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EX-31.1 - EX-31.1 - Reliance Bancshares, Inc. | c63010exv31w1.htm |
EX-31.2 - EX-31.2 - Reliance Bancshares, Inc. | c63010exv31w2.htm |
EX-32.2 - EX-32.2 - Reliance Bancshares, Inc. | c63010exv32w2.htm |
EX-21.1 - EX-21.1 - Reliance Bancshares, Inc. | c63010exv21w1.htm |
EX-32.1 - EX-32.1 - Reliance Bancshares, Inc. | c63010exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 1)
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 00-52588
Reliance Bancshares, Inc.
(Exact name of Registrant as Specified in its Charter)
Missouri | 43-1823071 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
10401 Clayton Road | ||
Frontenac, Missouri | 63131 | |
(Address of Principal Executive Offices) | (ZIP Code) |
Registrants telephone number, including area code:
(314) 569-7200
(314) 569-7200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Class A Common Stock, par value $0.25
Class A Common Stock, par value $0.25
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of June 30, 2009 (the last business day of the registrants
most recently completed second fiscal quarter) was approximately $34,282,606.
Indicate the number of shares outstanding of each of the registrants classes of common stock,
as of the latest practicable date: 20,972,091 shares of common stock outstanding as of March 22,
2009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2010 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission pursuant to SEC Regulation 14A are incorporated
by reference in Part III, Items 10 -13.
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1
Table of Contents
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Except for the historical
information contained in this Amendment No. 1 to Annual Report on Form 10-K, certain matters
discussed herein contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended. Although we believe that, in making any such
statements, our expectations are based on reasonable assumptions, any such statements may be
influenced by factors that could cause actual outcomes and results to be materially different from
those projected. When used in this document, the words anticipates, believes, expects,
intends and similar expressions as they relate to Reliance Bancshares, Inc. or its management are
intended to identify such forward-looking statements. These forward-looking statements are subject
to numerous risks and uncertainties. There are important factors that could cause actual results to
differ materially from those in forward-looking statements, certain of which are beyond our
control. These factors, risks and uncertainties are discussed under Item 1A, Risk Factors.
Our actual results, performance or achievement could differ materially from those expressed
in, or implied by, these forward-looking statements. Accordingly, we can give no assurances that
any of the events anticipated by the forward-looking statements will transpire or occur or, if any
of them do so, what impact they will have on our results of operations or financial condition. We
expressly decline any obligation to publicly revise any forward-looking statements that have been
made to reflect the occurrence of events after the date hereof.
EXPLANATORY NOTE 2009 RESTATEMENT
This Amendment No. 1 to Form 10-K (Amendment No. 1) is being filed by Reliance Bancshares,
Inc. (the Company) to amend and restate its Annual Report on Form 10-K for the year ended
December 31, 2009 filed with the United States Securities and Exchange Commission (SEC) on March
26, 2010 (the Initial Form 10-K). For purposes of this Annual Report on Form 10-K/A, and in
accordance with Rule 12b-15 under the Securities Exchange Act of 1934 (Exchange Act), Items 5, 6,
7, and 8A(T) of our Initial Form 10-K have been amended and restated in their entirety. In
addition, Exhibit 31.2 is being amended solely to add new certifications in accordance with Rule
13a-14(a) of the Exchange Act. Other than the Items outlined above, there are no changes to
the Initial Form 10-K. Except as otherwise specifically noted, all information contained herein
is as of December 31, 2009 and does not reflect any events or changes that have occurred
subsequent to that date. We are not required to and we have not updated any forward-looking
statements previously included in the Initial Form 10-K filed on March 26, 2010. We have not
amended, and do not intend to amend, any of our other previously filed reports for the periods
affected by the restatement. Our previously issued consolidated financial statements included in
those reports should no longer be relied upon. Accordingly, this
Annual Report on Form 10-K/A should be read in conjunction with the
Companys filings with the Securities and Exchange Commission
subsequent to the Initial Form 10-K.
This Amendment No. 1 is required due to certain disclosure omissions in the Initial Form 10-K
related to net losses available to common shareholders after increasing the net loss for preferred
dividends paid by the Company, which required an adjustment of the previously reported net loss per
share data included in the Companys consolidated statement of operations for the year ended
December 31, 2009. We have also restated the Companys consolidated statements of operations and
comprehensive loss for the year ended December 31, 2009 to expand the disclosures for
other-than-temporary losses on available for sale securities in those statements.
These restatements had no effect on the Companys consolidated net loss for the year ended December
31, 2009 or its consolidated stockholders equity as of December 31, 2009. Net loss available to
common shareholders, after increasing the loss for preferred dividends paid by the Company,
increased from the $(1.41) per share originally disclosed for
both basic and fully-diluted loss per share to $(1.49) and $(1.48)
for basic and fully-diluted loss per share for the year ended
December 31, 2009.
This Amendment No. 1 includes changes in Item 8A(T) Controls and Procedures and reflects
managements restated assessment of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2009. This restatement of
managements assessment regarding disclosure controls and procedures results from material
weaknesses in our internal control over financial reporting relating to the above
described restatements. The information required in this restatement was previously omitted and,
while it had no effect on the Companys consolidated net loss for the year ended December 31, 2009
and stockholders equity as of December 31, 2009, such information should have been disclosed in
our 2009 consolidated financial statements. The Company has implemented certain changes in our
internal controls as of the date of this report to address these material weaknesses, and believes
such weaknesses have been remediated. There can be no assurance that our remedial efforts will be
effective nor can there be any assurances that the Company will not incur losses due to
internal or external acts intended to defraud, misappropriate assets, or circumvent
applicable law or our system of internal controls. See
Item 8A(T) Controls and Procedures.
For
the convenience of the reader, this Annual Report sets forth the
Initial Form 10-K in its entirety.
Item 1. Business
General
Reliance Bancshares, Inc. (the Company or Reliance) is a multi-bank holding company that
was incorporated in Missouri on July 24, 1998. The Company organized its first subsidiary
commercial bank, Reliance Bank, in Missouri, which secured insurance from the Federal Deposit
Insurance Corporation (FDIC) and began conducting business on April 16, 1999 in Des Peres,
Missouri with full depository and loan capabilities. The Company organized an additional
subsidiary, Reliance Bank, FSB in Fort Myers, Florida as a federal savings bank after operating as
a loan production office of Reliance Bank since 2004. The Company applied for and received a
federal charter from the Office of Thrift Supervision (the OTS), secured insurance from the FDIC
and began conducting business on January 17, 2006. The Companys two subsidiaries, Reliance Bank
and Reliance Bank, FSB, are sometimes referred to as the Banks. Unless otherwise indicated,
references to the Company shall be intended to be references to Reliance Bancshares, Inc. and its
subsidiaries.
On April 27, 2007, the Company filed its Form 10 registration statement with the Securities
and Exchange Commission (the SEC) pursuant to Section 12(g) of the Securities Exchange Act of
1934, as amended. The effective date of the registration statement was June 26, 2007.
The Companys headquarters and executive offices are located at 10401 Clayton Road, Frontenac,
Missouri, 63131, (314) 569-7200.
Available Information
All of the Companys reports required to be filed by Sections 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, will be available or accessible free of charge, including copies
of our future Annual Reports on Form 10-K, future Quarterly Reports on Form 10-Q, future Current
Reports on Form 8-K, future Proxy Statements, and any amendments to those reports at our website
with the address www.reliancebancshares.com. All reports will be made available as soon as
reasonably practicable after they are filed with or furnished to the SEC. You may also request any
materials we file with the SEC from the SECs Public Reference Room at 100 F. Street, NE,
Washington, D.C., 20549, or by calling (800) SEC-0330. In addition, our filings with the SEC are
electronically available via the SECs website at http://www.sec.gov.
For general information about Reliance Bank and Reliance Bank, FSB, please visit our current
websites at www.reliancebankstl.com and www.reliancebankfsb.com, respectively.
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Recent Developments
The Emergency Economic Stabilization Act of 2008 (EESA) was enacted on October 3, 2008.
Pursuant to EESA, the United States Treasury Department (the Treasury) has the authority to among
other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain
other financial instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. Pursuant to its authority under EESA, the
Treasury created the Troubled Asset Relief Program (TARP) Capital Purchase Program (CPP) under
which the Treasury was authorized to invest in non-voting, senior preferred stock of U.S. banks and
savings associations or their holding companies.
The Treasury has invested in the Company through the EESA and CPP. On February 13, 2009, the
Company issued 40,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value,
Series A for a total of $40,000,000, and 2,000 shares of Fixed Rate Cumulative Perpetual Preferred
Stock, no par value, Series B for no additional funds, to the Treasury in connection with the
Companys participation in the CCP. The funds received by the Company are included in any the
financial data or calculations for this filing.
The Series A preferred stock will pay a dividend at the rate of 5% per annum for the first
five years and 9% thereafter. Dividends are payable quarterly and each share has a liquidation
amount of $1,000 and has liquidation rights in pari passu with other preferred stock, which is paid
in liquidation prior to Companys common stock. The Series B preferred stock will pay a dividend
at the rate of 9% per annum, payable quarterly, and includes other provisions similar to the Series
A preferred stock with liquidation at $1,000 per share.
The American Recovery and Reinvestment Act of 2009 (ARRA) was enacted on February 17, 2009.
Among other things, ARRA sets forth additional limits on executive compensation at all financial
institutions receiving federal funds under any program, including the CPP, both retroactively and
prospectively. The executive compensation restrictions in ARRA, which will be further described in
rules and regulations to be established, include among others: limits on compensation incentives,
prohibitions on golden parachute payments, the establishment by publicly registered CPP
recipients of a board compensation committee comprised entirely of independent directors for the
purpose of reviewing employee compensation plans, and the requirement of a non-binding vote on
executive pay packages at each annual shareholder meeting until the government funds are repaid.
The full impact of the ARRA is not yet certain because additional regulatory action is required.
On November 10, 2009, the Company authorized 25,000 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, no par value, Series C for sale with an offering price of $1,000 per share. The
offering was extended to existing shareholders who are accredited investors (as such term is
defined in Regulation D of the Securities Act of 1933, as amended) and to other accredited
investors to subscribe for and purchase shares of this series. At December 31, 2009, the Company
had subscriptions and payments totalling $300,000 for the purchase of 300 shares. The Series C
preferred stock pays a dividend at the rate of 7% per annum, payable quarterly and includes other
provisions similar to the Series A preferred stock with liquidation at $1,000 per share.
Informal Regulatory Agreements
The Company and the Banks have recently entered into a certain Agreement and memoranda of
understanding (MOU) with regulatory authorities as listed below. The Agreement and MOUs are
informal administrative agreements pursuant to which the Company and the Banks have agreed to take
various actions and comply with certain requirements to facilitate improvement in financial
condition.
On November 30, 2009, Reliance Banks Board of Directors entered into an Agreement with the
Missouri Division of Finance and the Federal Deposit Insurance Corporation (FDIC) to, among other
things, (a) develop a plan to reduce the level of risk in each criticized asset aggregating
$2,000,000 or more included in the September 21, 2009 Missouri Division of Finance examination
report; (b) maintain the reserve for possible loan losses at a level which is reasonable in
relation to the degree of risk inherent in the Banks loan portfolio; (c) develop and adopt
policies and procedures designed to identify and monitor concentrations of credit, including
out-of-territory loans and loan participations purchased; (d) formulate plans to reduce the Banks
concentrations of credit, particularly in commercial real estate and land acquisition and
development
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lending; (e) review and revise the Banks formal loan policy to address weaknesses noted in
the September 21, 2009 Missouri Division of Finance examination report; (f) cease making or
extending any loans which might violate the Banks written loan policy, except in those instances
in which the Board of Directors has made a prior determination that a variance from loan policy is
in the best interests of the Bank, with such Board decisions appropriately documented in the
minutes of the Board of Director meetings; (g) develop a formal written profit plan, which will
provide a three-year budget projection for asset growth and dividend payouts to ensure Tier 1
leverage capital is maintained at least a 7% level; and (h) maintain a Tier 1 leverage capital
ratio of at least 7%, and other capital ratios such that the Bank will remain well-capitalized, and
not pay any dividends, management fees or bonuses, or increase any executive salary or other
compensation that would reduce the Bank to a level below a well-capitalized status.
On February 10, 2010, Reliance Bank, FSBs Board of Directors entered into a MOU with the OTS
to, among other things, (a) develop a business plan for the years ending December 31, 2010, 2011,
and 2012 which shall include (1) strategies to preserve and enhance the Banks capital sufficient
to meet its needs and support its risk profile; (2) achieve core profitability by the end of 2010;
and (3) establish and maintain Board-approved loan concentration limits expressed as a percentage
of risk-based capital that takes into account the Banks current capital position, local and
regional market conditions, and the credit risks posed by higher risk loans; (b) continue to take
steps to identify, classify, and properly account for problem assets, including but not limited to
(1) conducting periodic asset quality reviews to identify and assign appropriate classifications to
all problem assets; (2) performing analyses on all impaired assets identified by the review
required by subparagraph (b)(1) above; and (3) estimating potential losses in identified problem
assets, while establishing an appropriate reserve for loan losses for all classified assets; (c)
develop a detailed, written plan with specific strategies, targets, and timeframes to reduce the
Banks level of criticized assets; (d) review the adequacy of the Banks reserve for loan losses
policies, procedures and methodologies on at least an annual basis to ensure the timely
establishment and maintenance of an adequate reserve for loan losses account balance; (e) identify
and monitor all loan modifications and troubled debt restructurings, with delinquent loans that are
modified being classified as substandard and placed on nonaccrual status for at least six months;
(f) prohibit the increase in the dollar amount of brokered deposits; (g) analyze the major
differences in and bases for significant differences in the value of assets, liabilities, and
off-balance-sheet positions calculated by the OTS Net Portfolio Value and the Banks internal
economic value of equity model; and (h) correct all deficiencies and weaknesses identified in the
October 5, 2009 OTS report of examination.
On March 16, 2010, the Company entered into a MOU with the Federal Reserve Bank of St. Louis
(Federal Reserve) requiring the Company to, among other things, (a) utilize its financial and
managerial resources to assist the Banks in addressing weaknesses identified during their most
recent regulatory examinations, and achieving/maintaining compliance with any supervisory action
between the Banks and their primary regulators; (b) declare no corporate dividends without the
prior written approval of the Federal Reserve; (c) incur no additional debt without the prior
written approval of the Federal Reserve; and (d) make no distributions of interest or other sums on
its preferred stock without the prior written approval of the Federal Reserve.
The Agreement and MOUs will remain in effect until modified or terminated by the applicable
regulatory authority. We do not expect the actions called for by the Agreement and MOUs to change
our business strategy in any material respect, although they may have the effect of limiting or
delaying our ability or plans to expand. Management has taken various actions to comply with the
Agreement and MOUs and will diligently endeavor to take all actions necessary for compliance.
Management believes that the Company and the Banks are currently in compliance with the Agreement
and MOUs, although formal determination of compliance with the Agreement and MOUs can only be made
by the applicable regulatory authority.
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Market Area and Approach to Geographic Expansion
Reliance Bank
In the greater St. Louis Metropolitan Statistical Area, (MSA), which includes St. Louis
bordering counties in Illinois, Reliance Bank has facilities in twenty locations. Reliance Bank
strategically chose to locate these branches within six to seven miles of each other so as not to
over-saturate any one municipality or area. Still, in any given area, customers are within a few
miles of local branches. When choosing branch locations, we have also focused on areas that we
believe have high growth potential, a high concentration of closely-held businesses and a large
number of professionals and executives. Typically, a high growth potential location consists of
both commercial and residential development, which provides us with potential commercial and
individual customers.
Reliance Bank, FSB
The current primary market area of Reliance Bank, FSB is Lee County on the southwest coast of
Florida. Reliance Bank, FSB has a total of three locations, and is headquartered in Fort Myers,
Florida.
Reliance Bank, FSBs original strategy was to expand in Lee County and Collier County, in
southwest Florida, as these areas have experienced high growth rates in recent years. However,
with the unprecedented downturn in the economy, specifically in the Southwest Florida real estate
market, Reliance Bank, FSB has amended its strategy for 2009 and did not establish any new branches
while the economy is recovering. Reliance Bank, FSB plans to work within the community to build
stronger customer relationships, deposit growth and loan production.
Competition
The Company and its subsidiaries operate in highly competitive markets. We face substantial
competition in all phases of operations from a variety of different competitors in the St. Louis
and Fort Myers markets, including: (i) large national and super-regional financial institutions
that have well-established branches and significant market share in the communities we serve; (ii)
finance companies, investment banking and brokerage firms, and insurance companies that offer
bank-like products; (iii) credit unions, which can offer highly competitive rates on loans and
deposits as they receive tax advantages not available to commercial or community banks; (iv) other
commercial or community banks, including start-up banks, that can compete with us for customers who
desire a high degree of personal service; (v) national and super-regional banks offering mortgage
loan application services; (vi) both local and out-of-state trust companies and trust service
offices; and (vii) multi-bank holding companies with substantial capital resources and lending
capacity.
Many of the larger banks have established specialized units, which target private businesses
and high net worth individuals. Also, the St. Louis market has recently experienced an increase in
de novo (i.e., new start- up) banks that have opened within the past five years.
Many existing community banks with which we compete directly, as well as several new community
bank start-ups, have marketing strategies similar to ours. These community banks may open new
branches in the communities we serve and compete directly for customers who want the level of
service offered by community banks. In addition, these banks compete directly for the same
management personnel.
Reliance Bank and Reliance Bank, FSB have both grown rapidly with aggressive branching in both
markets. Because of the Companys continued use of earnings for this expansion, we have not
historically issued dividends on common stock and do not anticipate doing so in the foreseeable
future. The Company has incurred significant expenses due to its aggressive organic growth plan.
This increased expense has negatively impacted our short term earnings per share. Both Reliance
Bank and Reliance Bank, FSB are comfortable with the amount of branches they have established in
both areas and therefore, did not expand in 2009.
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Supervision and Regulation
We are subject to various state, federal and self-regulatory organization banking laws,
regulations and policies in place to protect customers and, to some extent, shareholders, which
impose specific requirements and restrictions on our operations. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the Company and its
subsidiaries.
The following is a summary of significant regulations:
The Holding Company
Bank Holding Company Act of 1956: The Company is a multi-bank holding company registered under
the Bank Holding Company Act of 1956, as amended (BHCA). As such, we are subject to regulation
and examination by the Federal Reserve Board and are required to file periodic reports of our
operations and such additional information as the Federal Reserve may require. Financial holding
companies must be well managed and well capitalized pursuant to the standards set by the Federal
Reserve and have at least a satisfactory rating under the Community Reinvestment Act.
Under the BHCA, bank holding companies are generally required to obtain the prior approval of
the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring
direct or indirect ownership or control of any voting shares of any bank if, after such
acquisition, it would own or control more than 5% of the voting shares of such bank (unless it
already owns or controls the majority of such shares), or (iii) merging or consolidating with
another bank holding company.
Gramm-Leach Bliley Act of 1999: The Gramm-Leach-Bliley Act of 1999 (GLBA) eliminates many of
the restrictions placed on the activities of certain qualified financial or bank holding companies.
The GLBA also restricts the Company and the Banks from sharing certain customer personal
information with non- affiliated third parties and requires disclosure of the policies and
practices regarding such data sharing.
Source of Strength; Cross-Guarantee: Federal Reserve policy requires that we commit resources
to support our subsidiaries and in implementing this policy, the Federal Reserve takes the position
that it may require us to provide financial support when we otherwise would not consider it
necessary to do so.
Sarbanes-Oxley Act of 2002: The Sarbanes-Oxley Act of 2002 (SOX) generally applies to all
publicly-held companies and was enacted to increase corporate responsibility, provide for enhanced
penalties for accounting and auditing improprieties at publicly traded companies and protect
investors by improving the accuracy and reliability of corporate disclosures made pursuant to the
securities laws promulgated by the SEC. SOX requires, among other things, (i) certification of
financial statements by the Chief Executive Officer and the Chief Financial Officer and (ii)
adoption of procedures designed to ensure the adequacy of the internal controls and financial
reporting processes of public companies. Companies with securities listed on national securities
exchanges must also comply with strict corporate governance requirements.
Reliance Bank
Because Reliance Bank is not a member of the Federal Reserve System, the Missouri Division of
Finance and the FDIC are its primary regulators. Between these two regulatory authorities, all
areas of the Banks operations are monitored or regulated, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate reorganizations,
maintenance of books and records, and adequacy of staff training to carry on safe lending and
deposit gathering practices. In addition, Reliance Bank must maintain certain capital ratios and is
subject to limitations on total investments in real estate, bank premises, and furniture and
fixtures.
Transactions with Affiliates and Insiders: Regulation W, promulgated by the Federal Reserve,
imposes regulations on certain transactions with affiliates, including the amount of loans and
extensions of credit to affiliates, investments in affiliates and the amount of advances to third
parties collateralized by the securities or obligations of affiliates. Regulation W also requires,
among other things, that Reliance Bank transact
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business with affiliates on terms substantially the same, or at least as favorable to Reliance
Bank, as those prevailing at the time for comparable transactions with non-affiliates.
Community Reinvestment Act: The Community Reinvestment Act (the CRA) requires that the
Company and its subsidiaries take certain steps to meet the credit needs of varying income level
households in their local communities. The Companys record of meeting such needs is considered by
the FDIC when evaluating mergers and acquisitions and applications to open a branch or facility.
Both Reliance Bank and Reliance Bank, FSB have satisfactory ratings under the CRA.
Check 21: The Check Clearing for the 21st Century Act (Check 21) is designed to foster
innovation in the payments system and to enhance its efficiency by reducing some of the legal
impediments to check clearing. The law facilitates check clearing by creating a new negotiable
instrument called a substitute check, which permits banks to clear original checks, to process
check information electronically, and to deliver substitute checks to banks that want to continue
receiving paper checks. A substitute check is the legal equivalent of the original check and
includes all the information contained on the original check. The law does not require banks to
accept checks in electronic form nor does it require banks to use the new authority granted by
Check 21 to create substitute checks.
USA Patriot Act: The Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act) requires financial
institutions to take certain steps to protect against money laundering, such as establishing
anti-money laundering programs and maintaining controls with respect to private and foreign banking
matters.
Limitations on Loans and Transactions: The Federal Reserve Act generally imposes certain
limitations on extensions of credit and other transactions by and between banks that are members of
the Federal Reserve and other affiliates (which includes any holding company of which a bank is a
subsidiary and any other non-bank subsidiary of such holding company). Banks that are not members
of the Federal Reserve are also subject to these limitations. Further, federal law prohibits a bank
holding company and its subsidiaries from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or the furnishing of services.
Other Regulations: Interest and certain other charges collected or contracted for by the Bank
are subject to state usury laws and certain federal laws concerning interest rates. The Banks loan
operations are also subject to certain federal laws applicable to credit transactions, such as the
federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers; the Home
Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable
the public and public officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending
credit; the Fair Credit Reporting Act of 1978 governing information given to credit reporting
agencies; the Fair Debt Collection Act governing the manner in which consumer debts may be
collected by collection agencies; the Soldiers and Sailors Civil Relief Act of 1940, governing the
repayment terms of, and property rights underlying obligations of, persons in military service; and
the rules and regulations of the various federal agencies charged with the responsibility of
implementing such federal laws. The deposit operations of the Banks are also subject to the Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoenas of financial records,
and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to
implement that Act, which governs automatic deposits to and withdrawals from deposit accounts and
customers rights and liabilities arising from the use of automated teller machines and other
electronic banking services.
Deposit Insurance: The Bank is FDIC-insured, and is therefore required to pay deposit
insurance premium assessments to the FDIC.
Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the FDIRA) in 2006, the
previously separate deposit insurance funds for banks and savings associations were merged into a
single deposit insurance fund administered by the FDIC. The Banks deposits are insured up to
applicable limitations by that deposit insurance fund.
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Following the adoption of the FDIRA, the FDIC has the opportunity, through its rulemaking
authority, to better price deposit insurance for risk than was previously authorized. The FDIC
adopted regulations that create a system of risk-based assessments. Under the regulations, there
are four risk categories, and each insured institution is assigned to a risk category based on
capital levels and supervisory ratings. Well- capitalized institutions with the highest regulatory
composite ratings are placed in Risk Category I, while other institutions are placed in Risk
Categories II, III or IV depending on their capital levels and composite ratings. Currently,
Reliance Bank, FSB is ranked as Risk Category I and Reliance Bank is ranked as Risk Category II.
The assessment rates may be changed by the FDIC as necessary to maintain the insurance fund at the
reserve ratio designated by the FDIC, which currently is 1.25% of insured deposits. The FDIC may
set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Deposit insurance
assessments will be collected for a quarter, at the end of the next quarter. Assessments are based
on deposit balances at the end of the quarter, except for institutions with $1 billion or more in
assets, such as the Bank, and any institution that becomes insured on or after January 1, 2007
which will have their assessment base determined using average daily balances of insured deposits.
As of September 30, 2008, the reserve ratio of the deposit insurance fund fell to 0.76%. On
October 7, 2008, the FDIC established a restoration plan to restore the reserve ratio to at least
1.15% within five years (effective February 27, 2009 the FDIC extended this time to seven years)
and proposed rules increasing the assessment rate for deposit insurance and making adjustments to
the assessment system. On December 16, 2008, the FDIC adopted and issued a final rule increasing
the rates banks pay for deposit insurance uniformly by 7 basis points (annualized) effective
January 1, 2009. Under the final rule, risk-based rates for the first quarter 2009 assessment will
range between 12 and 50 basis points (annualized). The 2009 first quarter assessment rates
established by the FDIC provide that the highest rated institutions, those in Risk Category I, will
pay premiums of between 12 and 14 basis points and the lowest rated institutions, those in Risk
Category IV, will pay premiums of 50 basis points. On February 27, 2009, the FDIC adopted a final
rule amending the way that the assessment system differentiates for risk and setting new assessment
rates beginning with the second quarter of 2009. Beginning April 1, 2009, for the highest rated
institutions, those in Risk Category I, the initial base assessment rate will be between 12 and 16
basis points and for the lowest rated institutions, those in Risk Category IV, the initial base
assessment rate will be 45 basis points. The final rule modifies the means to determine a Risk
Category I institutions initial base assessment rate. It also provides for the following
adjustments to an institutions assessment rate: (1) a decrease for long-term unsecured debt,
including most senior and subordinated debt and, for small institutions, a portion of Tier 1
capital; (2) an increase for secured liabilities above a threshold amount; and (3) for institutions
in risk categories other than Risk Category I, an increase for brokered deposits above a threshold
amount. After applying these adjustments, for the highest rated institutions, those in Risk
Category I, the total base assessment rate will be between 7 and 24 basis points and for the lowest
rated institutions, those in Risk Category IV, the total base assessment rate will be between 40
and 77.5 basis points.
On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on
each institutions assets minus Tier 1 capital as of June 30, 2009, which was collected on
September 30, 2009. The amount of the special assessment for any institution was not to exceed 10
basis points times the institutions assessment base for the second quarter.
On November 12, 2009, the FDIC adopted a final rule amending the assessment regulations to
require institutions to prepay their quarterly risk-based assessments for the fourth quarter of
2009 and for all of 2010, 2011, and 2012, on December 30, 2009. The prepayment for the fourth
quarter of 2009 and all of 2010 was determined by multiplying the total base assessment rate that
the institution paid for the third quarter of 2009 by the corresponding prepaid assessment base for
each quarter. The prepayment for 2011 and 2012 was determined by multiplying the prepaid
assessment rate plus 75 basis points times the corresponding prepaid assessment base for each
quarter. For each quarter of the prepayment period, an institutions prepaid assessment base was
calculated by increasing its third quarter 2009 assessment base at an annual rate of 5 percent.
On November 21, 2008, the FDIC adopted final regulations implementing the Temporary Liquidity
Guarantee Program (TLGP) pursuant to which depository institutions could elect to participate.
Pursuant to the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or June 30,
2012, certain newly issued senior unsecured debt issued by participating institutions on or after
October 14, 2008 and before June 30,
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2009 (the Debt Guarantee), and (ii) provide full FDIC deposit insurance coverage for
non-interest bearing deposit transaction accounts regardless of dollar amount for an additional fee
assessment by the FDIC (the Transaction Account Guarantee). These accounts are mainly
payment-processing accounts, such as business payroll accounts. The Transaction Account Guarantee
will expire on June 30, 2010. Participating institutions will be assessed a 10 basis point
surcharge on the portion of eligible accounts that exceeds the general limit on deposit insurance
coverage. Reliance Bank and Reliance Bank, FSB elected to participate in this Program.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC
determines, after a hearing, that the institution (i) has engaged or is engaging in unsafe or
unsound practices, (ii) is in an unsafe or unsound condition to continue operations or (iii) has
violated any applicable law, regulation, order, or any condition imposed in writing by, or written
agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the
hearing process for a permanent termination of insurance, if the institution has no tangible
capital. Management of the Company is not aware of any activity or condition that could result in
termination of the deposit insurance of Reliance Bank.
Reliance Bank, FSB
Reliance Bank, FSB is a federally chartered thrift, and as such, is regulated by the same
agencies as its affiliate, Reliance Bank. The principal difference is that the FSBs primary
regulator is the OTS in lieu of the Missouri Division of Finance. As such, all of the above
mentioned federal regulations apply to Reliance Bank, FSB. Additionally, under OTS regulations,
Reliance Bank, FSB must maintain its standing as a qualified thrift lender. To maintain this
status, it is required to comply with restrictions and limitations imposed by OTS regulations on
the percentage of its loan portfolio that may be invested in different types of loans;
specifically, Reliance Bank, FSB must maintain at least 65% of its loan portfolio in qualified
thrift investments, which are essentially residential real estate loans. There are a wide variety
of loans that qualify for this purpose.
Employees
As of December 31, 2009, we had approximately 210 full-time equivalent employees. None of the
Companys employees are covered by a collective bargaining agreement. Management believes that its
relationship with its employees is good.
Item 1A. Risk Factors
An investment in shares of our Common Stock involves various risks. Before deciding to invest
in our Common Stock, you should carefully consider the risks described below in conjunction with
the other information in this Annual Report. Our business, financial condition and results of
operations could be harmed by any of the following risks or by other risks identified throughout
this Annual Report, or by other risks that have not been identified or that we may believe are
immaterial or unlikely. The value or market price of our Common Stock could decline due to any of
these risks, and you may lose all or part of your investment. The risks discussed below also
include forward-looking statements, and our actual results may differ substantially from those
discussed in these forward-looking statements.
The current economic environment poses challenges for us and could adversely affect our financial
condition and results of operations.
We are operating in a challenging and uncertain economic environment, including generally
uncertain national conditions and local conditions in our markets. The capital and credit markets
have been experiencing volatility and disruption for more than 24 months. The volatility and
disruption we have experienced are ongoing. The risks associated with our business become more
acute in periods of a slowing economy or slow growth. Financial institutions continue to be
affected by sharp declines in the real estate market and constrained financial markets. We retain
direct exposure to the residential and commercial real estate markets, and we are affected by these
events.
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Our loan portfolio includes commercial real estate loans, residential mortgage loans, and
construction and land development loans. Continued declines in real estate values, home sales
volumes and financial stress on borrowers as a result of the uncertain economic environment,
including job losses, could have an adverse effect on our borrowers or their customers, which could
adversely affect our financial condition and results of operations. In addition, a deepening of the
national economic recession or further deterioration in local economic conditions in our markets
could drive losses beyond that which is provided for in our reserve for loan losses and result in
the following other consequences: increases in loan delinquencies, problem assets and foreclosures
may increase; demand for our products and services may decline; deposits may decrease, which would
adversely impact our liquidity position; and collateral for our loans, especially real estate, may
decline in value, in turn reducing customers borrowing power, and reducing the value of assets and
collateral associated with our existing loans.
The impact of recent and future legislation may affect our business.
Congress and the Treasury Department have recently adopted legislation and taken actions to
address the disruptions in the financial system and declines in the housing market. It is not clear
at this time what impact EESA, TARP, ARRA, other liquidity and funding initiatives of the Treasury
and other bank regulatory agencies that have been previously announced, and any additional programs
that may be initiated in the future, will have on the financial markets and the financial services
industry. The actual impact that EESA and such related measures undertaken to alleviate the credit
crisis will have generally on the financial markets, including the extreme levels of volatility and
limited credit availability currently being experienced, is unknown. The failure of such measures
to help stabilize the financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common stock. Finally, there can be no
assurance regarding the specific impact that such measures may have on us.
In addition to the legislation mentioned above, federal and state governments could pass
additional legislation responsive to current credit conditions. As an example, the Bank could
experience higher credit losses because of federal or state legislation or regulatory action that
reduces the amount the Banks borrowers are otherwise contractually required to pay under existing
loan contracts. Also, the Bank could experience higher credit losses because of federal or state
legislation or regulatory action that limits its ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for several
years. In recent months, the volatility and disruption have reached unprecedented levels. In some
cases, the markets have produced downward pressure on stock prices and credit availability for
certain issuers without regard to those issuers underlying financial strength. If current levels
of market disruption and volatility continue or worsen, our ability to access capital may be
adversely affected which, in turn, could adversely affect our business, financial condition and
results of operations.
Additional increases in insurance premiums could affect our earnings.
The FDIC insures the Banks deposits up to certain limits. The FDIC charges us premiums to
maintain the Deposit Insurance Fund. Current economic conditions have increased the deposit
premiums as a result of bank failures. The FDIC takes control of failed banks and ensures payment
of deposits up to insured limits using the resources of the Deposit Insurance Fund. The FDIC has
designated the Deposit Insurance Fund long -term target reserve ratio at 1.25 percent of insured
deposits. Due to recent bank failures, the FDIC insurance fund reserve ratio has fallen below 1.15
percent, the statutory minimum.
The FDIC expects a higher ratio of insured institution failures in the next few years, which
may result in a continued decline in the reserve ratio. As discussed above, the FDIC has developed
a proposed restoration plan that will uniformly increase insurance assessments by 7 basis points
(annualized) effective January 1, 2009. Effective April 1, 2009, the plan also has made changes to
the deposit insurance assessment system requiring riskier institutions to pay a larger share. Even
though we fully paid FDIC deposit insurance for the year 2009, as well as prepaying for the years
2010, 2011, and 2012, there is no guarantee the FDIC will not implement further increases during these three years, even though prepaid. If these
assessments increase significantly it could adversely affect our earnings.
