Reliance Bancshares, Inc. - FORM 10-Q/A

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EX-32.2 - EX-32.2 - Reliance Bancshares, Inc.	c63006exv32w2.htm
EX-31.1 - EX-31.1 - Reliance Bancshares, Inc.	c63006exv31w1.htm
EX-31.2 - EX-31.2 - Reliance Bancshares, Inc.	c63006exv31w2.htm
EX-32.1 - EX-32.1 - Reliance Bancshares, Inc.	c63006exv32w1.htm

United States
Securities AND Exchange Commission

WASHINGTON, D. C. 20549

FORM 10-Q/A

(Amendment No. 1)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______

Commission file number: 000-52588

RELIANCE BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Missouri (State or Other Jurisdiction of Incorporation or Organization)		43-1823071 (IRS Employer Identification No.)

10401 Clayton Road Frontenac, Missouri (Address of Principal Executive Offices)		63131 (Zip Code)

(314) 569-7200
(Registrant’s Telephone Number, Including Area Code)

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 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
(Do not check if a smaller reporting company)

Smaller reporting company þ

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

As of October 29, 2010, the Registrant had 22,459,417 shares of outstanding Class A common stock, $0.25 par value.

EXPLANATORY NOTE — RESTATEMENT

This Amendment No. 1 to Form 10-Q (Amendment No. 1) is being filed by Reliance Bancshares, Inc. (the Company) to amend and restate its Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 filed with the United States Securities and Exchange Commission (SEC) on November 15, 2010 (the Initial Form 10-Q). For purposes of this Quarterly Report on Form 10-Q/A, and in accordance with Rule 12b-15 under the Securities Exchange Act of 1934 (Exchange Act), Item 1 under Part I of our Initial Form 10-Q has been amended and restated in its entirety. In addition, Item 4 under Part I 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-Q. Except as otherwise specifically noted, all information contained herein is as of September 30, 2010 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-Q filed on November 15, 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 interim condensed consolidated financial statements included in those reports should no longer be relied upon.

This Amendment No. 1 is required due to certain classification errors in the Initial Form 10-Q related to total other-than-temporary impairment losses and the portion of other-than-temporary impairment losses recognized in other comprehensive loss included in the Company’s interim condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009.

These restatements had no effect on the Company’s consolidated net loss for the three and nine months ended September 30, 2010 and 2009 or its consolidated stockholders’ equity as of September 30, 2010 and 2009.

For the convenience of the reader, this Quarterly Report sets forth the original filing in its entirety.

For additional information regarding the restatement, see Note 1 to our interim condensed consolidated financial statements appearing elsewhere in this report.

This Amendment No. 1 includes changes in “Item 4 — Controls and Procedures” and reflects management’s 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 September 30, 2010. This restatement of management’s 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 adjusts for certain classification errors in the interim condensed consolidated statements of operations and, while these errors had no effect on the Company’s consolidated net loss for the three and nine months ended September 30, 2010 and 2009, and stockholders’ equity as of September 30, 2010 and 2009, such information should have been disclosed in our September 30, 2010 interim condensed 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 believe 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 4 — Controls and Procedures.”

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS


		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Interim Condensed Consolidated Balance Sheets (Unaudited)	3
	Interim Condensed Consolidated Statements of Operations (Unaudited)	4
	Interim Condensed Consolidated Statements of Comprehensive Loss (Unaudited)	5
	Interim Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	6
	Interim Condensed Consolidated Statements of Cash Flows (Unaudited)	7
	Notes to Interim Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	40
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	[Removed and Reserved]	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
SIGNATURES		42

PART I — FINANCIAL INFORMATION

Part I — Item 1 — Financial Statements

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
September 30, 2010 and December 31, 2009


	September 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Cash and due from banks	$	13,882,626			11,928,668
Interest-earning deposits in other financial institutions		4,157,482			15,767,862
Investments in available-for-sale debt securities, at fair value		214,473,398			284,119,556
Loans		1,015,272,350			1,140,881,275
Less — Deferred loan fees/costs		(2,729	)		(84,741	)
Reserve for possible loan losses		(39,263,008	)		(32,221,569	)

Net loans		976,006,613			1,108,574,965

Premises and equipment, net		40,733,224			42,210,536
Accrued interest receivable		3,835,642			5,647,887
Other real estate owned		35,999,751			29,085,943
Identifiable intangible assets, net of accumulated amortization of $119,445 and $107,229 at September 30, 2010 and December 31, 2009, respectively		124,874			137,090
Goodwill		1,149,192			1,149,192
Other assets		43,745,530			38,085,885

	$	1,334,108,332			1,536,707,584

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	68,240,850			71,829,581
Interest-bearing		1,002,885,544			1,194,230,616

Total deposits		1,071,126,394			1,266,060,197
Short-term borrowings		23,872,470			12,696,932
Long-term Federal Home Loan Bank borrowings		93,000,000			104,000,000
Accrued interest payable		1,429,062			2,194,952
Other liabilities		4,306,848			2,086,080

Total liabilities		1,193,734,774			1,387,038,161

Commitments and contingencies
Stockholders’ equity:
Preferred stock, no par value; 2,000,000 shares authorized:
Series A, 40,000 shares issued and outstanding		40,000,000			40,000,000
Series B, 2,000 shares issued and outstanding		2,000,000			2,000,000
Series C, 535 and 300 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		535,000			300,000
Common stock, $0.25 par value; 40,000,000 shares authorized, 22,638,894 and 20,972,091 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		5,659,724			5,243,023
Subscriptions receivable		(682,500	)		—
Surplus		125,350,291			122,334,757
Retained earnings		(34,651,693	)		(19,796,397	)
Accumulated other comprehensive income — net unrealized holding gains (losses) on available-for-sale debt securities		2,162,736			(411,960	)

Total stockholders’ equity		140,373,558			149,669,423

	$	1,334,108,332			1,536,707,584

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	(restated) 2010			(restated) 2009			(restated) 2010			(restated) 2009
Interest income:
Interest and fees on loans	$	13,947,445			16,705,289			44,071,380			51,375,259
Interest on debt securities:
Taxable		1,475,110			1,867,460			4,982,403			5,784,448
Exempt from Federal income taxes		262,589			312,195			863,501			962,426
Interest on short-term investments		2,928			7,076			35,471			29,817

Total interest income		15,688,072			18,892,020			49,952,755			58,151,950

Interest expense:
Interest on deposits		4,514,514			7,835,261			15,769,633			26,017,912
Interest on short-term borrowings		33,792			22,734			90,543			330,272
Interest on long-term Federal Home Loan Bank borrowings		952,131			1,237,276			2,876,132			3,714,910

Total interest expense		5,500,437			9,095,271			18,736,308			30,063,094

Net interest income		10,187,635			9,796,749			31,216,447			28,088,856
Provision for possible loan losses		17,203,000			11,450,000			34,523,000			27,700,000

Net interest income (loss) after provision for possible loan losses		(7,015,365	)		(1,653,251	)		(3,306,553	)		388,856

Noninterest income:
Service charges on deposit accounts		224,675			265,069			684,986			713,587
Net gains on sales of debt securities		21,750			807,172			287,509			806,931
Other noninterest income		875,073			441,357			1,589,178			1,191,369

Total noninterest income		1,121,498			1,513,598			2,561,673			2,711,887

Noninterest expense:
Other-than-temporary impairment losses on available-for-sale securities:
Total other-than-temporary impairment losses		1,426,972			924,671			1,484,789			1,070,748
Portion of other-than-temporary losses recognized in other comprehensive income		(1,134,493	)		(750,827	)		(1,134,493	)		(750,827	)

Net impairment loss realized		292,479			173,844			350,296			319,921
Salaries and employee benefits		3,470,862			3,319,920			9,959,814			10,635,621
Other real estate owned expense		2,080,870			2,066,751			4,676,698			3,828,915
Occupancy and equipment expense		1,106,521			1,119,182			3,267,752			3,331,499
FDIC assessment		678,707			675,279			2,217,622			2,336,261
Data processing		437,829			505,299			1,247,409			1,499,653
Advertising		13,345			25,528			49,096			201,030
Amortization of intangible assets		4,072			4,072			12,216			12,216
Other noninterest expenses		835,263			836,886			2,457,485			2,500,838

Total noninterest expense		8,919,948			8,726,761			24,238,388			24,665,954

Loss before applicable income taxes		(14,813,815	)		(8,866,414	)		(24,983,268	)		(21,565,211	)
Applicable income tax benefit		(5,960,479	)		(3,091,023	)		(10,127,972	)		(7,507,800	)

Net loss	$	(8,853,336	)		(5,775,391	)		(14,855,296	)		(14,057,411	)


Net loss	$	(8,853,336	)		(5,775,391	)		(14,855,296	)		(14,057,411	)
Preferred stock dividends		(553,879	)		(545,000	)		(1,654,022	)		(1,102,111	)

Net loss available to common shareholders	$	(9,407,215	)		(6,320,391	)		(16,509,318	)		(15,159,522	)

Per share amounts:
Basic loss per share	$	(0.42	)		(0.30	)		(0.77	)		(0.73	)
Basic weighted average shares outstanding		22,569,372			20,918,020			21,593,589			20,840,691
Diluted loss per share	$	(0.42	)		(0.30	)		(0.77	)		(0.73	)
Diluted weighted average shares outstanding		22,569,372			20,918,020			21,593,589			20,862,858

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Interim Condensed Consolidated Statements of Comprehensive Loss

Nine Months Ended September 30, 2010 and 2009

(unaudited)


	2010			2009

Net loss	$	(14,855,296	)		(14,057,411	)


Other comprehensive income (loss) before tax:

Change in unrealized gains (losses) on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings, net of reclassification		(138,360	)		(60,161	)

Change in unrealized gains (losses) on other securities available for sale, net of reclassification		3,974,858			3,453,594

Reclassification adjustments for:
Available-for-sale security gains included in net loss		(287,509	)		(806,931	)
Writedown of investment securities included in net loss		350,296			319,921


Other comprehensive income before tax		3,899,285			2,906,423

Income tax related to items of other comprehensive income		1,324,589			988,181


Other comprehensive income, net of tax		2,574,696			1,918,242


Total comprehensive loss	$	(12,280,600	)		(12,139,169	)

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Stockholders’ Equity
Nine Months Ended September 30, 2010 and 2009
(unaudited)


																	Accumulated
																	other			Total
	Preferred		Common		Subscriptions						Retained			Treasury			comprehensive			stockholders’
	stock		stock		receivable			Surplus			earnings			stock			income (loss)			equity

Balance at December 31, 2008	$	—		5,192,696		—			124,193,318			10,663,076			(335,280	)		(104,930	)		139,608,880
Net loss		—		—		—			—			(14,057,411	)		—			—			(14,057,411	)
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	)		—			—			—			—
Preferred stock dividends		—		—		—			—			(1,102,111	)		—			—			(1,102,111	)
Stock issuance costs		—		—		—			(17,271	)		—			—			—			(17,271	)
Stock options exercised — 156,000 shares (19,604 from from treasury)		—		34,098		—			210,485			—			158,416			—			402,999
Treasury stock purchased — 10,000 shares		—		—		—			—			—			(40,000	)		—			(40,000	)
Sale of common stock in connection with employee stock purchase plan — 25,753 shares (14,910 from treasury)		—		2,711		—			(132,272	)		—			216,864			—			87,303
Stock option expense		—		—		—			391,469			—			—			—			391,469
Amortization of restricted stock		—		—		—			28,125			—			—			—			28,125
Change in valuation of available-for-sale securities, net of related tax effect		—		—		—			—			—			—			1,918,242			1,918,242

