UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Reliance Bancshares, Inc.

(Exact name of Registrant as Specified in its Charter)

Missouri		43-1823071
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
10401 Clayton Road
Frontenac, Missouri		63131
(Address of Principal Executive Offices)		(ZIP Code)

Registrant’s telephone number, including area code:
(314) 569-7200

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Title of Class
Class A Common Stock, par value $0.25
    

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ     

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

          

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o      

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o     

     Indicate by check mark whether the registrant 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

     The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2008 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $73,881,780.

     Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 20,770,781 shares of common stock outstanding as of March 16, 2009.

 

 

TABLE OF CONTENTS

		Page No.
Item 1. Business			2
Item 1A. Risk factors			9
Item 1B. Unresolved Staff Comments			15
Item 2. Properties			15
Item 3. Legal Proceedings			16
Item 4. Submission of Matters to a Vote of Security Holders			16
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			16
Item 6. Selected Financial Data			18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			46
Item 8. Financial Statements and Supplementary Data			46
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			46
Item 9A(T).Controls and Procedures			46
Item 9B. Other Information			47
Item 10. Directors, Executive Officers and Corporate Governance			48
Item 11. Executive Compensation			48
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			48
Item 13. Certain Relationships and Related Transactions, and Director Independence			48
Item 14. Principal Accountant Fees and Services			48
Item 15. Exhibits and Financial Statement Schedules			49
EX-21.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     Except for the historical information contained in this Annual Report, certain matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in this document, the words “anticipates,” “believes,” “expects,” “intends” and similar expressions as they relate to Reliance Bancshares, Inc. or its management are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, certain of which are beyond our control. These factors, risks and uncertainties are discussed under Item 1A, “Risk Factors.”

     Our actual results, performance or achievement could differ materially from those expressed in, or implied by, these forward-looking statements. Accordingly, we can give no assurances that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do so, what impact they will have on our results of operations or financial condition. We expressly decline any obligation to publicly revise any forward-looking statements that have been made to reflect the occurrence of events after the date hereof.

Item 1. Business

General

     Reliance Bancshares, Inc. (the “Company” or “Reliance”) is a multi-bank holding company that was incorporated in Missouri on July 24, 1998. The Company organized its first subsidiary commercial bank, Reliance Bank, in Missouri, which secured insurance from the Federal Deposit Insurance Corporation (“FDIC”) and began conducting business on April 16, 1999 in Des Peres, Missouri with full depository and loan capabilities. The Company organized an additional subsidiary, Reliance Bank, FSB in Fort Myers, Florida as a federal savings bank after operating as a loan production office of Reliance Bank since 2004. The Company applied for and received a federal charter from the Office of Thrift Supervision (the “OTS”), secured insurance from the FDIC and began conducting business on January 17, 2006. The Company’s two subsidiaries, Reliance Bank and Reliance Bank, FSB, are sometimes referred to as the “Banks.” Unless otherwise indicated, references to the “Company” shall be intended to be references to Reliance Bancshares, Inc. and its subsidiaries.

     On April 27, 2007, the Company filed its Form 10 registration statement with the Securities and Exchange Commission (the “SEC”) pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended. The effective date of the registration statement was June 26, 2007.

     The Company’s headquarters and executive offices are located at 10401 Clayton Road, Frontenac, Missouri, 63131, (314) 569-7200.

Available Information

     All of the Company’s reports required to be filed by Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, will be available or accessible free of charge, including copies of our future Annual Reports on Form 10-K, future Quarterly Reports on Form 10-Q, future Current Reports on Form 8-K, future Proxy Statements, and any amendments to those reports at our website with the address “www.reliancebancshares.com”. All reports will be made available as soon as reasonably practicable after they are filed with or furnished to the SEC. You may also request any materials we file with the SEC from the SEC’s Public Reference Room at 100 F. Street, NE, Washington, D.C., 20549, or by calling (800) SEC-0330. In addition, our filings with the SEC are electronically available via the SEC’s website at http://www.sec.gov.

     For general information about Reliance Bank and Reliance Bank, FSB, please visit our current websites at www.reliancebankstl.com and www.reliancebankfsb.com, respectively.

Recent Developments

     The Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3, 2008. Pursuant to EESA, the United States Treasury Department (the “Treasury”) has the authority to among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Pursuant to its authority under EESA, the Treasury created the Troubled Asset Relief Program (“TARP”) Capital Purchase Program (“CPP”) under which the Treasury was authorized to invest in non-voting, senior preferred stock of U.S. banks and savings associations or their holding companies.

     The Treasury has invested in the Company through the EESA and CPP. On February 13, 2009, the Company issued 40,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series A for a total of $40,000,000, and 2,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series B for no additional funds, to the Treasury in connection with the Company’s participation in the CCP.

     The Series A preferred stock will pay a dividend at the rate of 5% per annum for the first five years and 9% thereafter. Dividends are payable quarterly and each share has a liquidation amount of $1,000 and has liquidation rights in pari passu with other preferred stock, which is paid in liquidation prior to Company’s common stock. The Series B preferred stock will pay a dividend at the rate of 9% per annum, payable quarterly, and includes other provisions similar to the Series A preferred stock with liquidation at $1,000 per share.

