Attached files
file | filename |
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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
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
(Registrants Telephone Number, Including Area Code)
(Registrants 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 Companys 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 Companys 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
managements restated assessment of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2010. This restatement of
managements assessment regarding disclosure controls and procedures results from material
weaknesses in our internal control over financial reporting relating to the above described
restatements. The information required in this restatement adjusts for certain classification
errors in the interim condensed consolidated statements of operations and, while these errors had
no effect on the Companys 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
TABLE OF CONTENTS
2
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
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.
3
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2010 and 2009
(unaudited)
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.
4
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.
5
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Stockholders Equity
Nine Months Ended September 30, 2010 and 2009
(unaudited)
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.
6
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2010 and 2009
(unaudited)
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.
7
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 Companys
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 Corporations (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.
8
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
Companys 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 Companys 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 Companys 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.
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 Companys 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 | ) | |||||||
9
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 Companys
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 Companys consideration given in its acquisition of The Bank of Godfrey over the
fair value of the net assets acquired is recorded as goodwill, an intangible asset on the
consolidated balance sheets. Goodwill is the Companys only intangible asset with an indefinite
useful life, and the Company is required to test the intangible asset for impairment on an annual
basis. Impairment is measured as the excess of carrying value over the fair value of an intangible
asset with an indefinite life. No impairment writedown 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 Companys
consolidated financial statements over the period of service to which such compensation relates
(generally the vesting period), and are measured based on the fair value of the equity or liability
instruments issued. The grant date values of share options are estimated using option-pricing
models adjusted for the unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). If an equity award is modified after the
grant date, incremental compensation cost would be recognized in an amount equal to the excess of
the fair value of the modified award over the fair value of the original award immediately before
the modification.
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
Companys common stock is not actively traded on any exchange. Accordingly, the availability of
fair value information for the Companys common stock is limited. In using the Black-Scholes option
pricing model to value the options, several assumptions have been made in arriving at the estimated
fair value of the
10
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
options granted, including minimal or no volatility in the Companys common stock price, expected
forfeitures of 10%, no dividends paid on the common stock, an expected weighted average option life
of six years, and a risk-free interest rate approximating the U.S. Treasury rates for the
applicable duration period. Any change in these assumptions could have a significant impact on the
effects of determining compensation costs.
Following is a summary of the Companys 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.
11
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 | Gross | |||||||||||||||
unreal- | unreal- | Estimated | ||||||||||||||
Amortized | ized | 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.
12
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 Companys 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
13
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.
14
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 customers
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Banks upon extension of credit, is based on managements credit evaluation of the borrower.
Collateral held varies, but is generally residential or income-producing commercial property or
equipment, on which the Banks generally have a superior lien.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the
performance of a customer to a third party, for which draw requests have historically not been
made. 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.
15
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 Companys 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.
16
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 Companys 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.
17
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 Companys 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.
18
Part I Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
The following presents managements discussion and analysis of the consolidated financial
condition and results of operations of Reliance Bancshares, Inc. (the Company) for 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, FSBs profitability in light of the stressful market conditions in
southwestern Florida. The Companys branch expansion plans have been designed to increase the
Companys market share in the St. Louis metropolitan area in Missouri and Illinois and southwestern
Florida and to allow the Companys banking subsidiaries to compete with much larger financial
institutions in these markets. The Houston and Phoenix LPOs are intended to benefit from
commercial and residential lending and fee income generation opportunities in these larger and
historically higher-growth markets.
The St. Louis metropolitan, southwestern Florida, Houston and Phoenix markets in which the
Companys banking subsidiaries operate are highly competitive in the financial services area. The
Banks are subject to competition from other financial and nonfinancial institutions providing
financial products throughout these markets.
19
Executive Summary of Results of Operations and Financial Condition
The Companys 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 Companys 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
Companys 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
Companys 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
Companys 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 Companys cost of funds to 1.86% from
2.79% for the three months ended September 30, 2010 and 2009, respectively. One of the Companys
fastest growing funding categories also had the largest drop in rate of any of the Companys
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 | % |
20
Critical Accounting Policies
The impact and any associated risks related to the Companys critical accounting policies on
reporting operations are discussed throughout Managements 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 Companys consolidated financial statements as of and for the year ended December 31, 2009 and
the related Managements 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 Companys 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 Companys net interest margin for the nine-month periods ended September
30, 2010 and 2009 was 3.10% and 2.54%,respectively. The Companys 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 Companys 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 Companys retail deposit products and a shift in funding composition toward lower cost deposit
products. The Companys 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 Companys 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 Companys 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 Companys net interest margin is to maintain a higher
percentage of earning assets in the loan category, which is the Companys highest earning asset
category; however, average loans as a percentage of average earning assets 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.
21
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 Companys 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 Companys 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 Companys funding sources has a significant impact on the Companys net
interest margin. Following is a summary of the percentage of the various components of average
interest-bearing liabilities and noninterest-bearing deposits to the total of all average
interest-bearing liabilities and noninterest-bearing deposits (hereinafter described as total
funding sources) 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 Companys deposit portfolio will fluctuate as recently-added branches
help to diversify the Companys deposit base. The overall level of interest rates will also cause
fluctuations between categories. The Company has sought to increase the percentage of its
noninterest-bearing deposits to 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 Companys fastest growing funding categories also had the largest drop in rate of any of
the Companys 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
22
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)
23
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)
24
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)
25
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. |
26
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 Companys credit risk management in the section below
entitled Risk Management.
