UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from                      to                     

RELIANCE BANCSHARES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Missouri		43-1823071
(State or Other Jurisdiction of Incorporation or Organization)		(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, 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 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   þ (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

As of October 31, 2008, the Registrant had 20,770,781 shares of outstanding Class A common stock, $0.25 par value.

 

 

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Condensed Consolidated Balance Sheets (Unaudited)			1
Condensed Consolidated Statements of Income (Unaudited)			2
Condensed Consolidated Statements of Comprehensive Income (Unaudited)			3
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)			4
Condensed Consolidated Statements of Cash Flows (Unaudited)			5
Notes to Unaudited Interim Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			33
Item 4T. Controls and Procedures			34
PART II — OTHER INFORMATION			35
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults Upon Senior Securities			37
Item 4. Submission of Matters to a Vote of Security Holders			37
Item 5. Other Information			37
Item 6. Exhibits			37
Signatures			37
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I — FINANCIAL INFORMATION

Part I — Item 1 — Financial Statements

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

September 30, 2008 and 2007 and December 31, 2007

		September 30,								December 31,
		2008				2007				2007
ASSETS
Cash and due from banks		$	12,717,479				10,836,678				13,170,564
Interest-earning deposits in other financial institutions			2,041,867				98,598				89,876
Federal funds sold			—				39,000				30,000
Investments in available-for-sale debt and equity securities, at fair value			178,331,285				172,829,382				163,645,218
Loans			1,225,166,080				839,091,832				911,960,236
Less - Deferred loan fees/costs			(893,553	)			(269,909	)			(222,226	)
Reserve for possible loan losses			(12,398,957	)			(8,890,557	)			(9,685,011	)
Net loans			1,211,873,570				829,931,366				902,052,999
Premises and equipment, net			44,491,084				41,032,014				42,931,925
Accrued interest receivable			5,442,661				5,179,664				4,959,629
Identifiable intangible assets, net of accumulated amortization of $86,869, $70,581 and $74,653 at September 30, 2008 and 2007, and December 31, 2007, respectively			157,450				173,738				169,666
Goodwill			1,149,192				1,149,192				1,149,192
Other real estate			11,653,385				1,612,286				4,937,285
Other assets			8,271,407				3,137,029				3,016,068
		$	1,476,129,380				1,066,018,947				1,136,152,422
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Non-interest-bearing		$	54,401,841				46,139,342				53,441,589
Interest-bearing			1,042,132,382				753,325,445				781,134,860
Total deposits			1,096,534,223				799,464,787				834,576,449
Short-term borrowings			86,214,611				72,320,906				88,324,915
Notes payable to Federal Home Loan Bank			149,000,000				50,000,000				68,000,000
Accrued interest payable			4,239,781				3,122,877				3,656,113
Other liabilities			3,581,183				2,451,928				1,703,972
Total liabilities			1,339,569,798				927,360,498				996,261,449
Commitments and contingencies
Stockholders’ equity:
Preferred stock, no par value; 2,000,000 shares authorized			—				—				—
Common stock, $0.25 par value; 40,000,000 shares authorized, 20,770,781, 20,660,116, and 20,682,075 shares issued and outstanding at September 30, 2008 and 2007, and December 31, 2007, respectively			5,192,695				5,165,029				5,170,519
Surplus			124,315,888				123,258,544				123,329,517
Retained earnings			9,772,943				10,561,804				10,982,306
Treasury stock, at cost - 76,948 and 9,396 shares at September 30, 2008 and 2007, respectively			(964,488	)			(112,752	)			—
Accumulated other comprehensive income — net unrealized holding (losses) gains on available-for-sale debt securities			(1,757,456	)			(214,176	)			408,631
Total stockholders’ equity			136,559,582				138,658,449				139,890,973
		$	1,476,129,380				1,066,018,947				1,136,152,422

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income (Unaudited)

Three and Nine Months Ended September 30, 2008 and 2007

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Interest income:
Interest and fees on loans		$	18,669,323				14,451,420				51,484,539				39,854,890
Interest and dividends on debt and equity securities:
Taxable			1,636,351				1,636,356				4,806,351				5,222,663
Exempt from Federal income taxes			387,887				392,948				1,176,754				1,135,724
Interest on short-term investments			51,471				34,568				162,797				464,935
Total interest income			20,745,032				16,515,292				57,630,441				46,678,212
Interest expense:
Interest on deposits			8,662,923				8,536,764				25,694,396				24,884,820
Interest on short-term borrowings			571,906				751,558				1,680,996				1,605,876
Interest on notes payable to Federal Home Loan Bank			1,375,939				486,992				3,463,592				1,057,913
Total interest expense			10,610,768				9,775,314				30,838,984				27,548,609
Net interest income			10,134,264				6,739,978				26,791,457				19,129,603
Provision for possible loan losses			1,800,000				1,515,000				8,539,000				2,405,000
Net interest income after provision for possible loan losses			8,334,264				5,224,978				18,252,457				16,724,603
Noninterest income:
Service charges on deposit accounts			209,682				120,743				582,678				361,826
Net gains (losses) on sale of debt and equity securities			117				—				312,250				(7,026	)
Other noninterest income			374,521				292,871				1,095,250				921,536
Total noninterest income			584,320				413,614				1,990,178				1,276,336
Noninterest expense:
Salaries and employee benefits			4,219,635				3,258,328				12,628,179				9,266,254
Occupancy and equipment expense			1,212,522				827,839				3,375,614				2,404,268
Postage, printing and supplies			113,098				120,988				357,444				368,029
Professional fees			124,152				121,126				471,245				347,171
Data processing			473,512				393,291				1,359,070				1,048,903
Advertising			289,770				194,365				791,351				494,321
Amortization of identifiable intangible assets			4,072				4,072				12,216				12,216
Other noninterest expenses			1,364,110				627,251				3,655,767				1,881,008
Total noninterest expense			7,800,871				5,547,260				22,650,886				15,822,170
Income (loss) before applicable income taxes			1,117,713				91,332				(2,408,251	)			2,178,769
Applicable income tax (benefit) expense			266,621				(72,866	)			(1,198,888	)			484,324
Net income (loss)		$	851,092				164,198				(1,209,363	)			1,694,445
Per share amounts:
Basic earnings (loss) per share		$	0.04				0.01				(0.06	)			0.08
Basic weighted average shares outstanding			20,687,321				20,654,884				20,656,388				20,238,722
Diluted earnings (loss) per share		$	0.04				0.01				(0.06	)			0.08
Diluted weighted average shares outstanding			20,920,384				21,704,099				21,048,143				21,224,967

