##### 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, 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
    
    (IRS EmployerIncorporation or Organization)
    
    Identification No.)10401 Clayton RoadFrontenac, Missouri
    
    63131(Address of Principal Executive Offices)
    
    (Zip Code)
 (314) 569-7200
 
 þ o
  Large accelerated filer: o
    
    Accelerated filer: o
    

    Non-accelerated filer: þ
    
    Smaller reporting company: o(Do not check if a smaller reporting company)
 o þ




---



##### 



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATION
    
    
    2Item 1.Financial Statements
    
    
    2Condensed Consolidated Balance Sheets (Unaudited)
    
    
    2Condensed Consolidated Statements of Income (Unaudited)
    
    
    3Condensed Consolidated Statements of Comprehensive Income (Unaudited)
    
    
    4Condensed Consolidated Statements of Stockholders Equity (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    6Notes to Unaudited Interim Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4T. Controls and Procedures
    
    
    36PART II  OTHER INFORMATION
    
    
    36Item 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    36Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    40Signatures
    
    
    40Exhibit 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
 
   June 30,
    
    
    December 31,2008
    
    
    2007
    
    
    2007ASSETSCash and due from banks
    
    $
    18,554,276
    
    
    
    11,392,861
    
    
    
    13,170,564Interest-earning deposits in other financial institutions
    
    
    285,033
    
    
    
    712,869
    
    
    
    89,876Federal funds sold
    
    
    112,000
    
    
    
    6,229,171
    
    
    
    30,000Investments in available-for-sale debt and equity securities,
at fair value
    
    
    171,290,667
    
    
    
    175,840,325
    
    
    
    163,645,218Loans
    
    
    1,115,579,839
    
    
    
    763,126,477
    
    
    
    911,960,236Less -Deferred loan fees/costs
    
    
    (689,223
    )
    
    
    (174,024
    )
    
    
    (222,226
    )Reserve for possible loan losses
    
    
    (12,682,420
    )
    
    
    (7,537,171
    )
    
    
    (9,685,011
    )Net loans
    
    
    1,102,208,196
    
    
    
    755,415,282
    
    
    
    902,052,999Premises and equipment, net
    
    
    44,827,825
    
    
    
    39,547,343
    
    
    
    42,931,925Accrued interest receivable
    
    
    5,008,066
    
    
    
    4,559,014
    
    
    
    4,959,629Identifiable intangible assets, net of accumulated amortization
of $82,797, $66,509 and $74,653 at June 30, 2008 and 2007,
and December 31, 2007, respectively
    
    
    161,522
    
    
    
    177,810
    
    
    
    169,666Goodwill
    
    
    1,149,192
    
    
    
    1,149,192
    
    
    
    1,149,192Other real estate
    
    
    10,802,316
    
    
    
    1,632,579
    
    
    
    4,937,285Other assets
    
    
    8,075,773
    
    
    
    3,236,870
    
    
    
    3,016,068$
    1,362,474,866
    
    
    
    999,893,316
    
    
    
    1,136,152,422LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Non-interest-bearing
    
    $
    59,608,559
    
    
    
    47,578,758
    
    
    
    53,441,589Interest-bearing
    
    
    912,793,445
    
    
    
    735,356,546
    
    
    
    781,134,860Total deposits
    
    
    972,402,004
    
    
    
    782,935,304
    
    
    
    834,576,449Short-term borrowings
    
    
    104,488,569
    
    
    
    39,498,316
    
    
    
    88,324,915Notes payable to Federal Home Loan Bank
    
    
    142,000,000
    
    
    
    35,000,000
    
    
    
    68,000,000Accrued interest payable
    
    
    4,364,492
    
    
    
    3,381,756
    
    
    
    3,656,113Other liabilities
    
    
    3,209,986
    
    
    
    2,091,763
    
    
    
    1,703,972Total liabilities
    
    
    1,226,465,051
    
    
    
    862,907,139
    
    
    
    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, 20,641,615, and 20,682,075 shares issued and
outstanding at June 30, 2008 and 2007, and
December 31, 2007, respectively
    
    
    5,192,695
    
    
    
    5,160,404
    
    
    
    5,170,519Surplus
    
    
    124,301,338
    
    
    
    122,939,690
    
    
    
    123,329,517Retained earnings
    
    
    8,921,852
    
    
    
    10,397,606
    
    
    
    10,982,306Treasury stock, at cost - 94,954 shares at June 30, 2008
    
    
    (1,180,560
    )
    
    
    
    
    
    
    Accumulated other comprehensive income  net unrealized
holding (losses) gains on available-for-sale debt securities
    
    
    (1,225,510
    )
    
    
    (1,511,523
    )
    
    
    408,631Total stockholders equity
    
    
    136,009,815
    
    
    
    136,986,177
    
    
    
    139,890,973$
    1,362,474,866
    
    
    
    999,893,316
    
    
    
    1,136,152,422
  2




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income:Interest and fees on loans
    
    $
    16,796,847
    
    
    
    13,231,459
    
    
    
    32,815,215
    
    
    
    25,403,470Interest and dividends on debt and equity securities:Taxable
    
    
    1,595,361
    
    
    
    1,759,408
    
    
    
    3,169,999
    
    
    
    3,586,307Exempt from Federal income taxes
    
    
    391,394
    
    
    
    382,050
    
    
    
    788,868
    
    
    
    742,776Interest on short-term investments
    
    
    20,904
    
    
    
    227,097
    
    
    
    115,858
    
    
    