Balance at September 30, 2009	$	42,000,000		5,229,505		—			122,673,854			(4,496,446	)		—			1,813,312			167,220,225


Balance at December 31, 2009	$	42,300,000		5,243,023		—			122,334,757			(19,796,397	)		—			(411,960	)		149,669,423
Net loss		—		—		—			—			(14,855,296	)		—			—			(14,855,296	)
Subscriptions received for 1,595,517 shares of common stock		—		398,879		(4,786,551	)		4,387,672			—			—			—			—
Payments received for subscription receivable		—		—		4,104,051			—			—			—			—			4,104,051
Issuance of 235 shares of Series C preferred stock		235,000		—		—			—			—			—			—			235,000
Preferred stock dividends		—		—		—			(1,654,022	)		—			—			—			(1,654,022	)
Stock issuance costs		—		—		—			(27,654	)		—			—			—			(27,654	)
Issuance of stock in connection with employee stock purchase plan — 31,286 shares		—		7,822		—			61,566			—			—			—			69,388
Stock option expense		—		—		—			197,734			—			—			—			197,734
Issuance of restricted stock to officers — 40,000 shares				10,000					(10,000	)											—
Amortization of restricted stock		—		—		—			60,238			—			—			—			60,238
Change in valuation of available-for-sale securities, net of related tax effect		—		—		—			—			—			—			2,574,696			2,574,696

Balance at September 30, 2010	$	42,535,000		5,659,724		(682,500	)		125,350,291			(34,651,693	)		—			2,162,736			140,373,558

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2010 and 2009
(unaudited)


	2010			2009
Cash flows from operating activities:
Net loss	$	(14,855,296	)		(14,057,411	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		2,752,909			3,571,080
Provision for possible loan losses		34,523,000			27,700,000
Net (gains) losses on sales and writedowns of debt securities		62,787			(487,010	)
Net gain on sale of bank premises and equipment		—			(6,877	)
Net losses on sales and writedowns of other real estate owned		2,863,068			3,092,545
Stock option compensation cost		197,734			391,469
Amortization of restricted stock expense		60,238			28,125
Mortgage loans originated for sale in the secondary market		(20,859,588	)		(33,518,523	)
Mortgage loans sold in the secondary market		18,778,488			34,516,523
Decrease in accrued interest receivable		1,812,245			214,996
Decrease in accrued interest payable		(765,890	)		(1,558,531	)
Other operating activities, net		(4,765,234	)		(8,080,092	)

Net cash provided by operating activities		19,804,461			11,806,294

Cash flows from investing activities:
Purchase of available-for-sale debt securities		(88,768,335	)		(205,650,276	)
Proceeds from maturities and issuer calls of available-for-sale debt securities		140,239,309			132,794,998
Proceeds from sales of available-for-sale debt securities		20,848,467			36,851,707
Net decrease in loans		85,730,665			41,794,755
Proceeds from sale of other real estate owned		4,618,910			1,197,195
Construction expenditures to finish other real estate owned		—			(13,786	)
Proceeds from sale of bank premises and equipment		—			36,037
Purchase of bank premises and equipment		(98,397	)		(300,884	)

Net cash provided by investing activities		162,570,619			6,709,746

Cash flows from financing activities:
Net decrease in deposits		(194,933,803	)		(8,036,465	)
Net increase (decrease) in short-term borrowings		11,175,538			(49,869,892	)
Payments of long-term Federal Home Loan Bank borrowings		(11,000,000	)		(7,000,000	)
Issuance of preferred stock		235,000			40,000,000
Dividends on preferred stock		(1,654,022	)		(1,102,111	)
Issuance of common stock		4,173,439			33,478
Purchase of treasury stock		—			(40,000	)
Proceeds from sale of treasury stock		—			53,825
Stock options exercised		—			402,999
Payment of stock issuance costs		(27,654	)		(17,271	)

Net cash used in financing activities		(192,031,502	)		(25,575,437	)

Net decrease in cash and cash equivalents		(9,656,422	)		(7,059,397	)
Cash and cash equivalents at beginning of period		27,696,530			57,745,965

Cash and cash equivalents at end of period	$	18,040,108			50,686,568

Supplemental information:
Cash paid for:
Interest	$	19,502,198			31,621,625
Income taxes		—			964,000
Noncash transactions:
Warrant exercise and issuance of Series B preferred stock		—			2,000,000
Transfers to other real estate in settlement of loans		14,767,037			4,485,100
Loans made to facilitate the sale of other real estate		371,251			201,555
Issuance of restricted stock		10,000			—

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

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 also has 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, Houston and Phoenix metropolitan areas 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.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission the “SEC”. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Certain amounts in the 2009 consolidated financial statements have been reclassified to conform to the 2010 presentation. Such reclassifications have no effect on previously reported net loss or stockholders’ equity.

Operating results for the three- and nine-month periods ended September 30, 2010 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2009, included in the Company’s previously issued Annual Report on Form 10-K/A.

Principles of Consolidation

The interim condensed consolidated financial statements include the accounts of the Company and Banks. All significant intercompany accounts and transactions have been eliminated in consolidation.

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.

Cash Flow Information

For purposes of the consolidated statements of cash flows, cash equivalents include amounts due from banks, interest-earning deposits in banks (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 Corporation’s (“FDIC”) Transaction Account Guarantee Program. Under this program, these balances are fully guaranteed by the FDIC through December 31, 2010. After this period, these balances will be fully insured under the recently amended Federal Deposit Insurance Act, with the FDIC providing full insurance, without limitation from December 31, 2010 through December 31, 2012. After this period, these balances would generally exceed the level of deposits insured by the FDIC.

Stock Issuance Costs

The Company incurs certain costs associated with the issuance of its common stock. Such costs are recorded as a reduction of equity capital.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Subsequent Events

The Company has considered all events occurring subsequent to September 30, 2010 for possible disclosures through the filing date of this Form 10-Q.

Earnings per Share

Basic earnings per share data is calculated by dividing net 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.


	Three-Months Ended September 30,						Nine-Months Ended September 30,
	2010			2009			2010			2009

Basic
Net loss available to common shareholders	$	(9,407,215	)		(6,320,391	)		(16,509,318	)		(15,159,522	)

Weighted average common shares outstanding		22,569,372			20,918,020			21,593,589			20,840,691
Basic loss per share	$	(0.42	)		(0.30	)		(0.77	)		(0.73	)

Diluted
Net loss available to common shareholders	$	(9,407,215	)		(6,320,391	)		(16,509,318	)		(15,159,522	)

Weighted average common shares outstanding		22,569,372			20,918,020			21,593,589			20,840,691
Effect of dilutive stock options		—			—			—			22,167

Diluted weighted average common shares outstanding		22,569,372			20,918,020			21,593,589			20,862,858

Diluted loss per share	$	(0.42	)		(0.30	)		(0.77	)		(0.73	)

Restatement

On March 4, 2011, the Company determined that it needed to restate its previously issued interim condensed consolidated financial statements as of and for the three and nine months ended September 30, 2010 and 2009 and that these previously issued consolidated financial statements should no longer be relied upon, as a result of the identification of certain classification errors in the Company’s interim condensed consolidated financial statements issued for those particular periods.

This Amendment No. 1 is required due to certain classification errors in the Initial Form 10-Q related to total other than temporary impairment losses and the portion of other-than-temporary impairment losses recognized in other comprehensive income included in the Company’s interim condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009.

The effects of the restatement for disclosure errors related to total other than temporary impairment losses and the portion of other-than-temporary impairment losses recognized in other comprehensive income included in the Company’s interim condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 are as follows:


	Three Months Ended
	September 30,
	2010						2009
	As reported			As restated			As presented			As restated
Noninterest Expense
Other than temporary impairment losses on available-for-sale securities:
Total other-than-temporary impairment losses	$	78,535			1,426,972			970,749			924,671
Less portion of other-than-temporary impairment losses recognized in other comprehensive income		213,944			(1,134,493	)		(796,905	)		(750,827	)

Net impairment loss realized		292,479			292,479			173,844			173,844
Salaries and employee benefits		3,470,862			3,470,862			3,319,920			3,319,920
Other real estate expense		2,080,870			2,080,870			2,066,751			2,066,751
Occupancy and equipment expense		1,106,521			1,106,521			1,119,182			1,119,182
FDIC assessment		678,707			678,707			675,279			675,279
Data processing		437,829			437,829			505,299			505,299
Advertising		13,345			13,345			25,528			25,528
Amortization of intangible assets		4,072			4,072			4,072			4,072
Other interest expenses		835,263			835,263			836,886			836,886

Total noninterest expense		8,919,948			8,919,948			8,726,761			8,726,761

Loss before income taxes		(14,813,815	)		(14,813,815	)		(8,866,414	)		(8,866,414	)
Applicable income tax benefit		(5,960,479	)		(5,960,479	)		(3,091,023	)		(3,091,023	)

Net loss	$	(8,853,336	)		(8,853,336	)		(5,775,391	)		(5,775,391	)

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)


	Nine Months Ended
	September 30,
	2010						2009
	As reported			As restated			As reported			As restated
Noninterest Expense
Other than temporary impairment losses on available-for-sale securities:
Total other-than-temporary impairment losses	$	138,360			1,484,789			60,161			1,070,748
Less portion of other-than-temporary impairment losses recognized in other comprehensive income		211,936			(1,134,493	)		259,760			(750,827	)

Net impairment loss realized		350,296			350,296			319,921			319,921
Salaries and employee benefits		9,959,814			9,959,814			10,635,621			10,635,621
Other real estate expense		4,676,698			4,676,698			3,828,915			3,828,915
Occupancy and equipment expense		3,267,752			3,267,752			3,331,499			3,331,499
FDIC assessment		2,217,622			2,217,622			2,336,261			2,336,261
Data processing		1,247,409			1,247,409			1,499,653			1,499,653
Advertising		49,096			49,096			201,030			201,030
Amortization of intagible assets		12,216			12,216			12,216			12,216
Other interest expenses		2,457,485			2,457,485			2,500,838			2,500,838

Total noninterest expense		24,238,388			24,238,388			24,665,954			24,665,954

Loss before income taxes		(24,983,268	)		(24,983,268	)		(21,565,211	)		(21,565,211	)
Applicable income tax benefit		(10,127,972	)		(10,127,972	)		(7,507,800	)		(7,507,800	)

Net loss	$	(14,855,296	)		(14,855,296	)		(14,057,411	)		(14,057,411	)

NOTE 2 — INTANGIBLE ASSETS

Identifiable intangible assets include the core deposit premium relating to the Company’s acquisition of The Bank of Godfrey, which is being amortized into noninterest expense on a straight-line basis over 15 years. Amortization of the core deposit intangible assets existing at September 30, 2010 will be $4,072 per quarter until completely amortized.

The excess of the Company’s 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 Company’s 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 has thus far been required on this intangible asset.

NOTE 3 — STOCK OPTIONS

Compensation costs relating to share-based payment transactions are recognized in the Company’s 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.

No value was ascribed to the options granted in the first nine months of 2010 or 2009, as the option price significantly exceeded the market value of the stock on the grant date; however, the Company’s common stock is not actively traded on any exchange. Accordingly, the availability of fair value information for the Company’s common stock is limited. In using the Black-Scholes option pricing model to value the options, several assumptions have been made in arriving at the estimated fair value of the

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

options granted, including minimal or no volatility in the Company’s 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.

