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EX-32.1 - EX-32.1 - Reliance Bancshares, Inc.c63007exv32w1.htm
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EX-31.1 - EX-31.1 - Reliance Bancshares, Inc.c63007exv31w1.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Amendment No. 1)
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2010
 
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ____ to____
Commission file number: 000-52588
RELIANCE BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
     
Missouri
(State or Other Jurisdiction of
Incorporation or Organization)
  43-1823071
(IRS Employer
Identification No.)
     
10401 Clayton Road
Frontenac, Missouri

(Address of Principal Executive Offices)
  63131
(Zip Code)
(314) 569-7200
(Registrant’s Telephone Number, Including Area Code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files), 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 July 30, 2010, the Registrant had 22,369,061 shares of outstanding Class A common stock, $0.25 par value; 40,000 shares of outstanding Class A preferred stock, no par value; 2,000 shares of outstanding Class B preferred stock, no par value; and 535 shares of outstanding Class C preferred stock, no 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 June 30, 2010 filed with the United States Securities and Exchange Commission (SEC) on August 12, 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), Items 1 and 2 under Part I of our Initial Form 10-Q have been amended and restated in their 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 June 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 August 12, 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 disclosure omissions in the Initial Form 10-Q related to net losses available to common shareholders after increasing the net loss for preferred dividends paid by the Company, which required an adjustment of the previously reported net loss per share data included in the Company’s interim condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009. We have also restated the Company’s interim condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2010 and 2009 to expand the disclosures for other-than-temporary losses on available for sale securities in those interim condensed consolidated statements.
These restatements had no effect on the Company’s consolidated net loss for the three and six months ended June 30, 2010 and 2009 or its consolidated stockholders’ equity as of June 30, 2010 and 2009. Net loss available to common shareholders, after increasing the loss for preferred dividends paid by the Company, increased from the $(0.17) and $(0.28) per share, respectively originally disclosed to $(0.19) and $(0.34) per share, respectively as restated, for both basic and fully-diluted loss per share for the three and six months ended June 30, 2010, respectively. Net loss available to common shareholders, after increasing the loss for preferred dividends paid by the Company, increased from the $(0.40) and $(0.40) per share, respectively originally disclosed to $(0.43) and $(0.42) per share, respectively as restated, for both basis and fully-diluted loss per share for the three and six months ended June 30, 2009, respectively.
For the convenience of the reader, this Quarterly Report sets forth the original filing in its entirety.
For additional information regarding the restatement, see Note 1 to our interim condensed consolidated financial statements appearing elsewhere in this report.
This Amendment No. 1 includes changes in “Item 4 — Controls and Procedures” and reflects management’s restated assessment of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2010. This restatement of management’s assessment regarding disclosure controls and procedures results from material weaknesses in our internal control over financial reporting relating to the above described restatements. The information required in this restatement was previously omitted and, while it had no effect on the Company’s consolidated net loss for the three and six months ended June 30, 2010 and 2009, and stockholders’ equity as of June 30, 2010 and 2009, such information should have been disclosed in our June 30, 2010 interim condensed consolidated financial statements. The Company has implemented certain changes in our internal controls as of the date of this report to address these material weaknesses, and believe such weaknesses have been remediated. There can be no assurance that our remedial efforts will be effective nor can there be any assurances that the Company will not incur losses due to internal or external acts intended to defraud, misappropriate assets, or circumvent applicable law or our system of internal controls. See “Item 4 — Controls and Procedures.”

 


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
         
    Page
PART I — FINANCIAL INFORMATION
       
Item 1. Financial Statements
       
Condensed Consolidated Balance Sheets (Unaudited)
    3  
Condensed Consolidated Statements of Operations (Unaudited)
    4  
Condensed Consolidated Statements of Comprehensive Loss (Unaudited)
    5  
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
    6  
Condensed Consolidated Statements of Cash Flows (Unaudited)
    7  
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
    8  
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    20  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
    41  
Item 4. Controls and Procedures
    42  
PART II — OTHER INFORMATION
       
Item 1. Legal Proceedings
    42  
Item 1A. Risk Factors
    42  
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    43  
Item 3. Defaults Upon Senior Securities
    43  
Item 4. [Removed and Reserved]
    43  
Item 5. Other Information
    43  
Item 6. Exhibits
    43  
Signatures
    45  

2


 

PART I – FINANCIAL INFORMATION
Part I – Item 1 – Financial Statements
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Balance Sheets
June 30, 2010 and 2009 and December 31, 2009
(unaudited)
                         
    June 30,     December 31,  
    2010     2009     2009  
ASSETS
                       
Cash and due from banks
  $ 12,776,906       10,401,682       11,928,668  
Interest-earning deposits in other financial institutions
    17,563,040       648,192       15,767,862  
Federal funds sold
    144,000       ––        
Investments in available-for-sale debt securities, at fair value
    263,575,008       238,868,535       284,119,556  
Loans
    1,066,898,802       1,223,632,245       1,140,881,275  
Less — Deferred loan fees / costs
    (36,507 )     (217,965 )     (84,741 )
Reserve for possible loan losses
    (36,163,403 )     (24,044,510 )     (32,221,569 )
 
                 
Net loans
    1,030,698,892       1,199,369,770       1,108,574,965  
 
                 
Premises and equipment, net
    41,157,221       43,252,496       42,210,536  
Accrued interest receivable
    4,459,133       5,752,059       5,647,887  
Other real estate owned
    36,319,932       16,341,216       29,085,943  
Identifiable intangible assets, net of accumulated amortization of $115,373, $99,085 and $107,229 at June 30, 2010 and 2009, and December 31, 2009, respectively
    128,946       145,234       137,090  
Goodwill
    1,149,192       1,149,192       1,149,192  
Other assets
    39,903,192       21,766,041       38,085,885  
 
                 
 
  $ 1,447,875,462       1,537,694,417       1,536,707,584  
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Deposits:
                       
Non-interest-bearing
  $ 63,683,728       64,230,082       71,829,581  
Interest-bearing
    1,113,423,878       1,143,341,051       1,194,230,616  
 
                 
Total deposits
    1,177,107,606       1,207,571,133       1,266,060,197  
Short-term borrowings
    18,893,075       15,675,440       12,696,932  
Long-term Federal Home Loan Bank borrowings
    99,000,000       136,000,000       104,000,000  
Accrued interest payable
    1,759,664       2,578,382       2,194,952  
Other liabilities
    4,325,984       4,025,320       2,086,079  
 
                 
Total liabilities
    1,301,086,329       1,365,850,275       1,387,038,160  
 
                 
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       40,000,000  
Series B, 2,000 shares issued and outstanding
    2,000,000       2,000,000       2,000,000  
Series C, 535 and 300 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively
    535,000       ––       300,000  
Common stock, $0.25 par value; 40,000,000 shares authorized, 22,539,711, 20,770,781 and 20,972,091 shares issued and outstanding at June 30, 2010, 2009, and December 31, 2009, respectively
    5,634,928       5,226,794       5,243,023  
Subscriptions receivable
    (3,557,499 )     ––       ––  
Surplus
    125,703,572       122,507,257       122,334,757  
Retained earnings
    (25,798,356 )     1,823,944       (19,796,396 )
Accumulated other comprehensive income — net unrealized holding gains (losses) on available-for-sale debt securities
    2,271,488       286,147       (411,960 )
 
                 
Total stockholders’ equity
    146,789,133       171,844,142       149,669,424  
 
                 
 
  $ 1,447,875,462       1,537,694,417       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 Six Months Ended June 30, 2010 and 2009
(unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    (restated)     (restated)     (restated)     (restated)  
    2010     2009     2010     2009  
Interest income:
                               
Interest and fees on loans
  $ 14,671,909       16,998,726       30,123,935       34,669,969  
Interest on debt securities:
                               
Taxable
    1,673,943       1,961,004       3,507,293       3,916,989  
Exempt from Federal income taxes
    294,650       310,178       600,912       650,231  
Interest on short-term investments
    15,988       5,758       32,543       22,721  
 
                       
Total interest income
    16,656,490       19,275,666       34,264,683       39,259,910  
 
                       
Interest expense:
                               
Interest on deposits
    5,464,530       8,699,655       11,255,119       18,182,631  
Interest on short-term borrowings
    26,333       47,251       56,752       307,539  
Interest on long-term Federal Home Loan Bank borrowings
    955,082       1,245,663       1,924,001       2,477,633  
 
                       
Total interest expense
    6,445,945       9,992,569       13,235,872       20,967,803  
 
                       
Net interest income
    10,210,545       9,283,097       21,028,811       18,292,107  
Provision for possible loan losses
    9,628,000       14,000,000       17,320,000       16,250,000  
 
                       
Net interest income after provision for possible loan losses
    582,545       (4,716,903 )     3,708,811       2,042,107  
 
                       
Noninterest income:
                               
Service charges on deposit accounts
    235,836       240,879       460,312       448,517  
Net gains (losses) on sales of debt securities
    201,069       (241 )     265,760       (241 )
Other noninterest income
    348,689       422,880       714,104       750,012  
 
                       
Total noninterest income
    785,594       663,518       1,440,176       1,198,288  
 
                       
Noninterest expense:
                               
Other-than-temporary impairment losses on available-for-sale securities:
                               
Total other-than-temporary impairment losses
    666,759       1,040,871       666,759       1,040,871  
Less portion of other-than-temporary impairment losses recognized in other comprehensive income
    (608,942 )     (894,793 )     (608,942 )     (894,793 )
Net impairment loss realized
    57,817       146,078       57,817       146,078  
Salaries and employee benefits
    3,223,969       3,435,246       6,488,951       7,315,701  
Other real estate expense
    1,222,042       1,452,500       2,595,829       1,762,163  
Occupancy and equipment expense
    1,074,211       1,086,386       2,161,230       2,212,318  
FDIC assessment
    754,397       1,157,449       1,538,915       1,660,982  
Data processing
    377,037       519,679       809,580       994,353  
Advertising
    16,859       28,192       35,751       175,502  
Amortization of intangible assets
    4,072       4,072       8,144       8,144  
Other noninterest expenses
    833,526       868,459       1,622,224       1,663,952  
 
                       
Total noninterest expense
    7,563,930       8,698,061       15,318,441       15,939,193  
 
                       
Loss before applicable income taxes
    (6,195,791 )     (12,751,446 )     (10,169,454 )     (12,698,798 )
Applicable income tax benefit
    (2,692,536 )     (4,378,551 )     (4,167,494 )     (4,416,777 )
 
                       
Net loss
  $ (3,503,255 )     (8,372,895 )     (6,001,960 )     (8,282,021 )
 
                       
Net loss
  $ (3,503,255 )     (8,372,895 )     (6,001,960 )     (8,282,021 )
Preferred stock dividends
    (551,251 )     (557,111 )     (1,100,142 )     (557,111 )
Net loss available to common shareholders
  $ (4,054,506 )     (8,930,006 )     (7,102,102 )     (8,839,132 )
Per share amounts:
                               
Basic loss per share
  $ (0.19 )     (0.43 )     (0.34 )     (0.42 )
Basic weighted average shares outstanding
    21,221,753       20,855,898       21,097,611       20,801,385  
Diluted loss per share
  $ (0.19 )     (0.43 )     (0.34 )     (0.42 )
Diluted weighted average shares outstanding
    21,221,753       20,859,102       21,097,611       20,839,274  
See accompanying notes to interim condensed consolidated financial statements.

4


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Comprehensive Loss
Six Months Ended June 30, 2010 and 2009
(unaudited)
                 
    (restated)     (restated)  
    2010     2009  
Net loss
  $ (6,001,960 )     (8,282,021 )
 
           
 
               
Change in unrealized gains (losses) on available-for-sale securities which a portion of an other-than-temporary impairment loss has been recognized in earnings, net of reclassification
    (58,136 )     (30,284 )
 
Change in unrealized gains (losses) on other securities available-far-sale, net of reclassification
    4,331,909       476,506  
 
               
Reclassification adjustments for:
               
Available-for-sale security losses (gains) included in net loss
    (265,760 )     241  
Writedown of investment securities included in net loss
    57,817       146,078  
 
           
 
               
Other comprehensive income before tax
    4,065,830       592,541  
 
               
Income tax related to items of other comprehensive income
    1,382,382       201,464  
 
           
 
               
Other comprehensive income, net of tax
    2,683,448       391,077  
 
           
 
               
Total comprehensive loss
  $ (3,318,512 )     (7,890,944 )
 
           
See accompanying notes to interim condensed consolidated financial statements.