    430,367Total interest income
    
    
    18,804,506
    
    
    
    15,600,014
    
    
    
    36,889,940
    
    
    
    30,162,920Interest expense:Interest on deposits
    
    
    8,303,576
    
    
    
    8,454,275
    
    
    
    17,035,731
    
    
    
    16,348,056Interest on short-term borrowings
    
    
    529,816
    
    
    
    361,469
    
    
    
    1,109,089
    
    
    
    854,318Interest on notes payable to Federal Home Loan Bank
    
    
    1,202,776
    
    
    
    306,967
    
    
    
    2,087,653
    
    
    
    570,921Total interest expense
    
    
    10,036,168
    
    
    
    9,122,711
    
    
    
    20,232,473
    
    
    
    17,773,295Net interest income
    
    
    8,768,338
    
    
    
    6,477,303
    
    
    
    16,657,467
    
    
    
    12,389,625Provision for possible loan losses
    
    
    5,607,000
    
    
    
    500,000
    
    
    
    6,739,000
    
    
    
    890,000Net interest income after provision
for possible loan losses
    
    
    3,161,338
    
    
    
    5,977,303
    
    
    
    9,918,467
    
    
    
    11,499,625Noninterest income:Service charges on deposit accounts
    
    
    197,178
    
    
    
    130,852
    
    
    
    372,997
    
    
    
    241,083Net gains (losses) on sale of debt and equity securities
    
    
    118,118
    
    
    
    (7,026
    )
    
    
    312,133
    
    
    
    (7,026
    )Other noninterest income
    
    
    408,629
    
    
    
    350,199
    
    
    
    720,453
    
    
    
    628,665Total noninterest income
    
    
    723,925
    
    
    
    474,025
    
    
    
    1,405,583
    
    
    
    862,722Noninterest expense:Salaries and employee benefits
    
    
    4,260,926
    
    
    
    3,019,214
    
    
    
    8,408,544
    
    
    
    6,007,926Occupancy and equipment expense
    
    
    1,095,976
    
    
    
    771,515
    
    
    
    2,163,092
    
    
    
    1,576,429Postage, printing and supplies
    
    
    128,045
    
    
    
    114,208
    
    
    
    244,347
    
    
    
    247,041Professional fees
    
    
    186,188
    
    
    
    116,902
    
    
    
    347,092
    
    
    
    226,045Data processing
    
    
    443,279
    
    
    
    334,616
    
    
    
    885,558
    
    
    
    655,612Advertising
    
    
    290,711
    
    
    
    147,489
    
    
    
    501,581
    
    
    
    299,956Amortization of identifiable intangible assets
    
    
    4,072
    
    
    
    4,072
    
    
    
    8,144
    
    
    
    8,144Other noninterest expenses
    
    
    1,361,228
    
    
    
    790,844
    
    
    
    2,291,656
    
    
    
    1,253,757Total noninterest expense
    
    
    7,770,425
    
    
    
    5,298,860
    
    
    
    14,850,014
    
    
    
    10,274,910(Loss) income before applicable income taxes
    
    
    (3,885,162
    )
    
    
    1,152,468
    
    
    
    (3,525,964
    )
    
    
    2,087,437Applicable income tax (benefit) expense
    
    
    (1,514,610
    )
    
    
    317,624
    
    
    
    (1,465,510
    )
    
    
    557,190Net (loss) income
    
    $
    (2,370,552
    )
    
    
    834,844
    
    
    
    (2,060,454
    )
    
    
    1,530,247Per share amounts:Basic (loss) earnings per share
    
    $
    (0.11
    )
    
    
    0.04
    
    
    
    (0.10
    )
    
    
    0.08Basic weighted average shares outstanding
    
    
    20,673,419
    
    
    
    20,475,731
    
    
    
    20,650,862
    
    
    
    20,027,192Diluted (loss) earnings per share
    
    $
    (0.11
    )
    
    
    0.04
    
    
    
    (0.10
    )
    
    
    0.07Diluted weighted average shares outstanding
    
    
    21,119,050
    
    
    
    21,496,676
    
    
    
    21,149,790
    
    
    
    20,985,254
  3




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   2008
    
    
    2007Net (loss) income
    
    $
    (2,060,454
    )
    
    
    1,530,247Other comprehensive loss before tax:Net unrealized losses on available-for-sale securities
    
    
    (2,163,838
    )
    
    
    (1,833,749
    )Reclassification adjustment for (gains) losses included in net income
    
    
    (312,133
    )
    
    
    7,026Other comprehensive loss before tax
    
    
    (2,475,971
    )
    
    
    (1,826,723
    )Income tax related to items of other comprehensive loss
    
    
    (841,830
    )
    
    
    (621,086
    )Other comprehensive loss, net of tax
    
    
    (1,634,141
    )
    
    
    (1,205,637
    )Total comprehensive (loss) income
    
    $
    (3,694,595
    )
    
    
    324,610
  4




---



##### 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
    
    
    
    
    
    
    
    
    
    
    1,530,247
    
    
    
    
    
    
    
    
    
    
    
    1,530,247Issuance of 1,053,567 shares of
common stock
    
    
    246,392
    
    
    
    12,258,096
    
    
    
    
    
    
    
    689,400
    
    
    
    
    
    
    
    13,193,888Stock options exercised -
84,000 shares
    
    
    21,000
    
    
    
    485,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506,500Treasury stock purchased -
68,000 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (689,400
    )
    
    
    
    
    
    
    (689,400
    )800 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
    
    
    
    122,939,690
    
    
    