Following is a summary of the Company’s stock option activity for the nine-month periods ended September 30, 2010 and 2009:


	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
Nine Months Ended September 30, 2009:
Balance at December 31, 2008	$	7.61		1,553,450		$	8.44		673,000
Granted		7.50		102,250			7.50		500
Forfeited		9.33		(65,000	)		13.23		(3,000	)
Exercised		2.58		(156,000	)		—		—

Balance at September 30, 2009	$	8.07		1,434,700		$	8.42		670,500


Nine Months Ended September 30, 2010:
Balance at December 31, 2009	$	8.05		1,424,450		$	8.41		666,816
Forfeited		10.86		(17,250	)		10.70		(26,016	)

Balance at September 30, 2010	$	8.02		1,407,200		$	8.32		640,800

The weighted average option prices for the 2,048,000 and 2,105,200 options outstanding at September 30, 2010 and 2009 were $8.11 and $8.18, respectively. At September 30, 2010, options to purchase an additional 547,250 shares of Company common stock were available for future grants under the various plans.

The total intrinsic value of options exercised during the nine months ended September 30, 2009 was $228,300. No options were exercised during the nine months ended September 30, 2010. The average remaining contractual term for options exercisable as of September 30, 2010 was 2.89 years, with no intrinsic value at September 30, 2010. A summary of the activity of non-vested options during 2010 is as follows:


				Weighted
				Average
				Grant Date
	Shares			Fair Value

Nonvested at December 31, 2009		271,198		$	2.09
Granted		—			—
Vested		(142,857	)		2.73
Forfeited		(4,250	)		1.14

Nonvested at September 30, 2010		124,091			1.38

Unrecognized compensation expense related to nonvested stock options granted after January 1, 2006, was $18,545, and the related weighted average period over which it is expected to be recognized is approximately eight months. The Company recognized stock option expense of $197,734 and $391,469 for the nine months ended September 30, 2010 and 2009, respectively.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

NOTE 4 — 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 September 30, 2010 and December 31, 2009 were as follows:

Gross

unreal-

Estimated

Amortized

ized

fair

cost

gains

losses

value

September 30, 2010

Obligations of U.S. Government agencies and corporations

67,999,924

548,943

—

68,548,867

Obligations of state and political subdivisions

22,121,711

864,340

—

22,986,051

Trust preferred securities

3,363,681

—

(2,285,299

)

1,078,382

U.S. agency residential mortgage-backed securities

117,712,980

4,147,118

—

121,860,098

211,198,296

5,560,401

(2,285,299

)

214,473,398


December 31, 2009

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
Trust preferred securities		3,697,211	—	(2,459,474	)	1,237,737
U.S. agency residential 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

The amortized cost and estimated fair values of debt and equity securities classified as available-for-sale at September 30, 2010, 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	$	3,691,200		3,707,146
Due one year through five years		19,849,400		20,166,075
Due five years through ten years		58,183,722		59,123,722
Due after ten years		11,760,994		9,616,357
U.S. agency residential mortgage-backed securities		117,712,980		121,860,098

	$	211,198,296		214,473,398

Provided below is a summary of available-for sale investment securities which were in an unrealized loss position at September 30, 2010 and 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, Government National Mortgage Association or the Federal Home Loan Mortgage Corporation. The obligations of state and political subdivisions with unrealized losses at December 31, 2009 are primarily comprised of municipal bonds with adequate credit ratings, underlying collateral, and/or cash flow projections. The unrealized losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the Banks do not intend to sell the securities with unrealized losses, and it is not more likely than not that the Banks will be required to sell them before recovery of their amortized cost bases, which may be at maturity.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Trust preferred securities are comprised of trust preferred collateralized debt obligations issued by banks, thrifts, and insurance companies. The market for trust preferred securities at September 30, 2010 and December 31, 2009 was not active and markets for similar securities were also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which trust preferred securities 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 trust preferred securities 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. The Banks do not intend to sell the trust preferred securities, and it is more likely than not that the Banks will not be required to sell them.

September 30, 2010

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

—

Obligations of states and political subdivisions

—

Trust preferred securities

—

1,078,382

(2,285,299

)

1,078,382

(2,285,299

)

U.S. agency residential mortgage-backed securities

—

1,078,382

(2,285,299

)

1,078,382

(2,285,299

)


	December 31, 2009
	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	)
Trust preferred securities		—		—			1,237,737		(2,459,474	)		1,237,737		(2,459,474	)
U.S. agency residential 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 Banks’ trust preferred securities consist of the following issues:


														Percentage of
								PV of		Year to date		Number of		issuers
			Accrual	Book		Fair		estimated		2010		original		currently
Pool	Class		status	value		value		cash flows		impairment		issuers		performing
1		C	Accruing		1,000,000		519,351		1,004,427		—		25		96	%
2		B	Nonaccrual		933,360		263,203		980,221		—		56		75	%
3		B-1	Nonaccrual		813,880		272,127		813,880		203,773		64		63	%
4		B	Nonaccrual		616,441		23,701		616,441		146,523		59		25	%

					3,363,681		1,078,382		3,414,969		350,296

As noted in the above table, some of the Company’s investments in trust preferred securities have experienced fair value deterioration due to credit losses but are not otherwise considered to be other-than-temporarily impaired (OTTI). The

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

following table provides information about those trust preferred securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income (loss) for the nine months ended September 30, 2010 and 2009.


	Accumulated		Accumulated
	Credit Losses		Credit Losses
	September 30,		September 30,
	2010		2009
Credit losses on trust preferred securities held
Beginning of period	$	340,957		—
Additions related to OTTI losses not previously recognized		203,773		319,921
Reductions due to sales		—		—
Reductions due to change in intent or likelihood of sale		—		—
Additions related to increases in previously recognized OTTI losses		146,523		—
Reductions due to increases in expected cash flows		—		—

End of period	$	691,253		319,921

Declines in the fair value of securities below their cost that are deemed to be other-than-temporary (OTTI) are reflected in operations as realized losses. In estimating other-than-temporary impairment losses, management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. The analysis requires management to consider various factors, which include (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, (4) structure of the security, and (5) the intent to sell the security or whether its more likely than not that the Company would be required to sell the security before its anticipated recovery in market value.

For the nine months ended September 30, 1010 and 2009, certain available-for-sale securities were sold for proceeds totaling $20,848,467 and $36,851,707, respectively, resulting in gross gains of $295,024 and $807,172, respectively, and gross losses of $7,515 and $241, respectively.

NOTE 5 — LOANS

The composition of the loan portfolio at September 30, 2010 and 2009 as follows:


	September 30,		December 31,
	2010		2009
Commercial:
Real estate	$	752,228,053		797,054,385
Other		71,769,137		82,732,850
Real estate:
Construction		112,934,523		172,731,598
Residential		75,297,266		84,657,909
Consumer		3,043,371		3,704,533

	$	1,015,272,350		1,140,881,275

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 $59,636,549 at September 30, 2010. The ability of the Banks’ borrowers to honor their contractual obligations is dependent in part upon the local economies and their effect on the real estate market.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Transactions in the reserve for possible loan losses for the nine months ended September 30, 2010 and 2009 are summarized as follows:


	2010			2009

Balance, January 1	$	32,221,569			14,305,822
Provision charged to operations		34,523,000			27,700,000
Charge-offs		(27,797,700	)		(17,129,335	)
Recoveries of loans previously charged off		316,139			1,393,319

Balance, September 30	$	39,263,008			26,269,806

NOTE 6 — 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 September 30, 2010:


Financial instruments for which contractual amounts represent:
Commitments to extend credit	$	133,076,427
Standby letters of credit		13,111,997

	$	146,188,424

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 September 30, 2010, $24,016,554 was 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 customer’s 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 management’s 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. 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.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2010:


	Carrying		Estimated
	amount		fair value
Balance sheet assets:
Cash and due from banks	$	18,040,108		18,040,108
Investments in debt securities		214,473,398		214,473,398
Loans, net		976,006,613		990,906,372
Accrued interest receivable		3,835,642		3,835,642

	$	1,212,355,761		1,227,255,520

Balance sheet liabilities:
Deposits	$	1,071,126,394		1,078,233,376
Short-term borrowings		23,872,470		23,872,470
Long-term Federal Home
Loan Bank borrowings		93,000,000		112,155,548
Accrued interest payable		1,429,062		1,429,062

	$	1,189,427,926		1,215,690,456

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. 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.

The following is a description of valuation methodologies used for assets recorded at fair value:

Cash and Other Short-Term Instruments — For cash and due from banks (including 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.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Investments in Available-for-Sale Debt Securities — Investments in available-for-sale debt securities are recorded at fair value on a recurring basis. The Company’s available-for sale debt securities are measured at fair value using Level 2 and 3 valuations. For all debt securities other than the trust preferred securities described below, the market valuation utilizes several sources, primarily pricing services, 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 at September 30, 2010, the absence of observable transactions in the secondary and new issue markets for TRUP CDOs, the few observable transactions and market quotations that are available are not reliable for the purpose of determining fair value at September 30, 2010, 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 have been 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. The 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 on December 31, 2009	$	1,237,737
Net unrealized gain arising in 2010		174,176
Impairment writedowns recognized in 2010		(350,296	)
Accreted discount		1,153
Payments in kind during 2010		19,694
Principal payments received in 2010		(4,082	)

Balance, at fair value on September 30, 2010	$	1,078,382

Loans — The Company does not record loans at fair value on a recurring basis, other than loans that are considered impaired, which are recorded at the lower of fair value (less cost to sell) or amortized cost. At September 30, 2010, all impaired loans were evaluated based on the fair value of the collateral. The fair value of the underlying collateral is based upon an observable market price or current appraised value, and, therefore, the Company classifies these assets in the nonrecurring Level 3 category. The total principal balance of impaired loans measured at fair value at September 30, 2010 was $160,800,461.

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, which is a nonrecurring Level 3 valuation technique.

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, which is a nonrecurring Level 3 valuation technique.

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.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

The following table summarizes financial instruments measured at fair value on a recurring basis as of September 30, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.


	Quoted
	Prices in
	Active		Significant
	Markets for		Other		Significant
	Identical		Observable		Observable
	Assets		Inputs		Inputs		Total Fair
	(Level 1)		(Level 2)		(Level 3)		Value
Assets
Investment securities:
Obligations of U.S. Government agencies and corporations	$	—		68,548,867		—		68,548,867
Obligations of state and political subdivisions		—		22,986,051		—		22,986,051
Trust preferred collateralized debt obligations		—		—		1,078,382		1,078,382
U.S. agency residential mortgage-backed securities		—		121,860,098		—		121,860,098

Total investment securities available-for-sale	$	—		213,395,016		1,078,382		214,473,398

In addition, other real estate owned is adjusted to fair value upon foreclosure of the underlying loan. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value less costs to sell. Fair value of other real estate owned is based upon the current appraised values of the properties, as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Accordingly, these assets are classified in the Level 2 category. The total principal balance of other real estate owned at September 30, 2010 is $35,999,751.

Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following presents management’s discussion and analysis of the consolidated financial condition and results of operations of Reliance Bancshares, Inc. (the “Company”) for the three and nine-month periods ended September 30, 2010 and 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 the accompanying interim condensed consolidated financial statements included in this report and the consolidated financial statements for the year ended December 31, 2009, included in our most recent annual report on Form 10-K/A.

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.

Forward-Looking Statements

Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified with use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate,” “potential,” “could”, and similar words, although some forward-looking statements are expressed differently. 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 in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated from time to time in our subsequent filings. The Company does not intend to publicly revise or update forward-looking statements to reflect events or circumstances that arise after the date of this report, unless otherwise required by applicable rules.