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

Nine Months Ended September 30, 2008 and 2007

		2008				2007
Net income (loss)		$	(1,209,363	)			1,694,445
Other comprehensive income (loss) before tax:
Net unrealized gains (losses) on available-for-sale securities			(3,594,200	)			131,929
Reclassification adjustment for losses (gains) included in net income			(312,250	)			7,026
Other comprehensive income (loss) before tax			(3,281,950	)			138,955
Income tax related to items of other comprehensive income (loss)			(1,115,863	)			47,245
Other comprehensive income (loss), net of tax			(2,166,087	)			91,710
Total comprehensive income (loss)		$	(3,375,450	)			1,786,155

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

Nine Months Ended September 30, 2008 and 2007

																		Accumulated				Total
																		other				stock-
		Common								Retained				Treasury				comprehensive				holders’
		stock				Surplus				earnings				stock				income				equity
Balance at December 31, 2006		$	4,892,812				110,042,307				8,867,359				—				(305,886	)			123,496,592
Net income			—				—				1,694,445				—				—				1,694,445
Issuance of 1,071,973 shares of common stock (91,100 shares from treasury)			245,218				12,282,983				—				966,600				—				13,494,801
Stock options exercised - 100,000 shares			25,000				563,313				—				—				—				588,313
Treasury stock purchased - 104,128 shares			—				—				—				(1,123,461	)			—				(1,123,461	)
Issuance of 10,827 shares of common stock (3,632 shares from treasury) in connection with Employee Stock Purchase Plan			1,799				83,503				—				44,109				—				129,411
800 shares of common stock awarded to directors			200				9,800				—				—				—				10,000
Stock issuance costs			—				(28,759	)			—				—				—				(28,759	)
Stock option expense			—				305,397				—				—				—				305,397
Change in valuation of available-for-sale securities, net of related tax effect			—				—				—				—				91,710				91,710
Balance at September 30, 2007		$	5,165,029				123,258,544				10,561,804				(112,752	)			(214,176	)			138,658,449
Balance at December 31, 2007		$	5,170,519				123,329,517				10,982,306				—				408,631				139,890,973
Net loss			—				—				(1,209,363	)			—				—				(1,209,363	)
Issuance of 9,615 shares of common stock from treasury			—				(34,892	)			—				115,380				—				80,488
Stock options exercised - 101,000 shares (12,296 from treasury)			22,176				519,657				—				147,552				—				689,385
Treasury stock purchased - 105,324 shares			—				—				—				(1,305,000	)			—				(1,305,000	)
Issuance of 2,565 shares of common stock from treasury as partial payment for certain operating leases			—				(5,771	)			—				30,780				—				25,009
1,400 shares of common stock from treasury awarded to directors			—				(3,449	)			—				16,800				—				13,351
Stock option expense			—				421,946				—				—				—				421,946
Amortization of restricted stock			—				88,880				—				30,000				—				118,880
Change in valuation of available-for-sale securities, net of related tax effect			—				—				—				—				(2,166,087	)			(2,166,087	)
Balance at September 30, 2008		$	5,192,695				124,315,888				9,772,943				(964,488	)			(1,757,456	)			136,559,582

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended September 30, 2008 and 2007

		2008				2007
Cash flows from operating activities:
Net (loss) income		$	(1,209,363	)			1,694,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,592,243				1,130,140
Provision for possible loan losses			8,539,000				2,405,000
Capitalized interest expense on construction			(85,984	)			(439,669	)
Stock option compensation cost			421,946				305,397
Common stock awarded to directors			13,351				10,000
Amortization of restricted stock expense			118,880				—
Losses on sale of other real estate			38,525				10,389
Net (gains) losses on sale of debt and equity securities			(312,250	)			7,026
Increase in accrued interest receivable			(483,032	)			(767,334	)
Increase in accrued interest payable			583,668				383,735
Mortgage loans originated for sale in secondary market			(18,076,916	)			(6,915,625	)
Mortgage loans sold in secondary market			17,087,483				6,692,500
Other operating activities, net			425,966				375,890
Net cash provided by operating activities			8,653,517				4,891,894
Cash flows from investing activities:
Purchase of available-for-sale debt and equity securities			(90,282,122	)			(9,952,158	)
Proceeds from maturities and calls of available-for-sale debt securities			45,513,113				24,712,652
Proceeds from sales of available-for-sale debt securities			27,252,250				4,547,333
Net increase in loans			(325,613,463	)			(175,998,335	)
Proceeds from sale of other real estate owned			1,141,834				3,681,227
Construction expenditures to finish other real estate			(48,525	)			—
Purchase of bank premises and equipment			(5,565,726	)			(10,929,789	)
Proceeds from sale of bank premises and equipment			105,685				60,799
Net cash used in investing activities			(347,496,954	)			(163,878,271	)
Cash flows from financing activities:
Net increase in deposits			261,957,774				120,867,782
(Decrease) increase in short-term borrowings			(2,110,304	)			1,858,385
Proceeds from notes payable to Federal Home Loan Bank			93,000,000				30,000,000
Payments of notes payable to Federal Home Loan Bank			(12,000,000	)			(4,300,000	)
Purchase of treasury stock			(1,305,000	)			(1,123,461	)
Stock options exercised			689,385				588,313
Issuance of common stock			80,488				13,624,212
Payment of stock issuance costs			—				(28,759	)
Net cash provided by financing activities			340,312,343				161,486,472
Net increase in cash and cash equivalents			1,468,906				2,500,095
Cash and cash equivalents at beginning of period			13,290,440				8,474,181
Cash and cash equivalents at end of period		$	14,759,346				10,974,276
Supplemental information:
Cash paid for interest		$	30,341,300				27,548,609
Cash paid for income taxes			425,000				676,000
Noncash transactions:
Transfers to other real estate in settlement of loans			8,243,326				4,478,902
Loans made to facilitate the sale of other real estate			—				275,912
Capitalized interest expense			85,984				439,669
Common stock awarded to directors			13,350				10,000
Stock option compensation cost			421,946				305,397
Amortization of restricted stock expense			118,880				—
Stock issued for operating lease payments			25,009				—

See accompanying notes to interim condensed consolidated financial statements.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements

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. (the “Banks”).

The Company and Banks are subject to competition from other financial and nonfinancial institutions providing financial products throughout the St. Louis metropolitan area and southwestern Florida. Additionally, the Company and Banks are subject to the regulations of certain Federal and state agencies and undergo periodic examinations by those regulatory agencies.

The accounting and reporting policies of the Company and Banks conform to generally accepted accounting principles within the banking industry. In compiling the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to change in a short period of time include the determination of the reserve for possible loan losses, valuation of other real estate owned and stock options, and determination of possible impairment of intangible assets. Actual results could differ from those estimates.

The accompanying unaudited 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 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation. Such reclassifications have no effect on previously reported net income or stockholders’ equity.

Operating results for the three and nine-month periods ended September 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2007 filed with the Company’s 2007 Annual Report on Form 10-K.