5


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Stockholders’ Equity
Six Months Ended June 30, 2010 and 2009
(unaudited)
                                                                 
                                                    Accumulated        
                                                    other     Total  
    Preferred     Common     Subscriptions             Retained     Treasury     comprehensive     stockholders'  
    stock     stock     receivable     Surplus     earnings     stock     (loss) income     equity  
Balance at December 31, 2008
  $       5,192,696             124,193,318       10,663,076       (335,280 )     (104,930 )     139,608,880  
Net loss
                            (8,282,021 )                 (8,282,021 )
Issuance of 40,000 shares of Series A preferred stock
    40,000,000                                           40,000,000  
Issuance of 2,000.02 shares of Series B preferred stock
    2,000,000                   (2,000,000 )                        
Preferred stock dividend
                            (557,111 )                 (557,111 )
Stock issuance costs
                      (17,271 )                       (17,271 )
Stock options exercised - 156,000 shares (19,604 from treasury)
          34,098             210,485             158,416             402,999  
Treasury stock purchased - 10,000 shares
                                  (40,000 )           (40,000 )
Issuance of stock in connection with employee stock purchase plan — 14,910 shares
                      (163,039 )           216,864             53,825  
Stock option expense
                      268,764                         268,764  
Amortization of restricted stock
                      15,000                         15,000  
Change in valuation of available for-sale-securities, net of related tax effect
                                        391,077       391,077  
 
                                               
Balance at June 30, 2009
  $ 42,000,000       5,226,794             122,507,257       1,823,944             286,147       171,844,142  
 
                                               
 
                                                               
Balance at December 31, 2009
    42,300,000       5,243,023             122,334,757       (19,796,396 )           (411,960 )     149,669,424  
Net loss
                            (6,001,960 )                 (6,001,960 )
Subscriptions received for 1,551,517 shares of common stock
          387,879       (4,654,551 )     4,266,672                          
Payments received for subscription receivable
                1,097,052                               1,097,052  
Issuance of 235 shares of Series C preferred stock
    235,000                                           235,000  
Preferred stock dividend
                      (1,100,142 )                       (1,100,142 )
Stock issuance costs
                      (27,653 )                       (27,653 )
Issuance of stock in connection with employee stock purchase plan - 16,103 shares
          4,026             31,465                         35,491  
Stock option expense
                      169,412                         169,412  
Amortization of restricted stock
                      29,061                         29,061  
change in valuation of available-for-sale securities, net of related tax effect
                                        2,683,448       2,683,448  
 
                                               
 
                                                               
Balance at June 30, 2010
  $ 42,535,000       5,634,928       (3,557,499 )     125,703,572       (25,798,356 )           2,271,488       146,789,133  
 
                                               
See accompanying notes to interim condensed consolidated financial statements.

6


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2010 and 2009
                 
    2010     2009  
Cash flows from operating activities:
               
Net loss
  $ (6,001,960 )     (8,282,021 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    1,843,271       2,535,806  
Provision for possible loan losses
    17,320,000       16,250,000  
Net (gains) losses on sales and writedowns of debt securities
    (207,943 )     146,319  
Net gain on sale of premises and equipment
          (10,809 )
Net losses on sales and writedowns of other real estate owned
    1,503,964       1,289,359  
Stock option compensation cost
    169,412       268,764  
Amortization of restricted stock expense
    29,061       15,000  
Mortgage loans originated for sale in the secondary market
    (8,280,847 )     (28,241,565 )
Mortgage loans sold in secondary market
    8,113,447       28,726,594  
Decrease (increase) in accrued interest receivable
    1,188,754       (327,951 )
Decrease in accrued interest payable
    (435,288 )     (1,326,559 )
Other operating activities, net
    (959,784 )     (4,402,317 )
 
           
Net cash provided by operating activities
    14,282,087       6,640,620  
 
           
Cash flows from investing activities:
               
Purchase of available-for-sale debt securities
    (85,748,544 )     (159,923,841 )
Proceeds from maturities and issuer calls of available-for-sale debt securities
    94,126,644       112,732,816  
Proceeds from sales of available-for-sale debt securities
    15,672,280       1,228,825  
Net decrease in loans
    48,384,734       20,758,318  
Proceeds from sale of other real estate owned
    3,600,786       999,866  
Construction expenditures to finish other real estate owned
          (13,786 )
Proceeds from sale of fixed assets
          35,179  
Purchase of premises and equipment
    (13,871 )     (276,960 )
 
           
Net cash provided by (used in) investing activities
    76,022,029       (24,459,583 )
 
           
Cash flows form financing activities:
               
Net decrease in deposits
    (88,952,591 )     (20,476,166 )
Net increase (decrease) in short-term borrowings
    6,196,143       (48,243,404 )
Payments of long-term Federal Home Loan Bank borrowings
    (5,000,000 )      
Issuance of preferred stock
    235,000       40,000,000  
Dividends on preferred stock
    (1,100,142 )     (557,111 )
Issuance of common stock
    1,132,543        
Purchase of treasury stock
          (40,000 )
Proceeds from sale of treasury stock
          53,825  
Stock options exercised
          402,999  
Payment of stock issuance costs
    (27,653 )     (17,271 )
 
           
Net cash used in financing activities
    (87,516,700 )     (28,877,128 )
 
           
Net increase (decrease) in cash and cash equivalents
    2,787,416       (46,696,091 )
Cash and cash equivalents at beginning of period
    27,696,530       57,745,965  
 
           
Cash and cash equivalents at end of period
  $ 30,483,946       11,049,874  
 
           
Supplemental information:
               
Cash paid for:
               
Interest
  $ 13,671,160       22,294,362  
Cash received from:
               
Income tax refunds
    248,494        
Noncash transactions:
               
Warrant exercise and issuance of Series B preferred stock
          2,000,000  
Transfers to other real estate in settlement of loans
    12,709,989       3,478,995  
Loans made to facilitate the sale of other real estate
    371,250       151,510  
See accompanying notes to interim condensed consolidated financial statements.

7


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
June 30, 2010 and 2009
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. 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 income or shareholders’ equity.
Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2010. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2009, included in the Company’s previously issued Annual Report on Form 10-K/A for the fiscal year ended December 31, 2009.
Principles of Consolidation
The interim condensed consolidated financial statements include the accounts of the Company and Banks. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Accounting
The Company and Banks utilize the accrual basis of accounting, which includes in the total of net income all revenues earned and expenses incurred, regardless of when actual cash payments are received or paid. The Company is also required to report comprehensive income, of which net income is a component. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including all changes in equity during a period, except those resulting from investments by, and distributions to, owners.
Cash Flow Information
For purposes of the consolidated statements of cash flows, cash equivalents include amounts due from banks, interest-earning deposits in banks (all of which are payable on demand), and Federal funds sold. Certain balances are maintained in other financial institutions that participate in the Federal Deposit Insurance Corporation’s (“FDIC”) Transaction Account Guarantee Program. Under this program, these balances are fully guaranteed by the FDIC through December 31, 2011. 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 were 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 June 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 income 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 June 30,     Six-Months Ended June 30,  
    (restated)     (restated)     (restated)     (restated)  
    2010     2009     2010     2009  
Basic
                               
Net loss available to common shareholders
  $ (4,054,806 )     (8,930,006 )     (7,102,102 )     (8,839,132 )
 
                       
 
                               
Weighted average common shares outstanding
    21,221,753       20,855,898       21,097,611       20,801,385  
 
                       
Basic loss per share
  $ (0.19 )     (0.43 )     (0.34 )     (0.42 )
 
                       
 
                               
Diluted
                               
Net loss available to common shareholders
  $ (4,054,804 )     (8,930,006 )     (7,102,102 )     (8,839,132 )
 
                       
 
                               
Weighted average common shares outstanding
    21,221,753       20,855,898       21,097,611       20,801,385  
Effect of dilutive stock options
          3,204             37,889  
 
                       
Diluted weighted average common shares outstanding
    21,221,753       20,859,102       21,097,611       20,839,274  
 
                       
 
                               
Diluted loss per share
  $ (0.19 )     (0.43 )     (0.34 )     (0.42 )
 
                       

9


 

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 six months ended June 30, 2010 and 2009 and that these previously issued interim condensed consolidated financial statements should no longer be relied upon, as a result of the identification of certain omitted disclosures from the Company’s interim condensed consolidated financial statements issued for those particular periods.
This restatement is required due to certain disclosure omissions in the previously issued interim condensed consolidated financial statements related to net losses available to common shareholders after increasing the net loss for preferred dividends paid by the Company, which required an adjustment of the previously reported net loss per share data included in the Company’s interim condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009. We also have restated the Company’s interim condensed consolidated statements of operations and comprehensive loss to expand the disclosures for other-than-temporary losses on available-for-sale securities in those statements.
These restatements had no effect on the Company’s consolidated net loss for the three and six months ended June 30, 2010 and 2009, or its consolidated stockholders’ equity as of June 30, 2010 and 2009. Net loss available to common shareholders, after increasing the loss for preferred dividends paid by the Company, increased from the $(0.17) and $(0.28) per share, respectively originally disclosed to $(0.19) and $(0.34), respectively per share as restated, for both basic and fully-diluted loss per share for the three and six months ended June 30, 2010, respectively. Net loss available to common shareholders, after increasing the loss for preferred dividends paid by the Company, increased from $(0.40) and $(0.40), respectively originally presented to $(0.43) and $(0.42), respectively as restated, for both basic and fully-diluted loss per share for the three and six months ended June 30, 2009, respectively.
The Company has restated its interim condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2010 and 2009, to add the disclosures noted above. In connection with this restatement, note 1 to the interim condensed consolidated financial statements has been restated to reflect the changes in the loss per share calculation.
The effects of the restatement for additional disclosures regarding other-than-temporary impairment of the Company’s available-for sale securities, by financial statement line item on the interim condensed consolidated statements of operations for the three and six months ended June 30, 2010 and 2009, are as follows:

10


 

                                 
    Three Months Ended  
    June 30,  
    2010             2009        
    As presented     As restated     As presented     As restated  
Noninterest Expense
                               
Other than temporary impairment losses on available-for-sale securities:
                               
Total other-than-temporary impairment losses
            666,759               1,040,871  
Less portion of other-than-temporary impairment losses recognized in other comprehensive income
            (608,942 )             (894,793 )
 
                           
Net impairment loss realized
  $ 57,817       57,817       146,078       146,078  
Salaries and employee benefits
    3,223,969       3,223,969       3,435,246       3,435,246  
Other real estate expense
    1,222,042       1,222,042       1,452,500       1,452,500  
Occupancy and equipment expense
    1,074,211       1,074,211       1,086,386       1,086,386  
FDIC assessment
    754,397       754,397       1,157,449       1,157,449  
Data processing
    377,037       377,037       519,679       519,679  
Advertising
    16,859       16,859       28,192       28,192  
Amortization of intangible assets
    4,072       4,072       4,072       4,072  
Other interest expenses
    833,526       833,526       868,459       868,459  
 
                       
Total noninterest expense
    7,563,930       7,563,930       8,698,061       8,698,061  
 
                       
Loss before income taxes
    (6,195,791 )     (6,195,791 )     (12,751,446 )     (12,751,446 )
Applicable income tax benefit
    (2,692,536 )     (2,692,536 )     (4,378,551 )     (4,378,551 )
 
                       
Net loss
  $ (3,503,255 )     (3,503,255 )     (8,372,895 )     (8,372,895 )
 
                       
The effects of the restatement for additional disclosures and recalculation of per share information regarding the Company’s net loss available to common shareholders after payment of preferred dividends, by financial statement line item on the interim condensed consolidated statements of operations for the three months ended June 30, 2010 and 2009, are as follows:
                                 
    Three Months Ended
    June 30,
    2010   2009
    As reported   As restated   As reported   As restated
Net loss
  $ (3,503,255 )     (3,503,255 )     (8,372,895 )     (8,372,895 )
Preferred stock dividends
            (551,251 )             (557,111 )
 
                               
Net loss attributed to common shareholders
            (4,054,506 )             (8,930,006 )
 
                               
 
                               
Per share amounts
                               
Basic loss per share
    (0.17 )     (0.19 )     (0.40 )     (0.43 )
Basic weighted average shares outstanding
    21,221,753       21,221,753       20,855,898       20,855,898  
Diluted loss per share
    (0.17 )     (0.19 )     (0.40 )     (0.43 )
Diluted weighted average shares outstanding
    21,221,753       21,221,753       20,859,102       20,859,102  

11


 

                                 
    Six Months Ended  
    June 30,  
    2010             2009        
    As presented     As restated     As presented     As restated  
Noninterest Expense
                               