Overview of Operations

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”). Since its opening in 1999 through September 30, 2010, Reliance Bank has accumulated a total of 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 total assets, loans and deposits of $1.2 billion, $964 million, and $1 billion, respectively, at September 30, 2010.

On January 17, 2006, the Company opened a new Federal Savings Bank, Reliance Bank, FSB, in Ft. Myers, Florida. Since its opening in 2006 through September 30, 2010, Reliance Bank, FSB has accumulated a total of three branch locations in southwestern Florida and has total assets, loans, and deposits of $89.7 million, $51.4 million, and $69.5 million, respectively, at September 30, 2010.

During 2008, the Company completed building its St. Louis metropolitan branch network. The Company plans to continue building its branch network in southwestern Florida, with four additional branches planned; however, the building of these branches has been suspended while management focuses on Reliance Bank, FSB’s profitability in light of the stressful market conditions in southwestern Florida. The Company’s branch expansion plans have been designed to increase the Company’s market share in the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida and to allow the Company’s 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 Company’s 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.

Executive Summary of Results of Operations and Financial Condition

The Company’s consolidated net loss for the nine-month periods ended September 30, 2010 and 2009 totaled $14,855,296 and $14,057,411, respectively. Consolidated net loss for the three-month periods ended September 30, 2010 and 2009 totaled $8,853,336 and $5,775,391, respectively. While the Company’s quarterly and year-to-date net interest income has continued to grow, 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 Company’s banking subsidiaries operate.

Provision and Asset Quality

Credit costs continued to weigh heavily on third quarter 2010 earnings, as the Company recorded $17.2 million in provision for loan losses, largely related to asset quality deterioration in the Company’s land development, construction and commercial real estate portfolios. The Company experienced an increase in non-performing loans due to the current economic environment. Non-performing loans as of September 30, 2010 totaled $119.2 million, compared with $90.5 million as of September 30, 2009. Net charge-offs during the third quarter of 2010 were $14.1 million.

Management remains focused on improving credit quality and as a result of continued economic strains, has implemented rigorous problem credit action plans. During the third quarter of 2010, the Company has added personnel to address asset quality issues and dispose of non-performing assets.

Improved Net Interest Margin

Third quarter 2010 net interest margin grew by 4% over the same period in 2009, driven by a 39.5% drop in third quarter 2010 interest expense compared to third quarter 2009 The composition of the Company’s funding sources has shifted to lower cost transaction and savings accounts and away from higher cost time deposits. For the quarter ended September 30, 2010, average balances of transaction and savings accounts increased to 44.56% of total funding sources in 2010 as compared to 33.80% for the same quarter in 2009. Also, for the quarter ended September 30, 2010, average balances of time deposits decreased to 39.83% of total funding sources in 2010 as compared to 50.82% during the same period in 2009.

These increases in lower cost deposits helped reduce the Company’s cost of funds to 1.86% from 2.79% for the three months ended September 30, 2010 and 2009, respectively. One of the Company’s fastest growing funding categories also had the largest drop in rate of any of the Company’s funding categories. Average rates on savings accounts decreased from 2.81% to 1.01% for the three month periods ended September 30, 2009 to 2010, respectively.

Management has placed increased focus on growing low cost core transaction deposits, by concentrating on overall customer deposit relationships, allowing for a reduction in total deposit pricing and increased customer retention.

Capital

The Company continues to remain above the regulatory threshold for a well capitalized institution. In addition, during the past nine months, the Company has raised $4,104,051 from an ongoing stock offering and has outstanding subscriptions totaling an additional $682,500.

The following are certain ratios generally followed in the banking industry for the three- and nine-month periods ended September 30, 2010 and 2009:


	As of and for the						As of and for the
	nine months ended						quarters ended
	September 30,						September 30,
	2010			2009			2010			2009
Percentage of net loss to:
Average total assets		(1.37	)%		(1.19	)%		(2.52	)%		(1.49	)%
Average stockholders’ equity		(13.43	)%		(10.97	)%		(24.24	)%		(13.27	)%
Net interest margin		3.10	%		2.54	%		3.14	%		2.69	%

Percentage of average stockholders’ equity to average total assets		10.17	%		10.88	%		10.40	%		11.24	%

Critical Accounting Policies

The impact and any associated risks related to the Company’s critical accounting policies on reporting operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s consolidated financial statements as of and for the year ended December 31, 2009 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our most recent Annual Report on Form 10-K, which was filed March 30, 2010. Management believes that there have been no material changes to our critical accounting policies during the first nine months of 2010.

Results of Operations for the Three- and Nine-Month Periods Ended September 30, 2010 and 2009

Net Interest Income

The Company’s net interest income increased $3,127,591 (11.13%) to $31,216,447 for the nine-month period ended September 30, 2010 from the $28,088,856 earned during the nine-month period ended September 30, 2009. The Company’s net interest margin for the nine-month periods ended September 30, 2010 and 2009 was 3.10% and 2.54%,respectively. The Company’s net interest income increased $390,886 (3.99%) to $10,187,635 for the three-month period ended September 30, 2010 from the $9,796,749 earned during the three-month period ended September 30, 2009. The Company’s net interest margin for the three-month periods ended September 30, 2010 and 2009 was 3.14% and 2.69%, respectively. This increase in margin percentage is primarily attributed to lower cost of funds on the Company’s retail deposit products and a shift in funding composition toward lower cost deposit products. The Company’s average rate on interest-bearing liabilities for the nine-month periods ended September 30, 2010 and 2009 was 2.02% and 3.01%, respectively. The Company’s average rate on interest-bearing liabilities for the three-month periods ended September 30, 2010 and 2009 was 1.86% and 2.79%, respectively.

Average earning assets for the first nine months of 2010 decreased $137,746,409 (9.18%) to $1,363,101,704 from the level of $1,500,848,113 for the first nine months of 2009. Average earning assets for the third quarter of 2010 decreased $161,325,647 (11.03%) to $1,301,262,041 from the level of $1,462,587,688 for the third quarter of 2009. A significant portion of this decline can be attributed to the decrease in outstanding loan balances. Total average loans for the first nine months of 2010 decreased $137,654,190 (11.22%) to $1,088,718,081 from the level of $1,226,372,271 for the first nine months of 2009. Total average loans for the third quarter of 2010 decreased $152,690,671 (12.69%) to $1,050,647,121 from the level of $1,203,337,792 for the third quarter of 2009. The depressed economy has reduced the Company’s opportunities for loan growth in its current markets and a redirection away from commercial real estate.

Total average investment securities for the first nine months of 2010 decreased $2,464,088 (0.98%) to $249,301,195 from the level of $251,765,283 for the first nine months of 2009. Total average investment securities for the third quarter of 2010 decreased $1,752,037 (0.73%) to $239,626,970 from the level of $241,379,007 for the third quarter of 2009. 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 insured 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. The total carrying value of securities pledged to secure public funds and repurchase agreements was approximately $54.9 million at September 30, 2010.

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 nine-month periods ended September 30, 2010 and 2009 were $25,082,428 and $22,710,559, respectively. The average balances of such short-term investments for the quarters ended September 30, 2010 and 2009 were $10,987,950 and $17,870,889, respectively.

A key factor in attempting to increase the Company’s net interest margin is to maintain a higher percentage of earning assets in the loan category, which is the Company’s highest earning asset category; however, average loans as a percentage of average earning assets declined to 79.87% for the first nine months of 2010, which was a 1.84% decrease over the 81.71% achieved in the first nine months of 2009. Average loans as a percentage of average earning assets were 80.74% for the third quarter of 2010, which was a 1.53% decrease over the 82.27% achieved in the third quarter of 2009. This decline resulted from the depressed economic environment in the Banks’ market areas, resulting in fewer lending opportunities for the Banks.

Total average interest-bearing deposits for the first nine months of 2010 were $1,118,614,320, a decrease of $59,216,740 (5.03%) from the level of $1,177,831,060 for the first nine months of 2009. Total average interest-bearing deposits for the third quarter of 2010 were $1,047,709,903, a decrease of $100,072,217 (8.72%) from the level of $1,147,782,120 for the third quarter of 2009. As discussed in the following paragraphs, while the overall balance has declined, the mix of deposit balances has moved away from the higher cost time deposits to savings and transaction accounts. With the decline in loan demand and low rates available on investments, the Banks have not needed as much in deposits.

The Company’s short-term borrowings consist of overnight funds borrowed from unaffiliated financial institutions and securities sold under sweep repurchase agreements with larger deposit customers. Average short-term borrowings for the nine months ended September 30, 2010 declined $4,762,488 (19.92%) to $19,151,519 from $23,914,007 for the nine months ended September 30, 2009. Average short-term borrowings for the third quarter of 2010 increased $13,995,687 (100.30%) to $27,949,686 from $13,953,999 for the third quarter of 2009. Short-term borrowings can fluctuate significantly based on short-term liquidity needs and changes in deposit volumes.

The Company has used longer-term advances to match with longer-term fixed rate assets. The average balance of Federal Home Loan Bank advances decreased $34,855,436 (25.83%) to $100,062,127 for the first nine months of 2010, compared with $134,917,563 for the first nine months of 2009. The average balance of Federal Home Loan Bank advances declined $35,028,674 (26.39%) to $97,724,014 for the third quarter of 2010, compared with the $132,752,688 average balance for the third quarter of 2009. The decline is the result of the Company’s efforts to increase core retail deposits and reduce its percentage of wholesale funding, and less need for funding due to slow loan demand and low investment rates.

The overall mix of the Company’s funding sources has a significant impact on the Company’s 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”) for the three- and nine-month periods ended September 30, 2010 and 2009:


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Average deposits:
Noninterest-bearing		5.49	%		4.57	%		4.87	%		4.29	%

Interest-bearing:
Transaction accounts		18.10			12.37			17.63			11.90
Savings		26.46			21.43			24.94			17.08
Time deposits of $100,000 or more		15.60			21.30			18.20			23.32
Other time deposits		24.23			29.52			25.20			32.03

Total average interest-bearing deposits		84.39			84.62			85.97			84.33

Total average deposits		89.88			89.19			90.84			88.62
Average short-term borrowings		2.25			1.03			1.47			1.71
Average longer-term advances from Federal Home Loan Bank		7.87			9.78			7.69			9.67

		100.00	%		100.00	%		100.00	%		100.00	%

The composition of the Company’s deposit portfolio will fluctuate as recently-added branches help to diversify the Company’s 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 total funding sources and increase its percentage of lower cost savings and interest-bearing transaction accounts. Through deposit campaigns, the Company increased its percentage of average savings accounts to 26.46% and 24.94% of total average funding sources for the three and nine months ended September 30, 2010, respectively, compared to 21.43% and 17.08% for the three and nine months ended September 30, 2009, respectively. Also, average interest-bearing transaction accounts increased to 18.10% and 17.63% of total average funding sources for the three- and nine-month periods ended September 30, 2010, respectively, from 12.37% and 11.90% for the three and nine months ended September 30, 2009, respectively.

These increases in lower cost deposits helped reduce the rate paid on total interest-bearing liabilities from 3.01% to 2.02% for the nine months ended September 30, 2010, compared to the same period in 2009 and from 2.79% to 1.86% for the three months ended September 2010, compared to the same period in 2009. Rates on each category of interest-rate bearing deposits dropped for both the nine-month and three-month periods ended September 30, 2010 compared to the same periods in 2009. One of the Company’s fastest growing funding categories also had the largest drop in rate of any of the Company’s funding categories. Average rates on savings accounts decreased from 2.84% to 1.19% for the nine-month periods ended September 30, 2009 and 2010, respectively. Rates on savings accounts decreased from 2.81% to 1.01% for the three-month periods ended September 30, 2009 to 2010. Given the low rate of interest rates for all deposits, customers are more willing to maintain their

accounts in lower-yielding savings accounts, with the expectation that rates will eventually increase, rather than locking up their funds in lower-yielding time deposits for any length of time.