    10,397,606
    
    
    
    
    
    
    
    (1,511,523
    )
    
    
    136,986,177Balance at December 31, 2007
    
    $
    5,170,519
    
    
    
    123,329,517
    
    
    
    10,982,306
    
    
    
    
    
    
    
    408,631
    
    
    
    139,890,973Net loss
    
    
    
    
    
    
    
    
    
    
    (2,060,454
    )
    
    
    
    
    
    
    
    
    
    
    (2,060,454
    )Issuance of 4,409 shares of
common stock from treasury
    
    
    
    
    
    
    (8,862
    )
    
    
    
    
    
    
    52,908
    
    
    
    
    
    
    
    44,046Stock options exercised -
91,000 shares
    
    
    22,176
    
    
    
    614,656
    
    
    
    
    
    
    
    27,552
    
    
    
    
    
    
    
    664,384Treasury stock purchased -
105,324 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,305,000
    )
    
    
    
    
    
    
    (1,305,000
    )Issuance of 2,565 shares of
common stock as partial payment
for certain operating leases
    
    
    
    
    
    
    (5,771
    )
    
    
    
    
    
    
    30,780
    
    
    
    
    
    
    
    25,0091,100 shares of common stock
awarded to directors
    
    
    
    
    
    
    (1,739
    )
    
    
    
    
    
    
    13,200
    
    
    
    
    
    
    
    11,461Stock option expense
    
    
    
    
    
    
    292,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    292,127Amortization of restricted stock
    
    
    
    
    
    
    81,410
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,410Change in valuation of
available-for-sale securities,
net of related tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,634,141
    )
    
    
    (1,634,141
    )Balance at June 30, 2008
    
    $
    5,192,695
    
    
    
    124,301,338
    
    
    
    8,921,852
    
    
    
    (1,180,560
    )
    
    
    (1,225,510
    )
    
    
    136,009,815
  5




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
   2008
    
    
    2007Cash flows from operating activities:Net (loss) income
    
    $
    (2,060,454
    )
    
    
    1,530,247Adjustments
to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    907,545
    
    
    
    723,738Provision for possible loan losses
    
    
    6,739,000
    
    
    
    890,000Capitalized interest expense on construction
    
    
    (85,984
    )
    
    
    (269,184
    )Stock option compensation cost
    
    
    292,127
    
    
    
    168,917Common stock awarded to directors
    
    
    11,461
    
    
    
    10,000Amortization of restricted stock expense
    
    
    81,410
    
    
    
    Losses (gains) on sale of other real estate
    
    
    13,921
    
    
    
    (19,972
    )Net (gains) losses on sale of debt and equity securities
    
    
    (312,133
    )
    
    
    7,026Increase in accrued interest receivable
    
    
    (48,437
    )
    
    
    (146,684
    )Increase in accrued interest payable
    
    
    708,379
    
    
    
    642,614Mortgage loans originated for sale in secondary market
    
    
    (13,428,566
    )
    
    
    (4,153,800
    )Mortgage loans sold in secondary market
    
    
    13,236,216
    
    
    
    4,089,300Other operating activities, net
    
    
    (91,688
    )
    
    
    607,984Net cash provided by operating activities
    
    
    5,962,797
    
    
    
    4,080,186Cash flows from investing activities:Purchase of available-for-sale debt and equity securities
    
    
    (74,121,826
    )
    
    
    (6,276,933
    )Proceeds from maturities and calls of available-for-sale debt securities
    
    
    41,490,364
    
    
    
    16,057,125Proceeds from sales of available-for-sale debt securities
    
    
    23,037,133
    
    
    
    4,508,333Net increase in loans
    
    
    (213,490,713
    )
    
    
    (98,708,131
    )Proceeds from sale of other real estate owned
    
    
    647,091
    
    
    
    2,273,550Construction expenditures to finish other real estate
    
    
    (48,568
    )
    
    
    Purchase of bank premises and equipment
    
    
    (5,315,182
    )
    
    
    (9,170,590
    )Proceeds from sale of bank premises and equipment
    
    
    107,134
    
    
    
    37,028Net cash used in investing activities
    
    
    (227,694,567
    )
    
    
    (91,279,618
    )Cash flows from financing activities:Net increase in deposits
    
    
    137,825,555
    
    
    
    104,338,299Increase (decrease) in short-term borrowings
    
    
    16,163,654
    
    
    
    (30,964,205
    )Proceeds from notes payable to Federal Home Loan Bank
    
    
    86,000,000
    
    
    
    15,000,000Payments of notes payable to Federal Home Loan Bank
    
    
    (12,000,000
    )
    
    
    (4,300,000
    )Purchase of treasury stock
    
    
    (1,305,000
    )
    
    
    (689,400
    )Stock options exercised
    
    
    664,384
    
    
    
    506,500Issuance of common stock
    
    
    44,046
    
    
    
    13,193,888Payment of stock issuance costs
    
    
    
    
    
    
    (24,930
    )Net cash provided by financing activities
    
    
    227,392,639
    
    
    
    97,060,152Net increase in cash and cash equivalents
    
    
    5,660,869
    
    
    
    9,860,720Cash and cash equivalents at beginning of period
    
    
    13,290,440
    
    
    
    8,474,181Cash and cash equivalents at end of period
    
    $
    18,951,309
    
    
    
    18,334,901Supplemental information:Cash paid for interest
    
    $
    19,610,078
    
    
    
    17,773,295Cash paid for income taxes
    
    
    425,000
    
    
    