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A future reduction in liquidity in the banking system could increase our costs.
The Federal Reserve Bank has been providing vast amounts of liquidity into the banking system
to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction
in the Federal Reserves activities or capacity could reduce liquidity in the markets, thereby
increasing funding costs to the Company or reducing the availability of funds to the Company to
finance its existing operations.
Difficult market conditions have adversely affected our industry.
We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the
housing market over the past year, with falling home prices and increasing foreclosures,
unemployment and under-employment, have negatively impacted the credit performance of mortgage
loans and securities and resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities, major commercial and investment banks, and
regional financial institutions. Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and institutional investors have reduced
or ceased providing funding to borrowers, including to other financial institutions. This market
turmoil and tightening of credit have led to an increased level of commercial and consumer
delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of
business activity generally. The resulting economic pressure on consumers and lack of confidence in
the financial markets have adversely affected our business, financial condition and results of
operations. We do not expect that the difficult conditions in the financial markets are likely to
improve in the near future. A worsening of these conditions would likely exacerbate the adverse
effects of these difficult market conditions on us and others in the financial institutions
industry.
Our business is impacted by the local economies in which we operate.
Because the majority of our borrowers and depositors are individuals and businesses located
and doing business in the St. Louis and Fort Myers metropolitan areas, our success depends to a
significant extent upon economic conditions in the St. Louis and Fort Myers metropolitan areas.
Adverse economic conditions in our market areas could reduce our growth rate, affect the ability of
our customers to repay their loans and generally affect our financial condition and results of
operations. Conditions such as inflation, recession, unemployment, high interest rates, short money
supply, scarce natural resources, international disorder, terrorism, weather-related conditions and
other factors beyond our control may adversely affect our profitability. We are less able than a
larger institution to spread the risks of unfavorable local economic conditions across a large
number of diversified economies. Any sustained period of increased payment delinquencies,
foreclosures or losses caused by adverse market or economic conditions in the St. Louis or Fort
Myers metropolitan areas could adversely affect the value of our assets, revenues, results of
operations and financial condition. Our loan production offices (LPOs) in Phoenix and Houston
could also be impacted by local economies in regards to loan production and growth. Moreover, we
cannot give any assurance we will benefit from any market growth or favorable economic conditions
in our primary market areas if they do occur.
If the value of real estate in the St. Louis and Fort Myers metropolitan areas were to
continue to decline materially, a significant portion of our loan portfolio would become
under-collateralized, which could have a material adverse effect on us.
With most of our loans concentrated in the St. Louis and Fort Myers metropolitan areas at this
time, a continued decline in local economic conditions could adversely affect the value of the real
estate collateral securing our loans. A continued decline in property values would diminish our
ability to recover on defaulted loans by selling the real estate collateral, making it more likely
that we would suffer losses on defaulted loans. Additionally, the subsequent decrease in asset
quality could require additions to our reserve for possible loan losses through increased
provisions for loan losses, which would hurt our profits. Also, a further decline in local economic
conditions may have a greater effect on our earnings and capital than on the earnings and capital
of larger financial institutions whose real estate loan portfolios are more geographically diverse.
Real
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estate values are affected by various factors in addition to local economic conditions,
including, among other things, changes in general or regional economic conditions, governmental
rules or policies and natural disasters. A negative development in any of these factors could
adversely affect our results of operations and financial condition.
Our reserve for possible loan losses may be insufficient to absorb losses in our loan
portfolio.
Like most financial institutions, we maintain a reserve for possible loan losses to provide
for loans in our portfolio that may not be repaid in their entirety. We believe that our reserve
for possible loan losses is maintained at a level adequate to absorb probable losses inherent in
our loan portfolio as of the corresponding balance sheet date. However, our reserve for possible
loan losses may not be sufficient to cover actual loan losses, and future provisions for loan
losses could materially adversely affect our operating results.
In evaluating the adequacy of our reserve for possible loan losses, we consider numerous
quantitative factors, including our historical charge-off experience, growth of our loan portfolio,
changes in the composition of our loan portfolio and the volume of delinquent and criticized loans.
In addition, we use information about specific borrower situations, including their financial
position and estimated collateral values, to estimate the risk and amount of loss for those
borrowers. Finally, we also consider many qualitative factors, including general and economic
business conditions, duration of the current business cycle, current general market collateral
valuations, trends apparent in any of the factors we take into account and other matters, which are
by nature more subjective and fluid. Our estimates of the risk of loss and amount of loss on any
loan are complicated by the significant uncertainties surrounding our borrowers abilities to
successfully execute their business models through changing economic environments, competitive
challenges and other factors. Because of the degree of uncertainty and susceptibility of these
factors to change, our actual losses may vary from our current estimates.
At December 31, 2009, our reserve for possible loan losses as a percentage of total loans was
2.82%. Federal and state regulators, as an integral part of their examination process, periodically
review our reserve for possible loan losses and may require us to increase our reserve for possible
loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease
our reserve for possible loan losses by recognizing loan charge-offs, net of recoveries. Any such
additional provisions for loan losses or charge-offs, as required by these regulatory agencies,
could have a material adverse effect on our financial condition and results of operations.
Fluctuations in interest rates could reduce our profitability and affect the value of our
assets.
Like other financial institutions, we are subject to interest rate risk. Our primary source of
income is net interest income, which is the difference between interest earned on loans and
investments and the interest paid on deposits and borrowings. We expect that we will periodically
experience imbalances in the interest rate sensitivities of our assets and liabilities and the
relationships of various interest rates to each other. Over any defined period of time, our
interest-earning assets may be more sensitive to changes in market interest rates than our
interest-bearing liabilities, or vice versa. In addition, the individual market interest rates
underlying our loan and deposit products (e.g., the prime commercial rate) may not change to the
same degree over a given time period. In any event, if market interest rates should move contrary
to our position, our earnings may be negatively affected. In addition, loan volume and quality and
deposit volume and mix can be affected by market interest rates. Changes in levels of market
interest rates could materially and adversely affect our net interest spread, asset quality,
origination volume and overall profitability.
We principally manage interest rate risk by managing our volume and mix of our earning assets
and funding liabilities. In a changing interest rate environment, we may not be able to manage this
risk effectively. If we are unable to manage interest rate risk effectively, our business,
financial condition and results of operations could be adversely affected. Changes in the level of
interest rates also may negatively affect our ability to originate real estate loans, the value of
our assets and our ability to realize gains from the sale of our assets, all of which ultimately
affect our earnings.
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We are dependent upon the services of our management team.
Our future success and profitability is substantially dependent upon the management and
banking abilities of our executive management team. We believe that our future results will also
depend in part upon our attracting and retaining highly skilled and qualified senior and middle
management. We are especially dependent on a limited number of key management personnel, none of
whom has an employment agreement with us, except for our Chief Executive Officer and our Executive
Vice President. The loss of the Chief Executive Officer, Executive Vice President or other senior
executive officers could have a material adverse impact on our operations because other officers
may not have the experience and expertise to readily replace these individuals. Competition for
such personnel is intense, and we cannot assure you that we will be successful in attracting or
retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to
our business and could have a material adverse effect on our business, financial condition and
results of operations.
Our failure to recruit and retain qualified lenders could adversely affect our ability to
compete successfully and affect our profitability.
Our success and future growth depend heavily on our ability to attract and retain highly
skilled and motivated lenders and other banking professionals. We compete against many institutions
with greater financial resources both within our industry and in other industries to attract these
qualified individuals. Our failure to recruit and retain adequate talent could reduce our ability
to compete successfully and could adversely affect our business and profitability.
Competition from financial institutions and other financial service providers may adversely
affect our growth and profitability.
The banking business is highly competitive and we experience competition in each of our
markets from many other financial institutions. We compete with commercial banks, credit unions,
savings and loan associations, mortgage banking firms, consumer finance companies, securities
brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other
super-regional, national and international financial institutions that operate offices in our
primary market areas and elsewhere.
We compete with these institutions both in attracting deposits and in making loans. This
competition has made it more difficult for us to make new loans and has occasionally forced us to
offer higher deposit rates. Price competition for loans and deposits might result in us earning
less on our loans and paying more on our deposits, which reduces net interest income. Many of our
competitors are larger financial institutions. While we believe we successfully compete with these
other financial institutions in our primary markets, we may face a competitive disadvantage as a
result of our smaller size, smaller resources and smaller lending limits, lack of geographic
diversification and inability to spread our marketing costs across a broader market. In recent
years, several new financial institutions have been established in the St. Louis and Fort Myers
metropolitan areas. These new financial institutions have and are expected to continue to price
their loans and deposits aggressively in order to attract customers. Although we compete by
concentrating our marketing efforts in our primary markets with local advertisements, personal
contacts, and greater flexibility and responsiveness in working with local customers, we can give
no assurance this strategy will be successful.
We may have fewer resources than many of our competitors to invest in technological
improvements.
The financial services industry is undergoing rapid technological changes, with frequent
introductions of new technology-driven products and services. The effective use of technology
increases efficiency and enables financial institutions to better serve customers and reduce costs.
Our future success will depend, in part, upon our ability to address the needs of our customers by
using technology to provide products and services that will satisfy customer demands for
convenience, as well as to create additional efficiencies in our operations. Many of our
competitors have substantially greater resources to invest in technological improvements. We may
not be able to effectively implement new technology-driven products and services or be successful
in marketing these products and services to our customers.
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We are subject to security and operational risks relating to our use of technology that could
damage our reputation and our business.
Security breaches in our internet banking activities could expose us to possible liability and
damage our reputation. Any compromise of our security also could deter customers from using our
internet banking services that involve the transmission of confidential information. We rely on
standard internet security systems to provide the security and authentication necessary to effect
secure transmission of data. These precautions may not protect our systems from compromises or
breaches of our security measures that could result in damage to our reputation and our business.
Additionally, we outsource our data processing to a third party. If our third party provider
encounters difficulties or if we have difficulty in communicating with such third party, it will
significantly affect our ability to adequately process and account for customer transactions, which
would significantly affect our business operations.
We operate in a highly regulated environment and we may be adversely affected by changes in
laws and regulations.
We are subject to extensive regulation, supervision and examination by the Federal Reserve,
OTS, the Missouri Division of Finance, its chartering authorities, and by the FDIC, as insurer of
our deposits. Such regulation and supervision govern the activities in which we may engage, and are
intended primarily for the protection of the insurance fund and for the depositors and borrowers of
the Banks. The regulation and supervision by the Federal Reserve, OTS, the Missouri Division of
Finance and the FDIC are not intended to protect the interests of investors in our Common Stock.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities,
including the imposition of restrictions on our operations, the classification of our assets and
determination of the level of our reserve for possible loan losses. Any change in such regulation
and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory
action, may have a material impact on our operations. As an example, the GLBA eliminates many of
the restrictions placed on the activities of certain qualified financial or bank holding companies.
We will incur additional expenses as a publicly reporting company as a result of compliance costs
associated with the SECs public reporting requirements. In addition, SOX and the related rules and
regulations promulgated by the SEC that are now applicable to us, have increased the scope,
complexity and cost of corporate governance, reporting and disclosure practices, including the
costs of completing our audits and maintaining our internal controls.
ITEM 1b. Unresolved Staff Comments
None.
Item 2. Properties
Our executive offices are located at 10401 Clayton Road, Frontenac, Missouri, 63131. As of
December 31, 2009, the Companys subsidiary, Reliance Bank, had a total of twenty banking locations
in Missouri and Illinois. Reliance Bank owns nineteen of the bank branch buildings, as well as the
underlying real property on fourteen of them. One branch operates in a leased building, and the
remaining five branch buildings, although owned, are subject to ground leases that expire between
2015 and 2026 and include one or more renewal options.
As of December 31, 2009, the Companys subsidiary, Reliance Bank, FSB, had three locations in
Florida. Reliance Bank, FSB leases one of these locations, and owns the other two..
As of December 31, 2009, the Companys subsidiary, Reliance Loan Center in Phoenix, Arizona
had one leased location.
As of December 31, 2009, the Companys subsidiary, Reliance Loan Center in Houston, Texas had
one leased location.
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Item 3. Legal Proceedings
The Company and its subsidiaries are, from time to time, parties to various legal proceedings
arising out of their businesses. Management believes that there are no such proceedings pending or
threatened against the Company or its subsidiaries which, if determined adversely, would have a
material adverse effect on the business, financial condition, results of operations or cash flows
of the Company or any of its subsidiaries.
Item 4. Market for Registrants common equity, related stockholder matters and
issuer purchases of equity securities
The Class A Common Stock of the Company, par value $0.25 (the Common Stock), is not
registered under the Securities Act of 1933, as amended, however is registered under Section 12(g)
of the Securities Exchange Act of 1934, as amended. The Common Stock is quoted on the
Over-the-Counter Bulletin Board under the symbol RLBS, but the Company is unaware as to any
transactions involving its Common Stock other than occasional trades and private transactions
between shareholders and third parties.
The high and low price per share paid for the Common Stock as determined by reference to
offering prices of the Common Stock during the previous two fiscal years are reflected in the
following table:
High | Low | |||||||
2009 |
||||||||
First Quarter |
$ | 4.90 | $ | 3.00 | ||||
Second Quarter |
$ | 4.50 | $ | 3.25 | ||||
Third Quarter |
$ | 3.65 | $ | 2.65 | ||||
Fourth Quarter |
$ | 3.50 | $ | 2.00 | ||||
2008 |
||||||||
First Quarter |
$ | 12.00 | $ | 7.00 | ||||
Second Quarter |
$ | 10.10 | $ | 6.25 | ||||
Third Quarter |
$ | 11.00 | $ | 6.10 | ||||
Fourth Quarter |
$ | 7.75 | $ | 4.40 |
As of March 22, 2010 there were approximately 753 holders of our Common Stock.
Dividends
The Company has never paid any cash dividends and has no current intention to pay dividends on
common in the immediate future.
The following Stock Performance Graph and related information should not be deemed soliciting
material or to be filed with the SEC nor shall such performance be incorporated by reference
into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each
as amended, except to the extent that the Company specifically incorporates it by reference into
such filing.
The following graph compares the Companys cumulative stockholder return on its common stock
from June 26, 2007 through December 31, 2009, the measurement period. The graph compares the
Companys common stock with the NASDAQ Composite and the SNL $1B-$5B Bank Index. The graph assumes
an investment of $100.00 in the Companys common stock and each index on June 26, 2007 and
reinvestment of all quarterly dividends. The investment is measured as of the fiscal year end.
While there are no assurances, the Company believes that this trend will reverse as the economy
improves.
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Stock Performance Graph
Period Ending | ||||||||||||||||||||||||||||||||
Index | 06/26/07 | 12/31/07 | 06/30/08 | 12/31/08 | 06/30/09 | 12/31/09 | ||||||||||||||||||||||||||
Reliance Bancshares, Inc. |
100.00 | 93.33 | 62.22 | 45.24 | 28.89 | 20.44 | ||||||||||||||||||||||||||
NASDAQ Composite |
100.00 | 103.03 | 89.08 | 61.26 | 71.29 | 88.15 | ||||||||||||||||||||||||||
SNL $1B-$5B Bank Index |
100.00 | 84.90 | 66.04 | 70.42 | 51.72 | 50.48 | ||||||||||||||||||||||||||
Recent Sales of Unregistered Equity Securities
On December 4, 2009, December 15, 2009, and December 22, 2009 we sold 25, 175, and 100 shares,
respectively, of our Series C Preferred Stock for an aggregate consideration of $300,000.00. Such
shares were not registered and were sold in reliance upon the exemption from registration contained
in Section 4(2) of the Securities Act of 1933, as amended.
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Item 5. selected financial data
The following consolidated selected financial data is derived from the Companys audited
financial statements as of and for the five years ended December 31, 2009. This information should
be read in connection with our audited consolidated financial statements, related notes and
Managements Discussion and Analysis of Financial Condition and Results of Operations appearing
elsewhere in this report.
As of and for the | ||||||||||||||||||||
Years ended December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||
Statements of income: |
||||||||||||||||||||
Total interest income |
$ | 76,589 | $ | 78,209 | $ | 63,687 | $ | 47,961 | $ | 31,267 | ||||||||||
Total interest expense |
39,005 | 41,715 | 37,609 | 26,227 | 15,236 | |||||||||||||||
Net interest income |
37,584 | 36,494 | 26,078 | 21,734 | 16,031 | |||||||||||||||
Provision for possible loan losses |
53,450 | 11,148 | 3,187 | 2,200 | 2,333 | |||||||||||||||
Net interest income after provision
for possible loan losses |
(15,866 | ) | 25,346 | 22,891 | 19,534 | 13,698 | ||||||||||||||
Total noninterest income |
3,925 | 2,683 | 1,976 | 1,310 | 537 | |||||||||||||||
Total noninterest expense |
34,046 | 29,428 | 22,290 | 16,605 | 11,449 | |||||||||||||||
Income (loss) before income taxes |
(45,987 | ) | (1,399 | ) | 2,577 | 4,239 | 2,786 | |||||||||||||
Income tax expense (benefit) |
(16,630 | ) | (1,080 | ) | 462 | 1,223 | 863 | |||||||||||||
Net income (loss) |
$ | (29,357 | ) | $ | (319 | ) | $ | 2,115 | $ | 3,016 | $ | 1,923 | ||||||||
Common share data: |
||||||||||||||||||||
Basic net
income (loss) per common share (2009 restated) |
$ | (1.49 | ) | $ | (0.02 | ) | $ | 0.10 | $ | 0.16 | $ | 0.12 | ||||||||
Diluted net
income (loss) per common share (2009 restated) |
(1.48 | ) | (0.02 | ) | 0.10 | 0.15 | 0.12 | |||||||||||||
Dividends declared per share |
| | | | | |||||||||||||||
Book value per common share |
5.14 | 6.73 | 6.76 | 6.31 | 5.06 | |||||||||||||||
Tangible book value per common share |
5.09 | 6.67 | 6.70 | 6.24 | 4.98 | |||||||||||||||
Weighted average shares-basic |
20,864 | 20,670 | 20,343 | 18,685 | 16,095 | |||||||||||||||
Weighted average shares-diluted |
20,881 | 21,063 | 21,337 | 19,548 | 16,681 | |||||||||||||||
Shares outstanding-end of period |
20,972 | 20,771 | 20,682 | 19,571 | 18,242 | |||||||||||||||
Period-end balances: |
||||||||||||||||||||
Loans, net |
$ | 1,108,575 | $ | 1,240,191 | $ | 902,053 | $ | 660,318 | $ | 467,402 | ||||||||||
Investment securities |
284,120 | 193,888 | 158,042 | 188,369 | 187,842 | |||||||||||||||
Total assets |
1,536,708 | 1,573,989 | 1,136,152 | 900,799 | 702,462 | |||||||||||||||
Deposits |
1,266,060 | 1,228,047 | 834,576 | 678,597 | 576,425 | |||||||||||||||
Short-term borrowings |
12,697 | 63,919 | 88,325 | 70,463 | 16,847 | |||||||||||||||
Long-term borrowings |
104,000 | 136,000 | 68,000 | 24,300 | 14,300 | |||||||||||||||
Stockholders equity |
149,669 | 139,609 | 139,891 | 123,497 | 92,216 | |||||||||||||||
Average balances: |
||||||||||||||||||||
Loans |
$ | 1,213,937 | $ | 1,115,216 | $ | 770,523 | $ | 546,122 | $ | 397,584 | ||||||||||
Investment securities |
254,116 | 168,289 | 174,052 | 200,286 | 145,887 | |||||||||||||||
Total assets |
1,569,548 | 1,366,110 | 1,006,628 | 786,014 | 588,312 | |||||||||||||||
Deposits |
1,238,968 | 1,006,763 | 777,450 | 629,588 | 473,540 | |||||||||||||||
Short-term borrowings |
22,477 | 88,749 | 49,179 | 26,475 | 17,155 | |||||||||||||||
Long-term borrowings |
131,039 | 125,118 | 39,646 | 15,881 | 11,423 | |||||||||||||||
Stockholders equity |
169,792 | 138,394 | 134,548 | 109,940 | 83,324 | |||||||||||||||
Selected ratios: |
||||||||||||||||||||
Net yield on earning assets |
2.55 | % | 2.88 | % | 2.79 | % | 2.94 | % | 2.90 | % | ||||||||||
Return on average total assets |
(1.87 | )% | (0.02 | )% | 0.21 | % | 0.38 | % | 0.33 | % | ||||||||||
Return on average stockholders equity |
(17.29 | )% | (0.23 | )% | 1.57 | % | 2.74 | % | 2.31 | % | ||||||||||
Average stockholders equity as a
percent of average total assets |
10.82 | % | 10.13 | % | 13.37 | % | 13.99 | % | 14.16 | % | ||||||||||
Nonperforming loans as a percent of loans at year-end |
6.32 | % | 2.94 | % | 1.95 | % | 0.77 | % | 0.65 | % | ||||||||||
Reserve for possible loan losses as a
percent of loans at year-end |
2.82 | % | 1.14 | % | 1.06 | % | 1.06 | % | 1.10 | % |
Note: | All share and per share information has been retroactively restated for a two-for-one stock split and concurrent reduction in par value of $0.50 to $0.25, effective December 29, 2006. |
17
Table of Contents
Item 6. Managements discussion and analysis of financial condition and results of
operations
The following presents managements discussion and analysis of the consolidated financial
condition and results of operations of Reliance Bancshares, Inc. (the Company) for each of the
years in the three-year period ended December 31, 2009. This discussion and analysis is intended
to review the significant factors affecting the financial condition and results of operations of
the Company, and provides a more comprehensive review which is not otherwise apparent from the
consolidated financial statements alone. This discussion should be read in conjunction with
Selected Financial Data, the Companys consolidated financial statements and the notes thereto
and other financial data appearing elsewhere herein.
The Company has prepared all of the consolidated financial information in this report in
accordance with U.S. generally accepted accounting principles (U.S. GAAP). In preparing the
consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and
assumptions that affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the consolidated financial statements, and the reported
amounts of revenue and expenses during the reporting periods. No assurances can be given that
actual results will not differ from those estimates.
Overview
The Company provides a full range of banking services to individual and corporate customers
throughout the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida
through the 23 locations of its wholly-owned subsidiaries, Reliance Bank and Reliance Bank, FSB
(hereinafter referred to as the Banks). The Company was incorporated and began its development
stage activities on July 24, 1998. Such development stage activities (i.e., applying for a banking
charter, raising capital, acquiring property, and developing policies and procedures, etc.) led to
the opening of Reliance Bank (as a new bank) upon receipt of all regulatory approvals on April 16,
1999. Since its opening in 1999 through December 31, 2009, Reliance Bank has added 20 branch
locations in the St. Louis metropolitan area of Missouri and Illinois and Loan Production Offices
(LPOs) in Houston, Texas and Phoenix, Arizona and has grown its total assets, loans and deposits
to $1.4 billion, $1.1 billion, and $1.2 billion, respectively, at December 31, 2009.
Effective May 31, 2003, the Company purchased The Bank of Godfrey, a Godfrey, Illinois state
banking institution. The Godfrey bank was merged with and into Reliance Bank on October 31, 2005.
Reliance Bank also opened a LPO in Ft. Myers, Florida on July 1, 2004. Effective January 17, 2006,
the Company opened a new Federal Savings Bank, Reliance Bank, FSB, in Ft. Myers, Florida, and loans
totaling approximately $14 million that were originated by the Reliance Bank LPO were transferred
to Reliance Bank, FSB. Since its opening in 2006, Reliance Bank, FSB has three branch locations in
southwestern Florida and with total assets, loans, and deposits of $105.0 million, $65.5 million,
and $77.3 million, respectively, at December 31, 2009.
At December 31, 2009, Reliance Banks total assets, total revenues, and net loss represented
93.30%, 93.60%, and 70.39%, respectively, of the Companys consolidated total assets, total
revenue, and net loss. Reliance Bank, FSBs total assets, total revenues, and net loss represented
6.83%, 6.40%, and 24.16%, respectively, of the Companys consolidated totals. The Company incurred
a net loss of $29.4 million for the year ended December 31, 2009.
During 2008, the Company completed building its St. Louis metropolitan branch network. The
Company plans to continue building its branch network in southwestern Florida at some time in the
future , with four additional branches planned; however, the building of these branches has been
suspended while management focuses on Reliance Bank, FSBs profitability in light of the stressful
market conditions in southwestern Florida. The Companys branch expansion plans were designed to
increase the Companys market share in the St. Louis metropolitan area in Missouri and Illinois and
southwestern Florida and to allow the Companys banking subsidiaries to compete with much larger
financial institutions in these markets. The Houston and Phoenix LPOs are intended to benefit from
commercial and residential lending and fee income generation opportunities in these larger and
historically higher-growth markets.
The St. Louis metropolitan, southwestern Florida, Houston and Phoenix markets in which the
Companys banking subsidiaries operate are highly competitive in the financial services area. The
Banks are subject to
competition from other financial and nonfinancial institutions providing financial products
throughout these markets.
18
Table of Contents
The Companys total consolidated assets were $1.5 billion at December 31, 2009, with loans and
deposits totaling $1.1 billion and $1.3 billion, respectively. The branch locations of the Banks
have provided the Company with excellent strategic locations from which depositors and borrowers
can be accessed. Three Reliance Bank branches were opened in 2008, six Reliance Bank branches were
opened in 2006, one branch was opened in 2005, four branches were opened in 2004, two branches were
opened in 2003, and one branch was opened each year in 2002, 2001, and 1999. Three Reliance Bank,
FSB branches were opened in 2007 and one branch was opened in 2006, while one temporary branch was
closed on June 26, 2009 due to local economic conditions.
The Company has funded its Banks branch expansion with several private placement stock
offerings made to accredited investors since its inception. The Company has held a total of 12 such
offerings since its inception and has sold 20,972,091 shares of Company Common Stock through
December 31, 2009.
The Companys consolidated net income/(loss) for the years ended December 31, 2009, 2008, and
2007 totaled $(29,357,361), $(319,230), and $2,114,947, respectively. While the Companys net
interest income has grown, the provision for possible loan losses has increased, reflecting an
increase in non-performing loans, which has resulted from a substantial decline in the real estate
and local economic markets in which the Companys banking subsidiaries operate. These factors and
their effect on the Companys results of operations are discussed in more detail below.
Net interest income before the provision for possible loan losses for the years ended December
31, 2009, 2008, and 2007 totalled $37,584,384, $36,493,939, and $26,077,924, respectively. This
growth in net interest income resulted from a decrease in the rates paid on deposits and an
increasing level of interest-earning assets during this time period, reduced by increasing
nonearning problem assets. Total interest income was $76,589,196, $78,209,207, and $63,686,972,
for the years ended December 31, 2009, 2008, and 2007, respectively.
Interest expense incurred on interest-bearing liabilities for the years ended December 31,
2009, 2008, and 2007 totalled $39,004,812, $41,715,268, and $37,609,048, respectively. The Company
continues to restructure its mix of deposits away from higher rate time deposits and short term
borrowings to lower cost savings and money market accounts. Also, the Company has been able to
lower rates on retail deposits and still retain customer balances.
The substantial decline of the real estate market that has occurred during the past several
years on a national scale has also been experienced in the St. Louis metropolitan and southwestern
Florida areas. Residential home building and sales have declined significantly from the levels
enjoyed in prior years. As a result, since 2006, the Company has experienced a significant and
continual increase in non-performing assets (which include non-performing loans and other real
estate owned). Nonperforming assets totalled $101.2 million at December 31, 2009, compared with
$50.2 million at December 31, 2008. The reserve for possible loan losses as a percentage of net
outstanding loans was 2.82% and 1.14% at December 31, 2009 and 2008, respectively. Net charge-offs
for the year ended December 31, 2009 totalled $35,534,253 compared with $6,527,189 for the year
ended December 31, 2008. The provision for possible loan losses charged to expense for the years
ended December 31, 2009 and 2008 was $53,450,000 and $11,148,000, respectively. The increase in the
provision for loan losses was a direct reaction to the significant and continual decline in the
real estate market. The Company believes it has identified existing problems in the portfolio and
worked to address those issues, however, the economy continues to present challenges to our
borrowers and it could be likely that others will experience difficulties in meeting obligations.
See further discussion regarding the Companys management of credit risk in the section below
entitled Risk Management.
Total noninterest income excluding securities gains and losses for the years ended 2009, 2008
and 2007 was $2,578,517, $2,361,422, and $1,818,785. Gains on security sales for the years ended
2009, 2008 and 2007 were $1,346,565, $321,113, and $157,011, respectively.
19
Table of Contents
Deposit service charge income increased due to a larger deposit base. Deposit service charge
revenues for 2009, 2008 and 2007 were $975,664, $796,653, and $509,352, respectively. Residential
mortgage lending operations (in which fixed rate loans are originated and sold in the secondary
market) also increased. Total income for these secondary market activities during 2009, 2008 and
2007 were $435,570, $391,849 and $243,538, respectively.
Total noninterest expense was $34,046,389, $29,427,590, and $22,290,307, for the years ended
December 31, 2009, 2008, and 2007, respectively. Increased expenses relating to other real estate
owned (including losses on sales of foreclosed property and writedowns on properties still held, as
well as holding costs on such properties), increased FDIC insurance assessments, and writedowns on
investment securities more than offset the cost savings achieved in other operational expenses.
The Companys effective tax rate for the years ended December 31, 2009, 2008, and 2007 was
36.16%, 77.18%, and 17.93%, respectively. The change in effective tax rates during this three year
period is a result of the level of tax-exempt interest income and its effect on the pre-tax
income/loss.
Basic
earnings (loss) per common share for the years ended December 31, 2009, 2008, and 2007 were
$(1.49) (restated), $(0.02), and $0.10, respectively. On a diluted basis, earnings (loss) per share for the
years ended December 31, 2009, 2008, and 2007 were $(1.48) (restated), $(0.02), and $0.10, respectively.
Following are certain ratios generally followed in the banking industry for the Company for
the years ended December 31, 2009, 2008, and 2007:
As of and for the | ||||||||||||
Years Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Percentage of net income (loss) to: |
||||||||||||
Average total assets |
(1.87 | )% | (0.02 | )% | 0.21 | % | ||||||
Average stockholders equity |
(17.29 | )% | (0.23 | )% | 1.57 | % | ||||||
Percentage of common dividends declared to net income per common share |
| | | |||||||||
Percentage of average stockholders equity to average total assets |
10.82 | % | 10.13 | % | 13.37 | % |
Critical Accounting Policies
The following accounting policies are considered most critical to the understanding of the
Companys financial condition and results of operations. These critical accounting policies require
managements most difficult subjective and complex judgments about matters that are inherently
uncertain. Because these estimates and judgments are based on current circumstances, they are
likely to change over time or prove to be different than actual experiences. In the event that
different assumptions or conditions were to prevail, and depending upon the severity of such
changes, the possibility of a materially different financial condition and/or results of operations
could reasonably be expected. The impact and any associated risks related to our critical
accounting policies on our business operations are discussed throughout this Managements
Discussion and Analysis of Financial Condition and Results of Operations, where such policies
affect our reported and expected financial results. For a detailed discussion on the application of
these and other accounting policies, see Note 1 to our Consolidated Financial Statements for the
years ended December 31, 2009, 2008, and 2007 included elsewhere herein.
Reserve for Possible Loan Losses
Subject to the use of estimates, assumptions, and judgments, managements evaluation process
used to determine the adequacy of the reserve for possible loan losses combines several factors:
managements ongoing review of the loan portfolio; consideration of past loan loss experience;
trends in past due and nonperforming loans; risk characteristics of the various classifications of
loans, existing economic conditions; the fair value of underlying collateral; input from
regulators; and other qualitative and quantitative factors which could affect probable credit
losses. Because current economic conditions can change and future events are inherently difficult
to predict, the anticipated amount of estimated loan losses, and therefore the adequacy
20
Table of Contents
of the reserve, could change significantly. In addition, as an integral part of their
examination process, various regulatory agencies also review the reserve for possible loan losses.
Such agencies may require that certain loan balances be charged off when their credit evaluations
differ from those of management, based on their judgments about information available to them at
the time of their examinations, or may have particular views of the level of loan loss reserve.
The Company believes the reserve for possible loan losses is adequate and properly recorded in the
consolidated financial statements.
Deferred Tax Assets
The Company recognizes deferred tax assets and liabilities for the estimated future tax
effects of temporary differences, net operating loss carry-forwards and tax credits. Deferred tax
assets are recognized subject to managements judgment based upon available evidence that
realization is more likely than not. In the event that management determines the Company would not
be able to realize all or part of net deferred tax assets in the future, deferred tax assets would
be reduced if necessary, by a deferred tax asset valuation allowance, which would result from a
direct charge to income tax expense in the period that such determination is made. Likewise, the
Company would reverse the valuation allowance when realization of the deferred tax asset is
expected and decrease income tax expense, accordingly.
Results of Operations for the Three-Year Period Ended December 31, 2009
Net Interest Income
The Companys net interest income increased by $1,090,445 (2.99%) to $37,584,384 for the year
ended December 31, 2009 from the $36,493,939 earned for the year ended December 31, 2008, which was
an increase of $10,416,015 (39.94%) from the $26,077,924 earned in 2007. The Companys net interest
margin for the years ended December 31, 2009, 2008, and 2007 was 2.55%, 2.88%, and 2.79%,
respectively. The Companys net interest margin has been negatively impacted by increased
non-performing loans.
Average earning assets for 2009 increased $203,514,070 (15.77%) to $1,494,354,054 from the
level of $1,290,839,984 for 2008. Average earning assets for 2008 increased $337,460,622 (35.40%)
from the level of $953,379,362 for 2007. The growth in average interest earning assets was
primarily due to growth in both the investment and loan portfolios, although loan balances have
declined since December 31, 2008. Total average loans grew $98,720,183 (8.85%) in 2009 to
$1,213,936,609 from the level of $1,115,216,426 for 2008, which was an increase of $344,693,406
(44.73%) from the level of $770,523,020 for 2007. The Companys addition of LPOs in Houston and
Phoenix, and normal growth occurring in some of the Banks newer branches were the primary reasons
for the growth in the Companys average loan balances.