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.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements

Cash Flow Information

For purposes of the consolidated statements of cash flows, cash equivalents include due from banks, interest-earning deposits in banks (all of which are payable on demand), and Federal funds sold. Certain balances maintained in other financial institutions generally exceed the level of deposits insured by the Federal Deposit Insurance Corporation.

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.

New Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FASB Interpretation No. 48 (“FIN 48”) clarifies the accounting for uncertainty in income taxes in financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 became effective and was implemented in 2007 by the Company; however, Company management believes that the Company maintains no uncertain tax positions for tax reporting purposes, and, accordingly, no FIN 48 liability is required to be recorded.

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 Fair Value Measurements (“FAS No. 157”) and Statement of Financial Accounting Standards No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (“FAS No. 159”). In accordance with the FASB Staff Position 157-2, Effective Date of SFAS No. 157, the Company has not applied the provisions of FAS No. 157 to nonfinancial assets and nonfinancial liabilities such as other real estate owned and goodwill. The Company uses fair value measurements to determine fair value disclosures.

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

Investments in Available-For-Sale Debt Securities - 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 valuations. The market evaluation utilizes several sources which include observable inputs rather than “significant unobservable inputs” and, therefore, fall into the Level 2 category. The table below presents the balances of available-for sale debt securities measured at fair value on a recurring basis:

Obligations of U.S. Government agencies and corporations		$	66,847,242
Obligations of state and political subdivisions			33,615,128
Other debt securities			4,831,760
Mortgage-backed securities			62,488,281
		$	167,782,411

Loans - The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. Once a loan is identified as impaired, management measures impairment in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan. At September 30, 2008, all impaired loans were evaluated based on the fair value of the collateral. The fair value of the collateral is based upon an observable market price or current

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements

appraised value, and, therefore, the Company classifies these assets in the nonrecurring Level 2 category. The total principal balance of impaired loans measured at fair value at September 30, 2008 was $15,258,135.

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 September 30,								Nine Months Ended September 30,
		2008				2007				2008				2007
Basic
Net income (loss)		$	851,092				164,198				(1,209,363	)			1,694,445
Weighted average common shares outstanding			20,687,321				20,654,884				20,656,388				20,238,722
Basic earnings (loss) per share		$	0.04				0.01				(0.06	)			0.08
Diluted
Net income (loss)		$	851,092				164,198				(1,209,363	)			1,694,445
Weighted average common shares outstanding			20,687,321				20,654,884				20,656,388				20,238,722
Effect of dilutive stock options			233,063				1,049,215				391,755				986,245
Diluted weighted average common shares outstanding			20,920,384				21,704,099				21,048,143				21,224,967
Diluted earnings (loss) per share		$	0.04				0.01				(0.06	)			0.08

NOTE 2 — INTANGIBLE ASSETS

Identifiable intangible assets include the core deposit premium relating to the Company’s acquisition of The Bank of Godfrey, which is being amortized into noninterest expense on a straight-line basis over 15 years. Amortization of the core deposit intangible assets existing at September 30, 2008 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

The Company maintains various stock option plans. Prior to 2006, the Company applied the intrinsic value-based method, as outlined in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”) and related interpretations, in accounting for stock options granted under these plans. Under the intrinsic value-based method, no compensation expense was recognized if the exercise price of the Company’s employee stock options was equal to or greater than the market price of the

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements

underlying stock on the date of the grant. Accordingly, prior to 2006, no compensation cost was recognized in the consolidated statements of income for stock options granted to employees, since all options granted under the Company’s stock option plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of the grant.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) (“FAS 123R”) Share-based Payments. This statement replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB 25. FAS 123R requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value for all equity classified awards. The Company adopted this statement using the modified prospective method, which requires the Company to recognize compensation expense on a prospective basis for all outstanding unvested awards. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for share-based awards granted after the adoption date, expense is also recognized to reflect the remaining service period of awards that had been included in pro forma disclosures in prior periods.

Based on the valuation and accounting uncertainties that outstanding options presented under proposed accounting treatment at the time, the Board of Directors accelerated the vesting of substantially all of the Company’s outstanding stock options during the fourth quarter of 2005. This action resulted in the remaining fair value of substantially all of the outstanding stock options being recognized in 2005 as part of the pro-forma disclosures in previous periods.

The weighted average fair values of options granted during the first nine months of 2008 and 2007 were $2.24 and $3.87, respectively, for an option to purchase one share of Company common stock; however, the Company has only been in existence since July 24, 1998, and 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 options granted during the first nine months of 2008 and 2007, including 0-20% volatility in the Company’s common stock price, no dividends paid on the common stock, an expected weighted average option life of 6.0 years for options granted in 2008 and 2007, 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.

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements

Following is a summary of the Company’s stock option activity for the nine-month periods ended September 30, 2008 and 2007:

		Options Granted Under								Options Granted to Directors
		Incentive Stock Option Plans								Under Nonqualified Plans
		Weighted								Weighted
		Average								Average
		Option Price				Number				Option Price				Number
		per Share				of Shares				per Share				of Shares
Nine Months Ended September 30, 2007:
Balance at December 31, 2006		$	6.57				1,648,200			$	6.63				576,000
Granted			13.40				169,500				16.38				125,000
Forfeited			11.67				(4,500	)			4.85				(5,000	)
Exercised			5.73				(90,000	)			7.25				(10,000	)
Balance at September 30, 2007		$	7.27				1,723,200			$	8.41				686,000
Nine Months Ended September 30, 2008:
Balance at December 31, 2007		$	7.31				1,648,200			$	8.41				701,000
Granted			12.89				91,000				11.58				16,000
Forfeited			13.87				(27,250	)			9.14				(41,500	)
Exercised			6.83				(101,000	)			—				—
Balance at September 30, 2008		$	7.54				1,610,950			$	8.44				675,500

The weighted average option prices for the 2,286,450 and 2,409,200 options outstanding at September 30, 2008 and 2007, were $7.81 and $7.59, respectively. At September 30, 2008, options to purchase an additional 495,800 shares of Company common stock were available for future grants under the various plans.

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 September 30, 2008:

Financial instruments for which contractual amounts represent:
Commitments to extend credit		$	288,866,860
Standby letters of credit			23,174,333
		$	312,041,193

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Of the total commitments to extend credit at September 30, 2008,

RELIANCE BANCSHARES, INC. AND SUBSIDIARIES

Notes to Unaudited Interim Condensed Consolidated Financial Statements

$117,666,096 was made at fixed rates of interest. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally residential or income-producing commercial property or equipment, on which the Banks generally have a superior lien.

Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party, for which draw requests have historically not been made 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.