    566,000Noncash transactions:Transfers to other real estate in settlement of loans
    
    
    6,788,866
    
    
    
    3,061,158Loans made to facilitate the sale of other real estate
    
    
    
    
    
    
    275,912Capitalized interest expense
    
    
    85,984
    
    
    
    269,184Common stock awarded to directors
    
    
    11,461
    
    
    
    10,000Stock option compensation cost
    
    
    292,127
    
    
    
    168,917Amortization of restricted stock expense
    
    
    81,410
    
    
    
    Stock issued for operating lease payments
    
    
    25,009
    
    
    
    
 
 6




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
 
  NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
      Principles of Consolidation
  Basis of Accounting
  7




---



##### 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
    
    $
    51,512,730Obligations of state and political subdivisions
    
    
    38,705,470Other debt securities
    
    
    6,469,439Mortgage-backed securities
    
    
    64,330,151$
    161,017,790
 Loans Accounting by Creditors for
Impairment of a Loan.
 8




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
   Earnings per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007BasicNet (loss) income
    
    $
    (2,370,552
    )
    
    
    834,844
    
    
    
    (2,060,454
    )
    
    
    1,530,247Weighted average common
shares outstanding
    
    
    20,673,419
    
    
    
    20,475,731
    
    
    
    20,650,862
    
    
    
    20,027,192Basic (loss) earnings per share
    
    $
    (0.11
    )
    
    
    0.04
    
    
    
    (0.10
    )
    
    
    0.08DilutedNet (loss) income
    
    $
    (2,370,552
    )
    
    
    834,844
    
    
    
    (2,060,454
    )
    
    
    1,530,247Weighted average common
shares outstanding
    
    
    20,673,419
    
    
    
    20,475,731
    
    
    
    20,650,862
    
    
    
    20,027,192Effect of dilutive stock options
    
    
    445,631
    
    
    
    1,020,945
    
    
    
    498,928
    
    
    
    958,062Diluted weighted average common
shares outstanding
    
    
    21,119,050
    
    
    
    21,496,676
    
    
    
    21,149,790
    
    
    
    20,985,254Diluted (loss) earnings per share
    
    $
    (0.11
    )
    
    
    0.04
    
    
    
    (0.10
    )
    
    
    0.07
 NOTE 2  INTANGIBLE ASSETS
   NOTE 3  STOCK OPTIONS
 Accounting for Stock
Issued to Employees,
 9




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
   Share-based Payments Accounting for
Stock-Based Compensation
   10




---



##### 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, 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
    
    
    
    686,000Six Months Ended June 30, 2008:Balance at December 31, 2007
    
    $
    7.31
    
    
    
    1,648,200
    
    
    $
    8.41
    
    
    
    701,000Granted
    
    
    13.91
    
    
    
    76,500
    
    
    
    11.16
    
    
    
    16,000Forfeited
    
    
    12.50
    
    
    
    (5,000
    )
    
    
    
    
    
    
    Exercised
    
    
    7.30
    
    
    
    (91,000
    )
    
    
    
    
    
    
    Balance at June 30, 2008
    
    $
    7.60
    
    
    
    1,628,700
    
    
    $
    8.47
    
    
    
    717,000
  NOTE 4  DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
   Financial instruments for which
contractual amounts represent:Commitments to extend credit
    
    $
    326,451,351Standby letters of credit
    
    
    26,404,905$
    352,856,256
  11




---



##### Table of Contents



RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
    12




---



##### Table of Contents



Part I  Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations
   Forward-Looking Statements
  13




---



##### Table of Contents



Overview
       14




---



##### Table of Contents



15




---



##### Table of Contents



As of and for the
    
    As of and for theSix Months Ended June 30,
    
    Quarters Ended June 30,2008
    
    2007
    
    2008
    
    2007Percentage of net income to:Average total assets
    
    
    (0.33
    )%
    
    
    0.32
    %
    
    
    (0.73
    )%
    
    
    0.34
    %Average stockholders equity
    
    
    (2.95
    )%
    
    
    2.38
    %
    
    
    (6.78
    )%
    
    
    2.47
    %Percentage of common dividends
declared
to net income per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Percentage of average
stockholders equity
to average total assets
    
    
    11.29
    %
    
    
    13.62
    %
    
    
    10.78
    %
    
    
    13.88
    %
 Critical Accounting Policies
  Results of Operations for the Three and Six-Month Periods Ended June 30, 2008 and 2007
   16




---



##### Table of Contents



17




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Average deposits:Noninterest-bearing
    
    
    4.80
    %
    
    
    5.19
    %
    
    
    4.86
    %
    
    
    5.02
    %Interest-bearing:Transaction accounts
    
    
    14.29
    
    
    
    18.30
    
    
    
    15.22
    
    
    
    17.61Savings
    
    
    4.25
    
    
    
    7.36
    
    
    
    4.52
    
    
    
    7.73Time deposits of $100,000 or more
    
    
    28.05
    
    
    
    27.94
    
    
    
    28.48
    
    
    
    28.11Other time deposits
    
    
    29.92
    
    
    
    34.30
    
    
    
    30.05
    
    
    
    34.00Total average interest-bearing deposits
    
    
    76.51
    
    
    
    87.90
    
    
    
    78.27
    
    
    
    87.45Total average deposits
    
    
    81.31
    
    
    
    93.09
    
    
    
    83.13
    
    
    
    92.47Average short-term borrowings:Sweep repurchase agreements
    
    
    3.64
    
    
    
    2.89
    
    
    