Total average investment securities for 2009 increased $85,827,133 (51.00%) to $254,116,193
from the level of $168,289,060 for 2008, which was a decrease of $5,762,992 (3.31%) from the level
of $174,052,052 for 2007. The Company uses its investment portfolio to (a) provide support for
borrowing arrangements for securities sold under repurchase agreements, (b) provide support for
pledging purposes for deposits of governmental and municipal deposits over FDIC insurance limits,
(c) provide a secondary source of liquidity through laddered maturities of such securities, and
(d) provide increased interest income over that which would be earned on overnight/daily fund
investments. As the Companys deposits grow, a certain percentage of such deposits are invested in
investment securities for these specific purposes. The total carrying value of securities pledged
to secure public funds and repurchase agreements was approximately $160,923,000, $180,767,000, and
$156,904,000 at December 31, 2009, 2008, and 2007, respectively. The Banks have also pledged
letters of credit from the Federal Home Loan Banks totaling $17,791,974 as additional collateral to
secure public funds at December 31, 2009.
Average short-term investments can fluctuate significantly from day to day based on a number
of factors, including, but not limited to, the collected balances of customer deposits, loan demand
and investment security maturities. Excess funds not invested in loans or investment securities
are invested in overnight funds with various unaffiliated financial institutions. The average
balances of such short-term investments for the years ended December 31, 2009, 2008, and 2007 were
$26,301,252, $7,334,498, and $8,804,290 respectively.
21
Table of Contents
A key factor in increasing the Companys net interest margin is to maintain a higher
percentage of earning assets in the loan category, which is the Companys highest earning asset
category. However, average loans as a percentage of average earning assets were 81.23% for 2009,
which was a 516 basis point decrease under the 86.39% percentage achieved in 2008, which was a 557
basis point increase over the 80.82% percentage achieved in 2007. The decline from 2008 to 2009
resulted from the depressed economic environment in the Banks market areas, resulting in fewer
lending opportunities for the Banks.
Funding the Companys growth in interest-earning assets has been a challenge in the markets in
which the Companys banking subsidiaries operate. With the stock market rebounding through 2007
from its depressed levels in 2004 and 2003, deposits were not as plentiful in the banking market
overall, until the second half of 2007, when a declining real estate economy significantly reduced
loan demand. The stock market has since also declined from its record levels in 2007 to low levels
not seen since 1982, before rebounding in 2009. Additionally, the St. Louis metropolitan area has
added several new banks in the past five or six years (as well as several institutions such as
Reliance Bank adding numerous branches), resulting in an intensely competitive environment for
customer deposits. Competition for deposits in southwestern Florida is equally as intense as the
market for deposits in the St. Louis metropolitan area.
Total average interest-bearing deposits for 2009 increased $226,232,142 (23.80%) to
$1,176,771,212 from the level of $950,539,070 for 2008, which was an increase of $217,930,791
(29.75%) from the level of $732,608,279 for 2007. This increase in deposits resulted from the
Companys earlier aggressive branch expansion (with some of the newer branches showing strong
deposit growth) and aggressive pricing of deposits. The Companys banking subsidiaries have sought
to be aggressive on deposits, without necessarily being the highest rate available in their
markets.
The Companys short-term borrowings consist of overnight funds borrowed from unaffiliated
financial institutions, securities sold under sweep repurchase agreements with larger deposit
customers, and a short term note payable obtained in 2008 by the Company in the amount of
$7,000,000, and repaid in 2009. The average balances of such borrowings for the years ended
December 31, 2009, 2008, and 2007 totaled $22,476,551, $88,748,506, and $49,178,929, respectively.
The increase in retail savings accounts resulting from two special rate promotions allowed the
Company to reduce its short term borrowings.
The Company has used longer-term advances from the Federal Home Loan Bank as a less expensive
alternative to the intensely competitive deposit market, particularly when such longer-term fixed
rate advances can be matched up with longer-term fixed rate assets. During the three year period
ended December 31, 2009, average longer-term borrowings were $131,038,979, $125,117,708, and
$39,646,040, for 2009, 2008, and 2007, respectively.
The overall mix of the Companys funding sources has a significant impact on the Companys net
interest margin. Following is a summary of the percentage of the various components of average
interest-bearing liabilities and noninterest-bearing deposits to the total of all average
interest-bearing liabilities and noninterest-bearing deposits (hereinafter described as total
funding sources):
2009 | 2008 | 2007 | ||||||||||
Average deposits: |
||||||||||||
Noninterest-bearing |
4.47 | % | 4.61 | % | 5.18 | % | ||||||
Interest-bearing: |
||||||||||||
Transaction accounts |
12.11 | 13.29 | 18.39 | |||||||||
Savings |
18.88 | 4.30 | 6.97 | |||||||||
Time deposits of $100,000 or more |
22.58 | 27.85 | 25.95 | |||||||||
Other time deposits |
30.94 | 32.43 | 33.26 | |||||||||
Total average interest-bearing deposits |
84.51 | 77.87 | 84.57 | |||||||||
Total average deposits |
88.98 | 82.48 | 89.75 | |||||||||
Short-term borrowings |
1.61 | 7.27 | 5.67 | |||||||||
Longer-term advances from Federal Home Loan Bank |
9.41 | 10.25 | 4.58 | |||||||||
100.00 | % | 100.00 | % | 100.00 | % | |||||||
22
Table of Contents
The composition of the Companys deposit portfolio will fluctuate as recently-added branches
grow and help to diversify the Companys deposit base. The overall level of interest rates will
also cause fluctuations between categories. The Company has sought to increase the percentage of
its noninterest-bearing deposits to the total of all funding sources; however, in the competitive
markets in which the Companys banking subsidiaries operate, this has been difficult. Through a
campaign which began in the fourth quarter of 2008 and concluded in the first quarter of 2009, the
Company did increase its percentage of retail savings accounts, allowing it to reduce the
percentage of short term borrowings. This campaign, which has generated $252 million in deposit
balances, offered a rate similar to the 12-month CD rate, and was guaranteed until December 31,
2009. Another campaign was initiated to retain deposits after the first promotions guarantee
expiration. At December 31, 2009 this second campaign has generated an additional $54 million in
deposit balances. The Company has worked to replace its higher cost deposits with lower cost
transaction accounts; however, its most significant funding source has continued to be certificates
of deposit, which comprised 53.52% of total average funding sources during 2009, as compared with
60.28% in 2008, and 59.21% in 2007. Certificates of deposit have a lagging effect with interest
rate changes, as most certificates of deposit have longer maturities at fixed rates.
The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary
of the changes in interest income and interest expense resulting from changes in volume and changes
in yield/rates:
Amount of Increase (Decrease) | ||||||||||||||||||||||||
Change From 2008 to 2009 Due to | Change From 2007 to 2008 Due to | |||||||||||||||||||||||
Yield/ | Yield/ | |||||||||||||||||||||||
Volume (1) | Rate (2) | Total | Volume (1) | Rate (2) | Total | |||||||||||||||||||
Interest income: |
||||||||||||||||||||||||
Loans |
$ | 5,934,729 | $ | (8,642,779 | ) | $ | (2,708,050 | ) | $ | 22,321,195 | $ | (7,082,820 | ) | $ | 15,238,375 | |||||||||
Investment securities: |
||||||||||||||||||||||||
Taxable |
3,485,743 | (2,006,617 | ) | 1,479,126 | (257,862 | ) | (147,267 | ) | (405,129 | ) | ||||||||||||||
Exempt from Federal income taxes |
(369,278 | ) | (11,094 | ) | (380,372 | ) | (16,286 | ) | 122,591 | 106,305 | ||||||||||||||
Short term investments |
154,357 | (293,845 | ) | (139,488 | ) | (71,243 | ) | (229,499 | ) | (300,742 | ) | |||||||||||||
Total interest income |
9,205,551 | (10,954,335 | ) | (1,748,784 | ) | 21,975,804 | (7,336,995 | ) | 14,638,809 | |||||||||||||||
Interest expense: |
||||||||||||||||||||||||
Interest bearing transaction
accounts |
140,207 | (1,843,817 | ) | (1,703,610 | ) | 123,783 | (3,086,475 | ) | (2,962,692 | ) | ||||||||||||||
Savings accounts |
5,645,760 | 781,730 | 6,427,490 | (212,642 | ) | (642,000 | ) | (854,642 | ) | |||||||||||||||
Time deposits of $100,000 or
more |
(969,138 | ) | (2,991,052 | ) | (3,960,190 | ) | 4,978,501 | (2,678,056 | ) | 2,300,445 | ||||||||||||||
Other time deposits |
1,358,823 | (3,172,220 | ) | (1,813,397 | ) | 4,564,626 | (1,832,573 | ) | 2,732,053 | |||||||||||||||
Total deposits |
6,175,652 | (7,225,359 | ) | (1,049,707 | ) | 9,454,268 | (8,239,104 | ) | 1,215,164 | |||||||||||||||
Short term borrowings |
(1,277,362 | ) | (656,388 | ) | (1,933,750 | ) | 1,349,278 | (1,439,850 | ) | (90,572 | ) | |||||||||||||
Long term borrowings |
234,146 | 38,855 | 273,001 | 3,299,642 | (318,014 | ) | 2,981,628 | |||||||||||||||||
Total interest expense |
5,132,436 | (7,842,892 | ) | (2,710,456 | ) | 14,103,188 | (9,996,968 | ) | 4,106,220 | |||||||||||||||
Net interest income |
$ | 4,073,115 | $ | (3,111,443 | ) | $ | 961,672 | $ | 7,872,616 | $ | 2,659,973 | $ | 10,532,589 | |||||||||||
(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. |
Provision for Possible Loan Losses
The provision for possible loan losses charged to earnings for the years ended December 31,
2009, 2008, and 2007 totaled $53,450,000, $11,148,000, and $3,186,500, respectively. During this
same time period, the Company incurred net charge-offs of $35,534,253 in 2009, $6,527,189 in 2008,
and $602,520 in 2007. At December 31, 2009, 2008, and 2007, the reserve for possible loan losses
as a percentage of net outstanding loans was 2.82%, 1.14%, and 1.06%, respectively. The reserve for
possible loan losses as a percentage of nonperforming loans (comprised of loans for which the
accrual of interest has been discontinued and loans still accruing interest that were 90 days
delinquent) was 44.70%, 41.00%, and 54.57% at December 31, 2009, 2008, and 2007, respectively. The
continued significant decline of the real estate market has resulted in an
23
Table of Contents
increase in the level of nonperforming loans and a higher provision for loan losses during
2009. See further discussion regarding the Companys credit risk management in the section below
entitled Risk Management.
Noninterest Income
Total noninterest income for the year ended December 31, 2009 excluding security sale gains
and losses, increased $217,095 (9.19%) to $2,578,517 from the $2,361,422 earned for the year ended
December 31, 2008, which had increased $542,637 (29.84%) over the $1,818,785 earned for the year
ended December 31, 2007. Service charges on deposits increased $179,011 (22.47%) to $975,664 in
2009 from the $796,653 earned in 2008, which was an increase of $287,301 (56.41%) from the $509,352
earned in 2007, due to the increased level of customer deposits and the fees generated by the
Banks overdraft privilege programs.
Reliance Bank recorded net security sale gains of $1,346,565 in 2009, compared with net
security sale gains of $321,113 and $157,011 in 2008 and 2007, respectively. From time to time,
the Company will sell certain of its available-for-sale investment securities for short-term
liquidity purposes or longer-term asset/liability management reasons. See further discussion below
in the section entitled Liquidity and Rate Sensitivity Management.
Noninterest Expense
Noninterest expense increased $4,618,799 (15.70%) for the year ended December 31, 2009 to
$34,046,389 from the $29,427,590 incurred for the year ended December 31, 2008, which was a
$7,137,283 (32.02%) increase over the $22,290,307 of noninterest expenses incurred for the year
ended December 31, 2007. Savings achieved by the Companys cost reduction efforts were offset by
the increase in assessments from the FDIC and increased costs of other real estate owned.
Total personnel costs decreased $2,047,462 (12.86%) in 2009 to $13,867,628 from the
$15,915,090 of personnel costs incurred in 2008, which was an increase of $2,841,931 (21.74%) from
the $13,073,159 of personnel costs incurred in 2007. During 2009, the Company implemented a plan to
reduce operating costs, which included a reduction in staffing levels, elimination of 401(k)
matches and a one week furlough program for the Companys workforce.
Total occupancy and equipment expenses decreased $246,356 (5.47%) to $4,256,769 in 2009 from
the $4,503,125 incurred in 2008, which had increased $1,114,798 (32.90%) from the $3,388,327
incurred in 2007, as certain assets became fully depreciated and temporary facility use was
reduced.
Other real estate expense increased significantly in 2009 to $6,163,313, which was an increase
of $4,580,715 (289.44%) over the $1,582,598 of other real estate expenses incurred in 2008, which
had increased by $1,276,061 (416.28%) from the $306,537 incurred in 2007. The increase is due to
higher levels of foreclosed assets and the continued decline in real estate values. Net losses and
writedowns for 2009 were $4,818,900.
The Companys FDIC assessment has increased significantly during the three year period ended
December 31, 2009. This assessment increased $1,833,339 (201.00%) in 2009 to $2,745,432, from the
$912,093 paid in 2008, which was an increase of $350,514 (62.42%) from the $561,579 paid in 2007.
Approximately $690,500 of the increase in 2009 was attributed to the FDICs special assessment,
which was levied on all banks, varying based on size, to replenish the FDICs insurance fund. The
remaining portion of the increase relates to increases in rates on regular assessments.
Total data processing expenses for 2009 increased $69,259 (3.68%) to $1,950,227, from the
$1,880,968 incurred in 2008, which had increased $381,769 (25.46%) from the $1,499,199 incurred in
2007. Such increases are consistent with the overall growth in customer accounts during the
three-year period.
Total advertising expenses for 2009 decreased $628,637 (80.79%) to $149,435, as compared with
the $778,072 of expenses incurred in 2008, which was an increase of $208,414 (36.59%) from the
$569,658 incurred in 2007. The decrease is part of the Companys cost reduction efforts, as many
of the Companys advertising efforts have been scaled back.
24
Table of Contents
Income Taxes
Applicable income tax expenses (benefits) totaled $(16,629,562) for the year ended December
31, 2009, compared with $(1,079,886) and $461,966 for the years ended December 31, 2008 and 2007,
respectively. The effective tax rates for 2009, 2008, and 2007 were 36.16%, 77.18%, and 17.93%. The
changes in effective tax rates during the three-year period ended December 31, 2009 is a result of
the level of investment income that is exempt from Federal income taxes and its overall effect on
the pretax income or loss amount.
Financial Condition
Total assets of the Company declined $37,281,634 (2.37%) to $1,536,707,584 at December 31,
2009, from $1,573,989,218 at December 31, 2008, which had increased $437,836,796 (38.54%) in 2007
from $1,136,152,422 at December 31, 2007. The growth in prior years resulted from the Companys
continued emphasis on increasing its market share of loans and deposits with its branch expansion
program, establishment of LPOs in the Houston and Phoenix markets, a strong capital base, and
competitive pricing of banking products. In 2009, the depressed economy has reduced the Companys
opportunities for loan growth.
Total deposits of the Company grew $38,012,898 (3.10%) to $1,266,060,197 at December 31, 2009,
from $1,228,047,299 at December 31, 2008, which had increased $393,470,850 (47.15%) from
$834,576,449 at December 31, 2007. Non-retail, brokered deposits decreased by approximately
$103,129,000 during this same time period. These brokered deposits were replaced in part by
increases in retail deposit accounts, including increased savings accounts from two campaigns that
generated a combined $306 million. See the Results of Operations section of the report for
additional discussion of changes in deposit composition.
Total short-term borrowings of the Company declined $51,221,912 (80.14%) to $12,696,932 at
December 31, 2009, from $63,918,844 at December 31, 2008, which had decreased $24,406,071 (27.63%)
from $88,324,915 at December 31, 2007. The Company has worked to decrease the amount of short term
wholesale funding and increase retail deposits. Total long-term advances from the Federal Home
Loan Bank declined $32,000,000 (23.53%) to $104,000,000 at December 31, 2009, from $136,000,000 at
December 31, 2008, which had increased $68,000,000 (100%) from $68,000,000 at December 31, 2007.
These longer-term fixed rate advances are used as an alternative funding source and are matched up
with longer-term fixed rate assets.
Total loans declined $114,317,665 (9.11%) to $1,140,881,275 at December 31, 2009, from
$1,255,198,940 at December 31, 2008, which had increased $343,238,704 (37.64%) from the
$911,960,236 of total loans at December 31, 2007. The depressed economy has reduced the Companys
opportunities for loan growth in its current markets and management has slackened its desire for
growth at this time.
Investment securities, all of which are maintained as available-for-sale, increased
$90,231,064 (46.54%) to $284,119,556 at December 31, 2009, from the $193,888,492 at December 31,
2008, which had increased $35,846,074 (22.68%) from the $158,042,418 of investment securities
maintained at December 31, 2007. The Companys investment portfolio growth is dependent upon the
level of deposit growth and the funding requirements of the Companys loan portfolio, as described
above.
Total capital at December 31, 2009, 2008, and 2007 was $149,669,424, $139,608,880, and
$139,890,973, respectively, with capital-to-asset percentages of 9.74%, 8.87%, and 12.31%,
respectively. The increase relates to the U.S. Treasurys $42,000,000 investment in preferred
shares of Reliance Bancshares, Inc., in connection with the TARP
program. TARP proceeds were, in part, downstreamed to the Banks as a
capital injection, and a portion remained at the Parent Company. By
downstreaming the proceeds, the Banks were able to reduce lending
less than otherwise would have occurred, and increased reserves for
non-performing assets. This investment has
allowed the Company to maintain a strong capital position.
The following tables show the condensed average balance sheets for the periods reported and
the percentage of each principal category of assets, liabilities and stockholders equity to total
assets. Also shown is the average yield on each category of interest-earning assets and the
average rate paid on each category of interest-bearing liabilities for each of the periods
reported.
25
Table of Contents
Year Ended December 31, 2009 | ||||||||||||||||
Average | Percent of | Interest Income/ | Average Yield/ | |||||||||||||
Balance | Total Assets | Expense | Rate | |||||||||||||
ASSETS |
||||||||||||||||
Loans (1) (2) (3) |
$ | 1,213,936,609 | 77.34 | % | $ | 67,651,598 | 5.57 | % | ||||||||
Investment securities: |
||||||||||||||||
Taxable |
223,321,399 | 14.23 | 7,638,510 | 3.42 | ||||||||||||
Exempt from Federal income taxes (3) |
30,794,794 | 1.96 | 1,769,507 | 5.75 | ||||||||||||
Short-term investments |
26,301,252 | 1.68 | 49,305 | 0.19 | ||||||||||||
Total earning assets |
1,494,354,054 | 95.21 | 77,108,920 | 5.16 | ||||||||||||
Nonearning assets: |
||||||||||||||||
Cash and due from banks |
5,235,533 | 0.33 | ||||||||||||||
Reserve for possible loan losses |
(18,699,687 | ) | (1.19 | ) | ||||||||||||
Premises and equipment |
43,287,455 | 2.76 | ||||||||||||||
Other assets |
44,151,042 | 2.81 | ||||||||||||||
Available-for-sale investment market valuation |
1,219,514 | 0.08 | ||||||||||||||
Total nonearning assets |
75,193,857 | 4.79 | ||||||||||||||
Total assets |
1,569,547,911 | 100.00 | % | |||||||||||||
LIABILITIES |
||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||
Interest-bearing transaction accounts |
168,582,912 | 10.74 | % | 2,084,080 | 1.24 | % | ||||||||||
Savings |
262,920,235 | 16.75 | 7,369,936 | 2.80 | ||||||||||||
Time deposits of $100,000 or more |
314,461,095 | 20.04 | 9,707,845 | 3.09 | ||||||||||||
Other time deposits |
430,806,970 | 27.45 | 14,439,151 | 3.35 | ||||||||||||
Total interest-bearing deposits |
1,176,771,212 | 74.98 | 33,601,012 | 2.86 | ||||||||||||
Long-term borrowings |
131,038,979 | 8.35 | 5,047,542 | 3.85 | ||||||||||||
Short-term borrowings |
22,476,551 | 1.43 | 356,258 | 1.59 | ||||||||||||
Total interest-bearing liabilities |
1,330,286,742 | 84.76 | 39,004,812 | 2.93 | ||||||||||||
Noninterest-bearing deposits |
62,196,559 | 3.96 | ||||||||||||||
Other liabilities |
7,272,672 | 0.46 | ||||||||||||||
Total liabilities |
1,399,755,973 | 89.18 | ||||||||||||||
STOCKHOLDERS EQUITY |
169,791,938 | 10.82 | ||||||||||||||
Total liabilities
and stockholders equity |
$ | 1,569,547,911 | 100.00 | % | ||||||||||||
Net interest income |
$ | 38,104,108 | ||||||||||||||
Net yield on earning
assets |
2.55 | % | ||||||||||||||
26
Table of Contents
Year Ended December 31, 2008 | ||||||||||||||||
Percent of | Interest | Average | ||||||||||||||
Average | of Total | Income/ | Yield/ | |||||||||||||
Balance | Assets | Expense | Rate | |||||||||||||
ASSETS |
||||||||||||||||
Loans (1) (2) (3) |
$ | 1,115,216,426 | 81.63 | % | $ | 70,359,648 | 6.31 | % | ||||||||
Investment securities: |
||||||||||||||||
Taxable |
131,062,979 | 9.59 | 6,159,384 | 4.70 | ||||||||||||
Exempt from Federal income taxes (3) |
37,226,081 | 2.72 | 2,149,879 | 5.78 | ||||||||||||
Short-term investments |
7,334,498 | 0.55 | 188,793 | 2.57 | ||||||||||||
Total earning assets |
1,290,839,984 | 94.49 | 78,857,704 | 6.11 | ||||||||||||
Nonearning assets: |
||||||||||||||||
Cash and due from banks |
14,090,695 | 1.03 | ||||||||||||||
Reserve for possible loan losses |
(11,776,516 | ) | (0.86 | ) | ||||||||||||
Premises and equipment |
44,063,019 | 3.23 | ||||||||||||||
Other assets |
29,508,579 | 2.16 | ||||||||||||||
Available-for-sale investment market
valuation |
(615,955 | ) | (0.05 | ) | ||||||||||||
Total nonearning assets |
75,269,822 | 5.51 | ||||||||||||||
Total assets |
$ | 1,366,109,806 | 100.00 | % | ||||||||||||
LIABILITIES |
||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||
Interest-bearing transaction accounts |
$ | 162,299,967 | 11.88 | % | 3,787,690 | 2.33 | % | |||||||||
Savings |
52,455,044 | 3.84 | 942,446 | 1.80 | ||||||||||||
Time deposits of $100,000 or more |
339,942,549 | 24.88 | 13,668,035 | 4.02 | ||||||||||||
Other time deposits |
395,841,510 | 28.98 | 16,252,548 | 4.11 | ||||||||||||
Total interest-bearing deposits |
950,539,070 | 69.58 | 34,650,719 | 3.65 | ||||||||||||
Long-term borrowings |
125,117,708 | 9.16 | 4,774,541 | 3.82 | ||||||||||||
Short-term borrowings |
88,748,506 | 6.49 | 2,290,008 | 2.58 | ||||||||||||
Total interest-bearing liabilities |
1,164,405,284 | 85.23 | 41,715,268 | 3.58 | ||||||||||||
Noninterest-bearing deposits |
56,223,479 | 4.12 | ||||||||||||||
Other liabilities |
7,087,530 | 0.52 | ||||||||||||||
Total liabilities |
1,227,716,293 | 89.87 | ||||||||||||||
STOCKHOLDERS EQUITY |
138,393,513 | 10.13 | ||||||||||||||
Total liabilities and stockholders
equity |
$ | 1,366,109,806 | 100.00 | % | ||||||||||||
Net interest income |
$ | 37,142,436 | ||||||||||||||
Net yield on earning assets |
2.88 | % | ||||||||||||||
27
Table of Contents
Year Ended December 31, 2007 | ||||||||||||||||
Percent | Interest | Average | ||||||||||||||
Average | of Total | Income/ | Yield/ | |||||||||||||
Balance | Assets | Expense | Rate | |||||||||||||
ASSETS |
||||||||||||||||
Loans (1) (2) (3) |
$ | 770,523,020 | 76.54 | % | $ | 55,121,273 | 7.15 | % | ||||||||
Investment securities: |
||||||||||||||||
Taxable |
136,530,094 | 13.56 | 6,564,513 | 4.81 | ||||||||||||
Exempt from Federal income taxes (3) |
37,521,958 | 3.73 | 2,043,574 | 5.45 | ||||||||||||
Short-term investments |
8,804,290 | 0.87 | 489,535 | 5.56 | ||||||||||||
Total earning assets |
953,379,362 | 94.70 | 64,218,895 | 6.74 | ||||||||||||
Nonearning assets: |
||||||||||||||||
Cash and due from banks |
10,345,818 | 1.03 | ||||||||||||||
Reserve for possible loan losses |
(7,846,708 | ) | (0.78 | ) | ||||||||||||
Premises and equipment |
37,758,227 | 3.75 | ||||||||||||||
Other assets |
13,705,775 | 1.37 | ||||||||||||||
Available-for-sale investment market
valuation |
(714,086 | ) | (0.07 | ) | ||||||||||||
Total nonearning assets |
53,249,026 | 5.30 | ||||||||||||||
Total assets |
1,006,628,388 | 100.00 | % | |||||||||||||
LIABILITIES |
||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||
Interest-bearing transaction accounts |
159,338,600 | 15.83 | % | 6,750,382 | 4.24 | % | ||||||||||
Savings |
60,373,225 | 6.00 | 1,797,088 | 2.98 | ||||||||||||
Time deposits of $100,000 or more |
224,805,601 | 22.33 | 11,367,590 | 5.06 | ||||||||||||
Other time deposits |
288,090,853 | 28.62 | 13,520,495 | 4.69 | ||||||||||||
Total interest-bearing deposits |
732,608,279 | 72.78 | 33,435,555 | 4.56 | ||||||||||||
Long-term borrowings |
39,646,040 | 3.94 | 1,792,913 | 4.52 | ||||||||||||
Short-term borrowings |
49,178,929 | 4.89 | 2,380,580 | 4.84 | ||||||||||||
Total interest-bearing liabilities |
821,433,248 | 81.61 | 37,609,048 | 4.58 | ||||||||||||
Noninterest-bearing deposits |
44,841,777 | 4.45 | ||||||||||||||
Other liabilities |
5,805,815 | 0.57 | ||||||||||||||
Total liabilities |
872,080,840 | 86.63 | ||||||||||||||
STOCKHOLDERS EQUITY |
134,547,548 | 13.37 | ||||||||||||||
Total liabilities and stockholders equity |
$ | 1,006,628,388 | 100.00 | % | ||||||||||||
Net interest income |
$ | 26,609,847 | ||||||||||||||
Net yield on earning assets |
2.79 | % | ||||||||||||||
(1) | Interest includes loan fees, recorded as discussed in Note 1 to the Companys consolidated financial statements. | |
(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. |
28
Table of Contents
Risk Management
Managements objective in structuring the balance sheet is to maximize the return on average
assets while minimizing the associated risks. The major risks concerning the Company are credit,
liquidity and interest rate risks. The following is a discussion concerning the Companys
management of these risks.
Credit Risk Management
Managing risks that the Companys banking subsidiaries assume in providing credit products to
customers is extremely important. Credit risk management includes defining an acceptable level of
risk and return, establishing appropriate policies and procedures to govern the credit process and
maintaining a thorough portfolio review process.
Of equal importance in the credit risk management process are the ongoing monitoring
procedures performed as part of the Companys loan review process. Credit policies are examined and
procedures reviewed for compliance each year. Loan personnel also continually monitor loans after
disbursement in an attempt to recognize any deterioration which may occur so that appropriate
corrective action can be initiated on a timely basis.
Net charge-offs for 2009 were $35,534,253, compared to $6,527,189 in 2008, and $602,520 in
2007. The increased charge-off levels resulted from the increased levels of nonperforming loans
and the decline in the overall valuation of real estate securing such loans. The Companys banking
subsidiaries had no loans to any foreign countries at December 31, 2009, 2008 and 2007, nor did
they have any concentration of loans to any industry on these dates, although a significant portion
of the Companys loan portfolio is secured by real estate in the St. Louis metropolitan and
southwestern Florida areas, particularly commercial real estate and land acquisition and
development. The Company has also refrained from financing speculative transactions such as highly
leveraged corporate buyouts, or thinly-capitalized speculative start-up companies.
A summary of loans by type at December 31, 2009, 2008, 2007, 2006 and 2005 is as follows:
December 31, | ||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Commercial: |
||||||||||||||||||||
Real estate |
$ | 797,054,385 | $ | 843,312,225 | $ | 514,752,151 | $ | 394,469,137 | $ | 254,262,184 | ||||||||||
Other |
82,732,850 | 94,606,918 | 61,519,983 | 53,152,775 | 66,790,693 | |||||||||||||||
Real estate: |
||||||||||||||||||||
Construction |
172,731,598 | 190,381,178 | 184,167,532 | 108,408,270 | 56,525,290 | |||||||||||||||
Residential |
84,080,509 | 120,903,014 | 146,488,402 | 105,094,409 | 88,949,636 | |||||||||||||||
Held for Sale |
577,400 | 1,483,500 | 211,250 | | | |||||||||||||||
Consumer |
3,654,463 | 4,485,070 | 4,786,747 | 6,541,351 | 6,196,062 | |||||||||||||||
Overdrafts |
50,070 | 27,035 | 34,171 | 35,697 | 81,464 | |||||||||||||||
$ | 1,140,881,275 | $ | 1,255,198,940 | $ | 911,960,236 | $ | 667,701,639 | $ | 472,805,329 | |||||||||||
Commercial loans are made based on the borrowers character, experience, general credit
strength, and ability to generate cash flows for repayment from income sources, even though such
loans may also be secured by real estate or other assets. The credit risk related to commercial
loans is largely influenced by general economic conditions and the resulting impact on a borrowers
operations.
Real estate loans, including commercial real estate, residential real estate, and construction
loans, are also based on the borrowers character, but more emphasis is placed on the estimated
collateral values. Commercial real estate loans are mainly for owner-occupied business and
industrial properties, multifamily properties, and other commercial properties for which income
from the property is the primary source of repayment. Credit risk of these loan types is managed in
a similar manner to commercial loans and real estate
29
Table of Contents
construction loans by employing sound underwriting guidelines. These loans are underwritten
based on the cash flow coverage of the property, typically meet the Companys loan-to-value
guidelines, and generally require either the limited or full guarantee of principal sponsors of the
credit.
Real estate construction loans, relating to residential and commercial properties, represent
financing secured by real estate under construction for eventual sale. The Company requires third
party disbursement on the majority of loans in its builder portfolio and the Company reviews
projects regularly for progress status.
Residential real estate loans are predominantly made to finance single-family, owner-occupied
properties in the St. Louis metropolitan area and southwestern Florida. Loan-to-value percentage
requirements for collateral are based on the lower of the purchase price or appraisal and are
normally limited to 80% at loan origination, unless credit enhancements are added. Appraisals are
required on all owner-occupied residential real estate loans and private mortgage insurance is
required if the loan to value percentage exceeds 85% at loan origination. These loans generally
have a short duration of three years or less, with some loans repricing more frequently. Long-term,
fixed rate mortgages are generally not retained in the Banks loan portfolios, but rather are sold
into the secondary market. The Banks have not financed, and do not currently finance, sub-prime
mortgage credits.
Consumer and other loans represent loans to individuals on both a secured and unsecured
nature. Credit risk is controlled by thoroughly reviewing the credit worthiness of the borrowers
on a case-by-case basis.
The continued significant decline of the real estate market in the St. Louis metropolitan and
southwestern Florida areas has caused an increase in the Companys non-performing assets.
Following is a summary of information regarding the Banks nonperforming loans as of and for each
of the years in the five-year period ended December 31, 2009:
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Nonperforming loans: |
||||||||||||||||||||
Nonaccrual loans |
$ | 57,227,968 | $ | 33,716,050 | $ | 15,810,222 | $ | 5,082,784 | $ | 3,050,351 | ||||||||||
Loans 90 days delinquent and still accruing interest |
3,560,644 | 1,180,360 | 1,937,388 | 65,000 | 24,000 | |||||||||||||||
Restructured loans |
11,288,822 | | | | | |||||||||||||||
Total nonperforming loans |
$ | 72,077,434 | $ | 34,896,410 | $ | 17,747,610 | $ | 5,147,784 | $ | 3,074,351 | ||||||||||
Additional interest that would have been earned on
nonaccrual loans |
$ | 4,425,441 | $ | 1,716,845 | $ | 928,759 | $ | 177,687 | $ | 141,914 | ||||||||||
Non-performing loans are defined as loans on non-accrual status, loans 90 days or more
past due but still accruing, and restructured loans. Loans are placed on non-accrual status when
contractually past due 90 days or more as to interest or principal payments, unless the loans are
well secured and in process of collection. Additionally, whenever management becomes aware of facts
or circumstances that may adversely impact the collectability of principal or interest on loans, it
is managements practice to place such loans on non-accrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously accrued and uncollected
interest on such loans is reversed and income is recorded only to the extent that interest payments
are subsequently received in cash and a determination has been made that the principal balance of
the loan is collectible. If collectability of the principal is in doubt, payments received are
applied to loan principal for financial reporting purposes.
Loans past due 90 days or more but still accruing interest are also included in non-performing
loans. Loans past due 90 days or more but still accruing interest are classified as such when the
underlying loans are both well secured (the collateral value is sufficient to cover principal and
accrued interest) and are in the process of collection. Also included in non-performing loans are
restructured loans. Restructured loans involve the granting of some concession to the borrower
involving the modification of terms of the loan, such as changes in payment schedule or interest
rate.