The Company was also able to reduce the percentage of longer-term advances and higher cost certificates of deposit. Certificates of deposit declined to 43.40% and 39.83% for the nine and three months ended September 30, 2010, respectively compared to 55.35% and 50.82% for the three and nine months ended September 30, 2009, respectively. Certificates of deposit have a lagging effect with interest rate changes, as most certificates of deposit have longer maturities at fixed rates. Depositors are also less likely to lock into the current low interest rates for an extended period of time with certificates of deposit.

Management has placed increased focus on growing lower-cost core transaction deposits by concentrating on overall customer deposit relationships, allowing for a reduction in total deposit pricing and increased customer retention.

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.


	Nine Months Ended September 30, 2010
				Percent			Interest		Average
	Average			of Total			Income/		Yield/
	Balance			Assets			Expense		Rate
ASSETS
Loans (1) (2) (3)	$	1,088,718,081			74.83	%	$	44,088,809		5.41	%
Investment securities:
Taxable		221,460,781			15.22			4,982,403		3.01
Exempt from Federal income taxes (3)		27,840,414			1.91			1,234,870		5.93
Short-term investments		25,082,428			1.73			35,471		0.19

Total earning assets		1,363,101,704			93.69			50,341,553		4.94	%

Nonearning assets:
Cash and due from banks		5,310,275			0.36
Reserve for possible loan losses		(35,654,686	)		(2.45	)
Premises and equipment		41,508,278			2.85
Other assets		78,294,660			5.39
Available-for-sale investment market valuation		2,351,012			0.16

Total nonearning assets		91,809,539			6.31

Total assets	$	1,454,911,243			100.00	%

LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	229,389,564			15.77	%		1,526,456		0.89	%
Savings		324,538,835			22.31			2,884,150		1.19
Time deposits of $100,000 or more		236,831,419			16.28			4,368,278		2.47
Other time deposits		327,854,502			22.52			6,990,749		2.85

Total interest-bearing deposits		1,118,614,320			76.88			15,769,633		1.88
Long-term borrowings		100,062,127			6.88			2,876,132		3.84
Funds purchased and securities sold under repurchase agreements		19,151,519			1.32			90,543		0.63

Total interest-bearing liabilities		1,237,827,966			85.08			18,736,308		2.02

Noninterest-bearing deposits		63,405,125			4.36
Other liabilities		5,785,969			0.39

Total liabilities		1,307,019,060			89.83
STOCKHOLDERS’ EQUITY		147,892,183			10.17

Total liabilities and stockholders’ equity	$	1,454,911,243			100.00	%

Net interest income							$	31,605,245

Net yield on earning assets										3.10	%

(continued)


	Nine Months Ended September 30, 2009
				Percent			Interest		Average
	Average			of Total			Income/		Yield/
	Balance			Assets			Expense		Rate
ASSETS
Loans (1) (2) (3)	$	1,226,372,271			77.85	%	$	51,392,428		5.60	%
Investment securities:
Taxable		220,729,461			14.01			5,784,448		3.50
Exempt from Federal income taxes (3)		31,035,822			1.97			1,335,948		5.76
Short-term investments		22,710,559			1.44			29,817		0.18

Total earning assets		1,500,848,113			95.27			58,542,641		5.22	%

Nonearning assets:
Cash and due from banks		5,171,632			0.33
Reserve for possible loan losses		(16,645,273	)		(1.06	)
Premises and equipment		43,536,302			2.76
Other assets		41,433,140			2.63
Available-for-sale investment market valuation		862,440			0.07

Total nonearning assets		74,358,241			4.73

Total assets	$	1,575,206,354			100.00	%

LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	166,222,457			10.55	%		1,616,712		1.30	%
Savings		238,560,261			15.14			5,069,880		2.84
Time deposits of $100,000 or more		325,684,306			20.68			7,617,809		3.13
Other time deposits		447,364,036			28.40			11,713,511		3.50

Total interest-bearing deposits		1,177,831,060			74.77			26,017,912		2.95
Long-term borrowings		134,917,563			8.57			3,714,910		3.68
Funds purchased and securities sold under repurchase agreements		23,914,007			1.52			330,272		1.85

Total interest-bearing liabilities		1,336,662,630			84.86			30,063,094		3.01

Noninterest-bearing deposits		59,971,718			3.81
Other liabilities		7,244,134			0.45

Total liabilities		1,403,878,482			89.12
STOCKHOLDERS’ EQUITY		171,327,872			10.88

Total liabilities and stockholders’ equity	$	1,575,206,354			100.00	%

Net interest income							$	28,479,547

Net yield on earning assets										2.54	%

(continued)


	Quarter Ended September 30, 2010
				Percent			Interest		Average
	Average			of Total			Income/		Yield/
	Balance			Assets			Expense		Rate
ASSETS
Loans (1) (2) (3)	$	1,050,647,121			75.45	%	$	13,953,314		5.27	%
Investment securities:
Taxable		214,230,958			15.38			1,475,110		2.73
Exempt from Federal income taxes (3)		25,396,012			1.82			379,914		5.94
Short-term investments		10,987,950			0.79			2,928		0.11

Total earning assets		1,301,262,041			93.44			15,811,266		4.82

Nonearning assets:
Cash and due from banks		5,194,702			0.37
Reserve for possible loan losses		(40,501,497	)		(2.91	)
Premises and equipment		41,008,354			2.94
Other assets		81,806,110			5.88
Available-for-sale investment market valuation		3,756,147			0.28

Total nonearning assets		91,263,816			6.56

Total assets	$	1,392,525,857			100.00	%

LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	224,701,967			16.14	%		446,272		0.79	%
Savings		328,564,851			23.59			833,606		1.01
Time deposits of $100,000 or more		193,654,294			13.91			1,226,390		2.51
Other time deposits		300,788,791			21.60			2,008,246		2.65

Total interest-bearing deposits		1,047,709,903			75.24			4,514,514		1.71
Long-term borrowings		97,724,014			7.02			952,131		3.87
Funds purchased and securities sold under repurchase agreements		27,949,686			2.01			33,792		0.48

Total interest-bearing liabilities		1,173,383,603			84.27			5,500,437		1.86

Noninterest-bearing deposits		68,220,782			4.90
Other liabilities		6,043,428			0.43

Total liabilities		1,247,647,813			89.60
STOCKHOLDERS’ EQUITY		144,878,044			10.40

Total liabilities and stockholders’ equity	$	1,392,525,857			100.00	%

Net interest income							$	10,310,829

Net yield on earning assets										3.14	%

(continued)


	Quarter Ended September 30, 2009
				Percent			Interest		Average
	Average			of Total			Income/		Yield/
	Balance			Assets			Expense		Rate
ASSETS
Loans (1) (2) (3)	$	1,203,337,792			78.29	%	$	16,710,982		5.51	%
Investment securities:
Taxable		211,114,675			13.74			1,867,460		3.51
Exempt from Federal income taxes (3)		30,264,332			1.97			436,030		5.72
Short-term investments		17,870,889			1.16			7,076		0.16

Total earning assets		1,462,587,688			95.16			19,021,548		5.16

Nonearning assets:
Cash and due from banks		4,343,811			0.28
Reserve for possible loan losses		(20,972,655	)		(1.36	)
Premises and equipment		43,057,314			2.80
Other assets		46,355,645			3.01
Available-for-sale investment market valuation		1,620,549			0.11

Total nonearning assets		74,404,664			4.84

Total assets	$	1,536,992,352			100.00	%

LIABILITIES
Interest-bearing liabilities:
Interest-bearing transaction accounts	$	167,744,078			10.91	%		472,430		1.12	%
Savings		290,696,634			18.91			2,056,821		2.81
Time deposits of $100,000 or more		288,977,087			18.80			2,023,528		2.78
Other time deposits		400,364,321			26.05			3,282,482		3.25

Total interest-bearing deposits		1,147,782,120			74.67			7,835,261		2.71
Long-term borrowings		132,752,688			8.64			1,237,276		3.70
Funds purchased and securities sold under repurchase agreements		13,953,999			0.91			22,734		0.65

Total interest-bearing liabilities		1,294,488,807			84.22			9,095,271		2.79

Noninterest-bearing deposits		61,952,867			4.03
Other liabilities		7,828,447			0.51

Total liabilities		1,364,270,121			88.76
STOCKHOLDERS’ EQUITY		172,722,231			11.24

Total liabilities and stockholders’ equity	$	1,536,992,352			100.00	%

Net interest income							$	9,926,277

Net yield on earning assets										2.69	%


(1)		Interest includes loan fees, recorded as discussed in Note 1 to our consolidated financial statements for the year ended December 31, 2009, included in our Annual Report on Form 10-K, which was filed March 30, 2010.

(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.

The following table sets forth, on a tax-equivalent basis for the period 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)
	Third Quarter									First Nine Months
	Change From 2009 to 2010 Due to
				Yield/									Yield/
	Volume (1)			Rate (2)			Total			Volume (1)			Rate (2)			Total
Interest income:
Loans	$	(2,052,953	)		(704,715	)		(2,757,668	)		(5,608,365	)		(1,695,254	)		(7,303,619	)
Investment securities:
Taxable		27,267			(419,617	)		(392,350	)		18,862			(820,907	)		(802,045	)
Exempt from Federal income taxes		(72,375	)		16,259			(56,116	)		(139,899	)		38,821			(101,078	)
Short-term investments		(2,290	)		(1,858	)		(4,148	)		3,691			1,963			5,654

Total interest income		(2,100,351	)		(1,109,931	)		(3,210,282	)		(5,725,711	)		(2,475,377	)		(8,201,088	)

Interest expense:
Interest-bearing transaction accounts		135,401			(161,559	)		(26,158	)		507,786			(598,042	)		(90,256	)
Savings accounts		239,053			(1,462,268	)		(1,223,215	)		1,417,464			(3,603,194	)		(2,185,730	)
Time deposits of $100,000 or more		(615,820	)		(181,318	)		(797,138	)		(1,832,887	)		(1,416,644	)		(3,249,531	)
Other time deposits		(731,359	)		(542,877	)		(1,274,236	)		(2,785,977	)		(1,936,785	)		(4,722,762	)

Total deposits		(972,725	)		(2,348,022	)		(3,320,747	)		(2,693,614	)		(7,554,665	)		(10,248,279	)
Funds purchased and securities sold under repurchase agreements		18,256			(7,198	)		11,058			(55,604	)		(184,125	)		(239,729	)
Long-term borrowings		(339,752	)		54,607			(285,145	)		(994,349	)		155,571			(838,778	)

Total interest expense		(1,294,221	)		(2,300,613	)		(3,594,834	)		(3,743,567	)		(7,583,219	)		(11,326,786	)

Net interest income	$	(806,130	)		1,190,682			384,552			(1,982,144	)		5,107,842			3,125,698


(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 nine-month periods ended September 30, 2010 and 2009 was $34,523,000 and $27,700,000, respectively. The provision for possible loan losses charged to earnings for the three-month periods ended September 30, 2010 and 2009 was $17,203,000 and $11,450,000, respectively. Net charge-offs for the nine-month periods ended September 30, 2010 and 2009 totaled $27,481,561 and $15,736,016, respectively. Net charge-offs for the three-month periods ended September 30, 2010 and 2009 totaled $14,103,396 and $9,224,704, respectively. At September 30, 2010 and 2009, the reserve for possible loan losses as a percentage of net outstanding loans was 3.87% and 2.20%, respectively. The reserve for possible loan losses as a percentage of non-performing loans (comprised of loans for which the accrual of interest has been discontinued, loans still accruing interest that were 90 days delinquent, and restructured loans) was 32.95% and 29.02% at September 30, 2010 and 2009, respectively. The continued significant decline of the real estate market has resulted in an increase in the level of non-performing loans and a required higher provision for loan losses in the first nine months of 2010. See further discussion regarding the Company’s credit risk management in the section below entitled “Risk Management.”