    3.77
    
    
    
    3.33Daily/overnight funds purchased
    
    
    3.63
    
    
    
    0.73
    
    
    
    3.29
    
    
    
    1.01Total average short-term borrowings
    
    
    7.27
    
    
    
    3.62
    
    
    
    7.06
    
    
    
    4.34Average longer-term advances from Federal Home
Loan Bank
    
    
    11.42
    
    
    
    3.29
    
    
    
    9.81
    
    
    
    3.19100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
  18




---



##### Table of Contents



Amount of Increase (Decrease)Second Quarter
    
    
    First Six MonthsChange From 2007 to 2008 Due toYield/
    
    
    
    
    
    
    
    
    
    
    Yield/Volume (1)
    
    
    Rate (2)
    
    
    Total
    
    
    Volume (1)
    
    
    Rate (2)
    
    
    TotalInterest income:Loans
    
    $
    5,464,987
    
    
    
    (1,900,533
    )
    
    
    3,564,454
    
    
    $
    10,268,804
    
    
    
    (2,858,847
    )
    
    
    7,409,957Investment securities:Taxable
    
    
    (99,623
    )
    
    
    (64,424
    )
    
    
    (164,047
    )
    
    
    (438,893
    )
    
    
    22,585
    
    
    
    (416,308
    )Exempt from Federal income
taxes
    
    
    10,673
    
    
    
    (10,962
    )
    
    
    (289
    )
    
    
    59,566
    
    
    
    (28,191
    )
    
    
    31,375Short-term investments
    
    
    (116,623
    )
    
    
    (89,570
    )
    
    
    (206,193
    )
    
    
    (240,953
    )
    
    
    (73,556
    )
    
    
    (314,509
    )Total interest income
    
    
    5,259,414
    
    
    
    (2,065,489
    )
    
    
    3,193,925
    
    
    
    9,648,524
    
    
    
    (2,938,009
    )
    
    
    6,710,515Interest expense:Interest bearing transaction
accounts
    
    
    129,571
    
    
    
    (897,393
    )
    
    
    (767,822
    )
    
    
    458,819
    
    
    
    (1,454,376
    )
    
    
    (995,557
    )Savings accounts
    
    
    (81,447
    )
    
    
    (191,412
    )
    
    
    (272,859
    )
    
    
    (182,867
    )
    
    
    (383,673
    )
    
    
    (566,540
    )Time deposits of $100,000 or
more
    
    
    1,015,789
    
    
    
    (539,745
    )
    
    
    476,044
    
    
    
    1,933,695
    
    
    
    (767,287
    )
    
    
    1,166,408Other time deposits
    
    
    662,650
    
    
    
    (248,712
    )
    
    
    413,938
    
    
    
    1,221,150
    
    
    
    (137,786
    )
    
    
    1,083,364Total deposits
    
    
    1,726,563
    
    
    
    (1,877,262
    )
    
    
    (150,699
    )
    
    
    3,430,797
    
    
    
    (2,743,122
    )
    
    
    687,675Funds purchased and
securities sold
under repurchase agreements
    
    
    402,156
    
    
    
    (233,809
    )
    
    
    168,347
    
    
    
    711,365
    
    
    
    (456,594
    )
    
    
    254,771Long-term borrowings
    
    
    961,681
    
    
    
    (65,872
    )
    
    
    895,809
    
    
    
    1,595,937
    
    
    
    (79,205
    )
    
    
    1,516,732Total interest expense
    
    
    3,090,400
    
    
    
    (2,176,943
    )
    
    
    913,457
    
    
    
    5,738,099
    
    
    
    (3,278,921
    )
    
    
    2,459,178Net interest income
    
    $
    2,169,014
    
    
    
    111,454
    
    
    
    2,280,468
    
    
    $
    3,910,425
    
    
    
    340,912
    
    
    
    4,251,337
 
 (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.
    19




---



##### Table of Contents



20




---



##### Table of Contents



Financial Condition
    21




---



##### Table of Contents



22




---



##### Table of Contents



Six Months Ended June 30, 2008Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    1,008,930,061
    
    
    
    81.05
    %
    
    $
    32,826,481
    
    
    
    6.54
    %Investment securities:Taxable
    
    
    131,780,677
    
    
    
    10.59
    
    
    
    3,169,999
    
    
    
    4.84Exempt from Federal income taxes (3)
    
    
    38,457,556
    
    
    
    3.09
    
    
    
    1,062,115
    
    
    
    5.55Short-term investments
    
    
    5,427,909
    
    
    
    0.44
    
    
    
    115,858
    
    
    
    4.29Total earning assets
    
    
    1,184,596,203
    
    
    
    95.17
    
    
    
    37,174,453
    
    
    
    6.31Nonearning assets:Cash and due from banks
    
    
    9,890,901
    
    
    
    0.79Reserve for possible loan losses
    
    
    (10,554,237
    )
    
    
    (0.85
    )Premises and equipment
    
    
    43,549,605
    
    
    
    3.50Other assets
    
    
    15,653,828
    
    
    
    1.26Available-for-sale investment market valuation
    
    
    1,645,594
    
    
    
    0.13Total nonearning assets
    
    
    60,185,691
    
    
    
    4.83Total assets
    
    $
    1,244,781,894
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilitiesInterest-bearing transaction accounts
    
    $
    167,239,677
    
    
    
    13.44
    %
    
    
    2,152,738
    
    
    
    2.59
    %Savings
    
    
    49,651,000
    
    
    
    3.99
    
    
    