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The increase in non-performing loans is due to the continued weakness in the economy,
particularly regarding commercial and construction real estate in the Banks markets. During 2009,
the Company took a more aggressive approach toward collection and resolution of such problem
credits. Such loans have continually been reviewed for impairment as the underlying real estate
values have declined, resulting in additional loan charge-offs. Once foreclosure occurs,
additional declines in the value of the properties results in other real estate owned write-downs.
The Company believes the reserve for loan losses calculation at December 31, 2009 adequately
considers the fair value of the underlying collateral on its problem loan portfolio; however, the
values of these properties have continued to deteriorate throughout 2009, requiring the additional
provision for loan losses. Additional provisions and other real estate write-downs may be required
in subsequent quarters if the values of such properties continue to decline.
Of the Companys $1.1 billion loans outstanding at December 31, 2009, 7% were originated in
Florida and 93% outside Florida. The following table breaks down net charge-offs, non-performing
loans and non-performing assets between loans originated in Florida and all other loans:
Originated In | ||||||||||||
Florida | All other | Total | ||||||||||
Net charge-offs (year to date 12/31/2009) |
$23.0 million | $12.5 million | $35.5 million | |||||||||
Net charge-offs (year to date 12/31/2008) |
5.6 million | 0.9 million | 6.5 million | |||||||||
Net charge-offs (quarter ended
12/31/2009) |
10.6 million | 9.2 million | 19.8 million | |||||||||
Net charge-offs (quarter ended
12/31/2008) |
0.6 million | 0.1 million | 0.7 million | |||||||||
Non-performing loans (12/31/2009) |
25.4 million | 46.7 million | 72.1 million | |||||||||
Non-performing loans (9/30/2009) |
46.0 million | 44.5 million | 90.5 million | |||||||||
Non-performing loans (12/31/2008) |
30.1 million | 4.8 million | 34.9 million | |||||||||
Non-performing assets* (12/31/2009) |
44.5 million | 56.7 million | 101.2 million | |||||||||
Non-performing assets* (9/30/2009) |
52.0 million | 53.8 million | 105.8 million | |||||||||
Non-performing assets* (12/31/2008) |
37.5 million | 12.7 million | 50.2 million | |||||||||
Outstanding loans originated in
respective markets (12/31/2009) |
80.8 million | 1.060 billion | 1.141 billion |
* | Non-performing assets are comprised of non-performing loans and other real estate owned. |
In the normal course of business, the Companys practice is to consider and act upon
borrowers requests for renewal of loans at their maturity. Evaluation of such requests includes a
review of the borrowers credit history, the collateral securing the loan, and the purpose of such
requests. In general, loans which the Banks renew at maturity require payment of accrued interest,
a reduction in the loan balance, and/or the pledging of additional collateral and a potential
adjustment of the interest rate to reflect changes in economic conditions.
At December 31, 2005, nonaccrual loans consisted primarily of two borrowing relationships,
both construction contractors whose developments were slow in selling. At December 31, 2005, these
two credit relationships totaled $2,750,000 of the nonaccrual loans of $3,050,351. By December 31,
2006, the Company had foreclosed on one of the contractors and sold the property at no further loss
to the Company. By December 31, 2006, the other contractor had sold its property and the Company
was paid off with no loss incurred.
At December 31, 2006, the Companys nonaccrual loans of $5,082,784 were comprised primarily of
two borrowing relationships totaling $3,312,496. One of the nonaccrual loan relationships included
commercial and residential real estate loans to a small business owner whose various businesses had
been struggling for some time. The Company foreclosed on the various properties during the first
quarter of 2007 and incurred additional charge-offs of $274,740 on this credit relationship. The
other large nonaccrual loan relationship was to a real estate investor with several single family
residential properties that he was renting out. This real estate investor declared bankruptcy in
November 2006 after several properties incurred significant storm damage. The Company foreclosed
on these properties after additional charge-offs of $175,000 in 2007.
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The continued significant decline of the real estate markets (which began in 2007) in the
St. Louis metropolitan and southwestern Florida areas has caused a significant increase in the
Companys non-performing loans in 2007, 2008 and 2009. At December 31, 2009, non-performing loans
had increased $37,181,024 to $72,077,434, from $34,896,410 at December 31, 2008, which had
increased $17,148,800 from $17,747,610 at December 31, 2007. The largest components of which were
primarily comprised of the following loan relationships.
Following is a discussion of the primary loans that have deteriorated during this three-year
period:
| A loan for approximately $1.4 million to an individual Florida investor that is in default and in the process of foreclosure prior to being suspended by forbearance agreement. The loan is secured by an undeveloped real estate parcel in southwestern Florida. | ||
| A loan for approximately $1.5 million to a single purpose entity controlled by a group of investors that is in default. The loan is secured by a building and improved commercial lots in Florida. The Company is negotiating with the borrower and guarantors to develop a plan for the property. There has been recent interest by several potential lessees of the building. | ||
| A loan for approximately $2.2 million to an individual, secured by the individuals primary residence in Florida, that is in default. The borrower entered into a forbearance agreement, but has now defaulted under that negotiated plan. Foreclosure has been initiated again. | ||
| A loan for approximately $1.8 million to a single purpose entity, secured by one office building for sale and six improved commercial lots in Florida. The building is under contract to close in the first quarter of 2010. The Company continues to negotiate with the borrower and guarantor to develop a marketing plan for six remaining lots. | ||
| A loan for approximately $2.0 million to a single purpose entity secured by unimproved property in Florida that is in default. The Company is negotiating with the borrower and guarantor to determine the best course of action going forward for the proposed development. | ||
| A loan for approximately $1.4 million to an individual investor for future residential and commercial development. Development has not been started as planned. The loan is secured by approximately 240 acres of ground in Florida currently in agricultural production. The Company is in the process of foreclosure. | ||
| A loan for approximately $2.2 million to two Florida investors for future commercial development. Development has not started, as recent changes in FEMA flood maps have impacted the value and future development options. The borrower is currently operating under a forbearance agreement as it works through its options for the property that now includes action against Lee County, Florida for damages. | ||
| A loan for approximately $1.4 million to a single purpose entity for commercial development. Development has been delayed. The loan is secured by 3.4 acres of ground in Florida. The Company, borrower and guarantors continue to negotiate a resolution to the delay in development. | ||
| A loan for approximately $5.0 million to a single purpose entity. The operation is a retail commercial center in St Charles, Missouri. Exterior construction of the building is complete; interior configuration continues and is dictated by tenant needs. The center has experienced sluggish leasing, although recent leasing and leasing opportunities have increased slightly. The Company and borrower continue to work together to lease up the property. The borrower is reviewing options to sell the property. | ||
| A loan for approximately $1.2 million to a Texas limited partnership. The loan is secured by a newly constructed retail commercial property in Dallas, Texas. The borrower has entered into bankruptcy protection. The Company is seeking a dismissal of the case in court, so that it can foreclose on the property. Court hearings have occurred and will continue through the second quarter of 2010. The Company expects to begin foreclosure proceedings as soon as practicable thereafter. |
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| A loan participation totaling approximately $2.6 million to entities controlled by a group of Missouri real estate investors for the purchase and development of a parcel of land in St. Charles, Missouri. The majority of the proposed entitlements and development have been completed. The loans are secured by the property. The lead bank has reached an agreement with the Borrower to move the project forward. A new builder was engaged to build inventory homes and five homes have been completed. Sales have been slow to occur. | ||
| A loan for approximately $3.0 million to a single purpose entity in Phoenix, Arizona. The borrower owned and operated a new retail commercial 15,000 square foot strip center. The center was well located, well maintained and 90% occupied since inception; however the loan did not perform as planned. Deteriorating real estate and general market conditions stressed the developers and guarantors to force the Bank to commence additional collection action. The Company anticipates the note and collateral will be sold to a third party to retire the loan during the first quarter of 2010. | ||
| A loan for approximately $19.5 million loan to commercial real estate developer in Houston, Texas. The loan is secured by three office buildings and developed commercial land. The Company and borrower have been working to restructure the credit that will include a $2.2 million reduction of the loan during the first quarter of 2010. | ||
| A loan for approximately $2.0 million loan for the development of single family lots in Lincoln County, Missouri. The entity operated as a single asset entity that developed single family lots and construction of single family homes. The deteriorating real estate market and residential downturn have been contributing factors to the slowness of the project and the demise of the project. Additional collection efforts have begun for repayment of the loan. | ||
| A loan for approximately $4.4 million to a single operating entity that financed the purchase of single family lots in two subdivisions located in St. Louis County, Missouri. The lots are well located, good sized and fully developed. The residential real estate downturn has led to stress in the project and for the borrower. The Bank has initiated additional collection efforts to be repaid. The Company and borrower have reached agreement in principle that requires the borrower to execute a deed in lieu of foreclosure to repay the loan. The Company expects the lots to be turned over in the first quarter of 2010, at which time the Company will develop a plan to dispose of the lots. | ||
| A loan for approximately $4.0 million to a non profit organization for the purchase of 482 acres and a 7,000 square foot residence in St. Louis, Missouri. The borrowers purchased the property to conduct the preservation of wolves and other endangered canids through education, research and captive breeding. The property is well located in a natural setting that abuts a river. The nonprofit organization has experienced financial setbacks; most notably a decline in contributions. The Company and borrower have reached an agreement to operate under a standstill and forbearance agreement as we work together for the repayment of the loan. |
The Company also has nonperforming assets in the form of other real estate owned. The Banks
maintained other real estate owned totalling $29,085,943 and $15,289,170 at December 31, 2009 and
2008, respectively. Other real estate owned represents property acquired through foreclosure, or
deeded to the Banks in lieu of foreclosure for loans on which borrowers have defaulted as to
payment of principal and interest. The following table details the activity within other real
estate owned for the year ended December 31, 2009:
Balance at December 31, 2008 |
$ | 15,289,170 | ||
Foreclosures |
25,013,222 | |||
Loans made to facilitate sales of other real estate |
(1,784,045 | ) | ||
Cash proceeds from sales |
(4,627,290 | ) | ||
Construction expenditures |
13,786 | |||
Losses and writedowns |
(4,818,900 | ) | ||
Balance at December 31, 2009 |
$ | 29,085,943 | ||
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During this period of a depressed real estate market, the Company has sought to add loans
to its portfolio with increased collateral margins or excess payment capacity from proven
borrowers. Given the collateral values maintained on its loan portfolio, including the
nonperforming loans discussed above, the Company believes the reserve for possible loan losses is
adequate to absorb losses in the portfolio existing at December 31, 2009; however, should the
residential and commercial real estate market continue to decline, the Company may require
additional provisions to the reserve for possible loan losses to address the declining collateral
values.
Potential Problem Loans
As of December 31, 2009, the Company had 18 loans with a total principal balance of
$28,845,441 that were identified by management as having possible credit problems that raise doubts
as to the ability of the borrower to comply with the current repayment terms, which are not
included in nonperforming loans. These loans were continuing to accrue interest and were less than
90 days past due on any scheduled payments. However, various concerns, including, but not limited
to, payment history, loan agreement compliance, adequacy of collateral coverage, and borrowers
overall financial condition caused management to believe that these loans may result in
reclassification at some future time as nonaccrual, past due or restructured. Such loans are not
necessarily indicative of future nonaccrual loans, as the Company continues to work on resolving
issues with both nonperforming and potential problem credits on its watch list.
Policies and Procedures
The Companys credit management policies and procedures focus on identifying, measuring, and
controlling credit exposure. These procedures employ a lender-initiated system of rating credits,
which is ratified in the loan approval process and subsequently tested in internal loan review and
regulatory bank examinations. The system requires rating all loans at the time they are made, at
each renewal date and as conditions warrant.
Adversely rated credits, including loans requiring close monitoring, are included on a monthly
loan watch list. Other loans are added whenever any adverse circumstances are detected which might
affect the borrowers ability to meet the terms of the loan. This could be initiated by any of the
following:
| Delinquency of a scheduled loan payment; | ||
| Deterioration in the borrowers 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. |
Loans on the watch list require periodic detailed loan status reports, including recommended
corrective actions, prepared by the responsible loan officer, which are discussed at each monthly
loan committee meeting.
Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal
loan review, the Watch List Committee, the Loan Committee, or senior lending personnel at any time.
Upgrades of certain risk ratings may only be made with the concurrence of both the Chief Credit
Officer and Chief Operating Officer.
The Companys loan underwriting policies limit individual loan officers to specific amounts of
lending authority, over which various committees must get involved and approve a credit. The
Companys underwriting policies require an analysis of a borrowers ability to pay the loan and
interest on a timely basis in accordance with the loan agreement. Collateral is then considered as
a secondary source of payment, should the borrower not be able to pay.
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The Company conducts weekly loan committee meetings of all of its loan officers, including the
Chief Operating Officer, Chief Lending Officer, and Chief Credit Officer. This committee may
approve individual credit relationships up to $2,500,000. Larger credits must go to the Loan
Committee of the Board of Directors, which is comprised of three Directors on a rotating basis.
The Companys legal lending limit was $40,029,183 at December 31, 2009.
Reserve for Loan Losses
At December 31, 2009, 2008, 2007, 2006, and 2005, the reserve for possible loan losses was
$32,221,569, $14,305,822, $9,685,011, $7,101,031, and $5,213,032, respectively, or 2.82%, 1.14%,
1.06%, 1.06%, and 1.10% of net outstanding loans, respectively. The following table summarizes the
Companys loan loss experience for each of the years in the five-year period ended December 31,
2009.
December 31, | ||||||||||||||||||||
(in thousands of dollars) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Average loans outstanding |
$ | 1,213,937 | $ | 1,115,216 | $ | 770,523 | $ | 546,122 | $ | 397,584 | ||||||||||
Reserve at beginning
of year |
$ | 14,306 | 9,685 | 7,101 | 5,213 | 3,112 | ||||||||||||||
Provision for possible
loan losses |
53,450 | 11,148 | 3,187 | 2,200 | 2,333 | |||||||||||||||
67,756 | 20,833 | 10,288 | 7,413 | 5,445 | ||||||||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial loans: |
||||||||||||||||||||
Real estate |
(18,532 | ) | (2,828 | ) | (317 | ) | | (7 | ) | |||||||||||
Other |
(656 | ) | (77 | ) | (25 | ) | (62 | ) | (24 | ) | ||||||||||
Real estate: |
||||||||||||||||||||
Construction |
(16,042 | ) | (2,262 | ) | | (3 | ) | (50 | ) | |||||||||||
Residential |
(1,832 | ) | (1,313 | ) | (279 | ) | (220 | ) | (178 | ) | ||||||||||
Consumer |
(38 | ) | (21 | ) | (5 | ) | (48 | ) | | |||||||||||
Overdrafts |
(14 | ) | (52 | ) | (25 | ) | | | ||||||||||||
Total charge-offs |
(37,114 | ) | (6,553 | ) | (651 | ) | (333 | ) | (259 | ) | ||||||||||
Recoveries: |
||||||||||||||||||||
Commercial loans: |
||||||||||||||||||||
Real estate |
1,033 | 1 | 10 | | | |||||||||||||||
Other |
4 | 9 | 20 | 2 | 2 | |||||||||||||||
Real estate: |
||||||||||||||||||||
Construction |
371 | 1 | | | | |||||||||||||||
Residential |
150 | | 13 | 8 | 23 | |||||||||||||||
Consumer |
19 | 3 | | 11 | 2 | |||||||||||||||
Overdrafts |
3 | 12 | 5 | | | |||||||||||||||
Total recoveries |
1,580 | 26 | 8 | 21 | 27 | |||||||||||||||
Reserve at end of year |
$ | 32,222 | $ | 14,306 | $ | 9,685 | $ | 7,101 | $ | 5,213 | ||||||||||
Net charge-offs to
average loans |
2.93 | % | 0.59 | % | 0.08 | % | 0.06 | % | 0.06 | % | ||||||||||
Ending reserve to net
loans at end of year |
2.82 | % | 1.14 | % | 1.06 | % | 1.06 | % | 1.10 | % | ||||||||||
Loans charged off are subject to continuous review, and specific efforts are taken to achieve
maximum recovery of principal, accrued interest, and related expenses.
In determining the reserve and the related provision for loan losses, three principal elements
are considered:
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| Specific allocations based upon probable losses identified during a quarterly review of the loan portfolio; | ||
| Allocations based principally on the Companys risk rating formulas; and | ||
| An unallocated allowance based on subjective factors. |
The first element reflects managements estimate of probable losses based upon a systematic
review of specific loans considered to be impaired. These estimates are based upon collateral
exposure using current fair values of collateral.
The second element reflects the application of our loan rating system. This rating system is
similar to those employed by state and Federal banking regulators. In addition, the analysis
considers the following internal and external factors that may cause estimated losses to differ
from historical loss experience. Those factors include (a) changes in lending policies and
procedures, including underwriting standards and collection, charge-off, and recovery practices;
(b) changes in national and local economic and business conditions and developments, including the
condition of various market segments; (c) changes in the nature and volume of the portfolio; (d)
changes in the experience, ability, and depth of lending management and staff; (e) changes in the
trend of the volume and severity of past due and classified loans, and trends in the volume of
non-accrual loans, troubled debt restructurings and other loan modifications; and (f) the existence
and effect of any concentrations of credit, and changes in the level of such concentrations and the
effect of external factors such as competition and legal and regulatory requirements on the level
of estimated credit losses in the Banks current portfolio.
The unallocated allowance is based on managements evaluation of conditions that are not
directly reflected in the determination of the formula and specific allowances. The evaluation of
the inherent loss with respect to these conditions is subject to a higher degree of uncertainty
because they may not be identified with specific problem credits or portfolio segments. The
conditions evaluated in connection with the unallocated allowance include the following:
| General economic and business conditions affecting our key lending areas; | ||
| Credit quality trends (including trends in non-performing 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. |
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Executive management reviews these conditions quarterly in discussion with our entire lending
staff. To the extent that any of these conditions are evidenced by a specifically identifiable
problem credit or portfolio segment as of the evaluation date, managements estimate of the effect
of such conditions may be reflected as a specific reserve allocation, applicable to such credit or
portfolio segment. Where any of these conditions are not evidenced by a specifically identifiable
problem credit or portfolio segment as of the evaluation date, managements evaluation of the
probable loss related to such condition is reflected in the unallocated allowance.
Based on this quantitative and qualitative analysis, provisions are made to the reserve for
possible loan losses. Such provisions are reflected in our consolidated statements of operations.
The allocation of the reserve for possible loan losses by loan category is a result of the
above analysis. The allocation methodology applied by the Company, designed to assess the adequacy
of the reserve for possible loan losses, focuses on changes in the size and character of the loan
portfolio, changes in levels of impaired and other non-performing loans, the risk inherent in
specific loans, concentrations of loans to specific borrowers or industries, existing economic
conditions, and historical losses normally experienced in our banking market for each portfolio
category. Because each of the criteria used is subject to change, the allocation of the reserve for
possible loan losses is made for analytical purposes and is not necessarily indicative of the trend
of future loan losses in any particular loan category.
The total reserve for possible loan losses is available to absorb losses from any segment of
the portfolio. Management continues to target and maintain the reserve for possible loan losses
equal to the allocation methodology plus an unallocated portion, as determined by economic
conditions and other qualitative and quantitative factors affecting the Companys borrowers, as
described above.
In determining an adequate balance in the reserve for possible loan losses, management places
its emphasis as follows: evaluation of the loan portfolio with regard to potential future exposure
on loans to specific customers and industries; reevaluation of each watch list loan or loan
classified by supervisory authorities; and an overall review of the remaining portfolio in light of
loan loss experience normally experienced in our banking market. Any problems or loss exposure
estimated in these categories is provided for in the total current period reserve.
Management views the reserve for possible loan losses as being available for all potential or
as yet presently unidentifiable loan losses which may occur in the future. The risk of future
losses that is inherent in the loan portfolio is not precisely attributable to a particular loan or
category of loans.
Based on its review for adequacy, management has estimated those portions of the reserve that
could be attributable to major categories of loans as detailed in the following table at year end
for each of the years in the five-year period ended December 31, 2009:
December 31, (in thousands of dollars) |
||||||||||||||||||||||||||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||||
Percent by | Percent by | Percent by | Percent by | Percent by | ||||||||||||||||||||||||||||||||||||
Category | Category | Category | Category | Category | ||||||||||||||||||||||||||||||||||||
To Total | To Total | To Total | To Total | To Total | ||||||||||||||||||||||||||||||||||||
Allowance | Loans | Allowance | Loans | Allowance | Loans | Allowance | Loans | Allowance | Loans | |||||||||||||||||||||||||||||||
Commercial: |
||||||||||||||||||||||||||||||||||||||||
Real estate |
$ | 6,595 | 69.86 | % | $ | 4,075 | 67.19 | % | $ | 5,137 | 56.44 | % | $ | 3,465 | 59.08 | % | $ | 2,384 | 53.78 | % | ||||||||||||||||||||
Other |
380 | 7.25 | 479 | 7.54 | 783 | 6.75 | 804 | 7.96 | 896 | 14.13 | ||||||||||||||||||||||||||||||
Real estate: |
||||||||||||||||||||||||||||||||||||||||
Construction |
9,390 | 15.14 | 5,382 | 15.17 | 2,002 | 20.19 | 1,391 | 16.24 | 574 | 11.96 | ||||||||||||||||||||||||||||||
Residential |
814 | 7.37 | 1,006 | 9.63 | 1,608 | 16.06 | 1,045 | 15.74 | 814 | 18.81 | ||||||||||||||||||||||||||||||
Held for Sale |
| 0.05 | | | | 0.02 | | | | | ||||||||||||||||||||||||||||||
Consumer |
40 | 0.32 | 46 | 0.12 | 46 | 0.52 | 46 | 0.97 | 95 | 1.30 | ||||||||||||||||||||||||||||||
Overdrafts |
10 | 0.01 | 10 | 0.35 | 10 | 0.02 | 5 | 0.01 | 1 | 0.02 | ||||||||||||||||||||||||||||||
Not allocated |
14,993 | 3,308 | 99 | 345 | 449 | |||||||||||||||||||||||||||||||||||
Total allowance |
$ | 32,222 | 100.00 | % | $ | 14,306 | 100.00 | % | $ | 9,685 | 100.00 | % | $ | 7,101 | 100.00 | % | $ | 5,213 | 100.00 | % | ||||||||||||||||||||
The perception of risk with respect to particular loans within the portfolio will change
over time as a result of the characteristics and performance of those loans, overall economic and
market trends, and the actual and expected trends in non-performing loans. Consequently, while
there are no specific allocations of the reserve resulting from economic or market conditions or
actual or expected trends in non-performing loans, these
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factors are considered in the initial assignment of risk ratings to loans, subsequent changes
to those risk ratings and to a lesser extent in the size of any unallocated allowance amount.
The unallocated portion of the reserve for loan losses is based on factors that cannot
necessarily be associated with a specific loan or loan category. Management focuses on the
following factors and conditions:
| 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. | ||
| Qualitative or environmental factors may impact credit losses and they would include but not be limited to: |
- | Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. | ||
- | Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments. | ||
- | Changes in the nature and volume of the portfolio and in the terms of loans. | ||
- | Changes in the experience, ability, and depth of lending management and other relevant staff. | ||
- | Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the severity of adversely classified or graded loans. | ||
- | Changes in the quality of the institutions loan review system. | ||
- | Changes in the value of underlying collateral for collateral-dependent loans. | ||
- | The existence and effect of any concentrations of credit, and changes in the level of such concentrations. | ||
- | The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institutions existing portfolio. |
While the Company has no significant specific industry concentration risk, analysis showed
that over 91% of the loan portfolio was dependent on real estate collateral at December 31, 2009,
including commercial real estate, residential real estate, and construction and land development
loans. The following table details the significant categories of real estate loans as a percentage
of total regulatory capital:
Real Estate Loan Balances as a Percentage | ||||||||
of Total Regulatory Capital | ||||||||
12/31/2009 | 12/31/2008 | |||||||
Construction, land development and other land loans |
112 | % | 138 | % | ||||
Nonfarm nonresidential: |
||||||||
Owner occupied |
112 | % | 60 | % | ||||
Non-owner occupied |
340 | % | 408 | % | ||||
1-4 family closed end loans |
40 | % | 61 | % | ||||
Multi-family |
86 | % | 71 | % | ||||
Other |
22 | % | 20 | % |
The Company has policies, guidelines, and individual risk ratings in place to control
this exposure at the transaction level; however, given the volatile nature of interest rates and
their affect on the real estate market and the likely adverse impacts on borrowers debt service
coverage ratios, management believes it is prudent to maintain an unallocated allowance component.
38
Table of Contents
Additionally, the Company continues to be committed to a strategy of developing
relationships with larger commercial and industrial companies. Management believes it is prudent to
increase the percentage of the unallocated reserve to cover the risks inherent in the higher
average loan size of these relationships.
Liquidity and Rate Sensitivity Management
Management of rate sensitive earning assets and interest-bearing liabilities remains a key to
the Companys profitability. The Companys operations are subject to risk resulting from interest
rate fluctuations to the extent that there is a difference between the amount of the Companys
interest-earning assets and the amount of interest-bearing liabilities that are prepaid or
withdrawn, mature or are repriced in specified periods. The principal objective of the Companys
asset/liability management activities is to provide maximum levels of net interest income while
maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding
needs of the Company. The Banks utilize gap analyses as the primary quantitative tool in measuring
the amount of interest rate risk that is present at the end of each quarter. Bank management also
monitors, on a quarterly basis, the variability of earnings and fair value of equity in various
interest rate environments. Bank management evaluates the Banks risk position to determine whether
the level of exposure is significant enough to hedge a potential decline in earnings and value or
whether the Bank can safely increase risk to enhance returns.
Liquidity is a measurement of the Banks ability to meet the borrowing needs and the deposit
withdrawal requirements of their customers. The composition of assets and liabilities is actively
managed to maintain the appropriate level of liquidity in the balance sheet. Management is guided
by regularly-reviewed policies when determining the appropriate portion of total assets which
should be comprised of readily-marketable assets available to meet conditions that are reasonably
expected to occur.
Liquidity is primarily provided to the Banks through earning assets, including Federal funds
sold and maturities and principal payments in the investment portfolio, all funded through
continued deposit growth and short-term borrowings. Secondary sources of liquidity available to the
Banks include the sale of securities included in the available-for-sale category (with a carrying
value of $284,119,556 at December 31, 2009, of which approximately $160,923,000 is pledged to
secure deposits and repurchase agreements) and borrowing capabilities through correspondent banks,
the Federal Reserve Bank, and the Federal Home Loan Banks. Maturing loans also provide liquidity on
an ongoing basis. Accordingly, Bank management believes it has the liquidity necessary to meet
unexpected deposit withdrawal requirements or increases in loan demand.
The Banks have borrowing capabilities through correspondent banks, the Federal Reserve Bank,
and the Federal Home Loan Banks of Des Moines and Atlanta. The Banks have Federal funds lines of
credit totaling $23,000,000, through correspondent banks, of which $23,000,000 was available at
December 31, 2009. Also, Reliance Bank has a credit line with the Federal Home Loan Bank of Des
Moines in the amount of $195,478,835 and availability under that line was $77,786,861 as of
December 31, 2009. Reliance Bank, FSB maintained a credit line with the Federal Home Loan Bank of
Atlanta in the amount of $11,350,000, of which $7,250,000 was available at December 31, 2009. In
addition, Reliance Bank maintained a line of credit with the Federal Reserve Bank in the amount of
$43,967,261, of which $43,967,261 was available at December 31, 2009. As of December 31 2009, the
combined availability under these arrangements totaled $152,004,122. Company management believes
it has the liquidity necessary to meet unexpected deposit withdrawal requirements or increases in
loan demand. However, availability of the funds noted above is subject to the Banks maintaining a
satisfactory rating by their regulators. If the Banks were to become distressed and the Banks
ratings lowered, it could negatively impact the ability of the Banks to borrow the funds.
39
Table of Contents
The asset/liability management process, which involves structuring the balance sheet to allow
approximately equal amounts of assets and liabilities to reprice at the same time, is a dynamic
process essential to minimize the effect of fluctuating interest rates on net interest income. The
following table reflects the Companys interest rate gap (rate-sensitive assets minus
rate-sensitive liabilities) analysis as of December 31, 2009, individually and cumulatively,
through various time horizons:
Remaining Maturity if Fixed Rate;
Earliest Possible Repricing Interval if Floating Rate
Earliest Possible Repricing Interval if Floating Rate
3 | Over 3 | Over 1 | ||||||||||||||||||
months | months | year | ||||||||||||||||||
or | through | through | Over | |||||||||||||||||
less | 12 months | 5 years | 5 years | Total | ||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||
Loans |
$ | 448,550,730 | $ | 141,646,799 | $ | 498,203,166 | $ | 52,480,580 | $ | 1,140,881,275 | ||||||||||
Investment securities, at amortized cost |
34,338,031 | 67,148,070 | 152,223,081 | 31,034,556 | 284,743,738 | |||||||||||||||
Other interest-earning assets |
15,767,862 | | | | 15,767,862 | |||||||||||||||
Total interest-earning assets |
$ | 498,656,623 | $ | 208,794,869 | $ | 650,426,247 | $ | 83,515,136 | $ | 1.441,392,875 | ||||||||||
Interest bearing-liabilities: |
||||||||||||||||||||
Savings and interest bearing transaction
accounts |
$ | 543,516,999 | $ | 8,865 | | | $ | 543,525,864 | ||||||||||||
Time certificates of deposit of $100,00
or more |
71,356,500 | 152,529,886 | 70,293,030 | 3,026,486 | 297,205,902 | |||||||||||||||
All other time deposits |
62,822,894 | 166,871,328 | 119,845,220 | 3,959,408 | 353,498,850 | |||||||||||||||
Nondeposit interest-bearing liabilities |
11,304,649 | 7,392,283 | 26,000,000 | 72,000,000 | 116,696,932 | |||||||||||||||
Total interest-bearing liabilities |
$ | 689,001,042 | $ | 326,802,362 | $ | 216,138,250 | $ | 78,985,894 | $ | 1,310,927,548 | ||||||||||
Gap by period |
$ | (190,344,419 | ) | $ | (118,007,493 | ) | $ | 434,287,997 | $ | 4,529,242 | $ | 130,465,327 | ||||||||
Cumulative gap |
$ | (190,344,419 | ) | $ | (308,351,912 | ) | $ | 125,936,085 | $ | 130,465,327 | $ | 130,465,327 | ||||||||
Ratio of interest-sensitive assets to
interest-
sensitive liabilities |
0.72 | x | 0.64 | x | 3.01 | x | 1.06 | x | 1.10 | x | ||||||||||
Cumulative ratio of
interest-sensitive assets to
interest-sensitive liabilities |
0.72 | x | 0.70 | x | 1.10 | x | 1.10 | x | 1.10 | x | ||||||||||
A gap report is used by Bank management to review any significant mismatch between the
repricing points of the Banks rate sensitive assets and liabilities in certain time horizons. A
negative gap indicates that more liabilities reprice in that particular time frame and, if rates
rise, these liabilities will reprice faster than the assets. A positive gap would indicate the
opposite. Management has set policy limits specifying acceptable levels of interest rate risk as
measured by the gap report. Gap reports can be misleading in that they capture only the repricing
timing within the balance sheet, and fail to capture other significant risks such as basis risk and
embedded options risk. Basis risk involves the potential for the spread relationship between rates
to change under different rate environments and embedded options risk related to the potential for
the alteration of the level and/or timing of cash flows given changes in rates. As indicated in the
above table, the Company operates on a short-term basis similar to most other financial
institutions, as its liabilities, with savings and interest-bearing transaction accounts included,
could reprice more quickly than its assets. However, the process of asset/liability management in a
financial institution is dynamic. Bank management believes its current asset/liability management
program will allow adequate reaction time for trends in the marketplace as they occur, allowing
maintenance of adequate net interest margins.
Bank management also uses fair market value of equity analyses to help identify longer-term
risk that may reside on the current balance sheet. The fair market value of equity is represented
by the present value of all future income streams generated by the current balance sheet. The
Company measures the fair market value of equity as the net present value of all asset and
liability cash flows discounted at forward rates suggested by the current Treasury curve plus
appropriate credit spreads. This representation of the change in the fair market value of equity
under different rate scenarios gives insight into the magnitude of risk to future earnings due to
rate changes. Management has set policy limits relating to declines in the market value of equity.
The results of these analyses at December 31, 2009 indicate that the Companys fair market value of
equity would increase 1.39% and 4.91% from an immediate and sustained parallel decrease in interest
rates of 100 and 200 basis points, respectively, and decrease 4.89% and 10.50%, from a
corresponding increase in interest rates of 100 and 200 basis points, respectively.
40
Table of Contents
Following is a more detailed analysis of the maturity and interest rate sensitivity of the
Banks loan portfolios at December 31, 2009:
Over 1 | ||||||||||||||||
through | Over | |||||||||||||||
1 year | 5 | 5 | ||||||||||||||
or less | years | years | Total | |||||||||||||
Commercial: |
||||||||||||||||
Real estate |
$ | 349,206,625 | $ | 422,963,008 | $ | 24,884,752 | $ | 797,054,385 | ||||||||
Other |
62,995,588 | 19,131,631 | 605,631 | 82,732,850 | ||||||||||||
Real estate: |
||||||||||||||||
Construction |
135,952,321 | 23,482,978 | 13,296,299 | 172,731,598 | ||||||||||||
Residential |
38,822,676 | 32,038,080 | 13,219,753 | 84,080,509 | ||||||||||||
Held for Sale |
17,956 | 88,399 | 471,045 | 577,400 | ||||||||||||
Consumer |
3,152,293 | 499,070 | 3,100 | 3,654,463 | ||||||||||||
Overdrafts |
50,070 | | | 50,070 | ||||||||||||
$ | 590,197,529 | $ | 498,203,166 | $ | 52,480,580 | $ | 1,140,881,275 | |||||||||
For all loans maturing or repricing beyond the one year time horizon at December 31, 2009,
following is a breakdown of such loans into fixed and floating rates.