Other than temporary impairment losses on available-for-sale securities:
                               
Total other-than-temporary impairment losses
            666,759               1,040,871  
Less portion of other-than-temporary impairment losses recognized in other comprehensive income
            (608,942 )             (894,793 )
 
                           
Net impairment loss realized
  $ 57,817       57,817       146,078       146,078  
Salaries and employee benefits
    6,488,951       6,488,951       7,315,701       7,315,701  
Other real estate expense
    2,595,829       2,595,829       1,762,163       1,762,163  
Occupancy and equipment expense
    2,161,230       2,161,230       2,212,318       2,212,318  
FDIC assessment
    1,538,915       1,538,915       1,660,982       1,660,982  
Data processing
    809,580       809,580       994,353       994,353  
Advertising
    35,751       35,751       175,502       175,502  
Amortization of intangible assets
    8,144       8,144       8,144       8,144  
Other interest expenses
    1,622,224       1,622,224       1,663,952       1,663,952  
 
                       
Total noninterest expense
    15,318,441       15,318,441       15,939,193       15,939,193  
 
                       
Loss before income taxes
    (10,169,454 )     (10,169,454 )     (12,698,798 )     (12,698,798 )
Applicable income tax benefit
    (4,167,494 )     (4,167,494 )     (4,416,777 )     (4,416,777 )
 
                       
Net loss
  $ (6,001,960 )     (6,001,960 )     (8,282,021 )     (8,282,021 )
 
                       
The effects of the restatement for additional disclosures and recalculation of per share information regarding the Company’s net loss available to common shareholders after payment of preferred dividends, by financial statement line item on the interim condensed consolidated statements of operations for the six months ended June 30, 2010 and 2009, are as follows:
                                 
    Six Months Ended
    June 30,
    2010   2009
    As reported   As restated   As reported   As restated
Net loss
    (6,001,960 )     (6,001,960 )     (8,282,021 )     (8,282,021 )
Preferred stock dividends
            (1,100,142 )             (557,111 )
 
                               
Net loss attributed to common shareholders
            (7,102,102 )             (8,839,132 )
 
                               
 
                               
Per share amounts
                               
Basic loss per share
    (0.28 )     (0.34 )     (0.40 )     (0.42 )
Basic weighted average shares outstanding
    21,097,611       21,097,611       20,801,385       20,801,385  
Diluted loss per share
    (0.28 )     (0.34 )     (0.40 )     (0.42 )
Diluted weighted average shares outstanding
    21,097,611       21,097,611       20,839,274       20,839,274  

12


 

The effects of the restatement for additional disclosures regarding other-than-temporary impairment of the Company’s available-for sale securities, by financial statement line item on the interim condensed consolidated statements of comprehensive loss for the six months ended June 30, 2010 and 2009, are as follows:
                                 
    2010     2009  
    As reported     As restated     As reported     As restated  
Net loss
  $ (6,001,960 )     (6,001,960 )     (8,282,021 )     (8,282,021 )
 
                       
Other comprehensive income before tax:
                               
Net unrealized gains (losses) on available-for-sale securities
    4,273,773               446,222          
Change in unrealized gains (losses) on available-for-sale securities which a portion of an other-than-temporary impairment loss has been recognized in earnings, net of reclassification
            (58,136 )             (30,284 )
Change in unrealized gains (losses) on other securities available-for-sale, net of reclassification
            4,331,909               476,506  
Reclassification adjustments for:
                               
Available for sale losses (gains) included in net loss
    (265,760 )     (265,760 )     241       241  
Writedown of investment securities included in net loss
    57,817       57,817       146,078       146,078  
 
                       
Other comprehensive income before tax
    4,065,830       4,065,830       592,541       592,541  
Income tax related to items of other comprehensive income
    1,382,382       1,382,382       201,464       201,464  
 
                       
Other comprehensive income, net of tax
    2,683,448       2,683,448       391,077       391,077  
 
                       
Total comprehensive loss
  $ (3,318,512 )     (3,318,512 )     (7,890,944 )     (7,890,944 )
 
                       

13


 

NOTE 2 — INTANGIBLE ASSETS
Identifiable intangible assets include the core deposit premium relating to the Company’s acquisition of The Bank of Godfrey, which is being amortized into noninterest expense on a straight-line basis over 15 years. Amortization of the core deposit intangible assets existing at June 30, 2010 will be $4,072 per quarter until completely amortized.
The excess of the Company’s consideration given in its acquisition of The Bank of Godfrey over the fair value of the net assets acquired is recorded as goodwill, an intangible asset on the consolidated balance sheets. Goodwill is the Company’s only intangible asset with an indefinite useful life, and the Company is required to test the intangible asset for impairment on an annual basis. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. No impairment writedown has thusfar been required on this intangible asset.
NOTE 3 — STOCK OPTIONS
Compensation costs relating to share-based payment transactions are recognized in the Company’s consolidated financial statements over the period of service to which such compensation relates (generally the vesting period), and are measured based on the fair value of the equity or liability instruments issued. The grant date values of share options are estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost would be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
No value was ascribed to the options granted in the first six months of 2009 as the option price significantly exceeded the market value of the stock on the grant date; however, the Company’s common stock is not actively traded on any exchange. Accordingly, the availability of fair value information for the Company’s common stock is limited. In using the Black-Scholes option pricing model to value the options, several assumptions have been made in arriving at the estimated fair value of the

14


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
options granted, including minimal or no volatility in the Company’s common stock price, expected forfeitures of 10%, no dividends paid on the common stock, an expected weighted average option life of six years, and a risk-free interest rate approximating the U.S. Treasury rates for the applicable duration period. Any change in these assumptions could have a significant impact on the effects of determining compensation costs.
Following is a summary of the Company’s stock option activity for the six-month periods ended June 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  
Six-Months Ended June 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 )     15.49       (9,667 )
Exercised
    2.58       (156,000 )            
 
                           
Balance at June 30, 2009
  $ 8.07       1,434,700     $ 8.34       663,833  
 
                       
Six-Months Ended June 30, 2010:
                               
Balance at December 31, 2009
  $ 8.05       1,424,450     $ 8.41       666,816  
Forfeited
    10.86       (17,250 )     10.53       (20,816 )
 
                           
Balance at June 30, 2010
  $ 8.02       1,407,200     $ 8.34       646,000  
 
                       
The weighted average option prices for the 2,053,200 and 2,098,533 options outstanding at June 30, 2010 and 2009 were $8.12 and $8.15, respectively. At June 30, 2010, options to purchase an additional 542,050 shares of Company common stock were available for future grants under the various plans.
The total intrinsic value of options exercised during the six months ended June 30, 2009 was $228,300. No options were exercised during the six months ended June 30, 2010. The average remaining contractual term for options exercisable as of June 30, 2010 was 3.26 years, with no intrinsic value at June 30, 2010. A summary of the activity of the 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
    (125,157 )     2.54  
Forfeited
    (4,250 )     1.14  
 
             
Nonvested at June 30, 2010
    141,791       1.72  
 
           
Unrecognized compensation expense related to nonvested stock options granted after January 1, 2006, was $29,091, and the related weighted average period over which it is expected to be recognized is approximately 11 months. The Company recognized stock option expense of $169,412 and $268,764 for the six months ended June 30, 2010 and June 30, 2009, respectively.

15


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
NOTE 4 — 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 June 30, 2010:
         
Financial instruments for which contractual amounts represent:
       
Commitments to extend credit
  $ 113,380,599  
Standby letters of credit
    12,609,055  
 
     
 
  $ 125,989,654  
 
     
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 June 30, 2010, $23,929,733 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 fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally residential or income-producing commercial property or equipment, on which the Banks generally have a superior lien.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party, for which draw requests have historically not been made thereon. Such guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2010:
                 
    Carrying     Estimated  
    amount     fair value  
Balance sheet assets:
               
Cash and due from banks
  $ 30,339,946     $ 30,339,946  
Federal funds sold
    144,000       144,000  
Investments in debt securities
    263,575,008       263,575,008  
Loans, net
    1,030,698,892       1,044,242,297  
Accrued interest receivable
    4,459,133       4,459,133  
 
           
 
  $ 1,329,216,979     $ 1,342,760,384  
 
           
 
               
Balance sheet liabilities:
               
Deposits
  $ 1,177,107,606     $ 1,185,987,845  
Short-term borrowings
    18,893,075       18,893,075  
Long-term Federal
               
Home Loan Bank borrowings
    99,000,000       119,365,338  
Accrued interest payable
    1,759,664       1,759,664  
 
           
 
  $ 1,296,760,345     $ 1,326,005,922  
 
           

16


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
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.
Investments in Available-For-Sale Debt Securities — Investments in available-for-sale debt securities are recorded at fair value on a recurring basis. The Company’s available-for-sale debt securities are measured at fair value using Level 2 and 3 valuations. For all debt securities other than the other debt 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.

17


 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements (unaudited)
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 June 30, 2010, and 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 considered not reliable for the purpose of determining fair value at June 30, 2010, and an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs is considered 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  
Decrease in fair value
    (1,241 )
Impairment writedowns
    (57,817 )
Accreted discount
    932  
Payments in kind
    11,407  
Principal payments received
    (4,082 )
 
     
Balance, at fair value on June 30, 2010
  $ 1,186,936  
 
     
Loans — The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. At June 30, 2010, all impaired loans were evaluated based on the fair value of the underlying 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 June 30, 2010 was $117,788,158.
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.

18


 

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 June 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:
                             
U.S. government sponsored agency obligations
  $   $ 102,740,520     $     $ 102,740,520  
State and municipal securities
  $     28,899,845             28,899,845  
Other debt securities
  $           1,186,936       1,186,936  
Mortgage-backed securities
  $     130,747,707             130,747,707  
 
                           
Total Investment Securities available for sale
  $   $ 262,388,072     $ 1,186,936     $ 263,575,008  
 
                           
From time to time, the Company measures certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or fair value, including impaired loans and other real estate owned. Impaired loans are reported at the fair value of the underlying collateral. Fair values for impaired loans are obtained from current appraisals by qualified licensed appraisers or independent valuation specialists. 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 is based upon the current appraised values of the properties as determined by qualified licensed appraisers and the Company’s judgment of other relevant market conditions. Accordingly, these assets are classified in the Level 3 category. The total principal balance of impaired loans and other real estate owned at June 30, 2010 was $117,788,158 and $36,319,932, respectively.

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Part I — Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following presents management’s discussion and analysis of the consolidated financial condition and results of operations of Reliance Bancshares, Inc. (the “Company”) for the three and six-month periods ended June 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 SEC 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
The Company provides a full range of banking services to individual and corporate customers throughout the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida through the 23 locations of its wholly-owned subsidiaries, Reliance Bank and Reliance Bank, FSB (hereinafter referred to as the “Banks”). The Company was incorporated and began its development stage activities on July 24, 1998. Such development stage activities (i.e., applying for a banking charter, raising capital, acquiring property, and developing policies and procedures, etc.) led to the opening of Reliance Bank (as a new bank) upon receipt of all regulatory approvals on April 16, 1999. Since its opening in 1999 through June 30, 2010, Reliance Bank has added 20 branch locations in the St. Louis metropolitan area of Missouri and Illinois and Loan Production Offices (“LPO’s”) in Houston, Texas and Phoenix, Arizona and has grown its total assets, loans and deposits to $1.4 billion, $1.0 billion, and $1.1 billion, respectively, at June 30, 2010.
Effective May 31, 2003, the Company purchased The Bank of Godfrey, a Godfrey, Illinois state banking institution. The Godfrey bank was merged with and into Reliance Bank on October 31, 2005. Reliance Bank also opened a LPO in Ft. Myers, Florida on July 1, 2004. Effective January 17, 2006, the Company opened a new Federal Savings Bank, Reliance Bank, FSB, in Ft. Myers, Florida, and loans totaling approximately $14 million that were originated by the Reliance Bank LPO were transferred to Reliance Bank, FSB. Since its opening in 2006 through June 30, 2010, Reliance Bank, FSB has added two branch locations in southwestern Florida and has grown its total assets, loans, and deposits to $93.4 million, $60.0 million, and $71.6 million, respectively, at June 30, 2010.
At June 30, 2010, Reliance Bank’s total assets, total revenues, and net loss represented 93.52%, 94.31%, and 55.36%, respectively, of the Company’s consolidated total assets, total revenue, and net loss. Reliance Bank, FSB’s total assets, total revenues, and net loss represented 6.45%, 5.69%, and 37.32%, respectively, of the Company’s consolidated totals. The Company incurred a net loss of $6.0 million for the six months ended June 30, 2010.
During 2008, the Company completed building its St. Louis metropolitan branch network. The Company plans to continue building its branch network in southwestern Florida, with four additional branches planned; however, the building of these branches has been suspended while management focuses on Reliance Bank, FSB’s profitability in light of the stressful market conditions in southwestern Florida. The Company’s branch expansion plans have been designed to increase the Company’s market share in the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida and to allow the Company’s