    439,561
    
    
    
    1.78Time deposits of $100,000 or more
    
    
    312,876,127
    
    
    
    25.14
    
    
    
    6,951,647
    
    
    
    4.47Other time deposits
    
    
    330,100,919
    
    
    
    26.52
    
    
    
    7,491,785
    
    
    
    4.56Total interest-bearing deposits
    
    
    859,867,723
    
    
    
    69.09
    
    
    
    17,035,731
    
    
    
    3.98Long-term borrowings
    
    
    107,807,693
    
    
    
    8.66
    
    
    
    2,087,653
    
    
    
    3.89Funds purchased and securities sold under
repurchase agreements
    
    
    77,568,094
    
    
    
    6.23
    
    
    
    1,109,089
    
    
    
    2.88Total interest-bearing liabilities
    
    
    1,045,243,510
    
    
    
    83.98
    
    
    
    20,232,473
    
    
    
    3.89Noninterest-bearing deposits
    
    
    53,298,058
    
    
    
    4.28Other liabilities
    
    
    5,647,352
    
    
    
    0.45Total liabilities
    
    
    1,104,188,920
    
    
    
    88.71STOCKHOLDERS EQUITY
    
    
    140,592,974
    
    
    
    11.29Total liabilities and stockholders equity
    
    $
    1,244,781,894
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    16,941,980Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.88
    %
  23




---



##### 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 liabilitiesInterest-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
    
    
    
    4.44Funds 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
    %
  24




---



##### Table of Contents



Quarter Ended June 30, 2008Percent
    
    
    Interest
    
    
    AverageAverage
    
    
    of Total
    
    
    Income/
    
    
    Yield/Balance
    
    
    Assets
    
    
    Expense
    
    
    RateASSETSLoans (1) (2) (3)
    
    $
    1,064,328,888
    
    
    
    81.56
    %
    
    $
    16,802,480
    
    
    
    6.35
    %Investment securities:Taxable
    
    
    137,252,206
    
    
    
    10.52
    
    
    
    1,595,361
    
    
    
    4.67Exempt from Federal income taxes (3)
    
    
    38,169,627
    
    
    
    2.92
    
    
    
    531,173
    
    
    
    5.60Short-term investments
    
    
    3,686,720
    
    
    
    0.28
    
    
    
    20,904
    
    
    
    2.28Total earning assets
    
    
    1,243,437,441
    
    
    
    95.28
    
    
    
    18,949,918
    
    
    
    6.13Nonearning assets:Cash and due from banks
    
    
    9,398,280
    
    
    
    0.72Reserve for possible loan losses
    
    
    (11,221,086
    )
    
    
    (0.86
    )Premises and equipment
    
    
    43,504,994
    
    
    
    3.33Other assets
    
    
    18,418,390
    
    
    
    1.41Available-for-sale investment market valuation
    
    
    1,490,376
    
    
    
    0.12Total nonearning assets
    
    
    61,590,954
    
    
    
    4.72Total assets
    
    $
    1,305,028,395
    
    
    
    100.00
    %LIABILITIESInterest-bearing liabilitiesInterest-bearing transaction accounts
    
    $
    165,553,560
    
    
    
    12.69
    %
    
    
    910,851
    
    
    
    2.21
    %Savings
    
    
    49,241,231
    
    
    
    3.77
    
    
    
    203,207
    
    
    
    1.66Time deposits of $100,000 or more
    
    
    324,946,233
    
    
    
    24.90
    
    
    
    3,423,397
    
    
    
    4.24Other time deposits
    
    
    346,585,504
    
    
    
    26.56
    
    
    
    3,766,121
    
    
    
    4.37Total interest-bearing deposits
    
    
    886,326,528
    
    
    
    67.92
    
    
    
    8,303,576
    
    
    
    3.77Long-term borrowings
    
    
    132,241,758
    
    
    
    10.13
    
    
    
    1,202,776
    
    
    
    3.66Funds purchased and securities sold under
repurchase agreements
    
    
    84,267,910
    
    
    
    6.46
    
    
    
    529,816
    
    
    
    2.53Total interest-bearing liabilities
    
    
    1,102,836,196
    
    
    
    84.51
    
    
    
    10,036,168
    
    
    
    3.66Noninterest-bearing deposits
    
    
    55,586,147
    
    
    
    4.26Other liabilities
    
    
    5,946,070
    
    
    
    0.45Total liabilities
    
    
    1,164,368,413
    
    
    
    89.22STOCKHOLDERS EQUITY
    
    
    140,659,982
    
    
    
    10.78Total liabilities and stockholders equity
    
    $
    1,305,028,395
    
    
    
    100.00
    %Net interest income
    
    
    
    
    
    
    
    
    
    $
    8,913,750Net yield on earning assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.88
    %
  25




---



##### Table of Contents



Quarter 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 liabilitiesInterest-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
    
    
    
    4.48Funds 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
    %
 
 (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
  26




---



##### Table of Contents



27




---



##### 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. One property
with a value of $232,000 remained in foreclosure at June 30, 2008.
    
    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.
    