Noninterest Income

Total noninterest income for the first nine months of 2010, excluding security sale gains, increased $369,208 (19.38%) to $2,274,164 from the $1,904,956 earned for the first nine months of 2010. Total noninterest income for the third quarter of 2010, excluding security gains, increased $393,322 (55.68%) to $1,099,748 from the $706,426 earned for the third quarter of 2009. The Company recognized a gain during the third quarter of 2010 of $244,369 on the sale of approximately $4.9 million of loans guaranteed by the Small Business Administration.

Noninterest Expense

Total noninterest expense decreased $427,566 (1.73%) for the first nine months of 2010 to $24,238,388 from the $24,665,954 incurred during the first nine months of 2009. Noninterest expense increased $193,187 (2.21%) for the third quarter of 2010 to $8,919,948 from the $8,726,761 incurred during the third quarter of 2009. For the nine-month period, the Company had reductions in all noninterest expense categories with the exception of other real estate expense.

Total personnel costs decreased by $675,807 (6.35%) to $9,959,814 for the first nine months of 2010 from the $10,635,621 incurred in the first nine months of 2009. Total personnel costs increased by $150,942 (4.55%) to $3,470,862 for the third quarter of 2010 from the $3,319,920 incurred in the third quarter of 2009. During the second quarter of 2009, the Company implemented a plan to reduce operating costs, which included a reduction in staffing levels, and a reduction in certain benefits.

Total other real estate expenses for the first nine months of 2010 increased $847,783 (22.14%) to $4,676,698 as compared with the $3,828,915 of expenses incurred for the first nine months of 2009, due to higher levels of foreclosed assets and the continued decline in real estate values. Total other real estate expenses for the third quarter of 2010 increased $14,119 (0.68%) to $2,080,870, as compared with the $2,066,751 of expenses incurred for the third quarter of 2009. Net losses and writedowns for the first nine months and third quarter of 2010 were $2,863,068 and $1,359,104, respectively.

Total occupancy and equipment expenses decreased $63,747 (1.91%) to $3,267,752 for the first nine months of 2010 from the $3,331,499 incurred in the first nine months of 2009. Total occupancy and equipment expenses decreased $12,661 (1.13%) to $1,106,521 for the third quarter of 2010, as compared with $1,119,182 for the third quarter of 2009. Certain assets became fully depreciated and a temporary facility was closed in 2010.

FDIC insurance assessment expense for the first nine months of 2010 decreased $118,639 (5.08%) to $2,217,622 as compared with the $2,336,261 of expenses incurred for the first nine months of 2009. Total FDIC insurance assessment expense for the third quarter of 2010 increased $3,428 (0.51%) to $678,707, as compared with the $675,279 of expenses incurred for the third quarter of 2009. During 2009 the FDIC imposed a special assessment, which was levied on all banks, varying based on size, to replenish the FDIC’s insurance fund.

Total data processing expenses for the first nine months of 2010 decreased $252,244 (16.82%) to $1,247,409 as compared with the $1,499,653 of expenses incurred for the first nine months of 2009. Total data processing expenses for the third quarter of 2010 decreased $67,470 (13.35%) to $437,829 as compared with the $505,299 of expenses incurred for the third quarter of 2009. The decreases were achieved due to cost reduction efforts.

Total advertising expenses for the first nine months of 2010 decreased $151,934 (75.58%) to $49,096 as compared with the $201,030 of expenses incurred for the first nine months of 2009. Total advertising expenses for the third quarter of 2010 decreased $12,183 (47.72%) to $13,345, as compared with the $25,528 of expenses incurred for the third quarter of 2009. The decrease is part of the Company’s cost reduction efforts, as many of the Company’s advertising efforts have been scaled back.

Other noninterest expenses for the first nine months of 2010 decreased $43,353 (1.73%) to $2,457,485 as compared with the $2,500,838 of expenses incurred for the first nine months of 2009. Total other noninterest expenses for the third quarter of 2010 decreased $1,623 (0.19%) to $835,263 as compared with the $836,886 of expenses incurred for the third quarter of 2009. The year-to-date decrease is attributed to the Company’s cost reduction initiatives.

Income Taxes

Applicable income tax benefits totaled $10,127,972 and $7,507,800 for the nine-month periods ended September 30, 2010 and 2009, respectively. The effective tax rates for the nine-month periods ended September 30, 2010 and 2009 were 40.54% and 34.81%, respectively. Applicable income tax benefits totaled $5,960,479 and $3,091,023 for the three-month periods ended September 30, 2010 and 2009, respectively. The effective tax rates for the three-month periods ended September 30, 2010 and

2009 were 40.24% and 34.86%, respectively. The change in effective tax rates was primarily influenced by the level of tax-exempt interest income earned in each period.

Financial Condition

Total assets of the Company decreased $202,599,292,186 (13.18%) to $1,334,108,332 at September 30, 2010 from a level of $1,536,707,584 at December 31, 2009. The depressed economy has reduced the Company’s opportunities for loan growth in its current markets.

Total deposits of the Company decreased $194,933,803 (15.40%) in the first nine months of 2010 to $1,071,126,394 at September 30, 2010 from the level of $1,266,060,197 at December 31, 2009. The Company has sought to lower its percentage of higher cost time deposit balances while increasing lower cost savings and interest-bearing transaction account balances. The overall decline is consistent with the decline in total assets as less funding is required. However, the Company has achieved significant average growth in interest-bearing transaction and savings deposits, which reflects success in attracting retail deposits.

Short-term borrowings at September 30, 2010 increased $11,175,538 (88.02%) to $23,872,470 from the level of $12,696,932 at December 31, 2009. Short-term borrowings will fluctuate significantly based on short-term liquidity needs and certain seasonal deposit trends. Total longer-term advances from the Federal Home Loan Bank decreased $11,000,000 (10.58%) to $93,000,000 from the level of $104,000,000 at December 31, 2009. These longer-term fixed rate advances were used as an alternative funding source and are matched up with longer-term fixed rate assets.

Total loans decreased $125,608,925 (11.01%) in the first nine months of 2010 to $1,015,272,350 at September 30, 2010 from the level of $1,140,881,275 at December 31, 2009. The depressed economy and a reduced focus on commercial real estate has reduced the Company’s opportunities for loan growth in its current markets.

Investment securities, all of which are maintained as available-for-sale, decreased $69,646,158 (24.51%) in the first nine months of 2010 to $214,473,398 at September 30, 2010 from the level of $284,119,556 at December 31, 2009. The Company’s investment portfolio growth is dependent upon the level of deposit growth exceeding opportunities to grow the loan portfolio and the funding requirements of the Company’s loan portfolio, as described above.

Total stockholders’ equity decreased $9,295,865 (6.21%) in the first nine months of 2010 to $140,373,558 at September 30, 2010 from the level of $149,669,423 at December 31, 2009. The Company’s capital-to-asset percentage was 10.52% at September 30, 2010, compared to 9.74% at December 31, 2009. During the past nine months, the Company has raised $4,104,051 from an ongoing stock offering and has received subscriptions totaling an additional $682,500. See Part II — Item 2 for further discussion of the stock offering.

Risk Management

Management’s 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 Company’s management of these risks.

Credit Risk Management

Managing risks that the Company’s 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 Company’s 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 the first nine months of 2010 were $27,481,561, compared to $15,736,016 for the first nine months of 2009. Net charge-offs for the third quarter of 2010 were $14,103,396, compared to $9,224,704 for the third quarter of 2009. The increased charge-off levels result from the increased levels of nonperforming loans and the decline in the overall valuation of real estate securing such loans. The Company’s banking subsidiaries had no loans to any foreign countries at September 30, 2010 and 2009, nor did they have any concentration of loans to any industry on these dates, although a significant portion of the

Company’s loan portfolio is secured by real estate in the St. Louis metropolitan and southwestern Florida areas. The Company has also refrained from financing speculative transactions such as highly leveraged corporate buyouts, or thinly-capitalized speculative start-up companies.

The continued significant decline of the real estate market in the St. Louis metropolitan and southwestern Florida areas has caused an increase in the Company’s non-performing assets of $49,915,584 (47.17%) to $155,732,093 at September 30, 2010 from $105,816,509 at September 30, 2009. At September 30, 2010 and 2009, non-performing loans totaled $119,173,311 and $90,519,748, respectively, comprised of non-accrual loans of $114,601,722 and $69,698,109, respectively, and loans 90 days delinquent and still accruing interest of $736,300 and $4,599,823, respectively, and restructured loans totaling $3,835,290 and $16,221,816, respectively. The increase in nonperforming loans is due to the continued weakness in the economy, particularly regarding commercial and construction real estate in the Banks’ markets. The Company has taken a more aggressive approach toward collection and resolution of such problem credits. Such loans are continually 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 September 30, 2010 adequately considers the fair value of the underlying collateral on its problem loan portfolio; however, the values of these properties have continued to deteriorate, 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 Company’s $1.0 billion loans outstanding at September 30, 2010, 6% were originated in Florida and 94% 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 (quarter ended 9/30/10)

$5.4 million

$8.7 million

$14.1 million

Net charge-offs (quarter ended 9/30/09)

$7.3 million

$1.9 million

$9.2 million

Non-performing loans (9/30/2010)

$18.8 million

$100.4 million

$119.2 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 assets* (9/30/2010)

$39.3 million

$116.4 million

$155.7 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

Outstanding loans originated in respective markets (9/30/10)

$59.6 million

$955.7 million

$1.015 billion


*		Non-performing assets are comprised of non-performing loans, non-performing investments, and other real estate owned.

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 management’s 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.

The continued significant decline of the real estate markets in the St. Louis metropolitan and southwestern Florida areas has caused a significant increase in the Company’s non-performing loans in 2009 and 2010. At September 30, 2010, non-performing loans had increased $47,095,877 to $119,173,311 from $72,077,434 at December 31, 2009, the largest components of which were primarily comprised of the following loan relationships:

•

A loan for approximately $2.0 million for ground development of a proposed commercial retail strip center and self-storage facility in southwestern Florida. The entity was established by an experienced real estate developer; however, with the deterioration of the real estate market, the project did not begin construction, and the real estate downturn has affected the cash flow of the guarantor. The Company is working with the borrower on a strategy for repayment, resolution of the project, or obtaining a signed deed for the property in lieu of foreclosure.

•

A loan for approximately $1.5 million to a single purpose entity secured by unimproved property in Florida that is in default. The Company has determined no mutually agreeable solution is likely and is moving forward with foreclosure.

•

A loan for approximately $1.5 million to two Florida investors for future commercial development. Development has not started. The borrower is currently operating under a forbearance agreement against Lee County, Florida and the Company.

•

A loan for approximately $1.7 million to an individual, secured by the individual’s primary residence in Florida that is in default. The borrower entered into a forbearance agreement, but has now defaulted under that negotiated plan. Foreclosure proceedings have been initiated again.