20


 

banking subsidiaries to compete with much larger financial institutions in these markets. The Houston and Phoenix LPO’s are intended to benefit from commercial and residential lending and fee income generation opportunities in these larger and historically higher-growth markets.
The St. Louis metropolitan, southwestern Florida, Houston and Phoenix markets in which the Company’s banking subsidiaries operate are highly competitive in the financial services area. The Banks are subject to competition from other financial and nonfinancial institutions providing financial products throughout these markets.
The Company’s total consolidated assets were $1.4 billion at June 30, 2010, with loans and deposits totaling $1.1 billion and $1.2 billion, respectively. The branch locations of the Banks have provided the Company with excellent strategic locations from which depositors and borrowers can be accessed. Three Reliance Bank branches were opened in 2008, six Reliance Bank branches were opened in 2006, one branch was opened in 2005, four branches were opened in 2004, two branches were opened in 2003, and one branch was opened each year in 2002, 2001, and 1999. Three Reliance Bank, FSB branches were opened in 2007 and one branch was opened in 2006, while one temporary branch was closed on June 26, 2009 due to local economic conditions.
The Company has funded its Banks’ branch expansion with several private placement stock offerings made to accredited investors since its inception, and has sold 22,539,711 shares of Company Common Stock through June 30, 2010.
The Company’s consolidated net losses for the six-month periods ended June 30, 2010 and 2009 totaled $6,001,960 and $8,282,021, respectively. Consolidated net losses for the three-month periods ended June 30, 2010 and 2009 totaled $3,503,255 and $8,372,895, respectively. While the Company’s net interest income has continued to grow, the provision for possible loan losses increased compared to the same six months of 2009, reflecting an increase in nonperforming loans, which has resulted from a substantial decline in the real estate and local economic markets in which the Company’s banking subsidiaries operate. These factors and their effect on the Company’s results of operations are discussed in more detail below.
Net interest income before the provision for possible loan losses for the six-month periods ended June 30, 2010 and 2009 totaled $21,028,811 and $18,292,107, respectively. Net interest income before the provision for possible loan losses for the three-month periods ended June 30, 2010 and 2009 totaled $10,210,545 and $9,283,097, respectively. This growth in net interest income resulted from a decrease in the rates paid on deposits and a shift in funding composition toward lower cost deposit products, reduced by the impact from increasing nonearning problem assets.
Interest expense incurred on interest-bearing liabilities for the six-month periods ended June 30, 2010 and 2009 totaled $13,235,872 and $20,967,803, respectively. Interest expense incurred on interest-bearing liabilities for the quarters ended June 30, 2010 and 2009 totaled $6,445,945 and $9,992,569, respectively. The Company continues to restructure its mix of deposits away from higher rate time deposits and short-term borrowings to lower cost savings and money market accounts. Also, the Company has been able to lower rates on retail deposits and still retain customer balances.
The substantial decline of the real estate market that has occurred during the past several years on a national scale has also been experienced in the St. Louis metropolitan and southwestern Florida areas. Residential home building and sales have declined significantly from the levels enjoyed prior to the current economic recession. As a result, the Company has experienced a significant continual increase in nonperforming assets (which include nonperforming loans and other real estate owned). Nonperforming assets totaled $130.2 million at June 30, 2010 compared with $89.8 million at June 30, 2009. The reserve for possible loan losses as a percentage of net outstanding loans was 3.39% at June 30, 2010 compared with 1.97% at June 30, 2009. Net charge-offs for the six months ended June 30, 2010 totaled $13.4 million compared with $6.5 million for the six months ended June 30, 2009. Net charge-offs for the three months ended June 30, 2010 totaled $6.2 million compared with $4.2 million for the three months ended June 30, 2009. The provision for possible loan losses charged to expense for the six-month periods ended June 30, 2010 and 2009 totaled $17,320,000 and $16,250,000, respectively, and $9,628,000 and $14,000,000 for the three-month periods ended June 30, 2010 and 2009, respectively. The year to date increase in the provision for loan losses was a direct reaction to the significant decline in the real estate market. The Company believes it has identified existing problems in the loan portfolio and is working to address those issues. However, the economy continues to present challenges to our borrowers and it could be likely that others will meet with difficulty in meeting obligations. See further discussion regarding the Company’s management of credit risk in the section below entitled “Risk Management.”
Total noninterest income excluding securities gains and losses for the six-month periods ended June 30, 2010 and 2009 was $1,174,416 and $1,198,529, respectively, and $584,525 and $663,759 for the three-month periods ended June 30, 2010 and 2009, respectively. Gains (losses) on security sales for the six-month periods ended June 30, 2010 and 2009 were $265,760 and ($241), respectively and $201,069 and ($241) for the three month periods ended June 30, 2010 and 2009, respectively.

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Total noninterest expense was $15,318,441 and $15,939,193 for the six-month periods ended June 30, 2010 and 2009, respectively, and $7,563,930 and $8,698,061 for the three-month periods ended June 30, 2010 and 2009, respectively. The Company had reductions in all noninterest expense categories with the exception of other real estate expense.
The Company’s effective tax rate for the six-month periods ended June 30, 2010 and 2009 was 40.98% and 34.78%, respectively, and 43.46% and 34.34% for the three-month periods ended June 30, 2010 and 2009, respectively.
Basic and fully diluted loss per common share for the three-month period ended June 30, 2010 were both $(0.19) per share (restated). Basic and fully diluted loss per share for the six-month period ended June 30, 2010 were both $(0.42) (restated).
Following are certain of the Company’s ratios generally followed in the banking industry for the three and six-month periods ended June 30, 2010 and 2009:
                                 
    As of and for the   As of and for the
    six months ended June 30,   quarters ended June 30,
    2010   2009   2010   2009
Percentage of net loss to:
                               
Average total assets
    (0.81 )%     (1.05 )%     (0.96 )%     (2.12 )%
Average stockholders’ equity
    (8.10 )%     (9.79 )%     (9.48 )%     (18.58 )%
Percentage of common dividends declared to net income per common share
                       
Percentage of average stockholders’ equity to average total assets
    10.05 %     10.70 %     10.13 %     11.43 %
Critical Accounting Policies
The impact and any associated risks related to the Company’s critical accounting policies on reporting operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s consolidated financial statements as of and for year ended December 31, 2009 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K, which was filed March 26, 2010. Management believes there have been no material changes to our critical accounting policies during the first six months of 2010.

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Results of Operations for the Three and Six-Month Periods Ended June 30, 2010 and 2009
Net Interest Income
The Company’s net interest income increased $2,736,704 (14.96%) to $21,028,811 for the six-month period ended June 30, 2010 from the $18,292,107 earned during the six-month period ended June 30, 2009. The Company’s net interest margin for the six-month periods ended June 30, 2010 and 2009 was 3.08% and 2.46%, respectively. The Company’s net interest income increased $927,448 (9.99%) to $10,210,545 for the three-month period ended June 30, 2010 from the $9,283,097 earned during the three-month period ended June 30, 2009. The Company’s net interest margin for the three-month periods ended June 30, 2010 and 2009 was 3.03% and 2.51%, respectively. This increase in margin percentage is primarily attributed to lower cost of funds on the Company’s retail deposit products and a shift in funding composition toward lower cost deposit products.
Average earning assets for the first six months of 2010 decreased $125,962,734 (8.29%) to $1,394,021,535 from the level of $1,519,984,269 for the first six months of 2009. Average earning assets for the second quarter of 2010 decreased $134,014,937 (8.91%) to $1,369,375,108 from the level of $1,503,390,045 for the second quarter of 2009. Total average loans for the first six months of 2010 decreased $130,135,950 (10.51%) to $1,107,753,561 from the level of $1,237,889,511 for the first six months of 2009. Total average loans for the second quarter of 2010 decreased $140,527,314 (11.42%) to $1,090,087,275 from the level of $1,230,614,589 for the second quarter of 2009. The depressed economy has reduced the Company’s opportunities for loan growth in its current markets.
Total average investment securities for the first six months of 2010 decreased $2,826,056 (1.10%) to $254,138,307 from the level of $256,964,363 for the first six months of 2009. Total average investment securities for the second quarter of 2010 decreased $10,463,363 (4.05%) to $247,788,264 from the level of $258,251,627 for the second 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 $100,000, (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 $171.2 million at June 30, 2010. The Banks have also pledged letters of credit from the Federal Home Loan Banks totaling $1.5 million as additional collateral to secure public funds and loans at June 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 six-month periods ended June 30, 2010 and 2009 were $32,129,667 and $25,130,395, respectively. The average balances of such short-term investments for the quarters ended June 30, 2010 and 2009 were $31,499,569 and $14,523,829, respectively.
A key factor in attempting to increase the Company’s net interest margin is to maintain a higher percentage of earning assets in the loan category, which is the Company’s highest earning asset category. However, average loans as a percentage of average earning assets were 79.46% for the first six months of 2010, which was a 1.98% decrease over the 81.44% achieved in the first six months of 2009. Average loans as a percentage of average earning assets were 79.60% for the second quarter of 2010, which was a 2.26% decrease over the 81.86% achieved in the second quarter of 2009. This decline resulted from the depressed economic environment in the Banks’ market areas, resulting in fewer lending opportunities for the Banks.
Total average interest-bearing deposits for the first six months of 2010 were $1,154,066,529, a decrease of $38,789,534 (3.25%) from the level of $1,192,856,063 for the first six months of 2009. Total average interest-bearing deposits for the second quarter of 2010 were $1,135,034,567, a decrease of $43,646,651 (3.70%) from the level of $1,178,681,218 for the second quarter of 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. Total average time deposits for the first six months of 2010 decreased $215,095,004 (26.40%) to $599,807,338 from a level of $814,902,342 for the first six months of 2009. Average time deposits for the second quarter of 2010 declined $187,538,601 (24.55%) to $576,233,648 from $763,772,249 for the second quarter of 2009. The Company increased average savings account deposits by $110,033,754 (51.78%) to $322,525,828 from $212,492,074 for the first six months of 2009. Average savings accounts for the second quarter of 2010 increased $82,542,859 (33.82%) to $326,591,959 from $244,049,100 for the second quarter of 2009. Also, interest-bearing transaction accounts for the first six months of 2010 increased $66,271,716 (40.05%) to $231,733,363 from a level of

23


 

$165,461,647 for the first six months of 2009. Average interest bearing transaction accounts increased $61,349,091 (35.91%) to $232,208,960 from $170,859,869 for the second quarter of 2009.
The Company’s short-term borrowings consist of overnight funds borrowed from unaffiliated financial institutions and securities sold under sweep repurchase agreements with larger deposit customers. Average short term borrowings for the six months ended June 30, 2010 declined $14,141,576 (48.94%) to $14,752,435 from $28,894,011 for the six months ended June 30, 2009. Average short-term borrowings for the second quarter of 2010 declined $2,524,385 (13.84%) to $15,721,742 from $18,246,127 for the second quarter of 2009. The increase in retail savings and interest-bearing transaction accounts allowed the Company to reduce its short-term borrowings.
The Company has used longer-term advances to match with longer-term fixed rate assets. The average balance of Federal Home Loan Bank advances declined $34,768,817 (25.57%) to $101,231,183 for the first six months of 2010, compared with $136,000,000 for the first six months of 2009. The average balance of Federal Home Loan Bank advances declined $37,000,000 (27.21%) to $99,000,000 for the second quarter of 2010, compared with the $136,000,000 average balance for the second quarter of 2009. The Company has sought to lower its balances of wholesale funding.
The overall mix of the Company’s funding sources has a significant impact on the Company’s net interest margin. Following is a summary of the percentage of the various components of average interest-bearing liabilities and noninterest-bearing deposits to the total of all average interest-bearing liabilities and noninterest-bearing deposits (hereinafter described as “total funding sources”) for the three and six-month periods ended June 30, 2010 and 2009:
                                 
    Three months ended     Six months ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Average deposits:
                               
Noninterest-bearing
    4.45 %     4.31 %     4.58 %     4.16 %
 
                       
Interest-bearing:
                               
Transaction accounts
    17.75       12.27       17.41       11.68  
Savings
    24.97       17.52       24.23       15.00  
Time deposits of $100,000 or more
    18.80       23.32       19.41       24.28  
Other time deposits
    25.26       31.51       25.65       33.23  
 
                       
Total average interest-bearing deposits
    86.78       84.62       86.70       84.19  
 
                       
Total average deposits
    91.23       88.93       91.28       88.35  
 
                       
Average short-term borrowings
    1.20       1.31       1.11       2.05  
Average longer-term advances from Federal Home Loan Bank
    7.57       9.76       7.61       9.60  
 
                       
 
    100.00 %     100.00 %     100.00 %     100.00 %
 
                       
The composition of the Company’s deposit portfolio will fluctuate as recently added branches help to diversify the Company’s deposit base. The overall level of interest rates will also cause fluctuations between categories. The Company has sought to increase the percentage of its noninterest-bearing deposits to total funding sources and increase its percentage of lower cost savings and interest bearing transaction accounts. Through deposit campaigns, the Company increased its percentage of average savings accounts to 24.23% and 24.97% of total average funding sources for the six and three months ended June 30, 2010, respectively compared to 15.00% and 17.52% for the six and three months ended June 30, 2009, respectively. Also, average interest bearing transaction accounts increased to 17.41% and 17.75% of total average funding sources for the six and three month periods ended June 30, 2010, respectively from 11.68% and 12.27% for the six and three months ended June 30, 2009, respectively. These increases allowed the Company to reduce the percentage of short-term borrowings and longer term advances. Higher cost certificates of deposits declined to 45.06% and 44.06% for the six and three months ended June 30, 2010 compared to 57.51% and 54.83% at June 30, 2009. 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.