    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. Based on an internal review of the costs and status of the development,
the Company has allocated $1,547,000 of the reserve for possible loan losses for this loan
relationship; which represents approximately twenty-five 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.
     28




---



##### 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.
      29




---



##### Table of Contents



Six-Month PeriodsEnded
June 30,(in thousands of dollars)
    
    2008
    
    
    2007Average loans outstanding
    
    $
    1,008,930
    
    
    $
    702,520Reserve at beginning of year
    
    $
    9,685
    
    
    $
    7,101Provision for possible loan losses
    
    
    6,739
    
    
    
    89016,424
    
    
    
    7,991Charge-offs:Commercial loans:Real estate
    
    
    (2,466
    )
    
    
    (317
    )Other
    
    
    (30
    )
    
    
    (36
    )Real estate:Construction
    
    
    (212
    )
    
    
    Residential
    
    
    (1,016
    )
    
    
    (124
    )Consumer
    
    
    (19
    )
    
    
    (1
    )Overdrafts
    
    
    (17
    )
    
    
    (14
    )Total charge-offs
    
    
    (3,760
    )
    
    
    (492
    )Recoveries:Commercial loans:Real estate
    
    
    
    
    
    
    8Other
    
    
    9
    
    
    
    17Real estate:Construction
    
    
    
    
    
    
    Residential
    
    
    
    
    
    
    12Consumer
    
    
    3
    
    
    
    Overdrafts
    
    
    6
    
    
    
    1Total recoveries
    
    
    18
    
    
    
    38Reserve at end of period
    
    $
    12,682
    
    
    $
    7,537Net charge-offs to average loans
    
    
    0.37
    %
    
    
    0.06
    %Ending reserve to net outstanding loans at end of period
    
    
    1.14
    %
    
    
    0.99
    %
   
    
    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.
   30




---



##### 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.
      31




---



##### 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
    32




---



##### 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
    
    $
    148,607
    
    
    
    11.64
    %
    
    $
    102,172
    
    
    
    >8.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    116,829
    
    
    
    9.80
    %
    
    
    95,328
    
    
    
    >8.0
    %
    
    
    119,160
    
    
    
    >10.0
    %Reliance Bank, FSB
    
    
    23,452
    
    
    
    25.83
    %
    
    
    7,264
    
    
    
    >8.0
    %
    
    
    9,080
    
    
    
    >10.0
    %Tier 1 capital (to risk-weighted assets)Consolidated
    
    $
    135,925
    
    
    
    10.64
    %
    
    $
    51,086
    
    
    
    >4.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    105,381
    
    
    
    8.84
    %
    
    
    47,664
    
    
    
    >4.0
    %
    
    
    71,496
    
    
    
    >6.0
    %Reliance Bank, FSB
    
    
    22,674
    
    
    
    24.97
    %
    
    
    3,632
    
    
    
    >4.0
    %
    
    
    5,448
    
    
    
    >6.0
    %Tier 1 capital (to average assets)Consolidated
    
    $
    135,925
    
    
    
    10.43
    %
    
    $
    52,112
    
    
    
    >4.0
    %
    
    $
    N/A
    
    
    
    N/AReliance Bank
    
    
    105,381
    
    
    
    8.68
    %
    
    
    48,570
    
    
    
    >4.0
    %
    
    
    60,712
    
    
    
    >5.0
    %Reliance Bank, FSB
    
    
    22,674
    
    
    
    23.69
    %
    
    
    3,828
    
    
    
    >4.0
    %
    
    
    4,785
    
    
    
    >5.0
    %
  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.  33




---



##### Table of Contents



Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
   Over 1 YearTotal Cash
    
    Less Than 1
    
    Less Than 5
    
    Over 5Commitment
    
    Year
    
    Years
    
    YearsOperating leases
    
    $
    6,885,366
    
    
    $
    305,089
    
    
    $
    2,369,368
    
    
    $
    4,210,908Time deposits
    
    
    696,683,245
    
    
    
    557,518,138
    
    
    
    105,620,506
    
    
    
    33,544,601Federal Home Loan Bank
borrowings
    
    
    142,000,000
    
    
    
    13,000,000
    
    
    
    59,000,000
    
    
    
    70,000,000Commitments to extend credit
    
    
    326,451,351
    
    
    
    85,571,325
    
    
    
    145,849,114
    
    
    
    95,030,912Standby letters of credit
    
    
    26,404,905
    
    
    
    17,613,658
    
    
    
    8,491,247
    
    
    
    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
 34




---



##### Table of Contents



Obligations of U.S. Government agencies
and corporations
    
    $
    51,512,730Obligations of state and political subdivisions
    
    
    38,705,470Other debt securities
    
    
    6,469,439Mortgage-backed securities
    
    
    64,330,151$
    161,017,790
 Loans Accounting by Creditors for
Impairment of a Loan.
 
 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
    
    $
    370,832,199
    
    
    $
    120,506,440
    
    
    $
    557,991,728
    
    
    $
    66,249,471
    
    
    $
    1,115,579,838Investment securities, at amortized cost
    
    
    21,386,165
    
    
    
    22,605,390
    
    
    
    95,647,845
    
    
    
    33,508,101
    
    
    
    173,147,501Other interest-earning assets
    
    
    397,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,033Total interest-earning assets
    
    $
    392,615,397
    
    
    $
    143,111,830
    
    
    $
    653,639,573
    
    
    $
    99,757,572
    
    
    $
    1,289,124,372Interest bearing-liabilitiesSavings and interest bearing transaction accounts
    
    $
    216,097,473
    
    
    $
    12,727
    
    
    $
    
    
    
    $
    
    
    
    $
    216,110,200Time certificates of deposit of $100,00 or more
    
    
    116,030,777
    
    
    
    181,828,787
    
    
    
    37,161,200
    
    
    
    
    
    
    
    335,020,764All other time deposits
    
    
    70,271,189
    
    
    
    189,387,384
    
    
    