•

A loan for approximately $3.0 million to a group of Florida investors secured by unimproved property in Florida. After multiple quarters of performance by some of the guarantors, payments have stopped and the parties have engaged counsel. The Company has initiated foreclosure.

•

A loan for approximately $1.6 million to a group of investors secured by an improved commercial lot. The borrower and Bank were unable to reach agreement on further development of the site. Negotiations continue with the possibility of foreclosure increasing.

•

A loan for approximately $11 million, secured by an individual warehouse in St. Louis, Missouri. The loan is currently in forbearance as the borrower restructures its business operations. The warehouse is experiencing high vacancy.

•

A loan totaling approximately $1.8 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 Company reached an agreement with the borrower to move the project forward with a new home builder.

•

A $16.7 million loan to a commercial real estate developer in Houston, Texas. The loan is secured by three office buildings and developed commercial land. The borrower recently refinanced a tract of land that provided a principal loan reduction, payment of past due interest and real estate taxes. Additionally, the borrower has another tract of ground that is Bank collateral under contract to a national home builder.

•

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 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.

•

A loan for approximately $4.5 million to a commercial real estate developer for the development of a shopping center. The center has a long-term lease in place with a grocery store. The owner is actively marketing the center to get the vacant space leased.

•

Loans totaling approximately $3.2 million to build out a day spa in Missouri. The spa was paying as agreed until recently. The borrower continues to keep interest payments current and is working on a plan to turn around or liquidate the assets.

•

A loan for approximately $1.1 million of a 30,000 sq. ft. office warehouse in St. Charles, Missouri. The warehouse is partially occupied by the owner. The loan is secured by the building and assignment of rents. The Company has retained counsel to seek payment in full.

•

A loan for approximately $2.9 million for the purchase of a 35,500 sq. ft. retail strip center. The center has experienced high vacancy and slow leasing. Outside counsel has been engaged for collection.

•

A loan for approximately $1 million to a golf course in Florida. The course contains 342 acres with a clubhouse, swimming pool, fitness center, and other amenities. The slow economy in Florida has caused the borrower to have less than expected bookings for tee times and a drop in membership. This is a Small Business Administration loan and the Bank is working with the SBA on liquidation of assets and legal action.

•

A loan for approximately $7 million to a commercial real estate developer for the construction of medical office buildings in Arizona. The loan is secured by 10 acres. The borrower had a successful background in commercial real estate development and a strong financial background. The development has been struggling with the recent economic conditions. The Company has engaged counsel to seek payment in full.

•

A loan for approximately $2.2 million for a 64,000 sq. ft. industrial warehouse is used as a sports complex. The owner operates indoor soccer and inline hockey throughout the year. The Company is pursuing various collection opportunities.

•

A refinance of approximately $11.7 million on a 61,000 sq. ft. medical office building that in St. Louis County, Missouri. A new professional management company has been put in place to take over day-to-day operations.

•

A loan for approximately $7.9 million to refinance and provide additional capital to complete phase II of a land development in St. Charles, Missouri. The development has slowed significantly and experienced difficult times due to the continuing slow economy, industry and nature of the transaction.

•

A loan for approximately $1.9 million for the development of eight condominium buildings in St. Louis County, Missouri. Since originated, one building is under construction. The development of the land is fully completed. Borrower has experienced difficulties. The Company is working on a plan to secure the property and prepare the building for the winter months.

•

A loan for approximately $2.4 million for the purchase of two single tenant warehouse properties in Plymouth, Minnesota. The tenant has consolidated space and moved out of one building, leaving it vacant. The borrower is working to sell the vacant building and pay down the loan.

•

A loan for approximately $2.4 million to refinance a commercial building in St. Louis County, Missouri. The building was formerly occupied by a national chain but they have vacated. The borrower and investor are currently working on transforming the property into a sports complex.

•

A loan for approximately $8.7 million to refinance a commercial office property located in Phoenix, Arizona. The building has experienced vacancies. Borrower is developing a plan to increase occupancy and bring the loan current.

•

A loan for approximately $2.8 million to finance the purchase of a retail center in O’Fallon, Missouri. The center is currently experiencing high vacancy in an overdeveloped area. The borrower is continuing to make monthly interest payments and is seeking capital from investors to pay down the loan and fund the payment of real estate taxes.

The Company also has non-performing assets in the form of other real estate owned. The Banks maintained other real estate owned totaling $35,999,751 and $29,085,943 at September 30, 2010 and December 31, 2009, 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 since December 31, 2009:


Balance at December 31, 2009	$	29,085,943
Foreclosures		14,767,037
Cash proceeds from sales		(4,618,910	)
Loans made to facilitate sales of other real estate		(371,251	)
Losses and writedowns		(2,863,068	)

Balance at September 30, 2010	$	35,999,751

During this period of a declining real estate market, the Company has sought to add loans to its portfolio with increased collateral margins or excess payment capacity from proven borrowers to enhance the quality of the loan portfolio, and has often had to offer a competitively lower interest rate on such loans. Given the collateral values maintained on its loan portfolio, including the non-performing loans discussed above, the Company believes the reserve for possible loan losses is adequate to absorb losses in the portfolio existing at September 30, 2010; however, should the 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 September 30, 2010, the Company had 31 loans with a total principal balance of $70,948,829 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. These loans were continuing to accrue interest and were not greater than 90 days past due on any scheduled payments, and are not categorized as non-performing loans. However, various concerns, including, but not limited to, payment history, loan agreement compliance, adequacy of collateral coverage, and borrowers’ overall financial condition have 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 non-performing and potential problem credits on its watch list.

The Company’s 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 borrower’s 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 borrower’s financial condition identified in a review of periodic financial statements;

	•		Decrease in the value of collateral securing the loan; or

	•		Change in the economic environment in which the borrower operates.

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 a majority of the members of the loan committee.

The Company’s 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 Company’s underwriting policies require an analysis of a borrower’s 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.

The Company conducts weekly loan committee meetings of all of its loan officers, including the Chief Executive Officer, Chief Risk Officer, Chief Lending Officer, Chief Credit Officer, and the Chief Executive Officer of Reliance Bank FSB. 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 Company’s legal lending limit was $40,766,798 at September 30, 2010.

At September 30, 2010 and 2009, the reserve for possible loan losses was $39,263,008 and $32,221,569, respectively, or 3.87% and 2.82% of net outstanding loans, respectively. The following table summarizes the Company’s loan loss experience for the nine-month periods ended September 30, 2010 and 2009. The increase in the reserve is attributed to a number of factors, including the elevated levels of non-performing loans and continued declines in the value of real estate securing the Banks’ loans. The economy continues to present challenges to our borrowers and it could be likely that others will experience difficulties in meeting obligations.


	Nine-Month Periods
	Ended September 30,
	2010			2009
Average loans outstanding	$	1,088,718,081		$	1,226,372,271

Reserve at beginning of year	$	32,221,569		$	14,305,822
Provision for possible loan losses		34,523,000			27,700,000

		66,744,569			42,005,822


Charge-offs:
Commercial loans:
Real estate		(9,799,087	)		(7,611,361	)
Other		(318,596	)		(589,985	)
Real estate:
Construction, land development and other land loans		(16,602,003	)		(7,294,721	)
Residential		(1,056,871	)		(1,602,409	)
Consumer		(21,143	)		(30,344	)
Overdrafts		—			(515	)

Total charge-offs		(27,797,700	)		(17,129,335	)

Recoveries:
Commercial loans:
Real estate		83,968			865,106
Other		159,321			3,823
Real estate:
Construction		26,029			360,700
Residential		38,247			145,514
Consumer		8,574			18,176
Overdrafts		—			—

Total recoveries		316,139			1,393,319

Reserve at end of period	$	39,263,008		$	26,269,806

Net charge-offs to average loans (annualized)		3.37	%		1.72	%

Ending reserve to net outstanding loans at end of period		3.87	%		2.20	%

Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses.

Since its inception in 1999, the Company has experienced significant loan growth in the St. Louis metropolitan area, and in southwestern Florida, with expansion to that area by the Company in 2005. The southwestern Florida area began experiencing economic distress ahead of most of the country, with the long-booming real estate market in Florida beginning its decline in 2007. As a result, the Company began experiencing an increase in troubled asset situations in 2007 and began increasing its reserve for loan losses accordingly, as the Florida real estate market weakened. In 2010, after two and one-half years of a free-fall decline in Florida real estate values, Company management believes that the Florida real estate market has begun to stabilize at the low valuation levels to which it has dropped during this economic recession. While the Florida real estate market has begun to stabilize, the real estate markets in the St. Louis metropolitan area (as well as the Houston, Texas and Phoenix, Arizona markets in which the Company has established loan production offices) continue to experience increased stress. Throughout this time period, the Company has attempted to address this dichotomy of markets with the tables presented in its filings that portray the degree to which these geographic areas have been the source of problems.

While considering the level of nonperforming assets when assessing the appropriate level of the reserve for loan losses at a particular point in time, the Company does not use a pre-assigned coverage ratio of nonperforming assets. Since a significant percentage of the Company’s loan portfolio is concentrated in commercial and construction real estate, the most significant determining factor when an appropriate level for the reserve for loan losses is a detailed analysis of the individual credit relationships and their potential for loss after considering the value of the underlying real estate collateral. During the past three years (first in Florida and then migrating to the Company’s other markets in St. Louis, Houston and Phoenix), the Company has experienced continued declines in collateral values (e.g., one credit relationship had collateral with a current appraised value of $2,000,000 at the end of 2008 and a current appraised value of $1,000,000 at the end of 2009 for the same property). Company management has assessed that this additional uncertainty has warranted caution in assessing an appropriate level for the reserve for loan losses, and that somewhat greater conservatism is warranted at this time to ensure that the provisions reflects the level of losses inherent within the portfolio at a particular point in time.

The Company risk rates all of the loans in its loan portfolio, using a 1-7 risk rating system, with a “1” — rated credit being a high quality loan and a “7” — rated credit having some level of loss in the credit. Loan officers are responsible for risk-rating their own credits, including maintaining the risk rating on a current basis. Downgrades are discussed at various management and loan committee meetings. The risk ratings are also subject to an on-going review by an extensive loan review process performed independent of the loan officers. An adequately-controlled risk rating process allows Company management to conclude that the Banks’ watch lists (which include all credits risk-rated “4” or greater) are, for all practical purposes, a complete profile of situations with current loss exposure.

All loans included in the watch lists require separate action plans to be developed to reduce the level of risk inherent in the credit relationship. Based on the information included on the watch list and a review of each individual credit relationship thereon, the Company determines whether a credit is impaired. The Banks consider a loan to be 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 marketability), 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 borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.

When measuring impairment for loans, the expected further cash flows of impaired loans are discounted at the loan’s effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of collateral for a collateral dependent loan; however, substantially all of the Company’s presently impaired credit relationships are collateralized (and derive their ultimate cash flows therefrom) by commercial, construction, or residential real estate and, accordingly, virtually all of the Company’s impairment calculations for the present portfolio have been based on the underlying values of the real estate collateral.

The Banks’ watch lists include complete listings of credit relationships that are considered to be impaired, along with an assessment of the estimated impairment loss to be included as specific exposure for impaired loans. Such impairment calculations are based on current (less than six months old) appraisals of the underlying real estate collateral. The Company regularly obtains updated appraisals for all of its impaired credit relationships. As noted above, the continued decline in real estate values experienced by the Company during the past three years has resulted in an increased level of the reserve for loan losses for these specifically identifiable impairment losses.