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

The following presents management’s discussion and analysis of the consolidated financial condition and results of operations of Reliance Bancshares, Inc. (the “Company”) for the three and nine-month periods ended September 30, 2008 and 2007. 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 consolidated financial statements included in this report and the consolidated financial statements for the year ended December 31, 2007, included in our most recent Form 10-K.

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 Form 10-K filed with the Securities and Exchange Commission (“SEC”), as updated from time to time in our future 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.

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 26 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 September 30, 2008, 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, $1.1 billion, and $1.0 billion, respectively, at September 30, 2008.

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 September 30, 2008, Reliance Bank, FSB has added four branch locations in southwestern Florida and has grown its total assets, loans, and deposits to $110.3 million, $87.1 million, and $75.7 million, respectively, at September 30, 2008.

At September 30, 2008, Reliance Bank’s total assets, total revenues, and net income represented 92.51%, 93.39%, and (81.81%), respectively, of the Company’s consolidated total assets, total revenues, and net loss. Reliance Bank, FSB’s total assets, total revenues, and net loss represented 7.48%, 6.78%, and 152.20%, respectively, of the Company’s consolidated totals. The Company incurred a net loss of $1.2 million for the nine months ended September 30, 2008.

During the quarter ended June 30, 2008, the Company completed building its St. Louis metropolitan branch network. The Company plans to continue building its branch network in southwestern Florida, with three additional branches planned; however, the building of these branches has been suspended while management focuses on Reliance Bank, FSB’s profitability. The Company’s branch expansion plans are designed to increase the Company’s market share in the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida and to allow the Company’s banking subsidiaries to compete with much larger financial institutions in these markets. The Houston and Phoenix 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 increased to $1.5 billion at September 30, 2008, with loans and deposits increasing to $1.2 billion and $1.1 billion, respectively, primarily as a result of the Company’s continued emphasis on growth to improve its market share. 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. The Company has sought to staff each new branch location with an experienced commercial lender familiar with that branch’s market area and other experienced banking personnel.

The Company has funded its Banks’ branch expansion with several private placement stock offerings made to accredited investors since its inception. The Company has held a total of 13 such offerings since its inception and has sold a net 20,770,781 shares of Company Common Stock for a total of $129.5 million through September 30, 2008.

The Company’s consolidated net income (loss) for the nine-month periods ended September 30, 2008 and 2007 totaled $(1,209,363) and $1,694,445, respectively. Consolidated net income for the three-month periods ended September 30, 2008 and 2007 totaled $851,092 and $164,198, respectively. While the Company’s consolidated total assets and net interest income have continued to grow, the Company has continued to experience pricing pressures on its loans and deposits, and the provision for possible loan losses was increased for an increase in nonperforming loans, resulting from a softening in the real estate markets in which the Company’s banking subsidiaries operate and the overall economic downturn experienced nationally. 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 nine-month periods ended September 30, 2008 and 2007 totaled $26,791,457 and $19,129,603, respectively. Net interest income before the provision for possible loan losses for the three-month periods ended September 30, 2008 and 2007 totaled $10,134,264 and $6,739,978, respectively. This growth in net interest income resulted from an increasing level of interest-earning assets during this time period, with an increasingly proportionate share of such interest-earning assets being comprised of loans, which are the Company’s highest interest-earning assets.

Holding down the net interest income earned by the Company during these periods was an increasing cost of funds on an increasing total of interest-bearing liabilities. Interest expense incurred on interest-bearing liabilities for the nine-month periods ended September 30, 2008 and 2007 totaled $30,838,984 and $27,548,609, respectively. Interest expense incurred on interest-bearing liabilities for the quarters ended September 30, 2008 and 2007 totaled $10,610,768 and $9,775,314, respectively.

The softening of the real estate market and the overall economic downturn that has occurred during the past twelve to eighteen months 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 2007. As a result, the Company has experienced an increase in nonperforming assets (which include nonperforming loans and other real estate owned). Nonperforming assets totaled $26.9 million at September 30, 2008 compared with $10.4 million at September 30, 2007. The reserve for possible loan losses as a percentage of net outstanding loans was 1.01% at September 30, 2008 compared with 1.06% at September 30, 2007. Net charge-offs for the nine months ended September 30, 2008 totaled $5.8 million compared with $615 thousand for the nine months ended September 30, 2007.

Net charge-offs for the three months ended September 30, 2008 totaled $2.1 million compared with $161 thousand for the three months ended September 30, 2007. The provision for possible loan losses charged to expense for the nine-month periods ended September 30, 2008 and 2007 totaled $8,539,000 and $2,405,000, respectively, and $1,800,000 and $1,515,000 for the three-month periods ended September 30, 2008 and 2007, respectively. The increase in the provision for loan losses in these nine and three-month periods of 2008 was a direct reaction to the continued softening of the real estate market and overall economic downturn. See further discussion regarding the Company’s management of credit risk in the section below entitled “Risk Management.”

As the Company has grown its assets, the total of noninterest income has grown and new products have been introduced. Total noninterest income for the nine-month periods ended September 30, 2008 and 2007 was $1,990,178 and $1,276,336, respectively, and $584,320 and $413,614 for the three-month periods ended September 30, 2008 and 2007, respectively.

The Company’s fixed rate mortgage lending operation, which was established to arrange for long-term fixed rate commercial real estate financing with institutional investors, generated commission income of $228,671 and $418,825 for the nine-month periods ended September 30, 2008 and 2007, respectively, and $145,800 and $100,500 for the three-month periods ended September 30, 2008 and 2007, respectively. Residential mortgage lending operations (in which fixed rate loans are originated and sold in the secondary market) were also expanded beginning in 2007. Total income from these secondary market activities was $220,180 and $180,956 for the nine-month periods ended September 30, 2008 and 2007, respectively, and $41,538 and $48,256 for the three-month periods ended September 30, 2008 and 2007, respectively. Deposit service charge income also increased due to a larger deposit base. The Company also sold $27.3 million of available-for-sale investment securities in the nine-month period ended September 30, 2008 for a net gain of $312,250. During the quarter ended September 30, 2008, the Company sold $4.2 million of available-for-sale investment securities for a net gain of $117.

Noninterest expenses have increased significantly during the nine and three-month periods ended September 30, 2008 and 2007, resulting from the Company’s branch expansion program and increased level of problem assets. Total noninterest expense was $22,650,886 and $15,822,170 for the nine-month periods ended September 30, 2008 and 2007, respectively, and $7,800,871 and $5,547,260 for the three-month periods ended September 30, 2008 and 2007, respectively.

The Company’s effective tax rate for the nine-month periods ended September 30, 2008 and 2007 was 49.78% and 22.23%, respectively, and 23.85% and 79.78% for the three-month periods ended September 30, 2008 and 2007, respectively. The change in effective tax rates during these periods is a result of the effect that tax-exempt interest income levels have on this percentage.