24


 

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)  
    Second Quarter     First Six Months  
    Change From 2009 to 2010 Due to  
            Yield/                     Yield/        
    Volume (1)     Rate (2)     Total     Volume (1)     Rate (2)     Total  
Interest income:
                                               
Loans
  $ (1,905,226 )     (421,625 )     (2,326,851 )     (3,581,237 )     (964,693 )     (4,545,930 )
Investment securities:
                                               
Taxable
    (75,974 )     (211,087 )     (287,061 )     (8,086 )     (401,610 )     (409,696 )
Exempt from Federal income taxes
    (20,193 )     10,269       (9,924 )     (68,533 )     28,993       (39,540 )
Short-term investments
    8,427       1,803       10,230       7,021       2,801       9,822  
 
                                   
Total interest income
    (1,992,966 )     (620,640 )     (2,613,606 )     (3,650,835 )     (1,334,509 )     (4,985,344 )
 
                                   
Interest expense:
                                               
Interest-bearing transaction accounts
    167,208       (181,657 )     (14,449 )     372,938       (437,015 )     (64,077 )
Savings accounts
    462,029       (1,172,763 )     (710,734 )     1,145,343       (2,107,859 )     (962,516 )
Time deposits of $100,000 or more
    (551,054 )     (514,933 )     (1,065,987 )     (1,215,967 )     (1,236,425 )     (2,452,392 )
Other time deposits
    (859,758 )     (584,197 )     (1,443,955 )     (2,058,885 )     (1,389,642 )     (3,448,527 )
 
                                   
Total deposits
    (781,575 )     (2,453,550 )     (3,235,125 )     (1,756,571 )     (5,170,941 )     (6,927,512 )
Funds purchased and securities sold under repurchase agreements
    (5,857 )     (15,061 )     (20,918 )     (108,946 )     (141,841 )     (250,787 )
Long-term borrowings
    (355,082 )     64,501       (290,581 )     (657,346 )     103,714       (553,632 )
 
                                   
Total interest expense
    (1,142,514 )     (2,404,110 )     (3,546,624 )     (2,522,863 )     (5,209,068 )     (7,731,931 )
 
                                   
Net interest income (loss)
  $ (850,452 )     1,783,470       933,018       (1,127,972 )     3,874,559       2,746,587  
 
                                   
 
(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 six-month periods ended June 30, 2010 and 2009 was $17,320,000 and $16,250,000, respectively. The provision for possible loan losses charged to earnings for the three-month periods ended June 30, 2010 and 2009 was $9,628,000 and $14,000,000, respectively. Net charge-offs for the six-month periods ended June 30, 2010 and 2009 totaled $13,378,166 and $6,511,312, respectively. Net charge-offs for the three-month periods ended June 30, 2010 and 2009 totaled $6,181,681 and $4,151,537, respectively. As of June 30, 2010 and 2009, the reserve for possible loan losses as a percentage of net outstanding loans was 3.39% and 1.97%, respectively. The reserve for possible loan losses as a percentage of nonperforming loans (comprised of loans for which the accrual of interest has been discontinued and loans still accruing interest that were 90 days delinquent) was 38.51% and 32.72% at June 30, 2010 and 2009, respectively. The continued significant decline of the real estate market has resulted in an increase in the level of nonperforming loans and a required higher provision for loan losses in the first six months of 2010. See further discussion regarding the Company’s credit risk management in the section below entitled “Risk Management.”
Noninterest Income
Total noninterest income for the first six months of 2010, excluding security sale gains and losses, decreased $24,113 (2.01%) to $1,174,416 from the $1,198,529 earned for the first six months of 2009. Total noninterest income for the second quarter of 2010, excluding security gains and losses, decreased $79,234 (11.94%) to $584,525 from the $663,759 earned for the second quarter of 2009. Secondary mortgage market fees declined $210,501 (72.41%) to $80,194 from the $290,695 for the six months ended June 30, 2010 and declined $143,032 (79.44%) to $37,021 for the three-months ended June 30, 2010 from $180,053 for the three months ended June 30, 2009, resulting from less mortgage refinance activity. Offsetting these declines were increases from revenue generated from the Company’s other real estate properties. This income rose $116,360 (415.81%)

25


 

to $144,344 for the six months ended June 30, 2010 from $27,984 for the six months ended June 30, 2009. Other real estate income increased $49,601 (357.28%) to $63,484 for the three months ended June 20, 2010 from $13,883 for the three months ended June 30, 2010, due to an increase in the number of rentable properties held.
Noninterest Expense
Noninterest expense decreased $620,752 (3.89%) for the first six months of 2010 to $15,318,441 from the $15,939,193 incurred during the first six months of 2009. Noninterest expense decreased $1,134,131 (13.04%) for the second quarter of 2010 to $7,563,930 from the $8,698,061 incurred during the second quarter of 2009. The Company had reductions in all noninterest expense categories with the exception of other real estate expense.
Total personnel costs decreased by $826,750 (11.30%) to $6,488,951 for the first six months of 2010 from the $7,315,701 incurred in the first six months of 2009. Total personnel costs decreased by $211,277 (6.15%) to $3,223,969 for the second quarter of 2010 from the $3,435,246 incurred in the second 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 (which includes writedowns, losses upon sale, and operating expenses of other real estate owned), for the first six months of 2010 increased $833,666 (47.31%) to $2,595,829, as compared with the $1,762,163 of expenses incurred for the first six months of 2009. Total other real estate expenses for the second quarter of 2010 decreased $230,458 (15.87%) to $1,222,042, as compared with the $1,452,500 of expenses incurred for the second quarter of 2009. Net losses and writedowns for the first six months and second quarter of 2010 were $1,503,964 and $774,301, respectively.
Total occupancy and equipment expenses decreased $51,088 (2.31%) to $2,161,230 for the first six months of 2010 from the $2,212,318 incurred in the first six months of 2009. Total occupancy and equipment expenses decreased $12,175 (1.12%) to $1,074,211 for the second quarter of 2010 as compared with $1,086,386 for the second quarter of 2009. Certain assets became fully depreciated and a temporary facility was closed.
FDIC insurance assessment expense for the first six months of 2010 decreased $122,067 (7.35%) to $1,538,915, as compared with the $1,660,982 of expenses incurred for the first six months of 2009. Total FDIC insurance assessment expense for the second quarter of 2010 decreased $403,052 (34.82%) to $754,397, as compared with the $1,157,449 of expenses incurred for the second quarter of 2009. During 2009, the FDIC imposed a special assessment, which was levied on all banks, varying based on size to replenish the FDIC’s insurance fund.
Total data processing expenses for the first six months of 2010 decreased $184,773 (18.58%) to $809,580 for the first six months of 2010, as compared with the $994,353 of expenses incurred for the first six months of 2009. Total data processing expenses for the second quarter of 2010 decreased $142,642 (27.45%) to $377,037 as compared with the $519,679 of expenses incurred for the second quarter of 2009. The decreases were achieved due to cost reduction efforts.
Total advertising expenses for the first six months of 2010 decreased $139,751 (79.63%) to $35,751, as compared with the $175,502 of expenses incurred for the first six months of 2009. Total advertising expenses for the second quarter of 2010 decreased $11,333 (40.20%) to $16,859, as compared with the $28,192 of expenses incurred for the second quarter of 2009. The decrease is part of the Company’s cost reduction efforts, as many of the Company’s advertising efforts have been scaled back.
Other noninterest expenses for the first six months of 2010 decreased $41,728 (2.51%) to $1,622,224, as compared with the $1,663,952 of expenses incurred for the first six months of 2009. Total other noninterest expenses for the second quarter of 2010 decreased $34,933 (4.02%) to $833,526, as compared with the $868,459 of expenses incurred for the second quarter of 2009. The decrease is attributed to the Company’s cost reduction initiatives.
Income Taxes
Applicable income tax benefits totaled $4,167,494 and $4,416,777 for the six-month periods ended June 30, 2010 and 2009, respectively. The effective tax rates for the six-month periods ended June 30, 2010 and 2009 were 40.98% and 34.78%, respectively. Applicable income tax benefits totaled $2,692,536 and $4,378,551 for the three-month periods ended June 30, 2010 and 2009, respectively. The effective tax rates for the three-month periods ended June 30, 2010 and 2009 were 43.46% and 34.34%, respectively. The change in effective tax rates was primarily influenced by the level of tax-exempt interest income earned in each period.

26


 

Pre-tax core earnings increased $3,385,228 (55.02%) to $9,538,432 million for the six months ended June 30, 2010 from $6,153,204 for the six months ended June 30, 2009. Pre-tax core earnings increased $970,106 (27.40%) to $4,510,999 for the three months ended June 30, 2010 from the $3,540,893 for the three months ended June 30, 2009. Pre-tax core earnings, which is a non-GAAP financial measure, is presented because the Company believes adjusting its results to exclude loan loss provision expense, impairment charges, special FDIC assessments and unusual gains or losses provides shareholders with additional insight for evaluating period-to-period operating results. A schedule reconciling GAAP pre-tax loss to pre-tax core earnings is provided in the table below:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Loss before income taxes
  $ (6,195,791 )   $ (12,751,446 )   $ (10,169,454 )   $ (12,698,798 )
 
                       
Other real estate expense
    1,222,042       1,452,500       2,595,829       1,762,163  
Losses (gains) on sales and writedown of securities
    (143,252 )     146,319       (207,943 )     146,319  
FDIC special assessment
          693,520             693,520  
Provision for loan losses
    9,628,000       14,000,000       17,320,000       16,250,000  
 
                       
Pre-tax core earnings
  $ 4,510,999     $ 3,540,893     $ 9,538,432     $ 6,153,204  
 
                       
Financial Condition
Total assets of the Company decreased $89,818,955 (5.84%) to $1,447,875,462 at June 30, 2010 from a level of $1,537,694,417 at June 30, 2009. In the first six months of 2010, total assets decreased $88,832,122 (5.78%), from the level of $1,536,707,584 at December 31, 2009. The depressed economy has reduced the Company’s opportunities for loan growth in its current markets.
Total deposits of the Company decreased $88,952,591 (7.03%) in the first six months of 2010 to $1,177,107,606 at June 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, as presented in the following tables, the Company has achieved significant average growth in interest bearing and savings deposits, which reflects success in attracting retail deposits.
Short-term borrowings at June 30, 2010 increased $6,196,143 (48.80%) to $18,893,075 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 $5,000,000 (4.81%) to $99,000,000 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 $73,982,473 (6.48%) in the first six months of 2010 to $1,066,898,802 at June 30, 2010, from the level of $1,140,881,275 at December 31, 2009. The depressed economy has reduced the Company’s opportunities for loan growth in its current markets.
Investment securities, all of which are maintained as available-for-sale, decreased $20,544,548 (7.23%) in the first six months of 2010 to $263,575,008 at June 30, 2010, from the level of $284,119,556 at December 31, 2009. The Company’s investment portfolio growth is dependent upon the level of deposit growth exceeding opportunities to grow the loan portfolio and the funding requirements of the Company’s loan portfolio, as described above.
Total stockholders equity decreased $2,880,291 (1.92%) in the first six months of 2010 to $146,789,133 at June 30, 2010, from the level of $149,669,424 at December 31, 2009. The Company’s capital-to-asset percentage was 10.14% at June 30, 2010.

