
    
    1.07Reserve for possible loan losses
    
    
    (5,645,664
    )
    
    
    (0.76
    )Premises and equipment
    
    
    24,001,692
    
    
    
    3.22Other assets
    
    
    8,030,069
    
    
    
    1.07Available-for-sale investment market valuation
    
    
    (2,629,456
    )
    
    
    (0.35
    )Total nonearning assets
    
    
    31,716,181
    
    
    
    4.25Total assets
    
    $
    745,482,623
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    52,841,621
    
    
    
    7.09
    %
    
    
    696,777
    
    
    
    2.66
    %Savings
    
    
    139,754,781
    
    
    
    18.75
    
    
    
    2,355,646
    
    
    
    3.40Time deposits of $100,000 or more
    
    
    129,810,352
    
    
    
    17.41
    
    
    
    2,627,493
    
    
    
    4.08Other time deposits
    
    
    254,692,596
    
    
    
    34.16
    
    
    
    5,125,566
    
    
    
    4.06Total interest -bearing deposits
    
    
    577,099,350
    
    
    
    77.41
    
    
    
    10,805,482
    
    
    
    3.78Long-term borrowings
    
    
    14,300,000
    
    
    
    1.92
    
    
    
    323,311
    
    
    
    4.56Federal funds purchased and securities sold
under repurchase agreements
    
    
    13,781,809
    
    
    
    1.85
    
    
    
    344,748
    
    
    
    5.04Total interest -bearing liabilities
    
    
    605,181,159
    
    
    
    81.18
    
    
    
    11,473,541
    
    
    
    3.82Noninterest-bearing deposits
    
    
    31,020,660
    
    
    
    4.16Other liabilities
    
    
    4,723,031
    
    
    
    0.63Total liabilities
    
    
    640,924,850
    
    
    
    85.97STOCKHOLDERS EQUITY
    
    
    104,557,773
    
    
    
    14.03Total liabilities and stockholders equity
    
    $
    745,482,623
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    10,497,770
    
    
    
    2.97
    %
 20




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##### Table of Contents



Three Months Ended June 30, 2007Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    727,566,309
    
    
    
    74.46
    %
    
    $
    13,238,026
    
    
    
    7.30
    %Investment securities:Taxable
    
    
    145,608,911
    
    
    
    14.90
    
    
    
    1,759,408
    
    
    
    4.85Exempt from Federal income taxes (3)
    
    
    37,358,811
    
    
    
    3.82
    
    
    
    531,462
    
    
    
    5.71Short-term investments
    
    
    16,231,852
    
    
    
    1.67
    
    
    
    227,097
    
    
    
    5.61Total earning assets
    
    
    926,765,883
    
    
    
    94.85
    
    
    
    15,755,993
    
    
    
    6.82Nonearning assets:Cash and due from banks
    
    
    10,272,180
    
    
    
    1.05Reserve for possible loan losses
    
    
    (7,298,780
    )
    
    
    (0.75
    )Premises and equipment
    
    
    36,678,712
    
    
    
    3.75Other assets
    
    
    11,226,530
    
    
    
    1.16Available-for-sale investment market valuation
    
    
    (551,573
    )
    
    
    (0.06
    )Total nonearning assets
    
    
    50,327,069
    
    
    
    5.15Total assets
    
    $
    977,092,952
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    152,796,104
    
    
    
    15.64
    %
    
    
    1,678,673
    
    
    
    4.41
    %Savings
    
    
    61,427,645
    
    
    
    6.29
    
    
    
    476,066
    
    
    
    3.11Time deposits of $100,000 or more
    
    
    233,228,282
    
    
    
    23.87
    
    
    
    2,947,353
    
    
    
    5.07Other time deposits
    
    
    286,351,450
    
    
    
    29.31
    
    
    
    3,352,183
    
    
    
    4.70Total interest  bearing deposits
    
    
    733,803,481
    
    
    
    75.11
    
    
    
    8,454,275
    
    
    
    4.62Long-term borrowings
    
    
    27,475,824
    
    
    