The Company’s basic and diluted earnings (loss) per share for the nine and three-month periods ended September 30, 2008 and 2007, reflect the Company’s focus on growth in equity ownership and total assets, loans and deposits, with less of an emphasis on short-term earnings per share, as well as the problems experienced in the real estate markets of the St. Louis metropolitan area and southwestern Florida. Basic earnings (loss) per share were $(0.06) and $0.08 per share for the nine-month periods ended September 30, 2008 and 2007, respectively, and $.04 and $.01 per share for the three-month periods ended September 30, 2008 and 2007, respectively. Fully-diluted earnings (loss) per share for the nine-month periods ended September 30, 2008 and 2007 were $(0.06) and $0.08 per share, respectively, and $0.04 and $.01 for the three-month periods ended September 30, 2008 and 2007, respectively.

Following are certain of the Company’s ratios generally followed in the banking industry for the three and nine-month periods ended September 30, 2008 and 2007:

		As of and for the								As of and for the
		Nine Months Ended Sept. 30,								Quarters Ended Sept. 30,
		2008				2007				2008				2007
Percentage of net income to:
Average total assets			(0.12	)%			0.23	%			0.23	%			0.06	%
Average stockholders’ equity			(1.16	)%			1.71	%			2.47	%			0.47	%
Percentage of common dividends declared to net income per common share			—				—				—				—
Percentage of average stockholders’ equity to average total assets			10.60	%			13.52	%			9.43	%			13.35	%

Critical Accounting Policies

The impact and any associated risks related to the Company’s critical accounting policies on business operations are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the Company’s consolidated financial statements as of and for year ended December 31, 2007 and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K, which was filed March 28, 2008. Management believes there have been no material changes to our critical accounting policies during the first nine months of 2008.

Results of Operations for the Three and Nine-Month Periods Ended September 30, 2008 and 2007

Net Interest Income

The Company’s net interest income increased $7,661,854 (40.05%) to $26,791,457 for the nine-month period ended September 30, 2008 from the $19,129,603 earned during the nine-month period ended September 30, 2007. The Company’s net interest margin for the nine-month periods ended September 30, 2008 and 2007 was 2.90% and 2.80%, respectively. The Company’s net interest income increased $3,394,286 (50.36%) to $10,134,264 for the three-month period ended September 30, 2008 from the $6,739,978 earned during the three-month period ended September 30, 2007. The Company’s net interest margin for the three-month periods ended September 30, 2008 and 2007 was 2.96% and 2.76%, respectively.

Average earning assets for the first nine months of 2008 increased $320,500,787 (34.44%) to $1,251,070,616 from the level of $930,569,829 for the first nine months of 2007. Average earning assets for the third quarter of 2008 increased $402,539,742 (41.07%) to $1,382,742,565 from the level of $980,202,823 for the third quarter of 2007. This strong growth in interest earning assets was primarily due to the growth in the loan portfolio. Total average loans for the first nine months of 2008 increased $333,958,709 (45.35%) to $1,070,366,888 from the level of $736,408,179 for the first nine months of 2007. Total average loans for the third quarter of 2008 increased $388,825,400 (48.42%) to $1,191,904,958 from the level of $803,079,558 for the third quarter of 2008. The Company’s addition of LPO’s in Houston and Phoenix and expanding branch program and practice of adding an experienced commercial lender at each new branch were the primary reasons for the strong growth in the Company’s loan portfolio during these periods.

Total average investment securities for the first nine months of 2008 decreased $8,483,436 (4.64%) to $174,348,180 from the level of $182,831,616 for the first nine months of 2007. Total average investment securities for the third quarter of 2008 increased $7,224,687 (4.12%) to $182,478,731 from the level of $175,254,044 for the third quarter of 2007. The Company uses its investment portfolio to (a) provide support for borrowing arrangements for securities sold under repurchase agreements, (b) provide support for pledging purposes for deposits of governmental and municipality 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 $134.1 million at September 30, 2008. The Banks have also pledged letters of credit from the Federal Home Loan Banks totaling $44,615,000 as additional collateral to secure public funds at September 30, 2008.

Average short-term investments can fluctuate significantly from day to day based on a number of factors, including, but not limited to, the collected balances of customer deposits, loan demand and investment security maturities. Excess funds not invested in loans or investment securities are invested in overnight funds with various unaffiliated financial institutions. The average balances of such short-term investments for the nine-month periods ended September 30, 2008 and 2007 were $6,355,548 and $11,330,034, respectively. The average balances of such short-term investments for the quarters ended September 30, 2008 and 2007 were $8,358,876 and $1,869,221, 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. Average loans as a percentage of average earning assets were 85.56% for the first nine months of 2008, which was a 6.42% increase over the 79.14%

achieved in the first nine months of 2007. Average loans as a percentage of average earning assets were 86.20% for the third quarter of 2008, which was a 4.27% increase over the 81.93% achieved in the third quarter of 2007.

Funding the Company’s growth in interest-earning assets has been a challenge in the markets in which the Company’s banking subsidiaries operate. When the stock market was rebounding over the past three years from its depressed levels in 2004 and 2003, deposits were not as plentiful in the banking market overall, until the second half of 2007, when a softening real estate economy significantly reduced loan demand. The stock market has also declined from its record levels in 2007. Additionally, the St. Louis metropolitan area has added over ten new banks in recent years (as well as several institutions such as Reliance Bank adding numerous branches), resulting in an intensely competitive environment for customer deposits during the past few years. Competition for deposits in southwestern Florida has been equally as intense as the market for deposits in the St. Louis metropolitan area. As a result, the Company has had to supplement its deposit growth with alternate funding sources, including short-term overnight borrowings from unaffiliated financial institutions, sweep repurchase agreement borrowing arrangements with several of the Company’s larger depositors, and longer term advances from the Federal Home Loan Banks. Additionally, the inflated rates at which deposits have been offered in such competitive markets have served to offset the gains achieved in the Company’s net interest margin from loan growth.

Total average interest-bearing deposits for the first nine months of 2008 were $911,769,174, an increase of $188,976,231 (26.15%) from the level of $722,792,943 for the first nine months of 2007. Total average interest-bearing deposits for the third quarter of 2008 were $1,014,441,074, an increase of $273,754,703 (36.96%) from the level of $740,686,371 for the third quarter of 2007. This increase in deposits resulted from the Company’s aggressive branch expansion and aggressive pricing of deposits. The Company’s banking subsidiaries have sought to be aggressive on deposits, without necessarily being the highest rate available in their markets.