Fixed | Floating | |||||||||||
Rate | Rate | Total | ||||||||||
Due after one but within five years |
$ | 417,332,641 | $ | 80,870,525 | $ | 498,203,166 | ||||||
Due after five years |
52,425,168 | 55,412 | 52,480,580 | |||||||||
$ | 469,757,809 | $ | 80,925,937 | $ | 550,683,746 | |||||||
The investment portfolio is closely monitored to assure that the Banks have no unreasonable
concentration of securities in the obligations of any single debtor. Other than U.S. Government
agency securities, the Banks maintain no concentration of investments in any one political
subdivision greater than 10% of its total portfolio.
The book value and estimated market value of the Companys debt securities at December 31,
2009, 2008 and 2007, all of which are classified as available-for-sale, are summarized in the
following table:
2009 | 2008 | 2007 | ||||||||||||||||||||||
Amortized | Market | Amortized | Market | Amortized | Market | |||||||||||||||||||
Cost | Value | Cost | Value | Cost | Value | |||||||||||||||||||
U.S. Government agencies
and corporations |
$ | 116,150,389 | $ | 115,445,243 | $ | 65,973,705 | $ | 67,487,820 | $ | 79,705,325 | $ | 80,422,286 | ||||||||||||
State and political subdivisions |
30,012,602 | 30,651,585 | 34,063,983 | 33,680,096 | 38,913,135 | 39,255,593 | ||||||||||||||||||
Other debt securities |
3,697,211 | 1,237,737 | 6,298,345 | 3,574,962 | 7,595,063 | 7,203,905 | ||||||||||||||||||
Mortgage-backed securities |
134,883,536 | 136,784,991 | 87,711,440 | 89,145,614 | 31,209,657 | 31,160,534 | ||||||||||||||||||
$ | 284,743,738 | $ | 284,119,556 | $ | 194,047,473 | $ | 193,888,492 | $ | 157,423,180 | $ | 158,042,318 | |||||||||||||
41
Table of Contents
The following tables summarize maturity and yield information on the Companys investment
portfolio at December 31, 2009:
Weighted | ||||||||
Average Tax - | ||||||||
Amortized | Equivalent | |||||||
Cost | Yield | |||||||
Available-for-sale |
||||||||
U.S. Government agencies and
corporations: |
||||||||
0 to 1 year |
$ | 2,499,336 | 5.01 | % | ||||
1 to 5 years |
33,427,250 | 2.02 | ||||||
5 to 10 years |
53,552,143 | 3.09 | ||||||
Over 10 years |
26,671,660 | 3.53 | ||||||
Total |
$ | 116,150,389 | 2.92 | % | ||||
State and political subdivisions: |
||||||||
0 to 1 year |
$ | 469,970 | 5.99 | % | ||||
1 to 5 years |
5,845,617 | 5.55 | ||||||
5 to 10 years |
13,348,813 | 6.09 | ||||||
Over 10 years |
10,348,202 | 6.52 | ||||||
Total |
$ | 30,012,602 | 6.13 | |||||
Other debt securities: |
||||||||
0 to 1 year |
$ | | | % | ||||
1 to 5 years |
| | ||||||
5 to 10 years |
| | ||||||
Over 10 years |
3,697,211 | 2.14 | ||||||
Total |
$ | 3,697,211 | 2.14 | |||||
Mortgage-backed securities |
134,883,536 | 3.72 | % | |||||
Combined: |
||||||||
0 to 1 year |
$ | 2,969,306 | 5.17 | % | ||||
1 to 5 years |
39,272,867 | 2.55 | ||||||
5 to 10 years |
66,900,956 | 3.69 | ||||||
Over 10 years |
40,717,073 | 4.16 | ||||||
Mortgage-backed securities |
134,883,536 | 3.72 | ||||||
Total |
$ | 284,743,738 | 3.63 | % | ||||
Note: While yields by range of maturity are routinely provided by the Companys accounting system
on a tax -equivalent basis, the individual amounts of adjustments are not so provided. In total, at
an assumed Federal income tax rate of 34%, the adjustment amounted to $496,870.
42
Table of Contents
The Banks primary source of liquidity to fund growth is ultimately the generation of new
deposits. The following table shows the average daily amount of deposits and the average rate paid
on each type of deposit for the years ended December 31, 2009, 2008, and 2007:
Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||
Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
Noninterest-bearing demand deposits |
$ | 62,196,559 | | % | $ | 56,223,479 | | % | $ | 44,841,777 | | % | ||||||||||||
Interest-bearing transaction accounts |
168,582,912 | 1.24 | 162,299,967 | 2.33 | 159,338,600 | 4.24 | ||||||||||||||||||
Savings deposits |
262,920,235 | 2.80 | 52,455,044 | 1.80 | 60,373,225 | 2.98 | ||||||||||||||||||
Time deposits of $100,000 or more |
314,461,095 | 3.09 | 339,942,549 | 4.02 | 224,805,601 | 5.06 | ||||||||||||||||||
All other time deposits |
430,806,970 | 3.35 | 395,841,510 | 4.11 | 288,090,853 | 4.69 | ||||||||||||||||||
$ | 1,238,967,771 | 2.71 | % | $ | 1,006,762,549 | 3.44 | % | $ | 777,450,056 | 4.30 | % | |||||||||||||
As noted in the gap analyses above, at December 31, 2009, a substantial portion of the
Companys time deposits mature within one year, which is common in the present banking market. To
retain these deposits upon maturity, the Company will have to remain competitive on interest rates,
offer other more attractive deposit products, or replace such maturing deposits with funds from
wholesale funding sources or new customer deposits from our branch network. The following table
shows the maturity of time deposits of $100,000 or more at December 31, 2009:
Time | Other | |||||||||||||
Certificates | Time | |||||||||||||
Maturity | Of Deposit | Deposits | Total | |||||||||||
Three months or less |
$ | 69,675,413 | $ | 1,681,087 | $ | 71,356,500 | ||||||||
Three to six months |
68,830,330 | 690,454 | 69,520,784 | |||||||||||
Six to twelve months |
80,377,767 | 2,631,335 | 83,009,102 | |||||||||||
Over twelve months |
62,750,683 | 10,568,833 | 73,319,516 | |||||||||||
$ | 281,634,193 | $ | 15,571,709 | $ | 297,205,902 | |||||||||
Capital Adequacy
The Federal Reserve Board established risk-based capital guidelines for bank holding
companies, which require bank holding companies to maintain minimum levels of Tier 1 Capital and
Total Capital. Tier 1 Capital consists of common and qualifying preferred stockholders equity
and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% of
investments in unconsolidated subsidiaries. Total capital consists of, in addition to Tier 1
Capital, mandatory convertible debt, preferred stock not qualifying as Tier 1 Capital, subordinated
and other qualifying term debt and a portion of the reserve for possible loan losses, less the
remaining 50% of qualifying total capital. Risk-based capital ratios are calculated with reference
to risk-weighted assets, which include both on-and off-balance sheet exposures. The minimum
required ratio for qualifying Total Capital is 8%, of which at least 4% must consist of Tier 1
Capital.
In addition, Federal Reserve guidelines require bank holding companies to maintain a minimum
ratio of Tier 1 Capital to average total assets (net of goodwill) of 3%. The Federal Reserve
guidelines state that all of these capital ratios constitute the minimum requirements for the most
highly-rated banking organizations, and other banking organizations are expected to maintain
capital at higher levels.
43
Table of Contents
As of December 31, 2009, the Company and Banks were each in compliance with the Tier 1
Capital ratio requirement and all other applicable regulatory capital requirements, as calculated
in accordance with risk-based capital guidelines. The actual capital amounts and ratios for the
Company, Reliance Bank, and Reliance Bank, FSB at December 31, 2009, 2008, and 2007 are presented
in the following table:
To Be a Well | ||||||||||||||||||||||||
Capitalized Bank Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provision | ||||||||||||||||||||||
(in thousands of dollars) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||
December 31, 2009: |
||||||||||||||||||||||||
Total Capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 146,809 | 11.38 | % | $ | 103,198 | >8.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
124,248 | 10.17 | % | 97,691 | >8.0 | % | 122,113 | >10.0 | % | |||||||||||||||
Reliance Bank, FSB |
14,390 | 18.52 | % | 6,215 | >8.0 | % | 7,769 | >10.0 | % | |||||||||||||||
Tier 1 capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 130,486 | 10.12 | % | $ | 51,599 | >4.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
108,965 | 8.92 | % | 48,845 | >4.0 | % | 73,268 | >6.0 | % | |||||||||||||||
Reliance Bank, FSB |
13,401 | 17.25 | % | 3,108 | >4.0 | % | 4,661 | >6.0 | % | |||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 130,486 | 8.52 | % | $ | 61,244 | >4.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
108,965 | 7.62 | % | 57,211 | >4.0 | % | 71,514 | >5.0 | % | |||||||||||||||
Reliance Bank, FSB |
13,401 | 13.57 | % | 3,952 | >4.0 | % | 4,940 | >5.0 | % | |||||||||||||||
December 31, 2008: |
||||||||||||||||||||||||
Total Capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 152,517 | 10.87 | % | $ | 112,253 | >8.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
133,151 | 10.23 | % | 104,160 | >8.0 | % | 130,200 | 10.0 | % | |||||||||||||||
Reliance Bank, FSB |
22,117 | 22.00 | % | 8,044 | >8.0 | % | 10,055 | 10.0 | % | |||||||||||||||
Tier 1 capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 138,411 | 9.87 | % | $ | 56,102 | >4.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
121,099 | 9.30 | % | 52,080 | >4.0 | % | 78,120 | 6.0 | % | |||||||||||||||
Reliance Bank, FSB |
21,355 | 21.24 | % | 4,022 | >4.0 | % | 6,033 | 6.0 | % | |||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 138,411 | 9.07 | % | $ | 61,028 | >4.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
121,099 | 8.57 | % | 56,503 | >4.0 | % | 70,629 | 5.0 | % | |||||||||||||||
Reliance Bank, FSB |
21,355 | 17.30 | % | 4,937 | >4.0 | % | 6,171 | 5.0 | % | |||||||||||||||
December 31, 2007: |
||||||||||||||||||||||||
Total
capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 147,640 | 13.58 | % | $ | 86,951 | >8.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
108,550 | 10.79 | % | 80,510 | >8.0 | % | 100,637 | >10.0 | % | |||||||||||||||
Reliance Bank, FSB |
24,891 | 28.43 | % | 7,004 | >8.0 | % | 8,755 | >10.0 | % | |||||||||||||||
Tier 1
capital (to risk weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 137,955 | 12.69 | % | $ | 43,476 | >4.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
100,205 | 9.96 | % | 40,255 | >4.0 | % | 60,382 | >6.0 | % | |||||||||||||||
Reliance Bank, FSB |
24,258 | 27.71 | % | 3,502 | >4.0 | % | 5,253 | >6.0 | % | |||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 137,955 | 12.68 | % | $ | 43,532 | >4.0 | % | $ | N/A | N/A | |||||||||||||
Reliance Bank |
100,205 | 9.98 | % | 40,147 | >4.0 | % | 50,184 | >5.0 | % | |||||||||||||||
Reliance Bank, FSB |
24,258 | 28.13 | % | 3,450 | >4.0 | % | 4,312 | >5.0 | % |
44
Table of Contents
Federal law provides the federal banking regulators with broad power to take prompt corrective
action to resolve the problems of undercapitalized banking institutions. The extent of the
regulators powers depend on whether the banking institution in question is well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized, which are defined by the regulators as follows:
Total | Tier 1 | Tier 2 | ||||||||||
Risk-Based | Risk-Based | Leverage | ||||||||||
Ratio | Ratio | Ratio | ||||||||||
Well capitalized |
10 | % | 6 | % | 5 | % | ||||||
Adequately capitalized |
8 | 4 | 4 | |||||||||
Undercapitalized |
<8 | <4 | <4 | |||||||||
Significantly undercapitalized |
<6 | <3 | <3 | |||||||||
Critically undercapitalized |
* | * | * |
* | A critically undercapitalized institution is defined as having a tangible equity to total assets ratio of 2% or less. |
The Company and the Banks recently entered into certain agreements with regulatory authorities
described in Item 1. BUSINESS Informal Regulatory Agreements.
Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
Through the normal course of operations, the Banks have entered into certain contractual
obligations and other commitments. Such obligations relate to funding of operations through
deposits or debt issuances, as well as leases for premises and equipment. As financial services
providers, the Banks routinely enter into commitments to extend credit. While contractual
obligations represent future cash requirements of the Banks, a significant portion of commitments
to extend credit may expire without being drawn upon. Such commitments are subject to the same
credit policies and approval processes accorded to loans made by the Banks.
The required contractual obligations and other commitments at December 31, 2009 were as
follows:
Over 1 Year | ||||||||||||||||
Total Cash | Less Than 1 | Less Than 5 | Over 5 | |||||||||||||
Commitment | Year | Years | Years | |||||||||||||
Operating leases |
$ | 7,941,225 | $ | 713,549 | $ | 2,278,616 | $ | 4,949,060 | ||||||||
Time deposits |
650,704,752 | 453,580,608 | 190,138,250 | 6,985,894 | ||||||||||||
Federal Home Loan Bank borrowings |
104,000,000 | 6,000,000 | 26,000,000 | 72,000,000 | ||||||||||||
Commitments to extend credit |
126,088,501 | 61,763,257 | 37,080,066 | 27,245,178 | ||||||||||||
Standby letters of credit |
13,238,950 | 4,845,796 | 8,393,154 | |
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted ASC 820-10, Fair Value Measurement. The
Company uses fair value measurements to determine fair value disclosures. Fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In determining fair value, the Company uses
various methods including market, income and cost approaches. Based on these approaches, the
Company often utilizes certain assumptions that market participants would use in pricing the asset
or liability, including assumptions about risk and/or the risks inherent in the inputs to the
valuation technique. These inputs can be readily observable, market corroborated, or generally
unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. Additionally, during the second quarter of
2009, the Company adopted ASC 820-10-65, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that
are not Orderly, which provides additional guidance for estimating fair value in accordance with
ASC 820 when the volume and level of activity for the asset or liability have significantly
decreased. ASC 820-10-65 also
45
Table of Contents
includes guidance on identifying circumstances that indicate a transaction is not orderly.
ASC 820-10-65 emphasizes that even if there has been a significant decrease in the volume and level
of activity for the asset or liability regardless of the valuation techniques used, the objective
of a fair value measurement remains the same, i.e., fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. Based on the observability
of the inputs used in the valuation techniques, the Company is required to provide the following
information according to the fair value hierarchy. Financial assets and liabilities carried or
recorded at fair value will be classified and disclosed in one of the following three categories:
| Level 1 Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and Federal agency securities and Federal agency mortgage-backed securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
| Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. |
| Level 3 Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques, and not based on market exchange, dealer, or value assigned to such assets or liabilities. |
While certain assets and liabilities may be recorded at the lower of cost or fair value as
described above (e.g., impaired loans, loans held for sale, other real estate owned, etc.), the
only assets or liabilities recorded at fair value on a recurring basis are the Companys
investments in available-for-sale debt securities. The Companys available-for-sale debt
securities are measured at fair value using Level 2 and 3 valuations.
During 2009, the FASB issued the following additional pronouncements that are applicable to
the Company:
| ASC 855, Subsequent Events This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this standard sets forth: |
1. | The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. |
2. | The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. |
3. | The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. |
| ASC 320-10-65 regarding other-than-temporary impairment of investment securities this recognition guidance applies to debt securities classified as available-for-sale and held-to-maturity that are subject to the other-than-temporary impairment guidance within ASC 320. If the fair value of a debt security is less than its amortized costs basis at the balance sheet date, an entity shall assess whether the impairment is other-than-temporary. If an entity intends to sell the debt security, an other-than-temporary impairment shall be considered to have occurred. If an entity does not intend to sell the debt security, the entity shall consider available evidence to assess whether it more likely than not will be required to sell the security before the recovery of its amortized cost basis. If the entity more likely than not will be required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment shall be considered to have occurred. |
46
Table of Contents
If the entity does not expect to recover the entire amortized cost basis of the security, an other-than-temporary impairment shall be considered to have occurred. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered (that is, a credit loss exists), and an other-than-temporary impairment shall be considered to have occurred. In such situations, the credit loss should be recorded through earnings as an other-than temporary impairment. |
Quantitative and Qualitative Disclosures About Market Risk
For information regarding the market risk of the financial instruments of the Company, see the
section entitled Liquidity and Rate Sensitivity Management within this Managements Discussion
and Analysis of Financial Condition and Results of Operation section.
Effects of Inflation
Persistent high rates of inflation can have a significant effect on the reported financial
condition and results of operations of all industries. However, the asset and liability structure
of a financial institution is substantially different from that of an industrial company, in that
virtually all assets and liabilities of a financial institution are monetary in nature.
Accordingly, changes in interest rates may have a significant impact on a financial institutions
performance. Interest rates do not necessarily move in the same direction, or in the same
magnitude, as the prices of other goods and services.
Inflation, however, does have an important impact on the growth of total assets in the banking
industry, often resulting in a need to increase equity capital at higher than normal rates to
maintain an appropriate equity-to-assets ratio. One of the most important effects that inflation
has had on the banking industry has been to reduce the proportion of earnings paid out in the form
of dividends.
Although it is obvious that inflation affects the growth of total assets, it is difficult to
measure the impact precisely. Only new assets acquired each year are directly affected, so a simple
adjustment of asset totals by use of an inflation index is not meaningful. The results of
operations also have been affected by inflation, but again there is no simple way to measure the
effect on the various categories of income and expense.
Interest rates in particular are significantly affected by inflation, but neither the timing
nor the magnitude of the changes coincide with changes in the consumer price index. Additionally,
changes in interest rates on some types of consumer deposits may be delayed. These factors, in
turn, affect the composition of sources of funds by reducing the growth of deposits that are less
interest sensitive and increasing the need for funds that are more interest sensitive.
Item 6A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding the market risk of the financial instruments of the Company is included
in this report under Fluctuations in interest rates could reduce our profitability and affect the
value of our assets in Item 1A Risk Factors and under Liquidity and Rate Sensitivity
Management in item 6 Managements Discussion and Analysis of Financial Condition and Results of
Operations. Such information is incorporated in this Item 6A by reference.
Item 7. Financial Statements and Supplementary Data
The financial statements that are filed as part of this report are set forth in Item 14 of
this report.
Item 8. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
47
Table of Contents
Item 8A(T). Controls and procedures
Under the supervision and with the participation of the Companys Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities and Exchange act of 1934, as amended).
As a result of material weaknesses in our internal controls over financial reporting relating
to net losses available to common shareholders after increasing the net loss for preferred dividends
paid by the Company, which require an adjustment to the previously reported net loss per share
data reported by the Company, and the adequacy of disclosure for other-than-temporary losses on
available for sale securities, our management has reassessed the effectiveness of our disclosure
controls and procedures and has determined that our disclosure controls and procedures were not
effective as of December 31, 2009.
On March 4, 2011, the Audit Committee of the Board of Directors concluded that the
Companys audited financial statements for the year ended December 31, 2009, did not properly
account for certain items referred to in the preceding paragraph and, as a result, should not be
relied upon. The Audit Committee has authorized and directed the officers of the Company to
restate its audited financial statements included in this Form 10-K filing as of and for the year
ended December 31, 2009.
The Company has implemented certain changes in our internal controls as of the date of
this report to address the material weaknesses and believes that such weaknesses have been
remediated.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company, as such term is defined in Rule 13a-15(f) under the Exchange
Act. Under the supervision and with the participation of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2009. The
framework on which such evaluation was based is contained in the report entitled Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
This evaluation identified material weaknesses in our internal controls area regarding our
process and procedures relating to net losses available to common shareholders after increasing
the net loss for preferred dividends paid by the Company, which require an adjustment to
previously reported net loss per share data, and the adequacy of disclosure for
other-than-temporary losses on available for sale securities. These material weaknesses resulted
in the restatement of our annual financial statements for the year ended December 31, 2009 and
our quarterly reports for the periods ended March 31, June 30 and September 30, 2010.
Accordingly, we did not maintain effective control over financial statement reporting as of
December 31, 2009 based on the applicable COSO criteria.
This Annual Report on Form 10-K does not include an attestation report of the Companys
registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by the Companys registered public accounting
firm pursuant to temporary rules of the SEC that permit the Company to provide only managements
report in this Annual Report.
/s/ Allan D. Ivie, IV
|
||
Allan D. Ivie, IV |
||
President and Chief Executive Officer (Principal Executive Officer) | ||
/s/ Dale E. Oberkfell
|
||
Dale E. Oberkfell |
||
Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
There were no changes during the period covered by this Annual Report on Form 10-K in the
Companys internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 8b. Other information
None.
Item 9. Directors, Executive Officers and Corporate Governance
The information required by this Item 9 is set forth under the captions Proposal 1 Requiring
Your Vote: Election of Directors, Executive Officers, Section 16(a) Beneficial Ownership
Reporting Compliance, Code of Business Conduct and Ethics and Board of Directors and
Committees: The Audit Committee in the Companys Proxy Statement for the 2010 annual meeting of
shareholders (the 2010 Proxy Statement) and is incorporated herein by reference.
There have been no material changes to the procedures by which shareholders may recommend
Director nominees to our Board of Directors since the filing of our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009.
48
Table of Contents
Item 10. Executive Compensation
The information required by this Item 10 is set forth under the captions Compensation
Discussion and Analysis, Compensation Committee Report, Executive Compensation and
Compensation Committee Interlocks and Insider Participation in the 2010 Proxy Statement and is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Certain information required by this Item 11 is set forth under the caption Stock Ownership
of Executive Officers and Certain Beneficial Owners in the Companys 2010 Proxy Statement and is
incorporated herein by reference.
Equity Plan Table
The following table discloses certain information with respect to the Companys equity
compensation plans as of December 31, 2009:
Number of securities | ||||||||||||
remaining available for | ||||||||||||
future issuance under | ||||||||||||
Number of securities to | Weighted-average | equity compensation | ||||||||||
be issued upon exercise | exercise price of | plans (excluding | ||||||||||
of outstanding options, | outstanding options, | securities reflected in | ||||||||||
warrants and rights | warrants and rights | column (a)) | ||||||||||
Plan category | (a) | (b) | (c) | |||||||||
Equity
compensation plans
approved by security
holders |
1,424,450 | $ | 8.05 | 408,300 | ||||||||
Equity compensation
plans not approved
by security holders |
666,816 | $ | 8.41 | 116,500 | ||||||||
Total |
2,091,266 | $ | 8.17 | 524,800 |
Item 12. Certain Relationships and Related Transactions, and Director
Independence
The information required by this Item 12 is set forth under the captions Interest of
Management in Certain Transactions and Independent Directors in the Companys 2010 Proxy
Statement and is incorporated herein by reference.
Item 13. Principal Accountant Fees and Services
The information required by this Item 13 is set forth under the caption Audit Committee
Report and Payment of Fees to Auditors in the Companys 2010 Proxy Statement and is incorporated
herein by reference.
Item 14. Exhibits and Financial Statement Schedules
(a) | The following documents are filed as part of this Annual Report: | |
(1)Financial Statements | ||
The financial statements filed with this Annual Report are listed in the Index to Consolidated Financial Statements on page F-1. | ||
(2)Schedules | ||
None. | ||
(3)Exhibits | ||
The Exhibits required to be filed as a part of this Annual Report are listed in the attached Index to Exhibits. | ||
(b) | The Exhibits required to be filed as a part of this Annual Report are listed in the attached Index to Exhibits. | |
(c) | None. |
49
Table of Contents
Index to Consolidated Financial Statements
Page No. | ||
AUDITED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2009, 2008 and 2007 |
||
F-2 | ||
F-3 | ||
F-4 | ||
F-5 | ||
F-6 | ||
F-7 | ||
F-8 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Reliance Bancshares, Inc.:
Reliance Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Reliance Bancshares, Inc. (the
Company) and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements
of operations, comprehensive income (loss), stockholders equity, and cash flows for each of the
years in the three-year period ended December 31, 2009. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Reliance Bancshares, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
As
discussed in note 1 to the consolidated financial statements,
the consolidated financial statements have been restated.
St. Louis, Missouri
March 26, 2010, except as to the restatement discussed in note 1 to the consolidated financial statements, as to which the date is March 7, 2011.
F-2
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2009 and 2008
2009 | 2008 | |||||||
ASSETS |
||||||||
Cash and due from banks (note 2) |
$ | 11,928,668 | 14,366,579 | |||||
Interest-earning deposits in other financial institutions |
15,767,862 | 31,919,386 | ||||||
Federal funds sold |
| 11,460,000 | ||||||
Investments in available-for-sale debt securities,
at fair value (note 3) |
284,119,556 | 193,888,492 | ||||||
Loans (notes 4 and 9) |
1,140,881,275 | 1,255,198,940 | ||||||
Less Deferred loan fees |
(84,741 | ) | (702,514 | ) | ||||
Reserve for possible loan losses |
(32,221,569 | ) | (14,305,822 | ) | ||||
Net loans |
1,108,574,965 | 1,240,190,604 | ||||||
Premises and equipment, net (note 5) |
42,210,536 | 44,143,317 | ||||||
Accrued interest receivable |
5,647,887 | 5,424,108 | ||||||
Other real estate owned |
29,085,943 | 15,289,170 | ||||||
Identifiable intangible assets, net of accumulated amortization of
$107,229 and $90,941 at December 31, 2009 and 2008, respectively |
137,090 | 153,378 | ||||||
Goodwill |
1,149,192 | 1,149,192 | ||||||
Other assets (note 7) |
38,085,885 | 16,004,992 | ||||||
$ | 1,536,707,584 | 1,573,989,218 | ||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Deposits (note 6): |
||||||||
Non-interest-bearing |
$ | 71,829,581 | 59,374,964 | |||||
Interest-bearing |
1,194,230,616 | 1,168,672,335 | ||||||
Total deposits |
1,266,060,197 | 1,228,047,299 | ||||||
Short-term borrowings (note 8) |
12,696,932 | 63,918,844 | ||||||
Long-term Federal Home Loan Bank borrowings (note 9) |
104,000,000 | 136,000,000 | ||||||
Accrued interest payable |
2,194,952 | 3,904,941 | ||||||
Other liabilities |
2,086,079 | 2,509,254 | ||||||
Total liabilities |
1,387,038,160 | 1,434,380,338 | ||||||
Commitments and contingencies (notes 13 and 14) |
||||||||
Stockholders equity (notes 11, 12, and 15): |
||||||||
Preferred stock, no par value; 2,000,000 shares authorized |
||||||||
Series A, 40,000 shares issued and outstanding at December 31, 2009 |
40,000,000 | | ||||||
Series B, 2,000 shares issued and outstanding at December 31, 2009 |
2,000,000 | | ||||||
Series C, 300 shares issued and outstanding at December 31, 2009 |
300,000 | | ||||||
Common stock, $0.25 par value; 40,000,000 shares authorized,
20,972,091 and 20,770,781 shares issued and outstanding at
December 31, 2009 and 2008, respectively |
5,243,023 | 5,192,696 | ||||||
Surplus |
122,334,757 | 124,193,318 | ||||||
Retained earnings (accumulated deficit) |
(19,796,396 | ) | 10,663,076 | |||||
Treasury stock, 24,514 shares at December 31, 2008 |
| (335,280 | ) | |||||
Accumulated other comprehensive income net unrealized holding gains
(losses) on available-for-sale debt securities |
(411,960 | ) | (104,930 | ) | ||||
Total stockholders equity |
149,669,424 | 139,608,880 | ||||||
$ | 1,536,707,584 | 1,573,989,218 | ||||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2009, 2008, and 2007
(restated) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Interest income: |
||||||||||||
Interest and fees on loans (note 4) |
$ | 67,628,744 | 70,336,468 | 55,098,966 | ||||||||
Interest on debt securities: |
||||||||||||
Taxable |
7,638,510 | 6,159,384 | 6,564,513 | |||||||||
Exempt from Federal income taxes |
1,272,637 | 1,524,562 | 1,533,958 | |||||||||
Interest on short-term investments |
49,305 | 188,793 | 489,535 | |||||||||
Total interest income |
76,589,196 | 78,209,207 | 63,686,972 | |||||||||
Interest expense: |
||||||||||||
Interest on deposits (note 6) |
33,601,012 | 34,650,719 | 33,435,555 | |||||||||
Interest on short-term borrowings (note 8) |
356,258 | 2,290,008 | 2,380,580 | |||||||||
Interest on long-term Federal Home Loan Bank borrowings (note 9) |
5,047,542 | 4,774,541 | 1,792,913 | |||||||||
Total interest expense |
39,004,812 | 41,715,268 | 37,609,048 | |||||||||
Net interest income |
37,584,384 | 36,493,939 | 26,077,924 | |||||||||
Provision for possible loan losses (note 4) |
53,450,000 | 11,148,000 | 3,186,500 | |||||||||
Net interest income after provision for possible loan losses |
(15,865,616 | ) | 25,345,939 | 22,891,424 | ||||||||
Noninterest income: |
||||||||||||
Service charges on deposit accounts |
975,664 | 796,653 | 509,352 | |||||||||
Net gains on sale of debt securities (note 3) |
1,346,565 | 321,113 | 157,011 | |||||||||
Other noninterest income (note 5) |
1,602,853 | 1,564,769 | 1,309,433 | |||||||||
Total noninterest income |
3,925,082 | 2,682,535 | 1,975,796 | |||||||||
Noninterest expense: |
||||||||||||
Other than temporary impairment losses on available-for-sale securities: |
||||||||||||
Total other-than-temporary impairment losses |
1,078,763 | | | |||||||||
Less portion of other-than-temporary impairment losses recognized in other comprehensive income |
(737,806) | | | |||||||||
Net impairment/loss realized |
340,957 | | | |||||||||
Salaries and employee benefits (note 10) |
13,867,628 | 15,915,090 | 13,073,159 | |||||||||
Other real estate expense |
6,163,313 | 1,582,598 | 306,537 | |||||||||
Occupancy and equipment expense (note 5) |
4,256,769 | 4,503,125 | 3,388,327 | |||||||||
FDIC assessments |
2,745,432 | 912,093 | 561,579 | |||||||||
Data processing |
1,950,227 | 1,880,968 | 1,499,199 | |||||||||
Advertising |
149,435 | 778,072 | 569,658 | |||||||||
Amortization of intangible assets |
16,288 | 16,288 | 16,288 | |||||||||
Other noninterest expenses |
4,556,340 | 3,839,356 | 2,875,560 | |||||||||
Total noninterest expense |
34,046,389 | 29,427,590 | 22,290,307 | |||||||||
Income (loss) before applicable income taxes |
(45,986,923 | ) | (1,399,116 | ) | 2,576,913 | |||||||
Applicable income tax expense (benefit) (note 7) |
(16,629,562 | ) | (1,079,886 | ) | 461,966 | |||||||
Net income (loss) |
$ | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||
Net income (loss) |
$ | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||
Preferred stock dividends |
(1,647,111 | ) | | | ||||||||
Net income (loss) available to common shareholders |
$ | (31,004,472 | ) | (319,230 | ) | 2,114,947 | ||||||
Per share amounts: |
||||||||||||
Basic earnings (loss) per share |
$ | (1.49 | ) | (0.02 | ) | 0.10 | ||||||
Basic weighted average shares outstanding |
20,864,483 | 20,669,512 | 20,342,622 | |||||||||
Diluted earnings (loss) per share |
$ | (1.48 | ) | (0.02 | ) | 0.10 | ||||||
Diluted weighted average shares outstanding |
20,881,108 | 21,063,065 | 21,336,623 | |||||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2009, 2008, and 2007
2009 | 2008 | 2007 | ||||||||||
(restated) | ||||||||||||
Net income (loss) |
$ | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||
Other comprehensive income (loss) before tax: |
||||||||||||
Change in unrealized gains (losses) on available-for-sale securities which a portion of an other-than-temporary
impairment loss has been recognized in earnings, net of reclassification |
(68,176 | ) | | | ||||||||
Change in unrealized gains (losses)
on other securities available-for-sale, net of reclassification |
608,583 | (457,010 | ) | 1,239,613 | ||||||||
Reclassification adjustment for: |
||||||||||||
Available-for-sale security gains included in net income (loss) |
(1,346,565 | ) | (321,113 | ) | (157,011 | ) | ||||||
Writedown of investment securities included in net income (loss) |
340,957 | | | |||||||||
Other comprehensive income (loss) before tax |
(465,201 | ) | (778,123 | ) | 1,082,602 | |||||||
Income tax related to items of other comprehensive income (loss) |
(158,171 | ) | (264,562 | ) | 368,085 | |||||||
Other comprehensive income (loss), net of tax |
(307,030 | ) | (513,561 | ) | 714,517 | |||||||
Total comprehensive income (loss) |
$ | (29,664,391 | ) | (832,791 | ) | 2,829,464 | ||||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years ended December 31, 2009, 2008, and 2007
Retained | Accumulated | |||||||||||||||||||||||||||
earnings | other | Total | ||||||||||||||||||||||||||
Preferred | Common | (accumulated | Treasury | comprehensive | stockholders | |||||||||||||||||||||||
stock | stock | Surplus | deficit) | stock | income | equity | ||||||||||||||||||||||
Balance at December 31, 2006 |
$ | | 4,892,812 | 110,042,307 | 8,867,359 | | (305,886 | ) | 123,496,592 | |||||||||||||||||||
Net income |
| | | 2,114,947 | | | 2,114,947 | |||||||||||||||||||||
Other activity (note 11) |
| 277,707 | 13,287,210 | | | | 13,564,917 | |||||||||||||||||||||
Change in valuation of
available-for-sale securities,
net of related tax effect |
| | | | | 714,517 | 714,517 | |||||||||||||||||||||
Balance at December 31, 2007 |
| 5,170,519 | 123,329,517 | 10,982,306 | | 408,631 | 139,890,973 | |||||||||||||||||||||
Net loss |
| | | (319,230 | ) | | | (319,230 | ) | |||||||||||||||||||
Other activity (note 11) |
| 22,177 | 863,801 | | (335,280 | ) | | 550,698 | ||||||||||||||||||||
Change in valuation of
available-for-sale securities,
net of related tax effect |
| | | | | (513,561 | ) | (513,561 | ) | |||||||||||||||||||
Balance at December 31, 2008 |
| 5,192,696 | 124,193,318 | 10,663,076 | (335,280 | ) | (104,930 | ) | 139,608,880 | |||||||||||||||||||
Dividends on preferred stock |
| | (545,000 | ) | (1,102,111 | ) | | | (1,647,111 | ) | ||||||||||||||||||
Net loss |
| | | (29,357,361 | ) | | | (29,357,361 | ) | |||||||||||||||||||
Other activity (note 11) |
42,300,000 | 50,327 | (1,313,561 | ) | | 335,280 | | 41,372,046 | ||||||||||||||||||||
Change in valuation of
available-for-sale securities,
net of related tax effect |
| | | | | (307,030 | ) | (307,030 | ) | |||||||||||||||||||
Balance at December 31, 2009 |
$ | 42,300,000 | 5,243,023 | 122,334,757 | (19,796,396 | ) | | (411,960 | ) | 149,669,424 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2009, 2008, and 2007
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation and amortization |
4,536,948 | 2,255,316 | 1,587,332 | |||||||||
Provision for possible loan losses |
53,450,000 | 11,148,000 | 3,186,500 | |||||||||
Capitalized interest expense on construction |
| (85,984 | ) | (571,239 | ) | |||||||
Deferred income tax benefit |
(14,835,657 | ) | (2,478,369 | ) | (537,883 | ) | ||||||
Net gains on sale of debt securities, net of security write-downs |
(1,005,608 | ) | (321,113 | ) | (157,011 | ) | ||||||
Net gain on sale of premises and equipment |
(6,877 | ) | | | ||||||||
Net losses on sales and writedowns of other real estate owned |
4,818,900 | 611,916 | 118,183 | |||||||||
Stock option compensation cost |
504,553 | 560,895 | 449,020 | |||||||||
Common stock awarded to directors |
| 13,352 | 10,000 | |||||||||
Amortization of restricted stock expense |
50,959 | 191,786 | 43,214 | |||||||||
Mortgage loans originated for sale in secondary market |
(41,504,633 | ) | (22,985,716 | ) | (11,004,875 | ) | ||||||
Mortgage loans sold in secondary market |
42,410,733 | 21,713,466 | 10,793,625 | |||||||||
Decrease in accrued interest receivable |
(223,779 | ) | (464,479 | ) | (547,299 | ) | ||||||
Increase (decrease) in accrued interest payable |
(1,709,989 | ) | 248,828 | 916,971 | ||||||||
Other operating activities, net |
(7,504,840 | ) | 1,813,057 | 606,939 | ||||||||
Net cash provided by operating activities |
9,623,349 | 11,901,725 | 7,008,424 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of available-for-sale debt securities |
(312,966,915 | ) | (129,466,958 | ) | (25,619,513 | ) | ||||||
Proceeds from maturities and calls of available-for-sale debt securities |
164,919,620 | 54,582,323 | 45,673,941 | |||||||||
Proceeds from sales of available-for-sale debt securities |
56,075,085 | 35,428,956 | 9,584,621 | |||||||||
Net decrease (increase) in loans |
54,030,361 | (359,600,366 | ) | (251,234,191 | ) | |||||||
Proceeds from sale of other real estate owned |
4,627,290 | 691,040 | 2,699,813 | |||||||||
Construction expenditures to finish other real estate owned |
(13,786 | ) | (67,828 | ) | (129,825 | ) | ||||||
Proceeds from sale of premises and equipment |
44,357 | 107,134 | | |||||||||
Purchase of prior liens on other real estate owned |
| | (276,617 | ) | ||||||||
Purchase of premises and equipment |
(343,805 | ) | (5,813,127 | ) | (13,154,083 | ) | ||||||
Net cash used in investing activities |
(33,627,793 | ) | (404,138,826 | ) | (232,455,854 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Net increase in deposits |
38,012,898 | 393,470,850 | 155,979,444 | |||||||||
Net increase (decrease) in short-term borrowings |
(51,221,912 | ) | (24,406,071 | ) | 17,862,394 | |||||||
Proceeds from long-term Federal Home Loan Bank borrowings |
| 93,000,000 | 48,000,000 | |||||||||
Payments of long-term Federal Home Loan Bank borrowings |
(32,000,000 | ) | (25,000,000 | ) | (4,300,000 | ) | ||||||
Issuance of common stock |
121,571 | | 13,693,686 | |||||||||
Issuance of preferred stock |
40,300,000 | | | |||||||||
Dividends on preferred stock |
(1,647,111 | ) | | | ||||||||
Purchase of treasury stock |
(40,000 | ) | (1,305,000 | ) | (2,116,402 | ) | ||||||
Proceeds from sale of treasury stock |
53,825 | 143,462 | | |||||||||
Stock options exercised |
403,000 | 789,385 | 1,174,075 | |||||||||
Payment of stock issuance costs |
(27,262 | ) | | (29,508 | ) | |||||||
Net cash provided by (used in) financing activities |
(6,044,991 | ) | 436,692,626 | 230,263,689 | ||||||||
Net increase (decrease) in cash and cash equivalents |
(30,049,435 | ) | 44,455,525 | 4,816,259 | ||||||||
Cash and cash equivalents at beginning of period |
57,745,965 | 13,290,440 | 8,474,181 | |||||||||
Cash and cash equivalents at end of period |
$ | 27,696,530 | 57,745,965 | 13,290,440 | ||||||||
Supplemental information: |
||||||||||||
Cash paid for: |
||||||||||||
Interest |
$ | 40,714,801 | 41,552,424 | 37,263,316 | ||||||||
Income taxes |
963,278 | 399,312 | 838,000 | |||||||||
Noncash transactions: |
||||||||||||
Transfers to other real estate owned in settlement of loans |
25,013,222 | 12,192,805 | 7,574,751 | |||||||||
Loans made to facilitate the sale of other real estate owned |
1,784,045 | 605,794 | 1,050,912 | |||||||||
Tax benefit from sale of stock options exercised |
5,400 | 131,809 | 340,832 | |||||||||
Warrants exercised and issuance of Series B preferred stock |
2,000,000 | | | |||||||||
Stock issued for operating lease payments |
| 25,009 | | |||||||||
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reliance Bancshares, Inc. (the Company) provides a full range of banking services to individual and
corporate customers throughout the St. Louis metropolitan area in Missouri and Illinois and
southwestern Florida through its wholly-owned subsidiaries, Reliance Bank and Reliance Bank, F.S.B.