    2.80
    
    
    
    306,967
    
    
    
    4.48Federal funds purchased and securities sold
under repurchase agreements
    
    
    30,268,862
    
    
    
    3.10
    
    
    
    361,469
    
    
    
    4.79Total interest -bearing liabilities
    
    
    791,548,167
    
    
    
    81.01
    
    
    
    9,122,711
    
    
    
    4.62Noninterest-bearing deposits
    
    
    43,346,751
    
    
    
    4.43Other liabilities
    
    
    6,617,783
    
    
    
    0.68Total liabilities
    
    
    841,512,701
    
    
    
    86.12STOCKHOLDERS EQUITY
    
    
    135,580,251
    
    
    
    13.88Total liabilities and stockholders equity
    
    $
    977,092,952
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    6,633,282Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.87
    %
 21




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##### Table of Contents



Three Months Ended June 30, 2006Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    515,486,223
    
    
    
    67.60
    %
    
    $
    9,135,576
    
    
    
    7.11
    %Investment securities:Taxable
    
    
    176,439,911
    
    
    
    23.14
    
    
    
    1,974,773
    
    
    
    4.49Exempt from Federal income taxes (3)
    
    
    26,331,128
    
    
    
    3.45
    
    
    
    347,574
    
    
    
    5.29Short-term investments
    
    
    10,418,188
    
    
    
    1.37
    
    
    
    134,393
    
    
    
    5.17Total earning assets
    
    
    728,675,450
    
    
    
    95.56
    
    
    
    11,592,316
    
    
    
    6.38Nonearning assets:Cash and due from banks
    
    
    9,220,262
    
    
    
    1.21Reserve for possible loan losses
    
    
    (5,861,863
    )
    
    
    (0.77
    )Premises and equipment
    
    
    24,789,897
    
    
    
    3.25Other assets
    
    
    8,923,980
    
    
    
    1.17Available-for-sale investment market valuation
    
    
    (3,198,132
    )
    
    
    (0.42
    )Total nonearning assets
    
    
    33,874,144
    
    
    
    4.44Total assets
    
    $
    762,549,594
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilities:Interest-bearing transaction accounts
    
    $
    53,247,786
    
    
    
    6.98
    %
    
    
    453,294
    
    
    
    3.41
    %Savings
    
    
    126,924,218
    
    
    
    16.64
    
    
    
    1,046,050
    
    
    
    3.31Time deposits of $100,000 or more
    
    
    136,806,566
    
    
    
    17.94
    
    
    
    1,467,164
    
    
    
    4.30Other time deposits
    
    
    272,431,086
    
    
    
    35.73
    
    
    
    2,807,070
    
    
    
    4.13Total interest  bearing deposits
    
    
    589,409,656
    
    
    
    77.29
    
    
    
    5,773,578
    
    
    
    3.93Long-term borrowings
    
    
    14,300,000
    
    
    
    1.88
    
    
    
    150,294
    
    
    
    4.22Federal funds purchased and securities sold
under repurchase agreements
    
    
    15,285,800
    
    
    
    2.00
    
    
    
    192,751
    
    
    
    5.06Total interest -bearing liabilities
    
    
    618,995,456
    
    
    
    81.17
    
    
    
    6,116,623
    
    
    
    3.96Noninterest-bearing deposits
    
    
    29,366,291
    
    
    
    3.86Other liabilities
    
    
    5,430,321
    
    
    
    0.71Total liabilities
    
    
    653,792,068
    
    
    
    85.74STOCKHOLDERS EQUITY
    
    
    108,757,526
    
    
    
    14.26Total liabilities and stockholders equity
    
    $
    762,549,594
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    5,475,693Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.01
    %
 
 (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. 22




---



##### Table of Contents



Risk Management
         23




---



##### Table of Contents



Six-Month Periods Ended June 30,2007
    
    
    2006(in thousands of dollars)Average loans outstanding
    
    $
    702,520
    
    
    
    502,143Reserve at beginning of year
    
    
    7,101
    
    
    