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. The averages for securities sold under sweep repurchase agreements for the first nine months of 2008 and 2007 were $40,416,939 and $27,731,031, respectively. The averages for securities sold under sweep repurchase agreements for the third quarters of 2008 and 2007 were $38,360,162 and $28,839,047, respectively. Securities sold under sweep repurchase agreements have continued to provide a stable source of funding from certain of the Company’s larger depositors. The averages for funds purchased through daily/overnight borrowing arrangements for the first nine months of 2008 and 2007 totaled $41,160,319 and $15,153,822, respectively. The averages for funds purchased through daily/overnight borrowing arrangements for the third quarters of 2008 and 2007 totaled $51,316,409 and $28,768,859, respectively. Daily/overnight funds are used for short-term liquidity purposes as a less expensive alternative to the intensely competitive deposit market.

The Company also uses longer-term advances from the Federal Home Loan Bank as a less expensive alternative to the intensely competitive deposit market, particularly when such longer-term fixed rate advances can be matched up with longer-term fixed rate assets. The average balance of Federal Home Loan Bank advances grew $88,813,543 (282.04%) to $120,302,920 for the first nine months of 2008, compared with $31,489,377 for the first nine months of 2007. The average balance of Federal Home Loan Bank advances grew $102,576,088 (241.66%) to $145,021,740 for the third quarter of 2008, compared with the $42,445,652 average balance for the third quarter of 2007.

The overall mix of the Company’s funding sources has a significant impact on the Company’s net interest margin. Following is a summary of the percentage of the various components of average interest-bearing liabilities and noninterest-bearing deposits to the total of all average interest-bearing liabilities and noninterest-bearing deposits (hereinafter described as “total funding sources”) for the three and nine-month periods ended September 30, 2008 and 2007:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Average deposits:
Noninterest-bearing			4.47	%			5.36	%			4.71	%			5.14	%
Interest-bearing:
Transaction accounts			12.33				19.66				14.14				18.34
Savings			3.64				6.72				4.19				7.37

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Time deposits of $100,000 or more			28.75				23.86				28.58				26.60
Other time deposits			32.86				33.14				31.11				33.70
Total average interest-bearing deposits			77.58				83.38				78.02				86.01
Total average deposits			82.05				88.74				82.73				91.15
Average short-term borrowings:
Sweep repurchase agreements			2.93				3.25				3.46				3.30
Daily/overnight funds purchased			3.93				3.24				3.52				1.80
Total average short-term borrowings			6.86				6.49				6.98				5.10
Average longer-term advances from Federal Home Loan Bank			11.09				4.77				10.29				3.75
			100.00	%			100.00	%			100.00	%			100.00	%

The composition of the Company’s deposit portfolio has fluctuated as new branches were added, which served 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 the total of all funding sources; however, in the competitive markets in which the Company’s banking subsidiaries operate, this has been difficult. Over the past two years, the Company modified its pricing strategies on its savings (reducing rates) and transaction accounts (raising rates) products, resulting in a significant shift in mix from savings to interest-bearing transaction accounts. For the first nine months of 2008 and 2007, the Company’s most significant funding source has continued to be certificates of deposit, which comprised 59.69% of total average funding sources during the first nine months of 2008, as compared with 60.30% during the first nine months of 2007. Certificates of deposit have a lagging effect with interest rate changes, as most certificates of deposit have longer maturities at fixed rates. Due to the instability in the wholesale funding market, opportunity arose to take advantage of a lower cost of funds in the wholesale market compared to retail deposits. The positive result of this increase is reflected in the Company’s improved net interest margin for the first nine months of 2008; however, this has significantly tightened the Company’s liquidity.

The following table sets forth, on a tax-equivalent basis for the period indicated, a summary of the changes in interest income and interest expense resulting from changes in volume and changes in yield/rates:

		Amount of Increase (Decrease)
		Third Quarter																First Nine Months
										Change From 2007 to 2008 Due to
						Yield/												Yield/
		Volume (1)				Rate (2)				Total				Volume (1)				Rate (2)				Total
Interest income:
Loans		$	6,249,348				(2,028,919	)			4,220,429			$	16,492,495				(4,862,334	)			11,630,161
Investment securities:
Taxable			89,866				(89,871	)			(5	)			(340,830	)			(75,482	)			(416,312	)
Exempt from Federal income taxes			(8,413	)			66,392				57,979				45,155				(11,276	)			33,879
Short-term investments			52,736				(35,833	)			16,903				(162,547	)			(139,591	)			(302,138	)
Total interest income			6,383,537				(2,088,231	)			4,295,306				16,034,273				(5,088,683	)			10,945,590
Interest expense:
Interest bearing transaction accounts			(138,771	)			(912,850	)			(1,051,621	)			341,814				(2,388,991	)			(2,047,177	)
Savings accounts			(76,487	)			(181,376	)			(257,863	)			(260,113	)			(564,290	)			(824,403	)
Time deposits of $100,000 or more			1,658,870				(864,209	)			794,661				3,659,489				(1,698,420	)			1,961,069
Other time deposits			1,373,309				(732,327	)			640,982				2,641,415				(921,328	)			1,720,087
Total deposits			2,816,921				(2,690,762	)			126,159				6,382,605				(5,573,029	)			809,576
Funds purchased and securities sold under repurchase agreements			305,360				(485,012	)			(179,652	)			1,017,529				(942,409	)			75,120
Long-term borrowings			985,483				(96,536	)			888,947				2,577,181				(171,502	)			2,405,679
Total interest expense			4,107,764				(3,272,310	)			835,454				9,977,315				(6,686,940	)			3,290,375
Net interest income		$	2,275,773				1,184,079				3,459,852			$	6,056,958				1,598,257				7,655,215

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.

During the last half of 2007 through the third quarter of 2008, the Federal Reserve Bank has lowered its Federal funds target interest rate 3.25%, in an attempt to stimulate the sluggish national economy. Such actions have caused the overall rates earned and paid by the Company to be lowered; however, not all financial instruments reprice at the same time. Floating rate loans reprice immediately, while certificates of deposit and other fixed rate instruments have a lagging effect with interest rate changes. Competition will also cause interest rates to react differently.

Provision for Possible Loan Losses

The provision for possible loan losses charged to earnings for the nine-month periods ended September 30, 2008 and 2007 was $8,539,000 and $2,405,000, respectively. The provision for possible loan losses charged to earnings for the three-month periods ended September 30, 2008 and 2007 was $1,800,000 and $1,515,000, respectively. Net charge-offs for the nine-month periods ended September 30, 2008 and 2007 totaled $5,825,054 and $615,474, respectively. Net charge-offs for the three-month periods ended September 30, 2008 and 2007 totaled $2,083,464 and $161,614, respectively. At September 30, 2008 and 2007, the reserve for possible loan losses as a percentage of net outstanding loans was 1.01% and 1.06%, respectively. During Reliance Bank’s first three years of existence (1999, 2000, and 2001), Reliance Bank was required by the Missouri Division of Finance to maintain a minimum reserve for possible loan losses of at least 1.00% of net outstanding loans. Reliance Bank, FSB has a similar requirement through the year ended December 31, 2008. Accordingly, since its inception, the Company has sought to maintain its reserve for possible loan losses at a level of approximately 1.00% to 1.10% of net outstanding loans. 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 81.26% and 100.83% at September 30, 2008 and 2007, respectively. The continued softening of the real estate market and overall economic downturn have resulted in an increase in the level of nonperforming loans and a higher provision for loan losses in the first nine months of 2008. See further discussion regarding the Company’s credit risk management in the section below entitled “Risk Management.”