(hereinafter referred to as the Banks). The Company has also established loan production offices
in Houston, Texas and Phoenix, Arizona.
The Company and Banks are subject to competition from other financial and nonfinancial institutions
providing financial products throughout the St. Louis metropolitan area and southwestern Florida.
Additionally, the Company and Banks are subject to the regulations of certain Federal and state
agencies and undergo periodic examinations by those regulatory agencies.
The accounting and reporting policies of the Company and Banks conform to generally accepted
accounting principles within the banking industry. In compiling the consolidated financial
statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and expenses during the reporting
period. Estimates that are particularly susceptible to change in a short period of time include
the determination of the reserve for possible loan losses, valuation of other real estate owned and
stock options, and determination of possible impairment of intangible assets. Actual results could
differ from those estimates.
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles (SFAS No. 168), which replaces SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S.
generally accepted accounting principles (GAAP), authoritative and nonauthoritative. The FASB
Accounting Standards Codification (the Codification) is the source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange
Commission (SEC), which are sources of authoritative GAAP for SEC registrants. SFAS No. 168 is
effective for annual or interim periods ending after September 15, 2009. SFAS No. 168 is not
intended to change or alter existing GAAP and did not impact the Companys financial condition,
results of operations, or cash flows. The Company adopted SFAS No. 168 and has included the new
Codification reference (ASC) in these consolidated financial statements for the year ended December
31, 2009.
Following is a description of the more significant accounting policies of the Company and Banks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and Banks. All
significant intercompany accounts and transactions have been eliminated in consolidation.
F-8
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Basis of Accounting
The Company and Banks utilize the accrual basis of accounting, which includes in the total of net
income all revenues earned and expenses incurred, regardless of when actual cash payments are
received or paid. The Company is also required to report comprehensive income, of which net income
is a component. Comprehensive income is defined as the change in equity (net assets) of a business
enterprise during a period from transactions and other events and circumstances from non-owner
sources, including all changes in equity during a period, except those resulting from investments
by, and distributions to, owners, and cumulative effects of accounting changes recorded directly to
retained earnings.
Cash Flow Information
For purposes of the consolidated statements of cash flows, cash equivalents include due from banks,
interest-earning deposits in other financial institutions (all of which are payable on demand), and
Federal funds sold. Certain balances are maintained in other financial institutions that
participate in the Federal Deposit Insurance Corporations (FDIC) Transaction Account Guarantee
Program. Under this program, these balances are fully guaranteed by the FDIC through June 30,
2010. After this period, these balances will generally exceed the traditional level of deposits
insured by the FDIC.
Subsequent Events
In accordance with FASB ASC 855, Subsequent Events, the Company has evaluated subsequent events
occurring after the consolidated balance sheet date of December 31, 2009 through March 26, 2010,
the date the financial statements were issued with the filing of the Companys Annual Report on
Form 10-K with the Securities and Exchange Commission.
Investments in Debt Securities
The Banks classify their debt securities into one of three categories at the time of purchase:
trading, available-for-sale, or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near-term. Held-to-maturity securities are
those debt securities which the Banks have the ability and intent to hold until maturity. All
other debt securities not included in trading or held-to-maturity, and any equity securities, are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities
(for which no securities were so designated at December 31, 2009 and 2008) would be recorded at
amortized cost, adjusted for the amortization of premiums or accretion of discounts. Holding gains
and losses on trading securities (for which no securities were so designated at December 31, 2009
and 2008) would be included in earnings. Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded from earnings and reported as a component
of other comprehensive income in stockholders equity until realized. Transfers of securities
between categories would be recorded at fair value at the date of transfer. Unrealized holding
gains and losses would be recognized in earnings for transfers into the trading category.
Mortgage-backed securities represent participating interests in pools of long-term first mortgage
loans originated and serviced by the issuers of the securities. Amortization of premiums and
accretion of discounts for mortgage-backed securities are recognized as interest income using the
interest method, which considers the timing and amount of prepayments of the underlying
F-9
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
mortgages in estimating future cash flows for individual mortgage-backed securities. For other debt
securities in the available-for-sale and held-to-maturity categories, premiums and discounts are
amortized or accreted over the lives of the respective securities, with consideration of historical
and estimated prepayment rates, as an adjustment to yield using the interest method. Dividend and
interest income are recognized when earned. Realized gains and losses from the sale of any
securities classified as available-for-sale are included in earnings and are derived using the
specific identification method for determining the cost of securities sold.
A decline in the market value of any available-for-sale or held-to-maturity security below cost
that is deemed other-than-temporary will result in a charge to earnings and the establishment of a
new cost basis for the security. To determine whether an impairment is other-than-temporary, the
Company considers whether it has the ability and intent to hold the investment until a market price
recovery and considers whether evidence indicating the cost of the investment is recoverable
outweighs evidence to the contrary. Evidence considered in this assessment includes the reason for
impairment, the severity and duration of the impairment, changes in value after the balance sheet
date, and forecasted performance of the investee.
Loans
Interest on loans is credited to income based on the principal amount outstanding. Loans are
considered delinquent whenever interest and/or principal payments have not been received when due.
The recognition of interest income is discontinued when, in managements judgment, the interest
will not be collectible in the normal course of business. Subsequent payments received on such
loans are applied to principal if any doubt exists as to the collectibility of such principal;
otherwise, such receipts are recorded as interest income. Loans are returned to accrual status
when management believes full collectibility of principal and interest is expected. The Banks
consider a loan impaired when all amounts due both principal and interest will not be collected
in accordance with the contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration all of the circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the borrowers prior payment record, and the
amount of the shortfall in relation to the principal and interest owed. When measuring impairment
for loans, the expected future cash flows of an impaired loan are discounted at the loans
effective interest rate. Alternatively, impairment is measured by reference to an observable
market price, if one exists, or the fair value of the collateral for a collateral-dependent loan;
however, the Banks would measure impairment based on the fair value of the collateral, using
observable market prices, if foreclosure was probable.
Loan origination fees and certain direct loan origination costs are deferred and recognized as an
adjustment to interest income over the lives of the related loans using the interest method.
The reserve for possible loan losses is available to absorb loan charge-offs. The reserve is
increased by provisions charged to operations and is reduced by loan charge-offs less recoveries.
Loans are partially or fully charged off when Bank management believes such amounts are
uncollectible, either through collateral liquidation or cash payment. The provision charged to
operations each year is that amount which management believes is sufficient to bring the balance of
the reserve to a level adequate to absorb potential loan losses, based on their knowledge and
F-10
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
evaluation of past losses, the current loan portfolio, and the current economic environment in
which the borrowers of the Banks operate.
Management believes the reserve for possible loan losses is adequate to absorb losses in the loan
portfolio based upon information available. While management uses available information to
recognize losses on loans, future additions to the reserve may be necessary based on changes in
economic conditions. Additionally, various regulatory agencies, as an integral part of the
examination process, periodically review the Banks reserves for possible loan losses. Such
agencies may require the Banks to add to the reserve for possible loan losses based on their
judgments and interpretations about information available to them at the time of their
examinations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation of premises
and equipment are computed over the expected lives of the assets, using the straight-line method.
Estimated useful lives are 40 years for bank buildings and three to ten years for furniture,
fixtures, and equipment. Expenditures for major renewals and improvements of premises and
equipment (including related interest expense, which was $85,984 and $571,239 for the years ended
December 31, 2008 and 2007, respectively) are capitalized, and those for maintenance and repairs
are expensed as incurred.
Certain long-lived assets, such as premises and equipment, and certain identifiable intangible
assets must be reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amounts of the assets may not be recoverable. In such situations, recoverability of
assets to be held and used would be measured by a comparison of the carrying amount of the asset to
future net cash flows expected to be generated by the asset. If such assets were considered to be
impaired, the impairment to be recognized would be measured by the amount by which the carrying
amount of the assets exceeded the fair value of the assets, using observable market prices. Assets
to be disposed of would be reported at the lower of the carrying amount or estimated fair value,
less estimated selling costs.
Other Real Estate Owned
Other real estate owned represents property acquired through foreclosure, or deeded to the Banks in
lieu of foreclosure, for loans on which borrowers have defaulted as to payment of principal and
interest. Properties acquired are initially recorded at the lower of the Banks carrying amount of
the related loan or fair value, using observable market prices (less estimated selling costs).
Valuations are performed periodically by management, and an allowance for losses is established by
means of a charge to noninterest expense if the carrying value of a property exceeded its fair
value, using observable market prices, less estimated selling costs. Subsequent increases in the
fair value (less estimated selling costs) are recorded through a reversal of the allowance, but not
below zero. Costs related to development and improvement of property are capitalized, while costs
relating to holding the property are expensed.
Intangible Assets
Identifiable intangible assets include the core deposit premium relating to the Companys
acquisition of The Bank of Godfrey in 2003, which is being amortized into noninterest expense on a
straight-line basis over 15 years. Amortization of the core deposit intangible assets existing at
December 31, 2009 will be $16,288 for each of the next five years, and $55,650 thereafter.
F-11
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The excess of the Companys consideration given in its acquisition of The Bank of Godfrey over the
fair value of the net assets acquired is recorded as goodwill, an intangible asset on the
consolidated balance sheets. Goodwill is the Companys only intangible asset with an indefinite
useful life, and the Company is required to test the intangible asset for impairment on an annual
basis. Impairment is measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. No impairment writedown was required in 2009, 2008, or 2007.
Federal Home Loan Bank Stock
Included in other assets at December 31, 2009 and 2008 are equity securities totaling $7,221,300
and $8,726,400, respectively, representing common stock of the Federal Home Loan Bank of Des Moines
and the Federal Home Loan Bank of Atlanta, which are administered by the Federal Housing Finance
Agency. As members of the Federal Home Loan Bank System, the Banks must maintain minimum
investments in the capital stock of their respective district Federal Home Loan Banks. The stock
is recorded at cost, which represents redemption value. The Companys Chief Financial Officer also
serves as Vice Chairman on the Board of Directors of the Federal Home Loan Bank of Des Moines.
Securities Sold Under Agreements to Repurchase
The Banks enter into sales of securities under agreements to repurchase at specified future dates.
Such repurchase agreements are considered financing arrangements and, accordingly, the obligation
to repurchase assets sold is reflected as a liability in the consolidated balance sheets.
Repurchase agreements are collateralized by debt securities which are under the control of the
Banks.
Income Taxes
The Company and Banks file consolidated Federal and state income tax returns. Applicable income
tax expense is computed based on reported income and expenses, adjusted for permanent differences
between reported and taxable income. Penalties and interest assessed by income taxing authorities
would be included in income tax expense in the year assessed, unless such amounts relate to an
uncertain tax position. The Company believes it had no uncertain tax positions at December 31,
2009 or 2008.
The Company and Banks use the asset and liability method of accounting for income taxes, in which
deferred tax assets and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the period which includes the enactment date.
The Companys Federal and state income tax returns have never been examined by the Internal Revenue
Service or applicable state taxing authorities. The Companys Federal and state income tax returns
are subject to examination generally for three years after they are filed.
F-12
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Mortgage Banking Operations
The Banks mortgage banking operations include the origination of long-term, fixed rate residential
mortgage loans for sale in the secondary market. Upon receipt of an application for a residential
real estate loan, the Banks generally lock the interest rate with the applicable investor and, at
the same time, lock the interest rate with the customer. This practice minimizes the Banks
exposure to risk resulting from interest rate fluctuations. Upon disbursement of the loan proceeds
to the customer, the loan is delivered to the applicable investor. Sales proceeds are generally
received within two to seven days later. Therefore, no loans held for sale are included in the
Banks loan portfolios at any point in time, except those loans for which the sale proceeds have
not yet been received. Such loans are maintained at the lower of cost or market value, based on
the outstanding commitment from the applicable investors for such loans.
Loan origination fees are recognized upon the sale of the related loans and included in the
consolidated statements of income as other noninterest income. The Banks do not retain the
servicing rights for any such loans sold in the secondary market.
Stock Issuance Costs
The Company incurs certain costs associated with the issuance of its common and preferred stock.
Such costs are recorded as a reduction of equity capital.
Earnings per Share
Basic
earnings per common share data is calculated by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per share reflects the potential
dilution of earnings per share which could occur under the treasury stock method if contracts to
issue common stock, such as stock options, were exercised. The following table presents a summary
of per share data and amounts for the periods indicated.
Years Ended December 31, | ||||||||||||
(restated) 2009 |
2008 | 2007 | ||||||||||
Basic |
||||||||||||
Net income
(loss) available to common shareholders |
$ | (31,004,472 | ) | (319,230 | ) | 2,114,947 | ||||||
Weighted average common shares outstanding |
20,864,483 | 20,669,512 | 20,342,622 | |||||||||
Basic earnings (loss) per share |
$ | (1.49 | ) | (0.02 | ) | 0.10 | ||||||
Diluted |
||||||||||||
Net income (loss) available to common shareholders |
$ | (31,004,472 | ) | (319,230 | ) | 2,114,947 | ||||||
Weighted average common shares outstanding |
20,864,483 | 20,669,512 | 20,342,622 | |||||||||
Effect of average dilutive stock options |
16,625 | 393,553 | 994,001 | |||||||||
Diluted weighted average common shares outstanding |
20,881,108 | 21,063,065 | 21,336,623 | |||||||||
Diluted earnings (loss) per share |
$ | (1.48 | ) | (0.02 | ) | 0.10 | ||||||
As of December 31, 2009, 2008 and 2007, options to purchase 2,091,266, 1,593,450, and 130,500
shares, respectively, were excluded from the earnings per share calculation because their effect
was anti-dilutive.
F-13
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Options
Compensation costs relating to share-based payment transactions are recognized in the Companys
consolidated financial statements over the period of service to which such compensation relates
(generally the vesting period), and are measured based on the fair value of the equity or liability
instruments issued. The grant date values of share options are estimated using option-pricing
models adjusted for the unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). If an equity award is modified after
the grant date, incremental compensation cost would be recognized in an amount equal to the excess
of the fair value of the modified award over the fair value of the original award immediately
before the modification.
The weighted average fair value of options granted in 2008 and 2007 were $1.89 and $3.98,
respectively, for an option to purchase one share of Company common stock. No value was ascribed
to the options granted in 2009 as the option price significantly exceeded the market value of the
stock on the grant date; however, the Companys common stock is not actively traded on any
exchange. Accordingly, the availability of fair value information for the Companys common stock
is limited. In using the Black-Scholes option pricing model to value the options, several
assumptions have been made in arriving at the estimated fair value of the options granted,
including minimal or no volatility in the Companys common stock price, expected forfeitures of
10%, no dividends paid on the common stock, an expected weighted average option life of six years,
and a risk-free interest rate approximating the U.S. Treasury rates for the applicable duration
period. Any change in these assumptions could have a significant impact on the effects of
determining compensation costs.
Financial Instruments
For purposes of information included in note 14 regarding disclosures about financial instruments,
financial instruments are defined as cash, evidence of an ownership interest in an entity, or a
contract that both (a) imposes on one entity a contractual obligation to deliver cash or another
financial instrument to a second entity or to exchange other financial instruments on potentially
unfavorable terms with the second entity, and (b) conveys to that second entity a contractual right
to receive cash or another financial instrument from the first entity or to exchange other
financial instruments on potentially favorable terms with the first entity.
Reclassifications
Certain reclassifications have been made to the 2008 and 2007 consolidated financial statement
amounts to conform to the 2009 presentation. Such reclassifications have no effect on the
previously reported net income (loss) or stockholders equity.
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted ASC 820-10, Fair Value Measurement. The Company
uses fair value measurements to determine fair value disclosures. Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. In determining fair value, the Company uses
various methods including market, income and cost approaches. Based on these approaches, the
Company often utilizes certain assumptions that market participants would use in pricing the asset
or liability, including assumptions about risk and/or the risks inherent in the inputs to the
valuation technique. These inputs can be readily observable, market corroborated, or generally
F-14
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs. Additionally, during the second quarter of
2009, the Company adopted ASC 820-10-65, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that
are not Orderly, which provides additional guidance for estimating fair value in accordance with
ASC 820 when the volume and level of activity for the asset or liability have significantly
decreased. ASC 820-10-65 also includes guidance on identifying circumstances that indicate a
transaction is not orderly. ASC 820-10-65 emphasizes that even if there has been a significant
decrease in the volume and level of activity for the asset or liability regardless of the valuation
techniques used, the objective of a fair value measurement remains the same, i.e., fair value is
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current market conditions.
Based on the observability of the inputs used in the valuation techniques, the Company is required
to provide the following information according to the fair value hierarchy. Financial assets and
liabilities carried at fair value will be classified and disclosed in one of the following three
categories:
| Level 1 Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and Federal agency securities and Federal agency mortgage-backed securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. | ||
| Level 2 Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities. | ||
| Level 3 Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models, and similar techniques, and not based on market exchange, dealer, or value assigned to such assets or liabilities. |
While certain assets and liabilities may be recorded at the lower of cost or fair value as
described above (e.g., impaired loans, loans held for sale, other real estate owned, etc.), the
only assets or liabilities recorded at fair value on a recurring basis are the Companys
investments in available-for-sale debt securities. The Companys available-for-sale debt
securities are measured at fair value using Level 2 and 3 valuations. For all debt securities
other than the other debt securities described below, the market valuation utilizes several sources
which include observable inputs rather than significant unobservable inputs and, therefore, fall
into the Level 2 category.
Included in other debt securities are collateralized debt obligation securities that are backed by
trust preferred securities issued by banks, thrifts, and insurance companies (TRUP CDOs). Given
conditions in the debt markets during 2009 and 2008 and the absence of observable transactions in
the secondary and new issue markets for TRUP CDOs, the few observable transactions and market
quotations that have been available have not been reliable for the purpose of determining fair
value at any point during 2009 or 2008, and an income valuation approach technique (present value
technique) that maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs is more representative of fair value than the market approach valuation
techniques. Accordingly, the TRUP CDOs fall into the Level 3 category because significant
adjustments are required to determine fair value at the measurement date, particularly regarding
estimated default probabilities based on the credit quality of the specific issuer institutions.
The
F-15
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
TRUP CDOs are the only assets measured on a recurring basis using Level 3 inputs. Following is
further information regarding such assets:
Balance, at fair value, December 31, 2008 |
$ | 1,416,729 | ||
Increase in fair value on certain TRUP CDOs |
197,129 | |||
Impairment write-downs recognized |
(340,957 | ) | ||
Principal payments received |
(35,164 | ) | ||
Balance, at fair value, December 31, 2009 |
$ | 1,237,737 | ||
During 2009, the FASB issued the following additional pronouncements that are applicable to the
Company:
| ASC 855, Subsequent Events This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this standard sets forth: |
1. | The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. | ||
2. | The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. | ||
3. | The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. |
| ASC 320-10-65 regarding other-than-temporary impairment of investment securities this recognition guidance applies to debt securities classified as available-for-sale and held-to-maturity that are subject to the other-than-temporary impairment guidance within ASC 320. If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, an entity shall assess whether the impairment is other-than-temporary. If an entity intends to sell the debt security, an other-than-temporary impairment shall be considered to have occurred. If an entity does not intend to sell the debt security, the entity shall consider available evidence to assess whether it more likely than not will be required to sell the security before the recovery of its amortized cost basis. If the entity more likely than not will be required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment shall be considered to have occurred. | ||
If the entity does not expect to recover the entire amortized cost basis of the security, an other-than-temporary impairment shall be considered to have occurred. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered (that is, a credit loss exists), and an other-than-temporary impairment shall be considered to have occurred. In such situations, the credit loss should be recorded through earnings as an other-than temporary impairment. |
F-16
Table of Contents
Restatement
On March 4, 2011, the Company determined that it needed to restate its previously issued
consolidated financial statements as of and for the year ended December 31, 2009 and that the
previously issued consolidated financial statements for the year ended December 31, 2009 should no
longer be relied upon, as a result of the identification of certain omitted disclosures from the
Companys consolidated financial statements issued for the year ended December 31, 2009.
This restatement is required due to certain disclosure omissions in the previously issued
consolidated financial statements related to net losses available to common shareholders after
increasing the net loss for preferred dividends paid by the Company, which required an adjustment
of the previously reported net loss per share data included in the Companys consolidated statement
of operations for the year ended December 31, 2009. We have also restated the Companys
consolidated statements of operations and comprehensive loss for the year ended December 31, 2009
to expand the disclosures for other-than-temporary losses on available-for-sale securities in those
statements.
These restatements had no effect on the Companys consolidated net loss for the year ended December
31, 2009 or consolidated stockholders equity at December 31, 2009. Net loss available to common
shareholders, after increasing the loss for preferred dividends paid by the Company, increased from
the $(1.41) per share originally disclosed to $(1.49) per share as restated, for both basic and
fully-diluted loss per share for the year ended December 31, 2009.
The Company has restated its consolidated statements of operations and comprehensive loss for the
year ended December 31, 2009, to add the disclosures noted above. In connection with this
restatement, note 1 to the consolidated financial statements has been restated to reflect the
changes in the loss per share calculation. Additionally, the unaudited quarterly condensed
financial data for each of the quarters in 2009 has been restated (as described below) to reflect
the change in net loss available to common shareholders and net loss per common share.
The effects of the restatement for additional disclosures regarding other-than-temporary impairment
of the Companys available-for sale securities, by financial statement line item on the
consolidated statement of operations for the year ended December 31, 2009, are as follows:
2009 | ||||||||||||||||
As reported | As restated | 2008 | 2007 | |||||||||||||
Noninterest expense: |
||||||||||||||||
Other than temporary impairment losses on available-for-sale
securities: |
||||||||||||||||
Total other-than-temporary impairment losses |
1,078,763 | | | |||||||||||||
Less portion of other-than-temporary impairment
losses recognized in other comprehensive income |
(737,806 | ) | | | ||||||||||||
Net impairment/loss realized |
$ | 340,957 | 340,957 | | | |||||||||||
Salaries and employee benefits (note 10) |
13,867,628 | 13,867,628 | 15,915,090 | 13,073,159 | ||||||||||||
Other real estate expense |
6,163,313 | 6,163,313 | 1,582,598 | 306,537 | ||||||||||||
Occupancy and equipment expense (note 5) |
4,256,769 | 4,256,769 | 4,503,125 | 3,388,327 | ||||||||||||
FDIC assessments |
2,745,432 | 2,745,432 | 912,093 | 561,579 | ||||||||||||
Data processing |
1,950,227 | 1,950,227 | 1,880,968 | 1,499,199 | ||||||||||||
Advertising |
149,435 | 149,435 | 778,072 | 569,658 | ||||||||||||
Amortization of intangible assets |
16,288 | 16,288 | 16,288 | 16,288 | ||||||||||||
Other noninterest expenses |
4,556,340 | 4,556,340 | 3,839,356 | 2,875,560 | ||||||||||||
Total noninterest expense |
34,046,389 | 34,046,389 | 29,427,590 | 22,290,307 | ||||||||||||
Income (loss) before applicable income taxes |
(45,986,923 | ) | (45,986,923 | ) | (1,399,116 | ) | 2,576,913 | |||||||||
Applicable income tax expense (benefit) (note 7) |
(16,629,562 | ) | (16,629,562 | ) | (1,079,886 | ) | 461,966 | |||||||||
Net income (loss) |
$ | (29,357,361 | ) | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||||
The effects of the restatement for additional disclosures and recalculation of per share
information regarding the Companys net loss available to common shareholders after payment of
preferred dividends,
F-17
Table of Contents
by financial statement line item on the consolidated statement of operations
for the year ended December 31, 2009, are as follows:
2009 | ||||||||||||||||
As reported | As restated | 2008 | 2007 | |||||||||||||
Net income (loss) |
$ | (29,357,361 | ) | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||||
Preferred stock dividends |
(1,647,111 | ) | | | ||||||||||||
Net income (loss) available to common shareholders |
(31,004,472 | ) | (319,230 | ) | 2,114,947 | |||||||||||
Per share amounts: |
||||||||||||||||
Basic earnings (loss) per share |
$ | (1.41 | ) | (1.49 | ) | (0.02 | ) | 0.10 | ||||||||
Basic weighted average shares outstanding |
20,864,483 | 20,864,483 | 20,669,512 | 20,342,622 | ||||||||||||
Diluted earnings (loss) per share |
$ | (1.41 | ) | (1.48 | ) | (0.02 | ) | 0.10 | ||||||||
Diluted weighted average shares outstanding |
20,881,108 | 20,881,108 | 21,063,065 | 21,336,623 | ||||||||||||
The effects of the restatement for additional disclosures regarding other-than-temporary
impairment of the Companys available-for sale securities, by financial statement line item on the
consolidated statement of comprehensive loss for the year ended December 31, 2009, are as follows:
2009 | ||||||||||||||||
As reported | As restated | 2008 | 2007 | |||||||||||||
Net income (loss) |
$ | (29,357,361 | ) | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||||
Other comprehensive income (loss) before tax: |
||||||||||||||||
Net unrealized gains (losses) on available-for-sale securities |
540,407 | |||||||||||||||
Change in unrealized gains (losses) on available-for-sale
securities which a portion of an other-than-temporary
impairment loss has been recognized in earnings,
net of reclassification |
(68,176 | ) | | | ||||||||||||
Change in unrealized gains (losses) on other securities
available-for-sale, net of reclassification |
608,583 | (457,010 | ) | 1,239,613 | ||||||||||||
Reclassification adjustment for: |
||||||||||||||||
Available-for-sale security gains included in net income (loss) |
(1,346,565 | ) | (1,346,565 | ) | (321,113 | ) | (157,011 | ) | ||||||||
Writedown of investment securities included in net income (loss) |
340,957 | 340,957 | | | ||||||||||||
Other comprehensive income (loss) before tax |
(465,201 | ) | (465,201 | ) | (778,123 | ) | 1,082,602 | |||||||||
Income tax related to items of other comprehensive income (loss) |
(158,171 | ) | (158,171 | ) | (264,562 | ) | 368,085 | |||||||||
Other comprehensive income (loss), net of tax |
(307,030 | ) | (307,030 | ) | (513,561 | ) | 714,517 | |||||||||
Total comprehensive income (loss) |
$ | (29,664,391 | ) | (29,664,391 | ) | (832,791 | ) | 2,829,464 | ||||||||
F-18
Table of Contents
The effects of the restatement for additional disclosures and recalculation of per share
information within the unaudited quarterly condensed financial data for each of the quarters in
2009 are as follows:
(As originally presented)
First | Second | Third | Fourth | For the | ||||||||||||||||
quarter | quarter | quarter | quarter | year | ||||||||||||||||
2009: |
||||||||||||||||||||
Total interest income |
$ | 19,984,244 | 19,275,666 | 18,892,020 | 18,437,266 | 76,589,196 | ||||||||||||||
Total interest expense |
10,975,234 | 9,992,569 | 9,095,271 | 8,941,738 | 39,004,812 | |||||||||||||||
Net interest income |
9,009,010 | 9,283,097 | 9,796,749 | 9,495,528 | 37,584,384 | |||||||||||||||
Provision for possible losses |
2,250,000 | 14,000,000 | 11,450,000 | 25,750,000 | 53,450,000 | |||||||||||||||
Noninterest income |
534,770 | 663,518 | 1,513,598 | 1,213,196 | 3,925,082 | |||||||||||||||
Noninterest expense |
7,241,132 | 8,698,061 | 8,726,761 | 9,380,435 | 34,046,389 | |||||||||||||||
Income (loss) before
applicable income taxes |
52,648 | (12,751,446 | ) | (8,866,414 | ) | (24,421,711 | ) | (45,986,923 | ) | |||||||||||
Applicable income taxes |
(38,226 | ) | (4,378,551 | ) | (3,091,023 | ) | (9,121,762 | ) | (16,629,562 | ) | ||||||||||
Net income (loss) |
$ | 90,874 | (8,372,895 | ) | (5,775,391 | ) | (15,299,949 | ) | (29,357,361 | ) | ||||||||||
Weighted average shares
outstanding: |
||||||||||||||||||||
Basic |
20,746,267 | 20,855,898 | 20,918,020 | 20,935,083 | 20,864,483 | |||||||||||||||
Diluted |
20,818,840 | 20,859,102 | 20,918,020 | 20,935,083 | 20,881,108 | |||||||||||||||
Earnings (loss) per share: |
||||||||||||||||||||
Basic |
$ | <0.01 | (0.40 | ) | (0.28 | ) | (0.73 | ) | (1.41 | ) | ||||||||||
Diluted |
<0.01 | (0.40 | ) | (0.28 | ) | (0.73 | ) | (1.41 | ) |
(As restated)
First | Second | Third | Fourth | For the | ||||||||||||||||
quarter | quarter | quarter | quarter | year | ||||||||||||||||
2009: |
||||||||||||||||||||
Total interest income |
$ | 19,984,244 | 19,275,666 | 18,892,020 | 18,437,266 | 76,589,196 | ||||||||||||||
Total interest expense |
10,975,234 | 9,992,569 | 9,095,271 | 8,941,738 | 39,004,812 | |||||||||||||||
Net interest income |
9,009,010 | 9,283,097 | 9,796,749 | 9,495,528 | 37,584,384 | |||||||||||||||
Provision for possible
loan losses |
2,250,000 | 14,000,000 | 11,450,000 | 25,750,000 | 53,450,000 | |||||||||||||||
Noninterest income |
534,770 | 663,518 | 1,513,598 | 1,213,196 | 3,925,082 | |||||||||||||||
Noninterest expense |
7,241,132 | 8,698,061 | 8,726,761 | 9,380,435 | 34,046,389 | |||||||||||||||
Income before applicable
income taxes |
52,648 | (12,751,446 | ) | (8,866,414 | ) | (24,421,711 | ) | (45,986,923 | ) | |||||||||||
Applicable income taxes |
(38,226 | ) | (4,378,551 | ) | (3,091,023 | ) | (9,121,762 | ) | (16,629,562 | ) | ||||||||||
Net income (loss) |
$ | 90,874 | (8,372,895 | ) | (5,775,391 | ) | (15,299,949 | ) | (29,357,361 | ) | ||||||||||
Preferred stock dividends |
| (557,111 | ) | (545,000 | ) | (545,000 | ) | (1,647,111 | ) | |||||||||||
Net income (loss)
attributable to common
shareholders |
90,874 | (8,930,006 | ) | (6,320,391 | ) | (15,844,949 | ) | (31,004,472 | ) | |||||||||||
Weighted average shares
outstanding: |
||||||||||||||||||||
Basic |
20,746,267 | 20,855,898 | 20,918,020 | 20,935,083 | 20,864,483 | |||||||||||||||
Diluted |
20,818,840 | 20,859,102 | 20,918,020 | 20,935,083 | 20,881,108 | |||||||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | <0.01 | (0.43 | ) | (0.30 | ) | (0.76 | ) | (1.49 | ) | ||||||||||
Diluted |
<0.01 | (0.43 | ) | (0.30 | ) | (0.76 | ) | (1.48 | ) |
F-19
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 2 CASH AND DUE FROM BANKS
The Banks are required to maintain certain daily reserve balances of cash and due from banks in
accordance with regulatory requirements. The reserve balances maintained in accordance with such
requirements at December 31, 2009 and 2008 were $737,000 and $218,000, respectively.