    5,213Provision for possible loan losses
    
    
    890
    
    
    
    9507,991
    
    
    
    6,163Charge-offs:Commercial loans:Real estate
    
    
    (317
    )
    
    
    Other
    
    
    (36
    )
    
    
    (19
    )Real estate:Construction
    
    
    
    
    
    
    Residential
    
    
    (124
    )
    
    
    (73
    )Consumer
    
    
    (1
    )
    
    
    (12
    )Overdrafts
    
    
    (14
    )
    
    
    Total charge-offs
    
    
    (492
    )
    
    
    (104
    )Recoveries:Commercial loans:Real estate
    
    
    8
    
    
    
    Other
    
    
    17
    
    
    
    Real estate:Construction
    
    
    
    
    
    
    Residential
    
    
    12
    
    
    
    9Consumer
    
    
    
    
    
    
    4Overdrafts
    
    
    1
    
    
    
    Total recoveries
    
    
    38
    
    
    
    13Reserve at end of period
    
    $
    7,537
    
    
    
    6,072Net charge-offs to average loans
    
    
    0.13
    %
    
    
    0.04
    %Ending reserve to net outstanding loans at end of period
    
    
    0.99
    %
    
    
    1.14
    %
    
    
    delinquency of a scheduled loan payment;
    
    deterioration in the borrowers financial condition identified in a review of periodic
financial statements;
 24




---



##### 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
 25




---



##### Table of Contents




    
    findings of our internal loan review department.
        
    
    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.
 26




---



##### Table of Contents



Liquidity and Capital Resources
      27




---



##### Table of Contents



To Be a WellCapitalized Bank UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(in thousands of dollars)Total capital (to risk-weighted
assets)Consolidated
    
    $
    144,708
    
    
    
    16.47
    %
    
    $
    70,286
    
    
    
    8.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    105,669
    
    
    
    12.79
    %
    
    
    66,098
    
    
    
    8.0
    %
    
    
    82,623
    
    
    
    10.0
    %Reliance Bank, FSB
    
    
    20,535
    
    
    
    33.46
    %
    
    
    4,909
    
    
    
    8.0
    %
    
    
    6,137
    
    
    
    10.0
    %Tier 1 capital (to risk-weighted
assets)Consolidated
    
    $
    137,170
    
    
    
    15.61
    %
    
    $
    35,143
    
    
    
    4.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    98,667
    
    
    
    11.94
    %
    
    
    33,049
    
    
    
    4.0
    %
    
    
    49,574
    
    
    
    6.0
    %Reliance Bank, FSB
    
    
    19,990
    
    
    
    32.57
    %
    
    
    2,455
    
    
    
    4.0
    %
    
    
    3,682
    
    
    
    6.0
    %Tier 1 capital (to average assets)Consolidated
    
    $
    137,170
    
    
    
    14.06
    %
    
    $
    39,031
    
    
    
    4.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    98,667
    
    
    
    10.75
    %
    
    
    36,703
    
    
    
    4.0
    %
    
    
    45,879
    
    
    
    5.0
    %Reliance Bank, FSB
    
    
    19,990
    
    
    
    36.35
    %
    
    
    2,200
    
    
    
    4.0
    %
    
    
    2,749
    
    
    
    5.0
    %
  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
  28




---



##### Table of Contents



Over 1 YearTotal Cash
    
    Less Than 1
    
    Less than 5
    
    Over 5Commitment
    
    Year
    
    Years
    
    YearsOperating leases
    
    $
    7,049,685
    
    
    
    432,802
    
    
    
    1,399,439
    
    
    
    5,217,444Time deposits
    
    
    514,821,707
    
    
    
    485,171,380
    
    
    
    56,649,615
    
    
    
    712Federal Home Loan Bank borrowings
    
    
    50,000,000
    
    
    
    15,000,000
    
    
    
    25,000,000
    
    
    
    10,000,000Commitments to extend credit
    
    
    211,769,207
    
    
    
    56,798,249
    
    
    
    132,152,793
    
    
    
    22,818,165Standby letters of credit
    
    
    5,414,053
    
    
    
    2,014,570
    
    
    
    3,399,483
    
    
    
    
 Accounting Pronouncements
  
    
    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 (FAS)
No. 123 (Revised) Share-based Payments(FAS 123R). This statement replaces FAS 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 $3.79 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
 29




---



##### Table of Contents



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 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 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.
    