27


 

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.
                                 
    Six Months Ended June 30, 2010  
            Percent     Interest     Average  
    Average     of Total     Income/     Yield/  
    Balance     Assets     Expense     Rate  
ASSETS
                               
Loans (1) (2) (3)
  $ 1,107,753,561       74.54 %   $ 30,135,515       5.49 %
Investment securities:
                               
Taxable
    225,075,692       15.15       3,507,293       3.14  
Exempt from Federal income taxes (3)
    29,062,615       1.96       854,936       5.93  
Short-term investments
    32,129,667       2.16       32,543       0.20  
 
                         
Total earning assets
    1,394,021,535       93.81       34,530,287       5.00  
 
                       
Nonearning assets:
                               
Cash and due from banks
    5,368,062       0.36                  
Reserve for possible loan losses
    (33,231,280 )     (2.24 )                
Premises and equipment
    41,758,240       2.81                  
Other assets
    76,538,934       5.15                  
Available-for-sale investment market valuation
    1,648,445       0.11                  
 
                           
Total nonearning assets
    92,082,401       6.19                  
 
                           
Total assets
  $ 1,486,103,936       100.00 %                
 
                           
LIABILITIES
                               
Interest-bearing liabilities:
                               
Interest-bearing transaction accounts
  $ 231,733,363       15.60       1,080,184       0.94  
Savings
    322,525,828       21.70       2,050,543       1.28  
Time deposits of $100,000 or more
    258,419,981       17.39       3,141,889       2.45  
Other time deposits
    341,387,357       22.97       4,982,503       2.94  
 
                         
Total interest-bearing deposits
    1,154,066,529       77.66       11,255,119       1.97  
Long term borrowings
    101,231,183       6.81       1,924,001       3.83  
Funds purchased and securities sold under repurchase agreements
    14,752,435       0.99       56,752       0.78  
 
                         
Total interest-bearing liabilities
    1,270,050,147       85.46       13,235,872       2.10  
 
                             
Noninterest-bearing deposits
    60,997,297       4.11                  
Other liabilities
    5,657,239       0.38                  
 
                           
Total liabilities
    1,336,704,683       89.95                  
STOCKHOLDERS’ EQUITY
    149,399,253       10.05                  
 
                           
Total liabilities and stockholders’ equity
  $ 1,486,103,936       100.00 %                
 
                           
Net interest income
                  $ 21,294,415          
 
                             
Net yield on earning assets
                            3.08 %
 
                             
(continued)

28


 

                                 
    Six Months Ended June 30, 2009  
            Percent     Interest     Average  
    Average     of Total     Income/     Yield/  
    Balance     Assets     Expense     Rate  
ASSETS
                               
Loans (1) (2) (3)
  $ 1,237,889,511       77.64 %   $ 34,681,445       5.65 %
Investment securities:
                               
Taxable
    225,542,795       14.15       3,916,989       3.50  
Exempt from Federal income taxes (3)
    31,421,568       1.97       894,476       5.74  
Short-term investments
    25,130,395       1.58       22,721       0.18  
 
                         
Total earning assets
    1,519,984,269       95.34       39,515,631       5.24  
 
                       
Nonearning assets:
                               
Cash and due from banks
    5,585,542       0.35                  
Reserve for possible loan losses
    (14,481,582 )     (0.91 )                
Premises and equipment
    43,775,796       2.75                  
Other assets
    38,965,946       2.44                  
Available-for-sale investment market valuation
    483,384       0.03                  
 
                           
Total nonearning assets
    74,329,086       4.66                  
 
                           
Total assets
  $ 1,594,313,355       100.00 %                
 
                           
LIABILITIES
                               
Interest-bearing liabilities:
                               
Interest-bearing transaction accounts
    165,461,647       10.38 %     1,144,261       1.39  
Savings
    212,492,074       13.33       3,013,059       2.86  
Time deposits of $100,000 or more
    344,037,916       21.58       5,594,281       3.28  
Other time deposits
    470,864,426       29.53       8,431,030       3.61  
 
                         
Total interest-bearing deposits
    1,192,856,063       74.82       18,182,631       3.07  
Long term borrowings
    136,000,000       8.53       2,477,633       3.67  
Funds purchased and securities sold under repurchase agreements
    28,894,011       1.81       307,539       2.15  
 
                         
Total interest-bearing liabilities
    1,357,750,074       85.16       20,967,803       3.11  
 
                           
Noninterest-bearing deposits
    58,981,144       3.70                  
Other liabilities
    6,951,446       0.44                  
 
                           
Total liabilities
    1,423,682,664       89.30                  
STOCKHOLDERS’ EQUITY
    170,630,691       10.70                  
 
                           
Total liabilities and stockholders’ equity
  $ 1,594,313,355       100.00 %                
 
                           
Net interest income
                  $ 18,547,828          
 
                             
Net yield on earning assets
                            2.46 %
 
                             
(continued)

29


 

                                 
    Quarter Ended June 30, 2010  
            Percent     Interest     Average  
    Average     of Total     Income/     Yield/  
    Balance     Assets     Expense     Rate  
ASSETS
                               
Loans (1) (2) (3)
  $ 1,090,087,275       74.55 %   $ 14,677,482       5.40 %
Investment securities:
                               
Taxable
    219,279,697       15.00       1,673,943       3.06  
Exempt from Federal income taxes (3)
    28,508,567       1.95       419,474       5.90  
Short-term investments
    31,499,569       2.15       15,988       0.20  
 
                         
Total earning assets
    1,369,375,108       93.65       16,786,887       4.92  
 
                       
Nonearning assets:
                               
Cash and due from banks
    5,812,533       0.40                  
Reserve for possible loan losses
    (34,089,075 )     (2.33 )                
Premises and equipment
    41,495,707       2.84                  
Other assets
    77,389,385       5.29                  
Available-for-sale investment market valuation
    2,164,175       0.15                  
 
                           
Total nonearning assets
    92,772,725       6.35                  
 
                           
Total assets
  $ 1,462,147,833       100.00 %                
 
                           
LIABILITIES
                               
Interest-bearing liabilities
                               
Interest-bearing transaction accounts
  $ 232,208,960       15.88       534,575       0.92  
Savings
    326,591,959       22.34       1,026,262       1.26  
Time deposits of $100,000 or more
    245,914,015       16.82       1,501,777       2.45  
Other time deposits
    330,319,633       22.59       2,401,916       2.92  
 
                         
Total interest-bearing deposits
    1,135,034,567       77.63       5,464,530       1.93  
Long-term borrowings
    99,000,000       6.77       955,082       3.87  
Funds purchased and securities sold under repurchase agreements
    15,721,742       1.08       26,333       0.67  
 
                         
Total interest-bearing liabilities
    1,249,756,309       85.48       6,445,945       2.07  
 
                           
Noninterest-bearing deposits
    58,168,040       3.98                  
Other liabilities
    6,045,836       0.41                  
 
                           
Total liabilities
    1,313,970,185       89.87                  
STOCKHOLDERS’ EQUITY
    148,177,648       10.13                  
 
                           
Total liabilities and stockholders’ equity
  $ 1,462,147,833       100.00 %                
 
                           
Net interest income
                  $ 10,340,942          
 
                             
Net yield on earning assets
                            3.03 %
 
                             
(continued)

30


 

                                 
    Quarter Ended June 30, 2009  
            Percent     Interest     Average  
    Average     of Total     Income/     Yield/  
    Balance     Assets     Expense     Rate  
ASSETS
                               
Loans (1) (2) (3)
  $ 1,230,614,589       77.84 %   $ 17,004,333       5.54 %
Investment securities:
                               
Taxable
    228,358,817       14.44       1,961,004       3.44  
Exempt from Federal income taxes (3)
    29,892,810       1.89       429,398       5.76  
Short-term investments
    14,523,829       0.92       5,758       0.16  
 
                         
Total earning assets
    1,503,390,045       95.09       19,400,493       5.18 %
 
                       
Nonearning assets:
                               
Cash and due from banks
    6,053,883       0.38                  
Reserve for possible loan losses
    (14,033,695 )     (0.89 )                
Premises and equipment
    43,526,132       2.75                  
Other assets
    40,633,821       2.58                  
Available-for-sale investment market valuation
    1,362,916       0.09                  
 
                           
Total nonearning assets
    77,543,057       4.91                  
 
                           
Total assets
  $ 1,580,933,102       100.00 %                
 
                           
LIABILITIES
                               
Interest-bearing liabilities
                               
Interest-bearing transaction accounts
  $ 170,859,869       10.81 %     549,024       1.29 %
Savings
    244,049,100       15.44       1,736,996       2.85  
Time deposits of $100,000 or more
    324,880,091       20.55       2,567,764       3.17  
Other time deposits
    438,892,158       27.76       3,845,871       3.51  
 
                         
Total interest-bearing deposits
    1,178,681,218       74.56       8,699,655       2.96  
Long term borrowings
    136,000,000       8.60       1,245,663       3.67  
Funds purchased and securities sold under repurchase agreements
    18,246,127       1.15       47,251       1.04  
 
                         
Total interest-bearing liabilities
    1,332,927,345       84.31       9,992,569       3.01  
 
                           
Noninterest-bearing deposits
    60,076,229       3.80                  
Other liabilities
    7,183,033       0.46                  
 
                           
Total liabilities
    1,400,186,607       88.57                  
STOCKHOLDERS’ EQUITY
    180,746,495       11.43                  
 
                           
Total liabilities and stockholders’ equity
  $ 1,580,933,102       100.00 %                
 
                           
Net interest income
                  $ 9,407,924          
 
                             
Net yield on earning assets
                            2.51 %
 
                             
 
(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 26, 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.

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Risk Management
Management’s objective in structuring the balance sheet is to maximize the return on average assets while minimizing the associated risks. The major risks concerning the Company are credit, liquidity and interest rate risks. The following is a discussion concerning the Company’s management of these risks.
Credit Risk Management
Managing risks that the Company’s banking subsidiaries assume in providing credit products to customers is extremely important. Credit risk management includes defining an acceptable level of risk and return, establishing appropriate policies and procedures to govern the credit process and maintaining a thorough portfolio review process.
Of equal importance in the credit risk management process are the ongoing monitoring procedures performed as part of the Company’s loan review process. Credit policies are examined and procedures reviewed for compliance each year. Loan personnel also continually monitor loans after disbursement in an attempt to recognize any deterioration which may occur so that appropriate corrective action can be initiated on a timely basis.
Net charge-offs for the first six months of 2010 were $13,378,166, compared to $6,511,312 for the first six months of 2009. Net charge-offs for the second quarter of 2010 were $6,181,681, compared to $4,151,537 for the second quarter of 2009. The Company’s banking subsidiaries had no loans to any foreign countries at June 30, 2010 and 2009, nor did they have any concentration of loans to any industry on these dates, although a significant portion of the Company’s loan portfolio is secured by commercial and residential 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.
In the normal course of business, the Company’s practice is to consider and act upon borrowers’ requests for renewal of loans at their maturity. Evaluation of such requests includes a review of the borrower’s credit history, the collateral securing the loan, and the purpose of such requests. In general, loans which the Banks renew at maturity may require payment of accrued interest, a reduction in the loan balance, and/or the pledging of additional collateral and a potential adjustment of the interest rate to reflect changes in economic conditions.
The continued significant decline of the real estate market in the St. Louis metropolitan and southwestern Florida areas has caused an increase in the Company’s nonperforming assets of $40,404,836 (44.98%) to $130,234,522 at June 30, 2010 from $89,829,687 at June 30, 2009. At June 30, 2010 and 2009, nonperforming loans totaled $93,914,590 and $73,488,471, respectively, comprised of nonaccrual loans of $86,161,022 and $55,021,386, respectively; loans 90 days delinquent and still accruing interest of $858,478 and $4,535,232, respectively; and restructured loans totaling $6,895,090 and $13,931,853, 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 result in other real estate owned write-downs. The Company believes the reserve for loan losses calculation at June 30, 2010 adequately considers the current 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.