Noninterest Income

Total noninterest income for the first nine months of 2008, excluding security sale gains and losses, increased $394,566 (30.14%) to $1,677,928 from the $1,283,362 earned for the first nine months of 2007. Total noninterest income for the third quarter of 2008, excluding security sale gains and losses, increased $170,589 (41.24%) to $584,203 from the $413,614 earned for the third quarter of 2007. The commercial real estate brokerage department earned commission income of $228,671 and $418,825 for the first nine months of 2008 and 2007, respectively. The commercial real estate brokerage department earned commission income of $145,800 and $100,500 for the third quarters of 2008 and 2007, respectively. Commissions are earned by this department for arranging long-term, fixed rate commercial real estate financing for customers with institutional investors. Secondary market residential mortgage fee income was $220,180 and $180,956 for the first nine months of 2008 and 2007, respectively. Secondary market residential mortgage fee income was $41,538 and $48,256 for the third quarters of 2008 and 2007, respectively. These secondary market originators make long-term, fixed rate residential loans which are then sold into the secondary market. The company was a relatively new entrant into the secondary mortgage market, having just ramped up this business in 2007. Even with the softening of the real estate market, the secondary market has continued to remain relatively strong, but only at certain price points. Service charges on deposit accounts increased $220,852 (61.04%) to $582,678 for the nine-month period ended September 30, 2008 from $361,826 for the nine-month period ended September 30, 2007, due to the increased level of customer deposits and the fees generated by the Banks’ overdraft privilege programs. During the first nine months of 2008, the Company also sold $27.3 million of available-for-sale investment securities for a net gain of $312,250. From time to time, the Company will sell its available-for-sale investment securities for short-term liquidity purposes or longer-term asset/liability management reasons. See further discussion below in the sections entitled “Risk Management” and “Liquidity and Capital Resources.”

Noninterest Expense

Noninterest expense increased $6,828,716 (43.16%) for the first nine months of 2008 to $22,650,886 from the $15,822,170 incurred during the first nine months of 2007. Noninterest expense increased $2,253,611 (40.63%) for the third quarter

of 2008 to $7,800,871 from the $5,547,260 incurred during the third quarter of 2007. Most of the categories of noninterest expense increased due to the addition of six new branches and two LPOs during 2007 and 2008. The largest single component of the increase in noninterest expense for the first nine months and third quarter of 2008 was the category of salaries and employee benefits. Total personnel costs increased $3,361,925 (36.28%) for the first nine months of 2008 to $12,628,179 from the $9,266,254 of personnel costs incurred for the first nine months of 2007. Total personnel costs increased $961,307 (29.50%) for the third quarter of 2008 to $4,219,635 from the $3,258,328 of personnel costs incurred for the third quarter of 2007. The Company’s branch expansion program includes the hiring of personnel in each location with strong banking skills, including a seasoned commercial lender in each location. Due to the slowing economy, the Company has placed the opening of any new branches on hold. The Company had planned to open three additional branches in Florida in 2008.

The increased number of branches resulted in a growing level of occupancy and equipment expenses (including leases for temporary facilities during construction) during the first nine months and third quarter of 2008 compared with the first nine months and third quarter of 2007. Total occupancy and equipment expenses increased $971,346 (40.40%) to $3,375,614 for the first nine months of 2008 from the $2,404,268 incurred in the first nine months of 2007. Total occupancy and equipment expenses increased $384,683 (46.47%) to $1,212,522 for the third quarter of 2008 from the $827,839 incurred in the third quarter of 2007.

Total data processing expenses for the first nine months of 2008 increased $310,167 (29.57%) to $1,359,070, as compared with the $1,048,903 of expenses incurred for the first nine months of 2007. Total data processing expenses for the third quarter of 2008 increased $80,221 (20.40%) to $473,512, as compared with the $393,291 of expenses incurred for the third quarter of 2007. The increased number of customer accounts and additional new products offered has resulted in this increase in data processing expenses.

Total advertising expenses for the first nine months of 2008 increased $297,030 (60.09%) to $791,351, as compared with the $494,321 of expenses incurred for the first nine months of 2007. Total advertising expenses for the third quarter of 2008 increased $95,405 (49.09%) to $289,770, as compared with the $194,365 of expenses incurred for the third quarter of 2007. The increase is primarily related to the Company’s new branding and entry into the television media market.

Total professional fees increased $124,074 (35.74%) for the first nine months of 2008 to $471,245 from the $347,171 incurred for the first nine months of 2007. Total professional fees increased $3,026 (2.50%) for the third quarter of 2008 to $124,152 from the $121,126 incurred for the third quarter of 2007. Increased professional and legal costs relating to the Company’s nonperforming loans and charge-offs has contributed to this increase.

Other noninterest expenses increased $1,774,759 (94.35%) to $3,655,767 for the first nine months of 2008, from the $1,881,008 incurred for the first nine months of 2007. Other noninterest expenses increased $736,859 (117.47%) to $1,364,110 for the third quarter of 2008, from the $627,251 incurred for the third quarter of 2007. The increase during these periods is primarily due to (a) increased expenses relating to the operations of the Company’s expanding branch network, (b) additional costs incurred with its nonperforming assets, (c) an additional write-down on the value of Florida properties in the Company’s other real estate owned asset of $189,050, and (d) an additional $263,878 of Federal Deposit Insurance Corporation’s (“FDIC”) assessments in 2008. These assessments are based on the Banks’ net assets and have increased substantially on an industry-wide basis with the FDIC’s new assessment methodologies implemented in 2007.

Income Taxes

Applicable income tax expenses (benefits) totaled $(1,198,888) and $484,324 for the nine-month periods ended September 30, 2008 and 2007, respectively. The effective tax rates for the nine-month periods ended September 30, 2008 and 2007 were 49.78% and 22.23%, respectively. Applicable income tax (benefits) expenses totaled $266,622 and $(72,866) for the three-month periods ended September 30, 2008 and 2007, respectively. The effective tax rates for the three-month periods ended September 30, 2008 and 2007 were 23.85% and 79.78%, respectively. The change in effective tax rates was primarily influenced by the level of tax-exempt interest income earned in each period.