    In February 2007, the FASB issued FAS 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
    
    $
    203,168
    
    
    $
    105,544
    
    
    $
    424,751
    
    
    $
    29,490
    
    
    $
    762,953Investment securities, at fair value
    
    
    17,376
    
    
    
    25,076
    
    
    
    94,358
    
    
    
    39,031
    
    
    
    175,841Other interest-earning assets
    
    
    6,229
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,229Total interest-earnings assets
    
    $
    226,773
    
    
    $
    130,620
    
    
    $
    519,109
    
    
    $
    68,521
    
    
    $
    945,023Interest-bearing liabilitiesSavings, and interest bearing transaction accounts
    
    $
    220,573
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    220,573Time certificates of deposit of $100,000 or more
    
    
    111,798
    
    
    
    98,820
    
    
    
    19,203
    
    
    
    
    
    
    
    229,821All other time deposits
    
    
    104,532
    
    
    
    142,984
    
    
    
    37,447
    
    
    
    
    
    
    
    284,963Nondeposit interest-bearing liabilities
    
    
    37,742
    
    
    
    1,657
    
    
    
    25,100
    
    
    
    10,000
    
    
    
    74,499Total interest-bearing liabilities
    
    $
    474,645
    
    
    $
    243,461
    
    
    $
    81,750
    
    
    $
    10,000
    
    
    $
    809,856Gap by period
    
    $
    (247,872
    )
    
    $
    (112,841
    )
    
    $
    437,359
    
    
    $
    58,521
    
    
    $
    135,167Cumulative gap
    
    $
    (247,872
    )
    
    $
    (360,713
    )
    
    $
    76,646
    
    
    $
    135,167
    
    
    $
    135,167Ratio of interest-sensitive assets to
interest-sensitive liabilities
    
    
    0.48
    x
    
    
    0.54
    x
    
    
    6.35
    x
    
    
    6.85
    x
    
    
    1.17
    xCumulative ratio of interest- sensitive assets
to interest- sensitive liabilities
    
    
    0.48
    x
    
    
    0.50
    x
    
    
    1.10
    x
    
    
    1.17
    x
    
    
    1.17
    x
   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




---



##### Table of Contents



Part II  Item 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  Date
    
    Price
    
    Number of Shares
    
    ProceedsApril 1, 2007 to April 17,
2007
    
    $
    12.50
    
    
    
    947,505
    
    
    $
    11,843,813April 18, 2007 through June
30, 2007
    
    $
    15.00
    
    
    
    12,467
    
    
    $
    187,005
  Number of SharesDate
    

Issued Upon Exercise
    
    Exercise Price
    

    ProceedsApril 17, 2007
    
    
    8,000
    
    
    $
    2.75
    
    
    $
    22,000April 17, 2007
    
    
    8,000
    
    
    $
    3.50
    
    
    $
    28,000April 17, 2007
    
    
    8,000
    
    
    $
    4.8125
    
    
    $
    38,500April 17, 2007
    
    
    8,000
    
    
    $
    6.1875
    
    
    $
    49,500April 17, 2007
    
    
    4,000
    
    
    $
    8.50
    
    
    $
    34,000April 17, 2007
    
    
    2,000
    
    
    $
    9.50
    
    
    $
    19,000June 5, 2007
    
    
    2,000
    
    
    $
    7.25
    
    
    $
    14,500June 14, 2007
    
    
    2,000
    
    
    $
    2.75
    
    
    $
    5,500June 14, 2007
    
    
    2,000
    
    
    $
    8.50
    
    
    $
    17,000June 14, 2007
    
    
    2,000
    
    
    $
    9.50
    
    
    $
    19,000
  33




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##### Table of Contents



Date
    
    Number of Options
    
    Exercise Price
    
    Date Exercisable
    
    Expiration DateApril 17, 2007
    
    7,500 Incentive
    
    $12.50
    
    April 17, 2008   2500;
    