The sum of all exposure amounts calculated for impaired loans is included in the reserve for loan losses as the specifically-identifiable losses portion of the account balance. This is one portion of the reserve for loan losses. The second portion of the reserve for loan losses is a general reserve for all credit relationships not considered to be specifically impaired. This amount is calculated by first calculating the historical charge-off ratio for each of the particular loan categories and then subjectively adjusting these historical ratios for several economic and environmental factors. The adjusted ratio for each loan category is then applied against the non-impaired loans in that loan category, resulting in a general reserve for that particular loan category. The sum of these general reserve categories, when added to the amount of specifically identified losses on impaired credits, results in the final reserve for loan losses balance for a particular date. The Banks follow this process for calculating the reserve for loan losses on a quarterly basis.

In calculating the general portion of the reserve for possible loan losses, the loan categories used are real estate construction, residential real estate, commercial real estate, commercial and industrial, and consumer loans. Historical charge-off ratios are calculated on a rolling three-year basis, which has resulted in higher reserve levels with the increased levels of charge-offs

experienced during the past three years. The economic and environmental factors for which adjustments are made to the historical charge-off ratios include the following:

	•		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 collectibility 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 volume and severity of adversely classified or graded loans.

	•		Changes in the quality of the Banks’ loan review systems.

	•		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 Banks’ existing portfolios.

At September 30, 2010, the Company’s consolidated reserve for loan losses calculation had the following components (in thousands of dollars):

Specifically identifiable exposure on impaired loans:


Loan Type	# of credits		Loan balance		Exposure

Real estate construction		27	$	33,643	$	5,663
Residential real estate		15		2,980		621
Commercial real estate		50		122,784		13,298
Commercial and industrial		11		1,367		462
Consumer		2		26		9

			$	160,800	$	20,053

General reserve for non-impaired credits:


	Historical			Adjusted
	charge-off			charge-off			Non-impaired		Calculated
Loan Type	percentage			percentage			loan balance		reserve

Real estate construction		6.41	%		8.29	%	$	79,292	$	6,574
Residential real estate		1.27	%		2.28	%		72,317		1,650
Commercial real estate		1.35	%		1.59	%		629,444		9,983
Commercial and industrial		0.33	%		1.30	%		70,402		913
Consumer		1.15	%		2.98	%		3,017		90

							$	854,472		19,210

Total reserve calculated									$	39,263

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 outlined 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.

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.

While the Company has no significant specific industry concentration risk, over 93% of the loan portfolio was dependent on real estate collateral at September 30, 2010, 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
	9/30/2009			12/31/2009			9/30/2010
Construction, land development and other other land loans		103	%		112	%		92	%
Nonfarm nonresidential:
Owner occupied		66	%		112	%		144	%
Non-owner occupied		310	%		340	%		368	%
1-4 family closed end loans		37	%		40	%		46	%
Multi-family		71	%		86	%		97	%
Other		17	%		22	%		19	%

With the exception of owner occupied nonfarm nonresidential loans, outstanding balances in all real estate loan categories have declined between September 30, 2009 and September 30, 2010. However, total regulatory capital declined at a faster pace than most of the loan category declines, thus resulting in increased percentages noted above.

Liquidity and Capital Resources

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 $214,473,398 at September 30, 2010, of which approximately $125,976,948 is pledged to secure deposits and repurchase agreements) and borrowing capabilities through correspondent banks and the Federal Home Loan Banks. Maturing loans also provide liquidity on an ongoing basis. 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 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 September 30, 2010. Also, Reliance Bank has a credit line with the Federal Home Loan Bank of Des Moines in the amount of $141,286,008 and availability under that line was $42,267,434 at September 30, 2010. Reliance Bank, FSB maintained a credit line with the Federal Home Loan Bank of Atlanta in the amount of $9,330,000 of which $6,230,000 was available at September 30, 2010. As of September 30, 2010, the combined availability under these arrangements totaled $71,497,434. Also, the Banks participate in the FDIC’s Debt Guarantee component of the Temporary Liquidity Guarantee Program. This program provides a guarantee on borrowings up to 3% of each Bank’s gross liabilities. Bank 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 favorable 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.

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 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.

As of September 30, 2010, 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 September 30, 2010 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
Total capital (to risk-weighted assets):
Consolidated	$	122,810		10.76	%	$	91,306		³8.0	%	$	N/A		N/A
Reliance Bank		108,691		10.03	%		86,721		³8.0	%		108,401		³10.0	%
Reliance Bank, FSB		8,751		15.07	%		4,645		³8.0	%		5,807		³10.0	%
Tier 1 capital (to risk-weighted assets):
Consolidated	$	107,700		9.44	%	$	45,653		³4.0	%	$	N/A		N/A
Reliance Bank		94,899		8.75	%		43,360		³4.0	%		65,040		³6.0	%
Reliance Bank, FSB		7,995		13.77	%		2,323		³4.0	%		3,484		³6.0	%
Tier 1 capital (to average assets):
Consolidated	$	107,700		7.92	%	$	54,386		³4.0	%	$	N/A		N/A
Reliance Bank		94,899		7.42	%		51,137		³4.0	%		63,921		³5.0	%
Reliance Bank, FSB		7,995		9.89	%		3,234		³4.0	%		4,043		³5.0	%

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 depends 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

Risk-Based

Leverage

Ratio

Well capitalized

Adequately capitalized

Undercapitalized

Significantly undercapitalized

Critically undercapitalized


*		A critically undercapitalized institution is defined as having a tangible equity to total assets ratio of 2% or less.

Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver of the institution. The capital category of an institution also determines in part the amount of the premium assessed against the institution for FDIC insurance. At September 30, 2010, Reliance Bank and Reliance Bank, FSB were considered “well capitalized.”

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 September 30, 2010 were as follows:


					Over 1 year
	Total cash		Less than 1		less than 5		Over 5
	commitment		year		years		years
Operating leases	$	7,390,918		722,723		2,052,843		4,615,352
Time deposits		463,329,177		316,686,288		134,700,413		11,942,476
Federal Home Loan Bank borrowings		93,000,000		1,000,000		25,000,000		67,000,000
Commitments to extend credit		133,076,427		68,771,472		27,162,114		37,142,841
Standby letters of credit		13,111,997		12,428,448		683,549		—

Impact of New and Not Yet Adopted Accounting Pronouncements

None.

Part I — Item 3 — Quantitative and Qualitative Disclosures About Market Risk

Management of rate sensitive earning assets and interest-bearing liabilities remains a key to the Company’s profitability. The Company’s operations are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of the Company’s 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 Company’s 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. Reliance 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 Banks can safely increase risk to enhance returns.

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 Company’s interest rate gap (rate-sensitive assets minus rate-sensitive liabilities) analysis as of September 30, 2010, individually and cumulatively, through various time horizons:


	Remaining Maturity if Fixed Rate;
	Earliest Possible Repricing Interval if Floating Rate
				Over 3 months			Over 1 year
	3 months			through			through			Over
	less			12 months			5 years			5 years			Total
Interest-earning assets:
Loans	$	426,774,214			150,980,608			405,918,855			31,598,673			1,015,272,350
Investment securities, at amortized cost		65,636,825			56,938,332			82,280,042			6,343,097			211,198,296
Other interest-earnings assets		4,157,482			—			—			—			4,157,482

Total interest-earning assets	$	496,568,521			207,918,940			488,198,897			37,941,770			1,230,628,128

Interest-bearing liabilities:
Savings and interest-bearing transaction accounts	$	539,510,503			45,864			—			—			539,556,367
Time certificates of deposit of $100,000 or more		51,431,227			80,143,889			44,825,038			5,416,705			181,816,859
All other time deposits		47,719,560			137,391,612			89,875,375			6,525,771			281,512,318
Nondeposit interest-bearing liabilities		20,466,362			2,406,108			27,000,000			67,000,000			116,872,470

Total interest-bearing liabilities	$	659,127,652			219,987,473			161,700,413			78,942,476			1,119,758,014

Gap by period	$	(162,559,131	)		(12,068,533	)		326,498,484			(41,000,706	)		110,870,114

Cumulative gap	$	(162,559,131	)		(174,627,664	)		151,870,820			110,870,114			110,870,114


Ratio of interest-sensitive assets to interest- sensitive liabilities		0.75	x		0.95	x		3.02	x		0.48	x		1.10	x

Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities		0.75	x		0.80	x		1.15	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 relates to the potential for the divergence from expectations in 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 September 30, 2010 indicate that the Company’s fair market value of equity would decrease 4.04%, and 5.77%, from an immediate and sustained parallel decrease in interest rates of 100 and 200 basis points, respectively, and increase 8.37% and 13.73%, from a corresponding increase in interest rates of 100 and 200 basis points, respectively.

Part I — Item 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).

As a result of material weaknesses in our internal controls over financial reporting relating to the 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 September 30, 2010.

On March 4, 2011, the Audit Committee of the Board of Directors concluded that the Company’s audited financial statements for the year ended December 31, 2009, as well as interim financial statements in its Quarterly Reports on Form 10-Q for the quarters ending March 31, June 30 and September 30, 2010, 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 and interim quarterly financial statements included in the above referenced filing as of and for the periods covered by such filings.

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.

Changes in Internal Control Over Financial Reporting

There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Part II — Item 1 — 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.

Part II — Item 1A — Risk Factors

Financial reforms and related regulations may affect our business activities, financial position and profitability.

The Dodd-Frank Act, signed into law on July 21, 2010, makes extensive changes to the laws regulating financial services firms and requires significant rulemaking. In addition, the legislation mandates multiple studies, which could result in additional legislative or regulatory action. We are currently reviewing the impact the legislation will have on our business.

The legislation charges the federal banking agencies with drafting and implementing enhanced supervision, examination and capital standards for depository institutions and their holding companies. The enhanced requirements include, among other

things, changes to capital, leverage and liquidity standards and numerous other requirements. The Dodd-Frank Act also authorizes various new assessments and fees, expands supervision and oversight authority over nonbank subsidiaries, increases the standards for certain covered transactions with affiliates and requires the establishment of minimum leverage and risk-based capital requirements for insured depository institutions. In addition, the Dodd-Frank Act contains several provisions that change the manner in which deposit insurance premiums are assessed and which could increase the FDIC deposit insurance premiums paid by the Company.

The changes resulting from the Dodd-Frank Act, as well as the regulations promulgated by federal agencies, may impact the profitability of our business activities; require changes to certain of its business practices; impose upon us more stringent capital, liquidity, and leverage ratio requirements; or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes.

There have not been any other material changes in the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Part II — Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

The Company sold 1,002,333 shares (983,333 of which were previously subscribed) and received subscriptions for 25,000 shares of the Company’s common stock at the offering price of $3.00 per share for the quarter ended September 30, 2010. This represented an aggregate offering price of $3,081,999. This offering was extended to accredited investors (as such term is defined in Regulation D under the Securities Act of 1933, as amended), and was intended to qualify for exemption from registration pursuant to Rule 506 of Regulation D. The purpose of these offerings, which are still active, is to generate capital, as well as to remain well capitalized.

Part II — Item 3 — Defaults Upon Senior Securities

None.

Part II — Item 4 — [Removed and Reserved]

Part II — Item 5 — Other Information

(a)		None.

(b)		There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented during the period covered by this Quarterly Report on Form 10-Q.

Part II — Item 6 — Exhibits


Exhibit
Number		Description


31.1		Chief Executive Officer’s Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Chief Financial Officer’s Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements 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
		Chief Executive Officer


	By:	/s/ Dale E. Oberkfell
		Dale E. Oberkfell
		Chief Financial Officer

Date: March 16, 2011

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