Financial Condition

Total assets of the Company grew $339,976,958 (29.92%) in the first nine months of 2008 to $1,476,129,380 at September 30, 2008, from the level of $1,136,152,422 at December 31, 2007. This growth resulted from the Company’s continued

emphasis on increasing its market share of loans and deposits with its branch expansion program, establishment of LPO’s in the Houston and Phoenix markets, a strong capital base, and competitive pricing of banking products.

Total deposits of the Company grew $261,957,774 (31.39%) in the first nine months of 2008 to $1,096,534,223 at September 30, 2008, from the level of $834,576,449 at December 31, 2007. This growth in deposits resulted from the Company’s branch expansion program and competitive pricing on deposit products.

Short-term borrowings at September 30, 2008 decreased $2,110,304 (2.39%) to $86,214,611 from the level of $88,324,915 at December 31, 2007, with the increase in longer-term Federal Home Loan Bank advances. Short-term borrowings will fluctuate significantly based on short-term liquidity needs and certain seasonal deposit trends. Longer-term borrowings have increased significantly during the first nine months of 2008. At September 30, 2008, total longer-term advances from the Federal Home Loan Bank were $149,000,000, as compared with $68,000,000 at December 31, 2007. These longer-term fixed rate advances were used as an alternative funding source to a competitive deposit market. Due to the instability in the wholesale funding market, opportunity arose to take advantage of a lower cost of funds in the wholesale market compared to retail deposits. The positive result of this increase is reflected in the Company’s improved net interest margin for the first nine months of 2008; however, this has significantly tightened the Company’s liquidity.

Total loans increased $313,205,844 (34.34%) in the first nine months of 2008 to $1,225,166,080 at September 30, 2008, from the level of $911,960,236 at December 31, 2007. Company management has emphasized the need to grow the loan portfolio to improve the Company’s net interest margin, without, however, sacrificing the quality of the Company’s assets. This emphasis is supported by the inclusion of a seasoned commercial lending officer at each of the Banks’ branches.

Investment securities, all of which are maintained as available-for-sale, increased $14,686,067 (8.97%) in the first nine months of 2008 to $178,331,285 at September 30, 2008, from the level of $163,645,218 at December 31, 2007. The Company’s investment portfolio growth is dependent upon the level of deposit growth and the funding requirements of the Company’s loan portfolio, as described above. Rates offered on investment grade and low risk bonds have continued to remain very low in the current economic market.

The capitalization of the Company has remained strong since its initial capitalization in 1998. Total capital at September 30, 2008 was $136,559,582, which computes to a capital-to-asset percentage of 9.25%. Since its inception, the Company has had 13 separate private placement offerings of its Common Stock to accredited investors.

The following tables show the condensed average balance sheets for the periods reported and the percentage of each principal category of assets, liabilities and stockholders’ equity to total assets. Also shown is the average yield on each category of interest-earning assets and the average rate paid on each category of interest-bearing liabilities for each of the periods reported.

		Nine Months Ended September 30, 2008
						Percent				Interest				Average
		Average				of Total				Income/				Yield/
		Balance				Assets				Expense				Rate
ASSETS
Loans (1) (2) (3)		$	1,070,366,888				81.48	%		$	51,501,359				6.43	%
Investment securities:
Taxable			136,085,251				10.36				4,806,351				4.72
Exempt from Federal income taxes (3)			38,262,929				2.91				1,536,860				5.37
Short-term investments			6,355,548				0.48				162,797				3.42
Total earning assets			1,251,070,616				95.23				58,007,367				6.19
Nonearning assets:
Cash and due from banks			10,950,903				0.83
Reserve for possible loan losses			(11,406,428	)			(0.87	)
Premises and equipment			43,961,674				3.35
Other assets			18,810,531				1.44
Available-for-sale investment market valuation			314,438				0.02
Total nonearning assets			62,631,118				4.77
Total assets		$	1,313,701,734				100.00	%
LIABILITIES
Interest-bearing liabilities
Interest-bearing transaction accounts		$	165,207,045				12.58	%			3,027,936				2.45	%
Savings			48,944,845				3.73				621,548				1.70
Time deposits of $100,000 or more			334,052,847				25.43				10,440,040				4.17
Other time deposits			363,564,437				27.67				11,604,872				4.26
Total interest-bearing deposits			911,769,174				69.41				25,694,396				3.76
Long-term borrowings			120,302,920				9.16				3,463,592				3.85
Funds purchased and securities sold under repurchase agreements			81,577,258				6.21				1,680,996				2.75
Total interest-bearing liabilities			1,113,649,352				84.78				30,838,984				3.70
Noninterest-bearing deposits			55,075,699				4.19
Other liabilities			5,684,111				0.43
Total liabilities			1,174,409,162				89.40
STOCKHOLDERS’ EQUITY			139,292,572				10.60
Total liabilities and stockholders’ equity		$	1,313,701,734				100.00	%
Net interest income										$	27,168,383
Net yield on earning assets															2.90	%

(continued)

		Nine Months Ended September 30, 2007
						Percent				Interest				Average
		Average				of Total				Income/				Yield/
		Balance				Assets				Expense				Rate
ASSETS
Loans (1) (2) (3)		$	736,408,179				75.22	%		$	39,871,198				7.24	%
Investment securities:
Taxable			145,699,487				14.88				5,222,663				4.79
Exempt from Federal income taxes (3)			37,132,129				3.79				1,502,981				5.41
Short-term investments			11,330,034				1.16				464,935				5.49
Total earning assets			930,569,829				95.05				47,061,777				6.76
Nonearning assets:
Cash and due from banks			9,806,640				1.01
Reserve for possible loan losses			(7,411,018	)			(0.76	)
Premises and equipment			36,260,504				3.70
Other assets			10,780,453				1.10
Available-for-sale investment market valuation			(991,940	)			(0.10	)
Total nonearning assets			48,444,639				4.95
Total assets		$	979,014,468				100.00	%
LIABILITIES
Interest-bearing liabilities
Interest-bearing transaction accounts		$	154,148,693				15.74	%			5,075,113				4.40	%
Savings			61,939,351				6.33				1,445,951				3.12
Time deposits of $100,000 or more			223,509,035				22.83				8,478,971				5.07
Other time deposits			283,195,864				28.93				9,884,785				4.67
Total interest-bearing deposits			722,792,943				73.83				24,884,820				4.60
Long-term borrowings			31,489,377				3.22				1,057,913				4.49
Funds purchased and securities sold under repurchase agreements			42,884,853				4.38				1,605,876				5.01
Total interest-bearing liabilities			797,167,173				81.43				27,548,609				4.62
Noninterest-bearing deposits			43,199,115				4.41
Other liabilities			6,243,834				0.64
Total liabilities			846,610,122				86.48
STOCKHOLDERS’ EQUITY			132,404,346				13.52
Total liabilities and stockholders’ equity		$	979,014,468				100.00	%
Net interest income										$	19,513,168
Net yield on earning assets															2.80	%