    68,459,306
    
    
    
    33,544,601
    
    
    
    361,662,480Nondeposit interest-bearing liabilities
    
    
    86,372,961
    
    
    
    31,115,609
    
    
    
    59,000,000
    
    
    
    70,000,000
    
    
    
    246,488,570Total interest-bearing liabilities
    
    $
    488,772,400
    
    
    $
    402,344,507
    
    
    $
    164,620,506
    
    
    $
    103,544,601
    
    
    $
    1,159,282,014Gap by period
    
    $
    (96,157,003
    )
    
    $
    (259,232,677
    )
    
    $
    489,019,067
    
    
    $
    (3,787,029
    )
    
    $
    129,842,358Cumulative gap
    
    $
    (96,157,003
    )
    
    $
    (355,389,680
    )
    
    $
    133,629,387
    
    
    $
    129,842,358
    
    
    $
    129,842,358Ratio of interest-sensitive assets to interest-
sensitive liabilities
    
    
    0.80
    x
    
    
    0.36
    x
    
    
    3.97
    x
    
    
    0.96
    x
    
    
    1.11
    xCumulative ratio of interest-sensitive assets
to
interest-sensitive liabilities
    
    
    0.80
    x
    
    
    0.60
    x
    
    
    1.13
    x
    
    
    1.11
    x
    
    
    1.11
    x
  35




---



##### Table of Contents



Part I  Item 4T  Controls and Procedures
     
 PART II  OTHER INFORMATION
 
 Part II  Item 1  Legal Proceedings
  
 Part II  Item 1A  Risk Factors
  36




---



##### Table of Contents



Part II  Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  Number of SharesDate
    
    Issued Upon Exercise
    
    Exercise Price
    
    ProceedsApril 29, 2008
    
    
    2,296
    
    
    $
    6.5625
    
    
    $
    15,068
  Number of
    
    ExerciseDate
    
    Options
    
    Price
    
    Date Exercisable
    
    Expiration DateMay 7, 2008
    
    1,000 Incentive
    
    $9.23
    
    May 7, 2009-333;
    
    November       16,Stock Options
    
    
    
    May 7, 2010-333;
    
    2015May 7, 2011-334May 7, 2008
    
    9,500 Non-Qualified
    
    $9.23
    
    May 7, 2009-4,750;
    
    November 16,Stock Options
    
    
    
    May, 2010-4,750
    
    2015June 17, 2008
    
    1,500 Non-
    
    $9.75
    
    June 17, 2009-750;
    
    November 16,Qualified Stock
    
    
    
    June 17, 2011-750
    
    2015Options
  
 Part II  Item 3  Defaults Upon Senior Securities
  
 Part II  Item 4  Submission of Matters to a Vote of Security Holders
   37




---



##### Table of Contents



PROPOSAL NO. 1: ELECTION OF DIRECTORS
  Class III
 Class I
  Votes
    
    VotesName
    
    For
    
    Withheld Authority
    
    Class
    
    TermRobert M. Cox, Jr.
    
    
    17,270,905
    
    
    
    48,449
    
    
    III
    
    
    2011Barry D. Koenemann
    
    
    17,270,905
    
    
    
    48,449
    
    
    III
    
    
    2011Gary R. Parker
    
    
    17,270,905
    
    
    
    48,449
    
    
    III
    
    
    2011William P. Stiritz
    
    
    17,270,905
    
    
    
    48,449
    
    
    
    I
    
    
    
    2009Jerry S. Von Rohr
    
    
    17,270,905
    
    
    
    48,449
    
    
    III
    
    
    2011
  Name
    
    Class
    
    TermRalph W. Casazzone
    
    
    I
    
    
    
    2009Richard M. Demko
    
    
    I
    
    
    
    2009Patrick R. Gideon
    
    
    I
    
    
    
    2009Fortis M. Lawder
    
    II
    
    
    2010Earl G. Lindenberg
    
    II
    
    
    2010John J. Moller*
    
    II
    
    
    2010James E. SanFilippo
    
    II
    
    
    2010
 38




---



##### Table of Contents



*
    
    John J. Moeller resigned as director of the Company on June 17, 2008, see further discussion of
this matter in the section below entitled Part II  Item 5  Other Information (a). PROPOSAL NO. 2: INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  For
    
    Against
    
    AbstainAppointment of Cummings, Ristau & Associates, P.C.
    
    
    17,251,009
    
    
    
    65,565
    
    
    
    2,780
 
 Part II  Item 5  Other Information
 (a)
    
    On June 17, 2008, John J. Moller resigned as a member of the Board of Directors of the
Company, and as a member of all committees of the Board of Directors of the Company in which
Mr. Moller had been appointed to serve. The Board of Directors of the Company received and
accepted the resignation of Director John J. Moller on June 17, 2008. Mr. Moller resigned for
personal reasons and there was no disagreement or dispute between Mr. Moller and the Company
which led to his resignation.(b)
    
    None.
 39




---



##### Table of Contents



Part II  Item 6  Exhibits
 ExhibitNumber
    
    Description31.1
    
    Chief Executive Officers

Certification pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Chief Financial Officers

Certification pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934,
as

adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Chief Executive Officer Certification

pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley

Act of 2002.32.2
    
    Chief Financial

Officer Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906

of the
Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  RELIANCE BANCSHARES, INC.By:


/s/ Jerry S. Von RohrJerry S. Von RohrChief Executive

OfficerBy:
    /s/ Dale E. OberkfellDale E. OberkfellChief Financial

Officer  40