NOTE 3 INVESTMENTS IN DEBT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair values of the Banks
available-for-sale debt securities at December 31, 2009 and 2008 were as follows:
Gross | Gross | Estimated | ||||||||||||||
Amortized | unrealized | unrealized | fair | |||||||||||||
2009 | cost | gains | losses | value | ||||||||||||
Obligations of U.S. Government
agencies and corporations |
$ | 116,150,389 | 273,013 | (978,159 | ) | 115,445,243 | ||||||||||
Obligations of state and
political subdivisions |
30,012,602 | 651,846 | (12,863 | ) | 30,651,585 | |||||||||||
Other debt securities |
3,697,211 | | (2,459,474 | ) | 1,237,737 | |||||||||||
Mortgage-backed securities |
134,883,536 | 2,430,220 | (528,765 | ) | 136,784,991 | |||||||||||
$ | 284,743,738 | 3,355,079 | (3,979,261 | ) | 284,119,556 | |||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | unrealized | unrealized | fair | |||||||||||||
2008 | cost | gains | losses | value | ||||||||||||
Obligations of U.S. Government
agencies and corporations |
$ | 65,973,705 | 1,520,692 | (6,577 | ) | 67,487,820 | ||||||||||
Obligations of state and
political subdivisions |
34,063,983 | 141,586 | (525,473 | ) | 33,680,096 | |||||||||||
Other debt securities |
6,298,345 | | (2,723,383 | ) | 3,574,962 | |||||||||||
Mortgage-backed securities |
87,711,440 | 1,547,923 | (113,749 | ) | 89,145,614 | |||||||||||
$ | 194,047,473 | 3,210,201 | (3,369,182 | ) | 193,888,492 | |||||||||||
The amortized cost and estimated fair values of debt and equity securities classified as
available-for-sale at December 31, 2009, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because certain issuers have the right to call or
prepay obligations with or without prepayment penalties.
Estimated | ||||||||
Amortized | fair | |||||||
cost | value | |||||||
Due one year or less |
$ | 2,969,306 | 3,045,745 | |||||
Due one year through five years |
39,272,868 | 39,513,531 | ||||||
Due five years through ten years |
66,900,956 | 66,842,886 | ||||||
Due after ten years |
40,717,072 | 37,932,403 | ||||||
Mortgage-backed securities |
134,883,536 | 136,784,991 | ||||||
$ | 284,743,738 | 284,119,556 | ||||||
Provided below is a summary of available-for sale securities which were in an unrealized loss
position at December 31, 2009. The obligations of U.S. Government agencies and corporations and
mortgage-backed securities with unrealized losses at December 31, 2009 are primarily issued and
guaranteed by the Federal Home Loan Bank, Federal National Mortgage Association, or the Federal
Home Loan Mortgage Corporation.
F-20
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Obligations of states and political subdivisions in an unrealized loss position are primarily
comprised of municipal bonds with adequate credit ratings, underlying collateral, and/or cash flow
projections. The Banks have the ability and intent to hold these securities until such time as the
unimpaired value recovers or the securities mature.
Included in other debt securities are TRUP CDOs (as defined in Note 1) with an amortized cost and
fair value of $3,697,211 and $1,237,737, respectively, at December 31, 2009. The market for these
securities at December 31, 2009 is not active and markets for similar securities are also not
active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the
brokered markets in which TRUP CDOs trade and then by a significant decrease in the volume of
trades relative to historical levels. The new issue market is also inactive as a minimal number of
TRUP CDOs have been issued since 2007. Very few market participants are willing and/or able to
transact for these securities. The market values for these securities are very depressed relative
to historical levels. During 2009, the level of defaults of the underlying financial institutions
supporting certain of the TRUP CDOs increased to a level that resulted in an other-than-temporary
impairment loss on such instruments. Accordingly, these TRUP CDOs were written down by $340,957.
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
fair value | losses | fair value | losses | fair value | losses | |||||||||||||||||||
Obligations of U.S.
Government agencies
and corporations |
$ | 76,621,565 | (978,159 | ) | | | 76,621,565 | (978,159 | ) | |||||||||||||||
Obligations of states and
political subdivisions |
3,663,692 | (12,863 | ) | | | 3,663,692 | (12,863 | ) | ||||||||||||||||
Other debt securities |
| | 1,237,737 | (2,459,474 | ) | 1,237,737 | (2,459,474 | ) | ||||||||||||||||
Mortgage-backed securities |
53,124,575 | (528,399 | ) | 54,376 | (366 | ) | 53,178,951 | (528,765 | ) | |||||||||||||||
$ | 133,409,832 | (1,519,421 | ) | 1,292,113 | (2,459,840 | ) | 134,701,945 | (3,979,261 | ) | |||||||||||||||
The carrying value of debt securities pledged to secure public funds, securities sold under
repurchase agreements, certain borrowings, and for other purposes amounted to approximately
$160,923,000 and $180,767,000 at December 31, 2009 and 2008, respectively. The Banks have also
pledged letters of credit from the Federal Home Loan Banks totaling $17,791,974 and $42,940,000 as
additional collateral to secure public funds and for other purposes at December 31, 2009 and 2008,
respectively.
During 2009, 2008, and 2007, certain available-for-sale securities were sold for proceeds totaling
$56,075,085, $35,428,956, and $9,584,621, respectively, resulting in gross gains of $1,346,806,
$342,864, and $164,037, respectively, and gross losses of $241, $21,751, and $7,026, respectively.
F-21
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 4
LOANS
The composition of the loan portfolio at December 31, 2009 and 2008 is as follows:
2009 | 2008 | |||||||
Commercial: |
||||||||
Real estate |
$ | 797,054,385 | 843,312,225 | |||||
Other |
82,732,850 | 94,606,918 | ||||||
Real estate: |
||||||||
Construction |
172,731,598 | 190,381,178 | ||||||
Residential |
84,080,509 | 120,903,014 | ||||||
Held for sale |
577,400 | 1,483,500 | ||||||
Consumer |
3,654,463 | 4,485,070 | ||||||
Overdrafts |
50,070 | 27,035 | ||||||
$ | 1,140,881,275 | 1,255,198,940 | ||||||
The Banks grant commercial, real estate, and consumer loans throughout the St. Louis,
Missouri, Phoenix, Arizona, and Houston, Texas metropolitan areas and southwestern Florida. The
Banks do not have any particular concentration of credit in any one economic sector, except that a
substantial portion of the portfolio is concentrated in and secured by real estate in the St.
Louis, Missouri metropolitan area and southwestern Florida, particularly commercial real estate and
construction of commercial and residential real estate. Loans outstanding and originated in
Florida totaled $80,802,546 at December 31, 2009. The ability of the Banks borrowers to honor
their contractual obligations is dependent upon the local economies and their effect on the real
estate market.
The aggregate amount of loans to executive officers and directors and loans made for the benefit of
executive officers and directors was $62,282,603 and $69,023,878 at December 31, 2009 and 2008,
respectively. Such loans were made in the normal course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the same time for comparable
transactions with other persons, and did not involve more than the normal risk of collectibility.
A summary of activity for loans to executive officers and directors for the year ended December 31,
2009 is as follows:
Balance, December 31, 2008 |
$ | 69,023,878 | ||
New loans made |
18,979,559 | |||
Payments received |
(20,921,525 | ) | ||
Other |
(4,799,309 | ) | ||
Balance, December 31, 2009 |
$ | 62,282,603 | ||
Other changes represent changes in the composition of executive officers, directors, and their
related entities which occurred in 2009.
At December 31, 2009, 2008, and 2007, the Banks had a total of $98,144,668, $34,896,410, and
$17,747,610, respectively, of loans that were considered impaired, of which $57,227,968 $33,716,050
and $15,810,222, respectively, had the accrual of interest discontinued. At December 31, 2009,
2008, and 2007, $8,432,889, $6,329,024, and $3,691,953, respectively, of such impaired loans had no
specific allocation of the reserve for possible loan losses allocated thereto. The Banks had
allocated $16,742,007, $3,206,000, and $1,269,432 of the reserve for possible loan losses for all
other impaired loans at December 31, 2009, 2008, and 2007, respectively. Had the Banks nonaccrual
loans continued to accrue interest, the Banks would have earned additional income of $4,425,441,
$1,716,845, and $928,759 during the years ended December 31, 2009, 2008, and 2007, respectively.
The average balance of impaired loans for the years ended
F-22
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2009, 2008, and 2007 was $63,371,937, $18,655,899, and $8,092,288,
respectively. Loans 90 days or more delinquent and still accruing interest totaled approximately
$3,561,000, $1,180,000, and $1,937,000, at December 31, 2009, 2008, and 2007, respectively.
Transactions in the reserve for possible loan losses for the years ended December 31, 2009, 2008,
and 2007 are summarized as follows:
2009 | 2008 | 2007 | ||||||||||
Balance, January 1 |
$ | 14,305,822 | 9,685,011 | 7,101,031 | ||||||||
Provision charged to operations |
53,450,000 | 11,148,000 | 3,186,500 | |||||||||
Charge-offs |
(37,114,551 | ) | (6,553,417 | ) | (650,787 | ) | ||||||
Recoveries of loans previously
charged off |
1,580,298 | 26,228 | 48,267 | |||||||||
Balance, December 31 |
$ | 32,221,569 | 14,305,822 | 9,685,011 | ||||||||
NOTE 5
PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2009 and 2008 is as follows:
2009 | 2008 | |||||||
Land |
$ | 8,721,656 | 8,721,656 | |||||
Buildings and improvements |
29,948,836 | 29,794,306 | ||||||
Furniture, fixtures, and equipment |
9,217,411 | 9,062,346 | ||||||
Construction in progress |
3,732,590 | 3,785,085 | ||||||
51,620,493 | 51,363,393 | |||||||
Less accumulated depreciation |
9,409,957 | 7,220,076 | ||||||
$ | 42,210,536 | 44,143,317 | ||||||
Amounts charged to noninterest expense for depreciation aggregated $2,239,106, $2,319,204,
$1,749,397, for the years ended December 31, 2009, 2008, and 2007, respectively.
Certain of the Banks branch construction contracts have involved contracts for construction with a
general contracting company that is majority-owned by one of the Companys directors. All
construction contracts entered into by the Company have been made under formal sealed bid
processes. During the years ended December 31, 2009, 2008, and 2007, the Company paid $4,122,
$715,470, and $3,618,941, respectively, to the construction company owned by the Company director
for construction costs incurred.
Reliance Bank leases the land on which certain of its branch facilities have been built under
noncancelable operating lease agreements that expire at various dates through 2026, with various
options to extend the leases. Minimum rental commitments for payments under all noncancelable
operating lease agreements at December 31, 2009 for each of the next five years, and in the
aggregate, are as follows:
Year ending December 31: |
||||
2010 |
$ | 713,549 | ||
2011 |
722,413 | |||
2012 |
693,892 | |||
2013 |
429,698 | |||
2014 |
432,613 | |||
Thereafter |
4,949,060 | |||
Total minimum payments required |
$ | 7,941,225 | ||
F-23
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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Banks have also leased temporary facilities for its various branches during the
construction of the applicable new branch facilities. Total rent paid by the Company for 2009,
2008, and 2007 was $761,852, $750,113, and $600,517, respectively.
Reliance Bank leases out a portion of certain of its banking facilities to unaffiliated companies
under noncancelable leases that expire at various dates through 2013. Minimum rental income under
these noncancelable leases at December 31, 2009, for each of the next four years and in the
aggregate, is as follows:
Year ending December 31: |
||||
2010 |
$ | 261,289 | ||
2011 |
212,033 | |||
2012 |
35,618 | |||
2013 |
2,789 | |||
Total minimum payments required |
$ | 511,729 | ||
Total rental income recorded by the Banks included in other noninterest income in 2009, 2008,
and 2007 totaled $288,100, $260,970, and $127,174, respectively.
NOTE 6
DEPOSITS
A summary of interest-bearing deposits at December 31, 2009 and 2008 is as follows:
2009 | 2008 | |||||||
Interest-bearing transaction accounts |
$ | 202,348,691 | 154,586,653 | |||||
Savings |
341,177,173 | 130,237,599 | ||||||
Other time deposits: |
||||||||
Less than $100,000 |
353,498,850 | 500,170,185 | ||||||
$100,000 and over |
297,205,902 | 383,677,898 | ||||||
$ | 1,194,230,616 | 1,168,672,335 | ||||||
Deposits of executive officers, directors and their related interests at December 31, 2009 and
2008 totaled $14,687,238 and $6,266,523, respectively.
Interest expense on deposits for the years ended December 31, 2009, 2008, and 2007 is summarized as
follows:
2009 | 2008 | 2007 | ||||||||||
Interest-bearing transaction accounts |
$ | 2,084,080 | 3,787,690 | 6,750,382 | ||||||||
Savings |
7,369,936 | 942,446 | 1,797,088 | |||||||||
Other time deposits: |
||||||||||||
Less than $100,000 |
14,439,151 | 16,252,548 | 13,520,495 | |||||||||
$100,000 and over |
9,707,845 | 13,668,035 | 11,367,590 | |||||||||
$ | 33,601,012 | 34,650,719 | 33,435,555 | |||||||||
F-24
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following are the maturities of time deposits for each of the next five years and in the
aggregate at December 31, 2009:
Year ending December 31: |
||||
2010 |
$ | 453,690,875 | ||
2011 |
137,656,042 | |||
2012 |
28,658,946 | |||
2013 |
21,355,320 | |||
2014 |
2,467,942 | |||
Thereafter |
6,875,627 | |||
$ | 650,704,752 | |||
NOTE 7
INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, 2009, 2008, and
2007 are as follows:
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal income taxes |
$ | (1,793,905 | ) | 1,545,625 | 990,414 | |||||||
State income taxes |
| (147,142 | ) | 9,435 | ||||||||
Deferred income taxes |
(14,835,657 | ) | (2,478,369 | ) | (537,883 | ) | ||||||
$ | (16,629,562 | ) | (1,079,886 | ) | 461,966 | |||||||
A reconciliation of expected income tax expense (benefit) computed by applying the Federal
statutory rate of 34% to income (loss) before applicable income tax expense (benefit) for the years
ended December 31, 2009, 2008, and 2007 is as follows:
2009 | 2008 | 2007 | ||||||||||
Expected statutory Federal income
tax expense |
$ | (15,635,554 | ) | (475,699 | ) | 876,150 | ||||||
State income taxes, net of Federal benefit |
| (97,114 | ) | 6,227 | ||||||||
Tax exempt interest and dividend income |
(397,340 | ) | (459,002 | ) | (442,276 | ) | ||||||
Incentive stock options |
115,244 | 115,759 | 69,705 | |||||||||
Other, net |
(711,912 | ) | (163,830 | ) | (47,840 | ) | ||||||
$ | (16,629,562 | ) | (1,079,886 | ) | 461,966 | |||||||
F-25
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant portions of deferred
tax assets and liabilities at December 31, 2009, 2008, and 2007 are presented below:
2009 | 2008 | 2007 | ||||||||||
Deferred tax assets: |
||||||||||||
Amortization of start-up costs
for tax purposes |
$ | 39,326 | 43,068 | 46,813 | ||||||||
Reserve for possible loan losses |
11,973,337 | 5,313,444 | 3,592,926 | |||||||||
Operating loss carryforwards
for tax reporting purposes |
5,583,001 | 186,155 | 66,088 | |||||||||
Stock option expense |
203,610 | 203,610 | 134,947 | |||||||||
Other real estate owned |
1,152,721 | 211,176 | 7,883 | |||||||||
Nonaccrual loan interest |
1,841,692 | 679,081 | | |||||||||
Investment write-down |
126,358 | | | |||||||||
Unrealized net holding losses on
available-for-sale securities |
212,222 | 54,051 | | |||||||||
Other, net |
336,357 | | | |||||||||
Total deferred tax assets |
21,468,624 | 6,690,585 | 3,848,657 | |||||||||
Deferred tax liabilities: |
||||||||||||
Premises and equipment |
(1,693,402 | ) | (1,759,619 | ) | (1,332,251 | ) | ||||||
Purchase adjustments |
(53,219 | ) | (59,542 | ) | (65,865 | ) | ||||||
Unrealized net holding gains on
available-for-sale securities |
| | (210,507 | ) | ||||||||
Other, net |
| (143,249 | ) | (254,786 | ) | |||||||
Total deferred tax liabilities |
(1,746,621 | ) | (1,962,410 | ) | (1,863,409 | ) | ||||||
Net deferred tax assets |
$ | 19,722,003 | 4,728,175 | 1,985,248 | ||||||||
The Company is required to provide a valuation reserve on deferred tax assets when it is more
likely than not that some portion of the assets will not be realized. The Company has not
established a valuation reserve at December 31, 2009, 2008, and 2007 due to managements belief and
analysis that future income levels should be sufficient to realize the net deferred tax assets
recorded. At December 31, 2009, the Company has established deferred tax assets of $5,014,352 for
net operating loss carryforwards for tax reporting purposes totaling $15,131,700, which will expire
in 2029 if unused. The Company will receive a total of $2,019,898 for the carryback of net
operating losses for tax reporting purposes from prior years. The Company has also established
deferred tax assets for operating loss carryforwards for Florida state income tax reporting
purposes totaling $565,114 for losses incurred by Reliance Bank, F.S.B. Such operating losses
totaled $10,274,802 at December 31, 2009, and will expire if not used by 2023.
NOTE 8
SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings at December 31, 2009 and 2008:
2009 | 2008 | |||||||
Funds purchased |
$ | | 10,000,000 | |||||
Securities sold under repurchase agreements |
12,696,932 | 46,918,844 | ||||||
Short-term note payable |
| 7,000,000 | ||||||
$ | 12,696,932 | 63,918,844 | ||||||
Funds are purchased from the Federal Home Loan Bank of Des Moines and other financial
institutions on a daily basis, when needed for liquidity. The Banks also sell securities under
agreements to repurchase. Funds purchased and securities sold under repurchase agreements are
F-26
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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
collateralized by debt securities with a net carrying value of approximately $48,728,000 and
$76,211,000 at December 31, 2009 and 2008, respectively.
During 2008, the Company executed a short-term note payable for $7,000,000 with an unaffiliated
financial institution. The note payable bore interest at 8.50% and was secured by all of the
outstanding common stock of Reliance Bank. The note payable was repaid upon its maturity on March
31, 2009.
The average balances, maximum month-end amounts outstanding, average rates paid during the year,
and average rates at year-end for funds purchased and securities sold under repurchase agreements
and total short-term borrowings as of and for the years ended December 31, 2009, 2008, and 2007
were as follows:
2009 | 2008 | 2007 | ||||||||||
Federal funds purchased and securities
sold under repurchase agreements: |
||||||||||||
Average balance |
$ | 20,769,702 | 86,893,315 | 49,178,929 | ||||||||
Maximum amount outstanding at
any month-end |
28,194,919 | 129,677,160 | 88,324,915 | |||||||||
Average rate paid during the year |
1.01 | % | 2.45 | % | 4.84 | % | ||||||
Average rate at end of year |
0.63 | % | 1.42 | % | 4.40 | % | ||||||
Total short-term borrowings: |
||||||||||||
Average balance |
$ | 22,476,551 | 88,748,506 | 49,178,929 | ||||||||
Maximum amount outstanding at
any month-end |
35,194,919 | 136,677,160 | 88,324,915 | |||||||||
Average rate paid during the year |
1.59 | % | 2.58 | % | 4.84 | % | ||||||
Average rate at end of year |
0.63 | % | 2.19 | % | 4.40 | % | ||||||
NOTE 9
LONG-TERM FEDERAL HOME LOAN BANK BORROWINGS
At December 31, 2009, the Banks had fixed rate advances outstanding with the Federal Home Loan Bank
of Des Moines and the Federal Home Loan Bank of Atlanta, maturing as follows:
Weighted | ||||||||
average | ||||||||
Amount | rate | |||||||
Due in 2010 |
$ | 6,000,000 | 4.62 | % | ||||
Due in 2011 |
1,000,000 | 2.82 | % | |||||
Due in 2012 |
20,000,000 | 4.92 | % | |||||
Due in 2013 |
5,000,000 | 2.50 | % | |||||
Due in 2014 |
| | ||||||
Due after 2014 |
72,000,000 | 3.43 | % | |||||
$ | 104,000,000 | |||||||
At December 31, 2009, Reliance Bank maintained a line of credit in the amount of $195,478,835
with the Federal Home Loan Bank of Des Moines and had availability under that line of $77,786,861.
Federal Home Loan Bank of Des Moines advances are secured under a blanket agreement which assigns
all Federal Home Loan Bank of Des Moines stock and one-to-four family and multi-family mortgage and
commercial real estate loans. At December 31, 2009, Reliance Bank also maintained a line of credit
and availability in the amount of $43,967,261 with the Federal Reserve Bank. The Federal Reserve
Bank line of credit is secured with the assignment of construction loans. Additionally, at December
31, 2009, Reliance Bank, F.S.B.
maintained a line of credit in the amount of $11,350,000 (of which $7,250,000 was available) with
the Federal Home Loan Bank of Atlanta, secured by debt securities.
F-27
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10 EMPLOYEE BENEFITS
The Company sponsors a contributory 401(k) savings plan to provide retirement benefits to eligible
employees. Contributions made by the Company in 2009, 2008, and 2007 totaled $145,305, $292,353,
and $216,206, respectively.
NOTE 11 CAPITAL STOCK
The Company has authorized 40,000,000 shares of common stock with a par value of $0.25 per share.
At December 31, 2009, 20,972,091 shares were issued and outstanding, with 2,594,360 shares reserved
for issuance under the Companys stock option programs. Holders of the Companys common stock are
entitled to one vote per share on all matters submitted to a shareholder vote. Holders of the
Companys common stock are entitled to receive dividends when, as and if declared by the Companys
Board of Directors. In the event of liquidation of the Company, the holders of the Companys common
stock are entitled to share ratably in the remaining assets after payment of all liabilities and
preferred shareholders as described below.
The Company has authorized 2,000,000 shares of no par preferred stock, with 42,300 shares issued
and outstanding at December 31, 2009. Preferred stock may be issued by the Companys Board of
Directors from time to time, in series, at which time the terms of such series (par value per
share, dividend rates and dates, cumulative or noncumulative, liquidation preferences, etc.) shall
be fixed by the Board of Directors. On February 13, 2009, the Company issued 40,000 shares of
Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series A for a total of $40,000,000,
and 2,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series B for no
additional funds, to the United States Department of the Treasury under its Troubled Assets Relief
Program Capital Purchase Program authorized by the Emergency Economic Stabilization Act of 2008.
On November 10, 2009, the Company authorized 25,000 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, no par value, Series C for sale with an offering price of $1,000 per share. The
offering was extended to existing shareholders who are accredited investors (as such term is
defined in Regulation D of the Securities Act of 1933, as amended) and to other accredited
investors to subscribe for and purchase shares of this series. At December 31, 2009, the Company
had subscriptions and payments totaling $300,000 for the purchase of 300 shares.
The Series A preferred stock pays a dividend at the rate of 5% per annum for the first five years
and 9% thereafter. Dividends are payable quarterly and each share has a liquidation amount of
$1,000 and has liquidation rights in pari passu with other preferred stock and is paid in
liquidation prior to the Companys common stock. The Series B preferred stock pays a dividend at
the rate of 9% per annum, payable quarterly and includes other provisions similar to the Series A
preferred stock with liquidation at $1,000 per share. The Series C preferred stock pays a dividend
at the rate of 7% per annum, payable quarterly and includes other provisions similar to the Series
A preferred stock with liquidation at $1,000 per share.
Stock Option Plans
Various stock option plans have been adopted (both incentive stock option plans and nonqualified
stock option plans) under which options to purchase shares of Company common stock may be granted
to officers, employees and directors of the Company and its subsidiary banks. All options were
authorized and granted at prices approximating or exceeding the fair value of the Companys common
stock at the date of grant. Various vesting schedules have been authorized for the options granted
to date by the Companys Board of Directors, including certain performance measures used to
determine vesting of certain options granted. Options expire up to ten years from the date
F-28
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of grant if not exercised. For certain of the options granted, the Companys Board of Directors has
the ability, at its sole discretion, to grant to key officers of the Company and Banks, the right
to surrender their options held to the Company, in whole or in part, and to receive in exchange
therefore, payment by the Company of an amount equal to the excess of the fair value
of the shares subject to such options over the exercise price to acquire such options. Such
payments may be made in cash, shares of Company common stock, or a combination thereof.
The weighted average option prices for the 2,091,266 and 2,226,450 options outstanding at December
31, 2009 and 2008, respectively, was $8.17 and $7.86, respectively. At December 31, 2009, options
to purchase an additional 503,984 shares of Company common stock were available for future grants
under the various plans.
Following is a summary of stock option activity for the years ended December 31, 2009 and 2008:
Options Granted Under | Options Granted to Directors | |||||||||||||||
Incentive Stock Option Plans | Under Nonqualified Plans | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Option Price | Number | Option Price | Number | |||||||||||||
per Share | of Shares | per Share | of Shares | |||||||||||||
Balance at December 31, 2007 |
$ | 7.31 | 1,648,200 | $ | 8.41 | 701,000 | ||||||||||
Granted |
12.34 | 101,000 | 11.37 | 17,000 | ||||||||||||
Forfeited |
12.47 | (54,750 | ) | 9.01 | (45,000 | ) | ||||||||||
Exercised |
5.60 | (141,000 | ) | | | |||||||||||
Balance at December 31, 2008 |
7.61 | 1,553,450 | 8.44 | 673,000 | ||||||||||||
Granted |
7.50 | 102,250 | 7.50 | 500 | ||||||||||||
Forfeited |
9.47 | (75,250 | ) | 11.82 | (6,684 | ) | ||||||||||
Exercised |
2.58 | (156,000 | ) | | | |||||||||||
Balance at December 31, 2009 |
$ | 8.05 | 1,424,450 | $ | 8.41 | 666,816 | ||||||||||
During 2008, the Company awarded 2,500 shares of restricted stock to an officer, which will
vest over a three-year period. During 2009, the Company awarded 20,000 shares of restricted stock
to two officers, which will vest over a three-year period. The awarded shares are being amortized
over the estimated vesting periods.
The total intrinsic value of options exercised during 2009 and 2008 was $228,300 and $675,615,
respectively. The average remaining contractual term for options exercisable as of December 31,
2009 was 3.5 years, with no intrinsic value at December 31, 2009. A summary of the activity of the
non-vested options during 2009 is as follows:
Weighted | ||||||||
Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Nonvested at December 31, 2008 |
300,650 | $ | 3.40 | |||||
Granted |
102,750 | | ||||||
Vested |
(126,093 | ) | 3.67 | |||||
Forfeited |
(26,017 | ) | 2.69 | |||||
Nonvested at December 31, 2009 |
251,290 | 1.95 | ||||||
As of December 31, 2009, the total unrecognized compensation expense related to nonvested
stock options granted after January 1, 2006, was $101,547, and the related weighted average period
over
F-29
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
which it is expected to be recognized is approximately 14 months. During 2009, 2008 and 2007,
the Company recognized stock option expense of $504,553, $560,895, and $449,020, respectively.
Other Activity in Stockholders Equity
Following is a summary of other activity in the consolidated statements of stockholders equity for
the years ended December 31, 2009, 2008, and 2007:
Total | ||||||||||||||||||||
Preferred | Common | Treasury | stockholders | |||||||||||||||||
stock | stock | Surplus | stock | equity | ||||||||||||||||
2009 |
||||||||||||||||||||
Issuance of 40,000 shares of
Series A preferred stock |
$ | 40,000,000 | | | | 40,000,000 | ||||||||||||||
Issuance of 2,000 shares of
Series B preferred stock |
2,000,000 | | (2,000,000 | ) | | | ||||||||||||||
Issuance of 300 shares of
Series C preferred stock |
300,000 | | | | 300,000 | |||||||||||||||
Stock issuance costs |
| | (27,262 | ) | | (27,262 | ) | |||||||||||||
Stock options exercised
156,000 shares (19,604
shares from treasury) |
| 34,099 | 210,485 | 158,416 | 403,000 | |||||||||||||||
Purchase of 10,000 common
shares for treasury |
| | | (40,000 | ) | (40,000 | ) | |||||||||||||
Sale of stock to Employee
Stock Purchase Plan 59,824
shares (14,910 shares
from treasury) |
| 11,228 | (52,696 | ) | 216,864 | 175,396 | ||||||||||||||
Compensation cost recognized
for stock options granted |
| | 504,553 | | 504,553 | |||||||||||||||
Tax benefit from sale of stock
options exercised |
| | 5,400 | | 5,400 | |||||||||||||||
Issuance of 20,000 shares of
restricted stock to officers |
| 5,000 | (5,000 | ) | | | ||||||||||||||
Amortization of restricted
stock |
| | 50,959 | | 50,959 | |||||||||||||||
$ | 42,300,000 | 50,327 | (1,313,561 | ) | 335,280 | 41,372,046 | ||||||||||||||
F-30
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Preferred | Common | Treasury | ||||||||||||||||||
stock | stock | Surplus | stock | Total | ||||||||||||||||
2008 |
||||||||||||||||||||
Purchase of 105,324 common shares
for treasury |
$ | | | | (1,305,000 | ) | (1,305,000 | ) | ||||||||||||
Issuance of shares as partial payment
for certain operating leases
(2,565 shares from treasury) |
| (5,771 | ) | 30,780 | 25,009 | |||||||||||||||
Stock
options exercised 141,000 shares (52,296 shares from treasury) |
| 22,177 | 139,656 | 627,552 | 789,385 | |||||||||||||||
Tax benefit from sale of stock options
exercised |
| | 131,809 | | 131,809 | |||||||||||||||
Compensation cost recognized for
stock options granted |
| | 560,895 | | 560,895 | |||||||||||||||
Sale of stock to Employee Stock
Purchase Plan (22,049 shares
from treasury) |
| | (121,126 | ) | 264,588 | 143,462 | ||||||||||||||
1,400 shares of common stock
awarded to directors from treasury |
| | (3,448 | ) | 16,800 | 13,352 | ||||||||||||||
Issuance of 2,500 shares of
restricted stock to officer from treasury |
| | (30,000 | ) | 30,000 | | ||||||||||||||
Amortization of restricted stock |
| | 191,786 | | 191,786 | |||||||||||||||
$ | | 22,177 | 863,801 | (335,280 | ) | 550,698 | ||||||||||||||
2007 |
||||||||||||||||||||
Purchase of 177,951 common shares
for treasury |
$ | | | | (2,116,402 | ) | (2,116,402 | ) | ||||||||||||
Issuance of 1,087,878 shares of
common stock (99,810 shares
from treasury) |
| 247,017 | 12,366,090 | 1,080,579 | 13,693,686 | |||||||||||||||
Stock issuance costs |
| | (29,508 | ) | | (29,508 | ) | |||||||||||||
Stock
options exercised 180,100 shares (78,141 shares from treasury) |
| 25,490 | 112,762 | 1,035,823 | 1,174,075 | |||||||||||||||
Tax benefit from sale of stock options
exercised |
| | 340,832 | | 340,832 | |||||||||||||||
Compensation cost recognized for
stock options granted |
| | 449,020 | | 449,020 | |||||||||||||||
800 shares of common stock
awarded to directors |
| 200 | 9,800 | | 10,000 | |||||||||||||||
Issuance of 20,000 shares of restricted
stock to officers |
| 5,000 | (5,000 | ) | | | ||||||||||||||
Amortization of restricted stock |
| | 43,214 | | 43,214 | |||||||||||||||
$ | | 277,707 | 13,287,210 | | 13,564,917 | |||||||||||||||
NOTE 12 PARENT COMPANY FINANCIAL INFORMATION
Subsidiary bank dividends are the principal source of funds for the payment of dividends by the
Company to its stockholders and for debt servicing. The Banks are subject to regulation by
regulatory authorities that require the maintenance of minimum capital requirements. As of
December 31, 2009, there are no regulatory restrictions, other than the maintenance of minimum
capital standards (as discussed in Note 15), as to the amount of dividends the Banks may pay.