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Of the Company’s $1.2 billion loans outstanding at June 30, 2010, 6% were originated in Florida and 94% outside Florida. Following is a breakdown of problem assets originated in Florida and outside of Florida:
                         
    Originated In        
    Florida     All other     Total  
Net Charge-offs (quarter ended 6/30/10)
  $3.9 million   $2.3 million   $6.2 million
Net Charge-offs (quarter ended 6/30/09)
  $3.2 million   $1.0 million   $4.2 million
Nonperforming Loans (6/30/2010)
  $22.6 million   $71.3 million   $93.9 million
Nonperforming Loans (12/31/2009)
  $25.4 million   $46.7 million   $72.1 million
Nonperforming Loans (6/30/2009)
  $52.4 million   $21.1 million   $73.5 million
Nonperforming Assets* (6/30/2010)
  $42.9 million   $87.3 million   $130.2 million
Nonperforming Assets* (12/31/2009)
  $44.5 million   $56.7 million   $101.2 million
Nonperforming Assets* (6/30/2009)
  $59.6 million   $30.2 million   $89.8 million
Outstanding Loans Originated In Respective Markets
  $69.3 million   $998 million   $1.067 billion
Nonperforming loans are defined as loans on nonaccrual status, loans 90 days or more past due but still accruing, and restructured loans. Loans are placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments, unless the loans are well secured and in process of collection. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual 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 nonperforming 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 nonperforming loans are “restructured” loans. Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate.
The continued significant decline of the real estate markets in the St. Louis metropolitan and southwestern Florida areas has caused a significant increase in the Company’s nonperforming loans in 2009 and 2010. At June 30, 2010, nonperforming loans had increased $21,837,156 to $93,914,590, from $72,077,434 at December 31, 2009, the largest components of which were primarily comprised of the following loan relationships, which represents approximately 84.70% of total nonperforming loans:
    A loan for approximately $1.4 million to a single purpose entity, secured by six improved commercial lots in Florida. The Company has determined no mutually agreeable solution is likely and is moving forward with 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, as recent changes in FEMA flood maps have impacted the value and future development options. The borrower is currently operating under a forbearance agreement as it works through its options for the property, which now include action against Lee County, Florida for damages. The Company is attempting to join the suit as plaintiff to protect its collateral interests.
 
    A loan for approximately $1.4 million to a single purpose entity controlled by a group of investors that is in default. The loan is secured by a building and improved commercial lots in Florida. The Company has been

33


 

      negotiating with the borrower and guarantors to develop a plan for the property with no meaningful results. The Company is moving forward with foreclosure.
    A loan for approximately $2.0 million to an individual, secured by the individual’s primary residence in Florida, that is in default. The borrower entered into a forbearance agreement but has now defaulted under that negotiated plan. Foreclosure proceedings have been initiated again.
 
    A loan for approximately $4.0 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 $2.9 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 to the project, or obtaining a signed deed for the property in lieu of foreclosure.
 
    A loan for approximately $13.1 million, secured by an individual warehouse in St. Louis, Missouri. The loan is currently in forbearance as 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. The new builder has a good reputation and is qualified for the project. The Company and the builder are developing a marketing plan to increase sales prospects.
 
    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 $3.4 million to build out a day spa in Missouri. The spa was paying as agreed until recently.
 
    A loan for approximately $1.1 million of a 30,000 sq. ft. office warehouse in St. Charles, MO. The warehouse is partially occupied by the owner. The loan is secured by the building and assignment of rents. The Company is working with the borrower on getting the past due real estate taxes paid.
 
    A loan for approximately $3.0 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 $5.0 million to a group of investors for the building of a hotel. A few of the investors have been in the hotel industry for many years. Since opening, the hotel has not been able to achieve expected occupancy levels. Foreclosure proceedings have begun.
 
    A loan for approximately $1.6 million to a golf course in Florida. The course contains 342 acres with a club house, 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 Company is working with the SBA on liquidation of assets and legal action.

34


 

    A loan for approximately $8.4 million to a commercial real estate developer for the construction of medical office condominiums in Arizona. The loan is secured by 10.59 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 but the Company is working with the borrower and watching the development closely.
 
    A loan for approximately $2.3 million for a 64,000 sq. ft. industrial warehouse that is used as a sports complex. The owner operates indoor soccer and inline hockey throughout the year. The Company is pursuing various collection opportunities.
The Company also has nonperforming assets in the form of other real estate owned. The Banks maintained other real estate owned totaling $36,319,932, $29,085,943 and $16,341,216 at June 30, 2010, December 31, 2009 and June 30, 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
    12,709,989  
Loans made to facilitate sales of other real estate
    (371,250 )
Cash proceeds from sales
    (3,600,786 )
Losses and writedowns
    (1,503,964 )
 
     
Balance at June 30, 2010
  $ 36,319,932  
 
     
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 maintain 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 nonperforming loans discussed above, the Company believes the reserve for possible loan losses is adequate to absorb losses in the portfolio existing at June 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 June 30, 2010, the Company had 27 loans with a total principal balance of $42,663,445 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 nonperforming loans. However, various concerns, including, but not limited to, payment history, loan agreement compliance, adequacy of collateral coverage, and borrowers’ overall financial condition caused management to believe that these loans may result in reclassification at some future time as nonaccrual, past due or restructured. Such loans are not necessarily indicative of future nonaccrual loans, as the Company continues to work on resolving issues with both nonperforming and potential problem credits on its watch list.
The Company’s credit management policies and procedures focus on identifying, measuring, and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan review and regulatory bank examinations. The system requires rating all loans at the time they are made, at each renewal date and as conditions warrant.
Adversely rated credits, including loans requiring close monitoring, are included on a monthly loan watch list. Other loans are added whenever any adverse circumstances are detected which might affect the borrower’s ability to meet the terms of the loan. This could be initiated by any of the following:
    Delinquency of a scheduled loan payment;
 
    Deterioration in the borrower’s financial condition identified in a review of periodic financial statements;
 
    Decrease in the value of collateral securing the loan; or
 
    Change in the economic environment in which the borrower operates.

35


 

Loans on the watch list require periodic detailed loan status reports, including recommended corrective actions, prepared by the responsible loan officer, which are discussed at each monthly loan committee meeting.
Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan review, the Watch List Committee, the Loan Committee, or senior lending personnel at any time. Upgrades of certain risk ratings may only be made with the concurrence of both the Chief Credit Officer and Chief Operating Officer.
The Company’s loan underwriting policies limit individual loan officers to specific amounts of lending authority, over which various committees must get involved and approve a credit. The Company’s underwriting policies require an analysis of a borrower’s ability to pay the loan and interest on a timely basis in accordance with the loan agreement. Collateral is then considered as a secondary source of payment, should the borrower not be able to pay.
The Company conducts weekly loan committee meetings of all of its loan officers, including the Chief Executive Officer, Chief Operating Officer, Chief Lending Officer, and Chief Credit Officer. This committee may approve individual credit relationships up to $2,500,000. Larger credits must go to the Loan Committee of the Board of Directors, which is comprised of three Directors on a rotating basis. The Company’s legal lending limit was $40,201,019 at June 30, 2010.
At June 30, 2010 and 2009, the reserve for possible loan losses was $36,163,403 and $24,044,510, respectively, or 3.39% and 1.97% of net outstanding loans, respectively. The following table summarizes the Company’s loan loss experience for the six-month periods ended June 30, 2010 and 2009. The increase in the reserve is attributed to a number of factors, including the elevated levels of nonperforming 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 meet with difficulty in meeting obligations.
                 
    Six-Month Periods  
    Ended June 30,  
(in thousands of dollars)   2010     2009  
Average loans outstanding
  $ 1,107,754     $ 1,237,890  
 
           
Reserve at beginning of year
  $ 32,221     $ 14,306  
Provision for possible loan losses
    17,320       16,250  
 
           
 
    49,541       30,556  
 
           
 
               
Charge-offs:
               
Commercial loans:
               
Real estate
    (4,758 )     (1,164 )
Other
    (27 )     (134 )
Real estate:
               
Construction
    (8,256 )     (4,511 )
Residential
    (595 )     (1,176 )
Consumer
    (17 )     (21 )
Overdrafts
          (20 )
 
           
Total charge-offs
    (13,653 )     (7,026 )
 
           
Recoveries:
               
Commercial loans:
               
Real estate
    77       29  
Other
    135       1  
Real estate:
               
Construction
    25       353  
Residential
    30       118  
Consumer
    8       14  
Overdrafts
           
 
           
Total recoveries
    275       515  
 
           
Reserve at end of period
  $ 36,163     $ 24,045  
 
           
Net charge-offs to average loans
    2.44 %     1.06 %
 
           
Ending reserve to net outstanding loans at end of period
    3.39 %     1.97 %
 
           

36


 

Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses.
In determining the reserve and the related provision for loan losses, three principal elements are considered:
    Specific allocations based upon probable losses identified during a quarterly review of the loan portfolio;
 
    Allocations based principally on the Company’s risk rating formulas; and
 
    An unallocated allowance based on subjective factors.
The first element reflects management’s estimate of probable losses based upon a systematic review of specific loans considered to be impaired. These estimates are based upon collateral exposure, using current fair values of collateral.
The second element reflects the application of our loan rating system. This rating system is similar to those employed by state and Federal banking regulators. In addition, the analysis considers the following internal and external factors that may cause estimated losses to differ from historical loss experience. Those factors include (a) changes in lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices; (b) changes in national and local economic and business conditions and developments, including the condition of various market segments; (c) changes in the nature and volume of the portfolio; (d) changes in the experience, ability, and depth of lending management and staff; (e) changes in the trend of the volume and severity of past due and classified loans, and trends in the volume of non-accrual loans, troubled debt restructurings and other loan modifications; and (f) the existence and effect of any concentrations of credit, and changes in the level of such concentrations and the effect of external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Banks’ current portfolio.
The unallocated allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following:
    General economic and business conditions affecting our key lending areas;
 
    Credit quality trends (including trends in nonperforming loans expected to result from existing conditions);
 
    Collateral values;
 
    Loan volumes and concentrations;
 
    Competitive factors resulting in shifts in underwriting criteria;
 
    Specific industry conditions within portfolio segments;
 
    Recent loss experience in particular segments of the portfolio;
 
    Bank regulatory examination results; and
 
    Findings of our internal loan review department.
Executive management reviews these conditions quarterly in discussion with our entire lending staff. To the extent that any of these conditions are evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such conditions may be reflected as a specific reserve allocation applicable to such credit or portfolio segment. Where any of these conditions are not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable loss related to such condition is reflected in the unallocated allowance.
Based on this quantitative and qualitative analysis, provisions are made to the reserve for possible loan losses. Such provisions are reflected in our consolidated statements of income.
The allocation of the reserve for possible loan losses by loan category is a result of the above analysis. The allocation methodology applied by the Company, designed to assess the adequacy of the reserve for possible loan losses, focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, and

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historical losses normally experienced in our banking market for each portfolio category. Because each of the criteria used is subject to change, the allocation of the reserve for possible loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category.
The total reserve for possible loan losses is available to absorb losses from any segment of the portfolio. Management continues to target and maintain the reserve for possible loan losses equal to the allocation methodology plus an unallocated portion, as determined by economic conditions and other qualitative and quantitative factors affecting the Company’s borrowers, as described above.
In determining an adequate balance in the reserve for possible loan losses, management places its emphasis as follows: evaluation of the loan portfolio with regard to potential future exposure on loans to specific customers and industries; reevaluation of each watch list loan or loan classified by supervisory authorities; and an overall review of the remaining portfolio in light of loan loss experience normally experienced in our banking market. Any problems or loss exposure estimated in these categories is provided for in the total current period reserve.
Management views the reserve for possible loan losses as being available for all potential or as yet presently unidentifiable loan losses which may occur in the future. The risk of future losses that is inherent in the loan portfolio is not precisely attributable to a particular loan or category of loans.
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 nonperforming loans. Consequently, while there are no specific allocations of the reserve resulting from economic or market conditions or actual or expected trends in nonperforming loans, these factors are considered in the initial assignment of risk ratings to loans, subsequent changes to those risk ratings and to a lesser extent in the size of any unallocated allowance amount.
The unallocated reserve is based on factors that cannot necessarily be associated with a specific loan or loan category. Management focuses on the following factors and conditions:
    There is a level of imprecision necessarily inherent in the estimates of expected loan losses, and the unallocated reserve gives reasonable assurance that this level of imprecision in our formula methodologies is adequately provided for.
 