27
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 FDICs 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 Companys cost reduction efforts, as many of the Companys 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 Companys 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
28
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
Companys 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 Companys 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 Companys investment portfolio growth is dependent upon the
level of deposit growth exceeding opportunities to grow the loan portfolio and the funding
requirements of the Companys 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
Companys 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
Managements objective in structuring the balance sheet is to maximize the return on average assets
while minimizing the associated risks. The major risks concerning the Company are credit, liquidity
and interest rate risks. The following is a discussion concerning the Companys management of these
risks.
Credit Risk Management
Managing risks that the Companys banking subsidiaries assume in providing credit products to
customers is extremely important. Credit risk management includes defining an acceptable level of
risk and return, establishing appropriate policies and procedures to govern the credit process and
maintaining a thorough portfolio review process.
Of equal importance in the credit risk management process are the ongoing monitoring procedures
performed as part of the Companys loan review process. Credit policies are examined and procedures
reviewed for compliance each year. Loan personnel also continually monitor loans after disbursement
in an attempt to recognize any deterioration which may occur so that appropriate corrective action
can be initiated on a timely basis.
Net charge-offs for 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 Companys 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
29
Companys 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 Companys 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 Companys $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
managements practice to place such loans on non-accrual status immediately, rather than delaying
such action until the loans become 90 days past due. Previously accrued and uncollected interest on
such loans is reversed and income is recorded only to the extent that interest payments are
subsequently received in cash and a determination has been made that the principal balance of the
loan is collectible. If collectability of the principal is in doubt, payments received are applied
to loan principal for financial reporting purposes.
Loans past due 90 days or more but still accruing interest are also included in non-performing
loans. Loans past due 90 days or more but still accruing interest are classified as such when the
underlying loans are both well secured (the collateral value is sufficient to cover principal and
accrued interest) and are in the process of collection. Also included in non-performing loans are
restructured loans. Restructured loans involve the granting of some concession to the borrower
involving the modification of terms of the loan, such as changes in payment schedule or interest
rate.
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 Companys 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:
30
| 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 individuals primary residence in Florida that is in default. The borrower entered into a forbearance agreement, but has now defaulted under that negotiated plan. Foreclosure 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. |
31
| 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 OFallon, 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. |
32
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 Companys credit management policies and procedures focus on identifying, measuring, and
controlling credit exposure. These procedures employ a lender-initiated system of rating credits,
which is ratified in the loan approval process and subsequently tested in internal loan review and
regulatory bank examinations. The system requires rating all loans at the time they are made, at
each renewal date and as conditions warrant.
Adversely rated credits, including loans requiring close monitoring, are included on a monthly loan
watch list. Other loans are added whenever any adverse circumstances are detected, which might
affect the borrowers ability to meet the terms of the loan. This could be initiated by any of the
following:
| Delinquency of a scheduled loan payment; | ||
| Deterioration in the borrowers financial condition identified in a review of periodic financial statements; | ||
| Decrease in the value of collateral securing the loan; or | ||
| Change in the economic environment in which the borrower operates. |
Loans on the watch list require periodic detailed loan status reports, including recommended
corrective actions, prepared by the responsible loan officer, which are discussed at each monthly
loan committee meeting.
Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan
review, the watch list committee, the loan committee, or senior lending personnel at any time.
Upgrades of certain risk ratings may only be made with the concurrence of a majority of the members
of the loan committee.
The Companys loan underwriting policies limit individual loan officers to specific amounts of
lending authority, over which various committees must get involved and approve a credit. The
Companys underwriting policies require an analysis of a borrowers ability to pay the loan and
interest on a timely basis in accordance with the loan agreement. Collateral is then considered as
a secondary source of payment, should the borrower not be able to pay.
33
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 Companys 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 Companys 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.
34
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 Companys 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 Companys 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 borrowers 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 loans 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 Companys 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 Companys
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
35
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 Companys 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
36
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 FDICs Debt Guarantee component of the Temporary Liquidity Guarantee Program. This program
provides a guarantee on borrowings up to 3% of each Banks 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
37
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 | Tier 1 | ||||||||||
Risk-Based | Risk-Based | Leverage | ||||||||||
Ratio | Ratio | Ratio | ||||||||||
Well capitalized |
10 | % | 6 | % | 5 | % | ||||||
Adequately capitalized |
8 | 4 | 4 | |||||||||
Undercapitalized |
<8 | <4 | <4 | |||||||||
Significantly undercapitalized |
<6 | <3 | <3 | |||||||||
Critically undercapitalized |
* | * | * |
* | A critically undercapitalized institution is defined as having a tangible equity to total assets ratio of 2% or less. |
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.
38
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 Companys profitability. The Companys operations are subject to risk resulting from interest
rate fluctuations to the extent that there is a difference between the amount of the Companys
interest-earning assets and the amount of interest-bearing liabilities that are prepaid or
withdrawn, mature or are repriced in specified periods. The principal objective of the Companys
asset/liability management activities is to provide maximum levels of net interest income while
maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding
needs of the Company. The Banks utilize gap analyses as the primary quantitative tool in measuring
the amount of interest rate risk that is present at the end of each quarter. 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 Companys 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 | ||||||||||
39
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 Companys 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 Companys Chief Executive Officer and the
Chief Financial Officer, management has evaluated the effectiveness of the Companys 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
Companys 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
Companys 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
40
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 Companys
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 Companys 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 Companys 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 Officers Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Chief Financial Officers Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
41
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
42