F-31
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following are condensed balance sheets as of December 31, 2009 and 2008 and the related
condensed schedules of operations and cash flows for each of the years in the three-year period
ended December 31, 2009 of the Company (parent company only):
2009 | 2008 | |||||||
Condensed Balance Sheets |
||||||||
Assets: |
||||||||
Cash |
$ | 7,305,628 | 1,158,121 | |||||
Investment in subsidiary banks |
140,167,588 | 143,729,239 | ||||||
Premises and equipment |
792,360 | 797,008 | ||||||
Other assets |
1,431,717 | 952,344 | ||||||
Total assets |
$ | 149,697,293 | 146,636,712 | |||||
Liabilities: |
||||||||
Note payable |
$ | | 7,000,000 | |||||
Accrued expenses payable |
27,869 | 27,832 | ||||||
Total liabilities |
27,869 | 7,027,832 | ||||||
Total stockholders equity |
149,669,424 | 139,608,880 | ||||||
Total liabilities and stockholdersequity |
$ | 149,697,293 | 146,636,712 | |||||
2009 | 2008 | 2007 | ||||||||||
Condensed Schedules of Operations |
||||||||||||
Revenue: |
||||||||||||
Interest on interest-earning deposits
in subsidiary banks |
$ | 134,348 | 146,090 | 896,422 | ||||||||
Other income |
2,700 | 274 | | |||||||||
Total revenues |
137,048 | 146,364 | 896,422 | |||||||||
Expenses: |
||||||||||||
Interest expense |
147,097 | 160,319 | | |||||||||
Salaries and employee benefits |
498,463 | 302,163 | 575,027 | |||||||||
Professional fees |
167,557 | 171,503 | 272,372 | |||||||||
Other expenses |
358,155 | 396,894 | 310,787 | |||||||||
Total expenses |
1,171,272 | 1,030,879 | 1,158,186 | |||||||||
Loss before income tax and equity
in undistributed income (loss) of
subsidiary banks |
(1,034,224 | ) | (884,515 | ) | (261,764 | ) | ||||||
Income tax benefit |
302,934 | 300,735 | 99,671 | |||||||||
(731,290 | ) | (583,780 | ) | (162,093 | ) | |||||||
Equity in undistributed income (loss) of
subsidiary banks |
(28,626,071 | ) | 264,550 | 2,277,040 | ||||||||
Net income (loss) |
$ | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||
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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2009 | 2008 | 2007 | ||||||||||
Condensed Schedules of Cash Flows |
||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | (29,357,361 | ) | (319,230 | ) | 2,114,947 | ||||||
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities: |
||||||||||||
Undistributed income (loss) of
subsidiary banks |
28,626,071 | (264,550 | ) | (2,277,040 | ) | |||||||
Depreciation |
4,648 | 10,944 | | |||||||||
Capitalized interest expense |
| (4,265 | ) | (36,821 | ) | |||||||
Stock option compensation cost |
184,061 | 228,399 | 244,004 | |||||||||
Common stock awarded to directors |
| 13,352 | 10,000 | |||||||||
Other, net |
(473,935 | ) | 30,821 | 108,328 | ||||||||
Net cash provided by (used in)
operating activities |
(1,016,516 | ) | (304,529 | ) | 163,418 | |||||||
Cash flows
used in investing activities
capital injections into subsidiary banks |
(25,000,000 | ) | (17,000,000 | ) | (20,000,000 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from note payable |
| 7,000,000 | | |||||||||
Repayment of note payable |
(7,000,000 | ) | | | ||||||||
Proceeds from sale of treasury stock |
53,825 | 143,462 | | |||||||||
Purchase of treasury stock |
(40,000 | ) | (1,305,000 | ) | (2,116,402 | ) | ||||||
Issuance of common stock |
121,571 | | 13,693,686 | |||||||||
Issuance of preferred stock |
40,300,000 | | | |||||||||
Dividends on preferred stock |
(1,647,111 | ) | | | ||||||||
Stock options exercised |
403,000 | 789,385 | 1,174,075 | |||||||||
Payment of stock issuance costs |
(27,262 | ) | | (29,508 | ) | |||||||
Net cash provided by
financing activities |
32,164,023 | 6,627,847 | 12,721,851 | |||||||||
Net increase (decrease) in cash |
6,147,507 | (10,676,682 | ) | (7,114,731 | ) | |||||||
Cash at beginning of year |
1,158,121 | 11,834,803 | 18,949,534 | |||||||||
Cash at end of year |
$ | 7,305,628 | 1,158,121 | 11,834,803 | ||||||||
NOTE 13 LITIGATION
During the normal course of business, various legal claims have arisen which, in the opinion of
management, will not result in any material liability to the Company.
NOTE 14 DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Banks issue financial instruments with off-balance-sheet risk in the normal course of the
business of meeting the financing needs of their customers. These financial instruments include
commitments to extend credit and standby letters of credit and may involve, to varying degrees,
elements of credit risk in excess of the amounts recognized in the balance sheets. The contractual
amounts of those instruments reflect the extent of involvement the Banks have in particular classes
of these financial instruments.
The Banks exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for commitments to extend credit and standby letters of credit is represented
by the contractual amount of those instruments. The Banks use the same credit policies in making
commitments and conditional obligations as they do for financial instruments included on the
balance sheets. Following is a summary of the Banks off-balance-sheet financial instruments at
December 31, 2009 and 2008:
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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2009 | 2008 | |||||||
Financial instruments for which
contractual amounts represent: |
||||||||
Commitments to extend credit |
$ | 126, 088,501 | 229,216,837 | |||||
Standby letters of credit |
13,238,950 | 18,425,878 | ||||||
$ | 139,327,451 | 247,642,715 | ||||||
Commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Of the total commitments to extend credit
at December 31, 2009, $27, 700,230 were made at fixed rates of interest. Commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee. Since
certain of the commitments may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Banks upon extension of credit, is based on managements credit evaluation of the borrower.
Collateral held varies, but is generally residential or income-producing commercial property or
equipment, on which the Banks generally have a superior lien.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the
performance of a customer to a third party, for which draw requests have historically not been made
thereon. Such guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Following is a summary of the carrying amounts and estimated fair values of the Companys financial
instruments at December 31, 2009 and 2008:
2009 | 2008 | |||||||||||||||||||
Carrying | Estimated | Carrying | Estimated | Fair Value | ||||||||||||||||
amount | fair value | amount | fair value | Measurements | ||||||||||||||||
Balance sheet assets: |
||||||||||||||||||||
Cash and due from banks |
$ | 11,928,668 | 11,928,668 | 14,366,579 | 14,366,579 | Carrying value | ||||||||||||||
Interest-earning deposits in
other financial institutions |
15,767,862 | 15,767,862 | 31,919,386 | 31,919,386 | Carrying value | |||||||||||||||
Federal funds sold |
| | 11,460,000 | 11,460,000 | Carrying value | |||||||||||||||
Investments in debt securities |
284,119,556 | 284,119,556 | 193,888,492 | 193,888,492 | Level 2 and 3 inputs | |||||||||||||||
Loans, net |
1,108,574,965 | 1,093,573,025 | 1,240,190,604 | 1,264,473,824 | Level 3 inputs | |||||||||||||||
Accrued interest receivable |
5,647,887 | 5,647,887 | 5,424,108 | 5,424,108 | Carrying value | |||||||||||||||
$ | 1,426,038,938 | 1,411,036,998 | 1,497,249,169 | 1,521,532,389 | ||||||||||||||||
Balance sheet liabilities: |
||||||||||||||||||||
Deposits |
$ | 1,266,060,197 | 1,279,372,223 | 1,228,047,299 | 1,256,972,456 | Level 3 inputs | ||||||||||||||
Short-term borrowings |
12,696,932 | 12,696,932 | 63,918,844 | 63,918,844 | Carrying value | |||||||||||||||
Long-term Federal Home Loan
Bank borrowings |
104,000,000 | 127,515,065 | 136,000,000 | 152,070,910 | Level 3 inputs | |||||||||||||||
Accrued interest payable |
2,194,952 | 2,194,952 | 3,904,941 | 3,904,941 | Carrying value | |||||||||||||||
$ | 1,384,952,081 | 1,421,779,172 | 1,431,871,084 | 1,476,867,151 | ||||||||||||||||
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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fair values are calculated using one or more input types, as described in Note 1. The
following methods and assumptions were used to estimate the fair value of each class of financial
instruments:
Cash and Other Short-Term Instruments For cash and due from banks, interest-earning deposits in
other financial institutions, Federal funds sold, accrued interest receivable (payable), and
short-term borrowings, the carrying amount is a reasonable estimate of fair value, as such
instruments are due on demand and/or reprice in a short time period.
Investments in Debt and Equity Securities Fair values are based on quoted market prices or dealer
quotes, except for TRUP CDOs. Given conditions in the debt markets at December 31, 2009, and the
absence of observable transactions in the secondary and new issue markets, the few observable
transactions and market quotations that are available for these instruments are not reliable for
purposes of determining fair value at December 31, 2009, and an income valuation approach technique
(present value technique) that maximizes the use of relevant observable inputs and minimizes the
use of unobservable inputs is more representative of fair value than the market approach valuation
techniques. Accordingly, the TRUP CDOs are classified within Level 3 of the fair value hierarchy
because significant adjustments are required to determine fair value at the measurement date,
particularly regarding estimated default probabilities based on the credit quality of the specific
issuer institutions for the TRUP CDOs.
Loans For certain homogeneous categories of loans, such as residential mortgages and other
consumer loans, fair value is estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics. The fair value of other types of
loans is estimated by discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and with the same remaining
maturities. The fair values of impaired loans is measured as the lower of the cost of the loan or
fair value of the underlying collateral, using observable market prices.
Deposits The fair value of demand deposits, savings accounts, and interest-bearing transaction
account deposits is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits
of similar remaining maturities.
Long-Term Borrowings Rates currently available to the Company with similar terms and remaining
maturities are used to estimate the fair value of existing long-term debt.
Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments to
extend credit and standby letters of credit are estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the agreements, the likelihood
of the counterparties drawing on such financial instruments, and the present creditworthiness of
such counterparties. The Company believes such commitments have been made on terms that are
competitive in the markets in which it operates.
NOTE 15 REGULATORY MATTERS
The Company and Banks are subject to various regulatory requirements administered by the Federal
banking agencies, including those relating to capital. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the Companys consolidated
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Banks must meet specific capital guidelines that involve
F-35
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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
quantitative measures of the Companys and Banks assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The capital amounts and
classifications are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
Banks to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). Company management believes that, as of December 31,
2009, the Company and Banks meet all capital adequacy requirements to which they are subject.
As of December 31, 2009, the most recent notification from the applicable regulatory authorities
categorized the Banks as well capitalized banks under the regulatory framework for prompt
corrective action. To be categorized as a well capitalized bank, the Banks must maintain minimum
Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below.
There are no conditions or events since that notification that Company management believes have
changed the Banks risk categories.
The actual capital amounts and ratios for the Company, Reliance Bank, and Reliance Bank, F.S.B. at
December 31, 2009, 2008, and 2007 are presented in the following table:
To Be a Well | ||||||||||||||||||||||||
Capitalized Bank Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provision | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||
2009: |
||||||||||||||||||||||||
Total
capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 146,809 | 11.38 | % | $ | 103,198 | ³8.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
124,248 | 10.17 | % | 97,691 | ³8.0 | % | $ | 122,113 | ³10.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
14,390 | 18.52 | % | 6,215 | ³8.0 | % | 7,769 | ³10.0 | % | |||||||||||||||
Tier
1 capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 130,486 | 10.12 | % | $ | 51,599 | ³4.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
108,965 | 8.92 | % | 48,845 | ³4.0 | % | $ | 73,268 | ³6.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
13,401 | 17.25 | % | 3,108 | ³4.0 | % | 4,661 | ³6.0 | % | |||||||||||||||
Tier
1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 130,486 | 8.52 | % | $ | 61,244 | ³4.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
108,965 | 7.62 | % | 57,211 | ³4.0 | % | $ | 71,514 | ³5.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
13,401 | 13.57 | % | 3,952 | ³4.0 | % | 4,940 | ³5.0 | % |
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RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
To Be a Well | ||||||||||||||||||||||||
Capitalized Bank Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provision | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||
2008: |
||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 152,517 | 10.87 | % | $ | 112,253 | ³8.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
133,151 | 10.23 | % | 104,160 | ³8.0 | % | $ | 130,200 | ³10.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
22,117 | 22.00 | % | 8,044 | ³8.0 | % | 10,055 | ³10.0 | % | |||||||||||||||
Tier 1 capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 138,411 | 9.87 | % | $ | 56,102 | ³4.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
121,099 | 9.30 | % | 52,080 | ³4.0 | % | $ | 78,120 | ³6.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
21,355 | 21.24 | % | 4,022 | ³4.0 | % | 6,033 | ³6.0 | % | |||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 138,411 | 9.07 | % | $ | 61,028 | ³4.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
121,099 | 8.57 | % | 56,503 | ³4.0 | % | $ | 70,629 | ³5.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
21,355 | 17.30 | % | 4,937 | ³4.0 | % | 6,171 | ³5.0 | % |
To Be a Well | ||||||||||||||||||||||||
Capitalized Bank Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes | Action Provision | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
(in thousands of dollars) | ||||||||||||||||||||||||
2007: |
||||||||||||||||||||||||
Total capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 147,640 | 13.58 | % | $ | 86,951 | ³8.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
108,550 | 10.79 | % | 80,510 | ³8.0 | % | $ | 100,637 | ³10.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
24,891 | 28.43 | % | 7,004 | ³8.0 | % | 8,755 | ³10.0 | % | |||||||||||||||
Tier 1 capital (to risk-weighted assets) |
||||||||||||||||||||||||
Consolidated |
$ | 137,955 | 12.69 | % | $ | 43,476 | ³4.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
100,205 | 9.96 | % | 40,255 | ³4.0 | % | $ | 60,382 | ³6.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
24,258 | 27.71 | % | 3,502 | ³4.0 | % | 5,253 | ³6.0 | % | |||||||||||||||
Tier 1 capital (to average assets) |
||||||||||||||||||||||||
Consolidated |
$ | 137,955 | 12.68 | % | $ | 43,532 | ³4.0 | % | N/A | N/A | ||||||||||||||
Reliance Bank |
100,205 | 9.98 | % | 40,147 | ³4.0 | % | $ | 50,184 | ³5.0 | % | ||||||||||||||
Reliance Bank, F.S.B. |
24,258 | 28.13 | % | 3,450 | ³4.0 | % | 4,312 | ³5.0 | % |
On November 30, 2009, Reliance Banks Board of Directors entered into an Agreement (the
Agreement) with the Missouri Division of Finance and the Federal Deposit Insurance Corporation
(FDIC) to, among other things, (a) develop a plan to reduce the level of risk in each criticized
asset aggregating $2,000,000 or more included in the September 21, 2009 Missouri Division of
Finance examination report; (b) maintain the reserve for possible loan losses at a level which is
reasonable in relation to the degree of risk inherent in the Banks loan portfolio; (c) develop and
adopt policies and procedures designed to identify and monitor concentrations of credit, including
out-of-territory loans and loan participations purchased; (d) formulate plans to reduce the Banks
concentrations of credit, particularly in commercial real estate and land acquisition and
development lending; (e) review and revise the Banks formal loan policy to address weaknesses
noted in the September 21, 2009 Missouri Division of Finance examination report; (f) cease making
or extending any loans which might violate the Banks written loan policy, except in those
instances in which the Board of Directors has made a prior determination that a variance from
loan
F-37
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
policy is in the best interests of the Bank, with such Board decisions appropriately
documented in the minutes of the Board of Director meetings; (g) develop a formal written profit
plan, which will provide a three-year budget projection for asset growth and dividend payouts to
ensure Tier 1 leverage capital is maintained at least a 7% level; and (h) maintain a Tier 1
leverage capital ratio of at least 7%, and other capital ratios such that the Bank will remain
well-capitalized, and not pay any dividends, management fees or bonuses, or increase any executive
salary or other compensation that would reduce the Bank to a level below a well-capitalized status.
On February 10, 2010, Reliance Bank, FSBs Board of Directors entered into a Memorandum of
Understanding (the OTS MOU) with the Office of Thrift Supervision (OTS) to, among other things, (a)
develop a business plan for the years ended December 31, 2010, 2011, and 2012 which shall include
(1) strategies to preserve and enhance the Banks capital sufficient to meet its needs and support
its risk profile; (2) achieve core profitability by the end of 2010; and (3) establish and maintain
Board-approved loan concentration limits expressed as a percentage of risk-based capital that takes
into account the Banks current capital position, local and regional market conditions, and the
credit risks posed by higher risk loans; (b) continue to take steps to identify, classify, and
properly account for problem assets, including but not limited to (1) conducting periodic asset
quality reviews to identify and assign appropriate classifications to all problem assets; (2)
performing analyses on all impaired assets identified by the review required by subparagraph (b)(1)
above; and (3) estimating potential losses in identified problem assets, while establishing an
appropriate reserve for loan losses for all classified assets; (c) develop a detailed, written plan
with specific strategies, targets, and timeframes to reduce the Banks level of criticized assets;
(d) review the adequacy of the Banks reserve for loan losses policies, procedures and
methodologies on at least an annual basis to ensure the timely establishment and maintenance of an
adequate reserve for loan losses account balance; (e) identify and monitor all loan modifications
and troubled debt restructurings, with delinquent loans that are modified being classified as
substandard and placed on nonaccrual status for at least six months; (f) prohibit the increase in
the dollar amount of brokered deposits; (g) analyze the major differences in and bases for
significant differences in the value of assets, liabilities, and off-balance-sheet positions
calculated by the OTS Net Portfolio Value and the Banks internal economic value of equity model;
and (h) correct all deficiencies and weaknesses identified in the October 5, 2009 OTS report of
examination.
On March 16, 2010, the Company entered into a Memorandum of Understanding (the Fed MOU) with the
Federal Reserve Bank of St. Louis (the Federal Reserve) requiring the Company to, among other
things, (a) utilize its financial and managerial resources to assist the Banks in addressing
weaknesses identified during their most recent regulatory examinations, and achieving/maintaining
compliance with any supervisory action between the Banks and their primary regulators; (b) declare
no corporate dividends without the prior written approval of the Federal Reserve; (c) incur no
additional debt without the prior written approval of the Federal Reserve; and (d) make no
distributions of interest or other sums on its preferred stock without the prior written approval
of the Federal Reserve.
While no absolute assurance can be given, management of the Company and Banks believe the necessary
actions have been or are being taken toward complying with the provisions of the Agreement and OTS
and Fed MOUs. It is not presently determinable what actions, if any, the banking regulators might
take if the provisions of the Agreement and OTS and Fed MOUs are not complied within the specific
time periods required.
F-38
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 16 QUARTERLY FINANCIAL INFORMATION (unaudited)
Following is a summary of quarterly financial information for the years ended December 31, 2009,
2008, and 2007:
First | Second | Third | Fourth | For the | ||||||||||||||||
quarter | quarter | quarter | quarter | year | ||||||||||||||||
2009
(restated): |
||||||||||||||||||||
Total interest income |
$ | 19,984,244 | 19,275,666 | 18,892,020 | 18,437,266 | 76,589,196 | ||||||||||||||
Total interest expense |
10,975,234 | 9,992,569 | 9,095,271 | 8,941,738 | 39,004,812 | |||||||||||||||
Net interest income |
9,009,010 | 9,283,097 | 9,796,749 | 9,495,528 | 37,584,384 | |||||||||||||||
Provision for possible losses |
2,250,000 | 14,000,000 | 11,450,000 | 25,750,000 | 53,450,000 | |||||||||||||||
Noninterest income |
534,770 | 663,518 | 1,513,598 | 1,213,196 | 3,925,082 | |||||||||||||||
Noninterest expense |
7,241,132 | 8,698,061 | 8,726,761 | 9,380,435 | 34,046,389 | |||||||||||||||
Income (loss) before
applicable income taxes |
52,648 | (12,751,446 | ) | (8,866,414 | ) | (24,421,711 | ) | (45,986,923 | ) | |||||||||||
Applicable income taxes |
(38,226 | ) | (4,378,551 | ) | (3,091,023 | ) | (9,121,762 | ) | (16,629,562 | ) | ||||||||||
Net income (loss) |
$ | 90,874 | (8,372,895 | ) | (5,775,391 | ) | (15,299,949 | ) | (29,357,361 | ) | ||||||||||
Weighted average shares
outstanding: |
||||||||||||||||||||
Basic |
20,746,267 | 20,855,898 | 20,918,020 | 20,935,083 | 20,864,483 | |||||||||||||||
Diluted |
20,818,840 | 20,859,102 | 20,918,020 | 20,935,083 | 20,881,108 | |||||||||||||||
Earnings
(loss) per common share: |
||||||||||||||||||||
Basic |
$ | <0.01 | (0.43 | ) | (0.30 | ) | (0.76 | ) | (1.49 | ) | ||||||||||
Diluted |
<0.01 | (0.42 | ) | (0.30 | ) | (0.76 | ) | (1.48 | ) |
First | Second | Third | Fourth | For the | ||||||||||||||||
quarter | quarter | quarter | quarter | year | ||||||||||||||||
2008: |
||||||||||||||||||||
Total interest income |
$ | 18,037,013 | 18,696,397 | 20,643,965 | 20,831,832 | 78,209,207 | ||||||||||||||
Total interest expense |
10,196,305 | 10,036,168 | 10,610,768 | 10,872,027 | 41,715,268 | |||||||||||||||
Net interest income |
7,840,708 | 8,660,229 | 10,033,197 | 9,959,805 | 36,493,939 | |||||||||||||||
Provision for possible losses |
1,132,000 | 5,607,000 | 1,800,000 | 2,609,000 | 11,148,000 | |||||||||||||||
Noninterest income |
730,079 | 832,034 | 685,387 | 435,035 | 2,682,535 | |||||||||||||||
Noninterest expense |
7,079,589 | 7,770,425 | 7,800,871 | 6,776,705 | 29,427,590 | |||||||||||||||
Income (loss) before
applicable income taxes |
359,198 | (3,885,162 | ) | 1,117,713 | 1,009,135 | (1,399,116 | ) | |||||||||||||
Applicable income taxes |
49,100 | (1,514,610 | ) | 266,621 | 119,003 | (1,079,886 | ) | |||||||||||||
Net income (loss) |
$ | 310,098 | (2,370,552 | ) | 851,092 | 890,132 | (319,230 | ) | ||||||||||||
Weighted average shares
outstanding: |
||||||||||||||||||||
Basic |
20,668,304 | 20,673,419 | 20,687,321 | 20,728,599 | 20,669,512 | |||||||||||||||
Diluted |
21,227,572 | 21,119,050 | 20,920,384 | 20,865,356 | 21,063,065 | |||||||||||||||
Earnings
(loss) per common share: |
||||||||||||||||||||
Basic |
$ | 0.02 | (0.11 | ) | 0.04 | 0.04 | (0.02 | ) | ||||||||||||
Diluted |
0.01 | (0.11 | ) | 0.04 | 0.04 | (0.02 | ) |
F-39
Table of Contents
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
First | Second | Third | Fourth | For the | ||||||||||||||||
quarter | quarter | quarter | quarter | year | ||||||||||||||||
2007: |
||||||||||||||||||||
Total interest income |
$ | 14,530,068 | 15,550,720 | 16,475,736 | 17,130,448 | 63,686,972 | ||||||||||||||
Total interest expense |
8,650,584 | 9,122,711 | 9,775,314 | 10,060,439 | 37,609,048 | |||||||||||||||
Net interest income |
5,879,484 | 6,428,009 | 6,700,422 | 7,070,009 | 26,077,924 | |||||||||||||||
Provision for possible losses |
390,000 | 500,000 | 1,515,000 | 781,500 | 3,186,500 | |||||||||||||||
Noninterest income |
421,535 | 523,319 | 453,170 | 577,772 | 1,975,796 | |||||||||||||||
Noninterest expense |
4,976,050 | 5,298,860 | 5,547,260 | 6,468,137 | 22,290,307 | |||||||||||||||
Income before applicable
income taxes |
934,969 | 1,152,468 | 91,332 | 398,144 | 2,576,913 | |||||||||||||||
Applicable income taxes |
239,566 | 317,624 | (72,866 | ) | (22,358 | ) | 461,966 | |||||||||||||
Net income |
$ | 695,403 | 834,844 | 164,198 | 420,502 | 2,114,947 | ||||||||||||||
Weighted average shares
outstanding: |
||||||||||||||||||||
Basic |
19,573,670 | 20,475,731 | 20,654,884 | 20,650,935 | 20,342,622 | |||||||||||||||
Diluted |
20,432,149 | 21,496,676 | 21,704,099 | 21,675,890 | 21,336,623 | |||||||||||||||
Earnings per
common share: |
||||||||||||||||||||
Basic |
$ | 0.04 | 0.04 | 0.01 | 0.02 | 0.10 | ||||||||||||||
Diluted |
0.03 | 0.04 | 0.01 | 0.02 | 0.10 |
F-40
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
RELIANCE BANCSHARES, INC. |
||||
By: | /s/ Allan D. Ivie, IV | |||
Allan D. Ivie, IV | ||||
President and Chief Executive Officer (Principal Executive Officer) |
||||
By: | /s/ Dale E. Oberkfell | |||
Dale E. Oberkfell | ||||
Chief Financial Officer (Principal Financial and Principal Accounting Officer) | ||||
Date: March 26, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Name | Title | Date | ||||||
/s/ Allan D. Ivie, IV
|
Chairman | March 26 2010 | ||||||
/s/ Dale E. Oberkfell
|
Principal Financial and Principal Accounting Officer | March 26, 2010 | ||||||
/s/ Robert M. Cox, Jr.
|
Director | March 26, 2010 | ||||||
Robert M. Cox, Jr. |
||||||||
/s/ Richard M. Demko
|
Director | March 26, 2010 | ||||||
Richard M. Demko |
Table of Contents
Name | Title | Date | ||||||
/s/ Patrick R. Gideon
|
Director | March 26, 2010 | ||||||
Patrick R. Gideon |
||||||||
/s/ Barry D. Koenemann
|
Director | March 26, 2010 | ||||||
Barry D. Koenemann |
||||||||
/s/ Fortis M. Lawder
|
Director | March 26, 2010 | ||||||
Fortis M. Lawder |
||||||||
/s/ Earl G. Lindenberg
|
Director | March 26, 2010 | ||||||
Earl G. Lindenberg |
||||||||
/s/ Gary R. Parker
|
Director | March 26, 2010 | ||||||
Gary R. Parker |
||||||||
/s/ James E. SanFilippo
|
Director | March 26, 2010 | ||||||
James E. SanFilippo |
||||||||
/s/ Lawrence P. Keeley, Jr.
|
Director | March 26, 2010 | ||||||
Lawrence P. Keeley, Jr. |
||||||||
/s/ David R. Spence
|
Director | March 26, 2010 | ||||||
David R. Spence |
||||||||
/s/ Scott A. Sachtleben
|
Director | March 26, 2010 | ||||||
Scott A. Sachtleben |
Table of Contents
Index to Exhibits
3.1 | Restated Articles of Incorporation of Reliance Bancshares, Inc. (filed as Exhibit 3.1 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
3.2 | Bylaws of Reliance Bancshares, Inc. (filed as Exhibit 3.2 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
3.3 | Certificate of Designation establishing Fixed Rate Cumulative Perpetual Preferred Stock, No Par Value, Series A, of Reliance Bancshares, Inc. (filed as Exhibit 4.1 to the registrants Form 8-K (File No. 000-52588) filed on February 23, 2009 and incorporated herein by reference). | |
3.4 | Certificate of Designation establishing Fixed Rate Cumulative Perpetual Preferred Stock, No Par Value, Series B, of Reliance Bancshares, Inc. (filed as Exhibit 4.2 to the registrants Form 8-K (File No. 000-52588) filed on February 23, 2009 and incorporated herein by reference). | |
3.5 | Corrected Certificate of Designation establishing Fixed Rate Cumulative Perpetual Preferred Stock, No Par Value, Series B, of Reliance Bancshares, Inc. (filed as Exhibit 4.3 to the registrants Form 8-K (File No. 000-52588) filed on February 23, 2009 and incorporated herein by reference). | |
3.6 | Notice of Exempt Offerings of Securities for the issuance of Perpetual Convertible Preferred Stock, no par value, Series C. (Filed as Form D with the SEC on December 18, 2009 (File No. 021-137031) and incorporated herein by reference). | |
10.1 | Employment Agreement between Reliance Bancshares, Inc. and Jerry S. Von Rohr, dated July 29, 1998 (filed as Exhibit 10.1 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.2 | Assignment of Employment Agreement between Reliance Bancshares, Inc., Reliance Bank and Jerry S. Von Rohr, dated June 16, 1999 (filed as Exhibit 10.2 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.3 | First Amendment to Employment Agreement between Reliance Bank and Jerry S. Von Rohr, dated September 1, 2001 (filed as Exhibit 10.3 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.4 | Employment Agreement between Reliance Bancshares, Inc., Reliance Bank and Dale E. Oberkfell, dated March 21, 2005 (filed as Exhibit 10.4 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.5 | Data Processing Services Agreement between Reliance Bank and Jack Henry & Associates, Inc., dated August 10, 2005 (filed as Exhibit 10.5 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.6 | Data Processing Services Agreement between Reliance Bank, FSB and Jack Henry & Associates, Inc., dated June 23, 2005 (filed as Exhibit 10.6 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.7 | 2001 Incentive Stock Option Plan (filed as Exhibit 10.8 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.8 | 2001 Non-Qualified Stock Option Plan (filed as Exhibit 10.9 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.9 | First Amendment of the 2001 Non-Qualified Stock Option Plan (filed as Exhibit 10.10 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). |
Table of Contents
10.10 | Second Amendment of the 2001 Non-Qualified Stock Option Plan (filed as Exhibit 10.11 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.11 | 2003 Incentive Stock Option Plan (filed as Exhibit 10.12 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.12 | 2003 Non-Qualified Stock Option Plan (filed as Exhibit 10.13 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.13 | First Amendment of the 2003 Non-Qualified Stock Option Plan (filed as Exhibit 10.14 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.14 | Second Amendment of the 2003 Non-Qualified Stock Option Plan (filed as Exhibit 10.15 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.15 | 2004 Non-Qualified Stock Option Plan (filed as Exhibit 10.16 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.16 | 2005 Incentive Stock Option Plan (filed as Exhibit 10.17 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.17 | 2005 Non-Qualified Stock Option Plan (filed as Exhibit 10.18 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.18 | First Amendment of the 2005 Non-Qualified Stock Option Plan (filed as Exhibit 10.19 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.19 | Agreement of Compensation Package between Jerry S. Von Rohr and the Compensation Committee of Reliance Bancshares, Inc., dated December 14, 2005 (filed as Exhibit 10.20 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.20 | Reliance Bancshares, Inc. 2005 Employee Stock Purchase Plan (filed as Exhibit 10.21 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.21 | 2007 Non-Qualified Stock Option Plan (filed as Exhibit 10.26 to the registrants Amendment No. 2 to its Form 10 (File No. 000-52588) filed on July 19, 2007 and incorporated herein by reference). | |
10.22 | Check 21 Exchange Services Agreement between Reliance Bank and Jack Henry & Associates, Inc., dated January 31, 2006 (filed as Exhibit 10.22 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.23 | Software License and Support Agreement between Reliance Bank and Jack Henry & Associates, Inc., dated January 31, 2006 (filed as Exhibit 10.23 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.24 | Check 21 Exchange Services Agreement between Reliance Bank, FSB and Jack Henry & Associates, Inc., dated November 15, 2005 (filed as Exhibit 10.24 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.25 | Software License Agreement between Reliance Bank, FSB and Jack Henry & Associates, Inc., dated November 15, 2005 (filed as Exhibit 10.25 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
10.26 | Letter Agreement dated February 13, 2009 including the Securities Purchase Agreement Standard Terms incorporated by reference therein between the Company and the Treasury (filed as Exhibit 4.3 to the registrants Form 8-K (File No. 000-52588) filed on February 23, 2009 and incorporated herein by reference). |
Table of Contents
10.27 | Form of Omnibus Agreement between Reliance Bancshares, Inc. and each of Jerry S. Von Rohr, Dale E. Oberkfell, David S. Matthews, Daniel W. Jasper and Daniel S. Brown (filed as Exhibit 10.2 to the registrants Form 8-K (File No. 000-52588) filed on February 23, 2009 and incorporated herein by reference). | |
10.28 | Waivers executed by each of Jerry S. Von Rohr, Dale E. Oberkfell, David S. Matthews, Daniel W. Jasper and Daniel S. Brown (filed as Exhibit 10.3 to the registrants Form 8-K (File No. 000-52588) filed on February 23, 2009 and incorporated herein by reference). | |
14.1 | Reliance Bancshares, Inc. Code of Conduct and Ethics (filed as Exhibit 14.1 to the registrants Form 10 (File No. 000-52588) filed on April 27, 2007 and incorporated herein by reference). | |
21.1* | Subsidiaries of Reliance Bancshares, Inc. | |
31.1* | Chief Executive Officers 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 Officers 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. |
* | Filed herewith. |