    Pressures to maintain and grow the loan portfolio with increasing competition from de novo institutions and larger competitors have to some degree affected credit granting criteria adversely. The Company monitors the disposition of all credits, which have been approved through its Executive Loan Committee, in order to better understand competitive shifts in underwriting criteria.
While the Company has no significant specific industry concentration risk, analysis showed that over 91% of the loan portfolio was dependent on real estate collateral at June 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  
    6/30/2010     12/31/2009     6/30/2009  
Construction, land development and other land loans
    93 %     112 %     98 %
Nonfarm nonresidential:
                       
Owner occupied
    136 %     112 %     73 %
Non-owner occupied
    341 %     340 %     303 %
1-4 family closed end loans
    43 %     40 %     38 %
Multi-family
    84 %     86 %     68 %
Other
    23 %     22 %     18 %

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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 $263,575,008 at June 30, 2010, of which approximately $171,229,666 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. Accordingly, Bank management believes it has the liquidity necessary to meet unexpected deposit withdrawal requirements or increases in loan demand.
The Banks have borrowing capabilities through correspondent banks 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 June 30, 2010. Also, Reliance Bank has a credit line with the Federal Home Loan Bank of Des Moines in the amount of $144,726,676 and availability under that line was $48,307,101 as of June 30, 2010. Reliance Bank, FSB maintained a credit line with the Federal Home Loan Bank of Atlanta in the amount of $9,920,000, of which $5,820,000 was available at June 30, 2010. In addition, Reliance Bank maintained a line of credit with the Federal Reserve Bank in the amount of $32,054,198, of which $32,054,198 is available at June 30, 2010. As of June 30, 2010, the combined availability under these arrangements totaled $109,181,299. Bank management believes it has the liquidity necessary to meet unexpected deposit withdrawal requirements or increases in loan demand. However, availability of the funds noted above is subject to the Banks’ maintaining a favorable rating by their regulators. If the Banks were to become distressed and the Banks’ ratings lowered, it could negatively impact the ability of the Banks to borrow the funds.
The Federal Reserve Board established risk-based capital guidelines for bank holding companies, which require bank holding companies to maintain minimum levels of “Tier 1 Capital” and “Total Capital.” Tier 1 Capital consists of common and qualifying preferred stockholders’ equity and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% of investments in unconsolidated subsidiaries. Total capital consists of, in addition to Tier 1 Capital, mandatory convertible debt, preferred stock not qualifying as Tier 1 Capital, subordinated and other qualifying term debt and a portion of the reserve for possible loan losses, less the remaining 50% of qualifying total capital. Risk-based capital ratios are calculated with reference to risk-weighted assets, which include both on-and off-balance sheet exposures. The minimum required ratio for qualifying Total Capital is 8%, of which at least 4% must consist of Tier 1 Capital.

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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 June 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 June 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
  $ 135,056       11.14 %   $ 96,966       ³8.0 %     N/A       N/A  
Reliance Bank
    117,806       10.25 %     91,915       ³8.0 %     114,894       ³10.0 %
Reliance Bank, FSB
    10,676       14.75 %     5,790       ³8.0 %     7,238       ³10.0 %
Tier 1 capital (to risk-weighted assets)
                                               
Consolidated
    119,111       9.83 %     48,483       ³4.0 %     N/A       N/A  
Reliance Bank
    103,256       8.99 %     45,957       ³4.0 %     68,936       ³6.0 %
Reliance Bank, FSB
    9,734       13.45 %     2,895       ³4.0 %     4,343       ³6.0 %
Tier 1 capital (to average assets)
                                               
Consolidated
    119,111       8.30 %     57,424       ³4.0 %     N/A       N/A  
Reliance Bank
    103,256       7.66 %     53,921       ³4.0 %     67,401       ³5.0 %
Reliance Bank, FSB
    9,734       11.37 %     3,423       ³4.0 %     4,279       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 depend on whether the banking institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” which are defined by the regulators as follows:
                         
    Total     Tier 1     Tier 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 June 30, 2010, Reliance Bank and Reliance Bank, FSB were considered “well capitalized.”
Contractual Obligations, Off-Balance Sheet Risk, and Contingent Liabilities
Through the normal course of operations, the Banks have entered into certain contractual obligations and other commitments. Such obligations relate to funding of operations through deposits or debt issuances, as well as leases for premises and equipment. As financial services providers, the Banks routinely enter into commitments to extend credit. While contractual obligations represent future cash requirements of the Banks, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval processes accorded to loans made by the Banks.

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The required contractual obligations and other commitments at June 30, 2010 were as follows:
                                 
                    Over 1 Year        
    Total Cash     Less Than 1     Less Than 5     Over 5  
    Commitment     Year     Years     Years  
Operating leases
  $ 7,573,260     $ 720,255     $ 2,128,917     $ 4,724,088  
Time deposits
    535,575,085       365,028,547       160,585,679       9,960,859  
Federal Home Loan Bank borrowings
    99,000,000       6,000,000       26,000,000       67,000,000  
Commitments to extend credit
    113,380,599       60,396,701       19,451,797       33,532,101  
Standby letters of credit
    12,609,055       4,429,881       8,179,174        
Impact of New and Not Yet Adopted Accounting Pronouncements
None.
Part I — Item 3 — Quantitative and Qualitative Disclosures About Market Risk
Management of rate sensitive earning assets and interest-bearing liabilities remains a key to the Company’s profitability. The Company’s operations are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of the Company’s interest-earning assets and the amount of interest-bearing liabilities that are prepaid or withdrawn, mature or are repriced in specified periods. The principal objective of the Company’s asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Company. The Banks utilize gap analyses as the primary quantitative tool in measuring the amount of interest rate risk that is present at the end of each quarter. Reliance Bank management also monitors, on a quarterly basis the variability of earnings and fair value of equity in various interest rate environments. Bank management evaluates the Banks’ risk position to determine whether the level of exposure is significant enough to hedge a potential decline in earnings and value or whether the Banks can safely increase risk to enhance returns.
The asset/liability management process, which involves structuring the balance sheet to allow approximately equal amounts of assets and liabilities to reprice at the same time, is a dynamic process essential to minimize the effect of fluctuating interest rates on net interest income. The following table reflects the Company’s interest rate gap (rate-sensitive assets minus rate-sensitive liabilities) analysis as of June 30, 2010, individually and cumulatively, through various time horizons:
                                         
            Remaining Maturity if Fixed Rate;        
            Earliest Possible Repricing Interval if Floating Rate        
    3     Over 3     Over 1              
    months     months     year              
    or     through     through     Over        
    less     12 months     5 years     5 years     Total  
Interest-earning assets
                                       
Loans
  $ 441,698,149       139,176,744       449,978,537       36,045,372       1,066,898,802  
Investment securities, at amortized cost
    35,016,293       58,147,981       151,800,295       15,168,791       260,133,360  
Other interest-earnings assets
    17,707,040                         17,707,040  
 
                             
Total interest-earning assets
  $ 494,421,482       197,324,725       601,778,832       51,214,163       1,344,739,202  
 
                             
Interest bearing-liabilities
                                       
Savings and interest bearing transaction accounts
  $ 577,805,563       43,230                   577,848,793  
Time certificates of deposit of $100,000 or more
    90,120,769       79,724,796       55,063,234       4,382,871       229,291,670  
All other time deposits
    83,234,082       111,948,900       105,522,445       5,577,988       306,283,415  
Nondeposit interest-bearing liabilities
    23,622,645       1,270,430       26,000,000       67,000,000       117,893,075  
 
                             
Total interest-bearing liabilities
  $ 774,783,059       192,987,356       186,585,679       76,960,859       1,231,316,953  
 
                             
Gap by period
  $ (280,361,577 )     4,337,369       415,193,153       (25,746,696 )     113,422,249  
 
                             
Cumulative gap
  $ (280,361,577 )     (276,024,208 )     139,168,945       113,422,249       113,422,249  
 
                             
Ratio of interest-sensitive assets to interest- sensitive liabilities
    0.64x       1.02x       3.23x       0.67x       1.09x  
 
                             
Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities
    0.64x       0.71x       1.12x       1.09x       1.09x  
 
                             

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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 alteration of the level and/or timing of cash flows given changes in rates. As indicated in the above table, the Company operates on a short-term basis similar to most other financial institutions, as its liabilities, with savings and interest-bearing transaction accounts included, could reprice more quickly than its assets. However, the process of asset/liability management in a financial institution is dynamic. Bank management believes its current asset/liability management program will allow adequate reaction time for trends in the marketplace as they occur, allowing maintenance of adequate net interest margins.
Bank management also uses fair market value of equity analyses to help identify longer-term risk that may reside on the current balance sheet. The fair market value of equity is represented by the present value of all future income streams generated by the current balance sheet. The Company measures the fair market value of equity as the net present value of all asset and liability cash flows discounted at forward rates suggested by the current Treasury curve plus appropriate credit spreads. This representation of the change in the fair market value of equity under different rate scenarios gives insight into the magnitude of risk to future earnings due to rate changes. Management has set policy limits relating to declines in the market value of equity. The results of these analyses at June 30, 2010 indicate that the Company’s fair market value of equity would decrease 5.23%, and 7.65%, from an immediate and sustained parallel decrease in interest rates of 100 and 200 basis points, respectively, and increase 5.26% and 6.41%, from a corresponding increase in interest rates of 100 and 200 basis points, respectively.
Part I — Item 4 — Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)).
As a result of material weaknesses in our internal controls over financial reporting relating to net losses available to common shareholders after increasing the net loss for preferred dividends paid by the Company, which require an adjustment to the previously reported net loss per share data reported by the Company, and the adequacy of disclosure for other-than-temporary losses on available for sale securities, our management has reassessed the effectiveness of our disclosure controls and procedures and has determined that our disclosure controls and procedures were not effective as of June 30, 2010.
On March 4, 2011, the Audit Committee of the Board of Directors concluded that the Company’s audited financial statements for the year ended December 31, 2009, as well as interim financial statements in its Quarterly Reports on Form 10-Q for the quarters ending March 31, June 30 and September 30, 2010, did not properly account for certain items referred to in the preceding paragraph and, as a result, should not be relied upon. The Audit Committee has authorized and directed the officers of the Company to restate its audited financial statements and interim quarterly financial statements included in the above referenced filing as of and for the periods covered by such filings.
The Company has implemented certain changes in our internal controls as of the date of this report to address the material weaknesses and believes that such weaknesses have been remediated.
Changes in Internal Control Over Financial Reporting
There were no changes during the period covered by this Quarterly Report on Form 10-Q in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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

42


 

things, changes to capital, leverage and liquidity standards and numerous other requirements. The Dodd-Frank Act also authorizes various new assessments and fees, expands supervision and oversight authority over nonbank subsidiaries, increases the standards for certain covered transactions with affiliates and requires the establishment of minimum leverage and risk-based capital requirements for insured depository institutions. In addition, the Dodd-Frank Act contains several provisions that change the manner in which deposit insurance premiums are assessed and which could increase the FDIC deposit insurance premiums paid by the Company.
     The changes resulting from the Dodd-Frank Act, as well as the regulations promulgated by federal agencies, may impact the profitability of our business activities, require changes to certain of its business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes.
There have not been any other material changes in the risk factors as disclosed in the Company’s annual report in 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 365,684 shares and received subscriptions for 1,185,833 shares of the Company’s common stock at the offering price of $3.00 per share for the quarter ended June 30, 2010. This represented an aggregate offering price of $4,654,551. Also, the Company sold 180 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series C, at the offering price of $1,000 per share for the quarter ended June 30, 2010. This represented an aggregate offering price of $180,000. On April 13, 2010, the Company redeemed 25 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series C, at a price of $1,000 per share for the quarter ended June 30, 2010. This represented an aggregate price of $25,000. These offerings were extended to accredited investors (as such term is defined in Regulation D under the Securities Act of 1933, as amended), and were intended to qualify for exemption from registration pursuant to Rule 506 of Regulation D. The purpose of these offerings, which are still active, is to generate capital, as well as to remain well capitalized.
Part II — Item 3 — Defaults Upon Senior Securities
None.
Part II — Item 4 — [Removed and Reserved]
Part II — Item 5 — Other Information
(a) None.
(b) There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors implemented during the period covered by this Quarterly Report on Form 10-Q.
Part II — Item 6 — Exhibits
     
Exhibit    
Number   Description
31.1
  Chief Executive Officer’s Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Chief Financial Officer’s Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Exhibit    
Number   Description
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.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  RELIANCE BANCSHARES, INC.
 
 
  By:   /s/ Allan D. Ivie, IV    
    Allan D. Ivie, IV   
    Chief Executive Officer   
 
     
  By:   /s/ Dale E. Oberkfell    
    Dale E. Oberkfell   
    Chief Financial Officer   
 
Date: March 16, 2011

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