    November 16, 2015Stock Options
    
    
    
    April 17, 2009  2,500;April 17, 2010  2,500April 17, 2007
    
    4,500 Non-Qualified
    
    $13.25
    
    April 17, 2009  4,500
    
    August 1, 2015Stock OptionsMay 16, 2007
    
    23,000 Incentive
    
    $15.00
    
    May 16, 2008  7,666;
    
    November 16, 2015Stock Options
    
    
    
    May 16, 2009  7,666;May 16, 2010  7,668May 16, 2007
    
    500 Non-Qualified
    
    $15.75
    
    May 16, 2009  500
    
    August 1, 2015Stock OptionsMay 16, 2007
    
    120,000 Non-
    
    $16.50
    
    June 1, 2008  39,996;
    
    May 16, 2017Qualified Stock
    
    
    
    June 1, 2009  39,996;Options
    
    
    
    June 1, 2010  40,008
   34




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##### Table of Contents



Total Number of
    
    Maximum Number ofShares Purchased as
    
    Shares that May YetPart of Publicly
    
    be Purchased underTotal Number of
    
    Average Price Paid
    
    Announced Plans or
    
    Publicly AnnouncedPeriod
    
    Shares Purchased
    
    per Share
    
    Programs
    
    Plans or ProgramsApril 1, 2007 to
April 30, 2007
    
    
    34,000
    
    
    $
    10.00
    
    
    
    0
    
    
    
    0May 1, 2007 through
May 31, 2007
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0June 1, 2007
through June 30,
2007
    
    
    6,000
    
    
    $
    12.00
    
    
    
    0
    
    
    
    0
 
 Part II  Item 3  Defaults Upon Senior Securities
  
 Part II  Item 4  Submission of Matters to Vote of Security Holders
   PROPOSAL NO. 1: INCREASE IN AUTHORIZED SHARES
  For
    
    Against
    
    AbstainIncrease in Authorized Shares
    
    
    17,781,578
    
    
    
    169,884
    
    
    
    46,336
 PROPOSAL NO. 2: ELECTION OF DIRECTORS
  Class II
  Class I
 Class III
 35




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##### Table of Contents



VotesName
    
    For
    
    Withheld Authority
    
    Class
    
    TermEarl G. Lindenberg
    
    
    17,978,066
    
    
    
    19,732
    
    
    II
    
    
    2010James E. SanFilippo
    
    
    17,978,066
    
    
    
    19,732
    
    
    II
    
    
    2010John J. Moller
    
    
    17,978,066
    
    
    
    19,732
    
    
    II
    
    
    2010Fortis M. Lawder
    
    
    17,997,798
    
    
    
    0
    
    
    II
    
    
    2010William P. Stiritz
    
    
    17,912,498
    
    
    
    85,300
    
    
    
    I
    
    
    
    2008Robert M. Cox, Jr.
    
    
    17,997,798
    
    
    
    0
    
    
    III
    
    
    2009
  Name
    
    Class
    
    TermRalph W. Casazzone
    
    
    I
    
    
    
    2009Richard M. Demko
    
    
    I
    
    
    
    2009Patrick R. Gideon
    
    
    I
    
    
    
    2009Barry D. Koenemann
    
    III
    
    
    2008Gary R. Parker
    
    III
    
    
    2008Jerry S. Von Rohr
    
    III
    
    
    2008
 PROPOSAL NO. 3: INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  For
    
    Against
    
    AbstainAppointment of Cummings, Ristau & Associates, P.C.
    
    
    17,924,486
    
    
    
    19,732
    
    
    
    48,796
 
 Part II  Item 5  Other Information
  36




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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 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 Section 906 of the
Sarbanes-Oxley Act of 2002.
 37




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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  38