     The funds received by the Company pursuant to the CCP were not included in any financial data or calculations for this filing as they were received after the end of the 2008 fiscal year. The application of funds within the Company will be discussed in full in the Company’s 10-Q filing for the first quarter of 2009, when the funds were received.

     The American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted on February 17, 2009. Among other things, ARRA sets forth additional limits on executive compensation at all financial institutions receiving federal funds under any program, including the CPP, both retroactively and prospectively. The executive compensation restrictions in ARRA, which will be further described in rules and regulations to be established, include among others: limits on compensation incentives, prohibitions on “golden parachute payments”, the establishment by publicly registered CPP recipients of a board compensation committee comprised entirely of independent directors for the purpose of reviewing employee compensation plans, and the requirement of a non-binding vote on executive pay packages at each annual shareholder meeting until the government funds are repaid. The full impact of the ARRA is not yet certain because additional regulatory action is required.

2008 Updates

     As of December 31, 2008, Reliance Bank branches numbered twenty (sixteen in Missouri and four in Illinois), and the total number of Reliance Bank, FSB branches was four. In 2008, Reliance Bank established another Illinois branch, which is located in Edwardsville, and another Missouri branch in Clayton.

     In November, 2007, Reliance Bank expanded its geographical footprint to the southwestern United States with one Loan Production Office in Houston, Texas, and a second in Phoenix, Arizona. These locations were selected for their growth and continuous increases in both the business and consumer sectors. These locations continued to grow in loan production through 2008. There were no branch expansions in the Houston or Phoenix markets in 2008 and there are no specific plans for any branching in 2009.

     At December 31, 2008, Reliance Bank’s total assets and total revenues represented 92.04% and 93.36%, respectively, of the Company’s consolidated total assets and total revenues. Reliance Bank, FSB’s total assets and total revenues represented 7.87% and 6.77%, respectively, of the Company’s consolidated totals as

of and for the year ended December 31, 2008. Reliance Bank recorded net income of $3,124,814 and Reliance Bank, FSB incurred a net loss of $2,860,264 for the year ended December 31, 2008.

Business Strategy

     Our philosophy is to offer the friendlier, personal service that only a small, personal bank can provide while delivering state of the art banking products and services competitive with the world’s biggest banks. This philosophy is fundamental to our business strategies and operations. We also recognize that our continued growth and expansion relies on the expertise of key executive management, as well as the careful selection and retention of officers and employees Company-wide.

     Both Reliance Bank and Reliance Bank, FSB are community oriented and customer friendly institutions that cater to small and mid-size businesses and individuals with a desire for personal service. We offer a complete array of financial services and products to meet both commercial and individual needs, including a variety of both business and individual interest bearing and non-interest bearing deposit accounts, personal lines of credit, home equity loans and consumer loans.

     In the commercial banking market, we compete successfully with our peers by offering a broad range of business services in areas such as commercial real estate, real estate construction and development, commercial equipment, residential real estate, and lines of credit. In addition, we provide individual banking services such as U. S. savings bonds, traveler’s checks, cashiers checks, safe deposit boxes, bank-by-mail services, direct deposit, remote deposit, on-line banking, and automated teller services. We believe that all of our services are supported by state-of-the-art technology in data processing that is comparable to many larger banks, and we are continually upgrading this technology to meet our customers’ needs. In addition, our subsidiaries may participate in inter-company loan sharing so that the excess of an individual bank’s loan limit may be shared with the other banking subsidiary, given acceptable credit risk, history and industry concentration, resulting in greater customer retention. The Banks have not financed, and do not currently finance, sub-prime mortgage credits.

     Primary responsibility for managing our banking branches lies with the officers of each branch. However, we centralize most of our overall corporate policies, procedures and administrative functions and provide centralized operational and loan administration support functions from our Company headquarters in Frontenac, Missouri.

     In Reliance Bank and Reliance Bank FSB’s development we have focused largely on expansion through branching to create the customer convenience we feel is necessary to achieve our goals.

     We have established the desired amount of branches in the St. Louis metropolitan area and have no plans to continue branching in that area. This follows the original strategy of Reliance Bank. In lieu of aggressive branching, Reliance Bank will be more focused on building and maintaining a reliable presence in the St. Louis area through infrastructure growth and modification to provide as many services as our customers need. We will continue to focus on strengthening our commercial banking business, our external sales of various business services and our retail banking service product line.

     Reliance Bank, FSB has decided to adjust their initial strategy of aggressive branching and will focus on growing internally with the already established branches until the economy has recovered. The economic downturn and decline in real estate values, especially in the Southwest Florida market, has caused Reliance Bank, FSB to adapt to the current state of the economy and we feel that at this time a more direct concentration on strengthening our loan portfolio, commercial and retail banking will serve us and the community better than an aggressive branching strategy.

Market Area and Approach to Geographic Expansion

     Reliance Bank

     In the greater St. Louis Metropolitan Statistical Area, (“MSA”), which includes St. Louis bordering counties in Illinois, Reliance Bank has facilities in twenty locations and one freestanding automated teller machine (“ATM”). Reliance Bank strategically chose to locate these branches within six to seven miles of each other so as not to over-saturate any one municipality or area. Still, in any given area, customers are within a few miles of local branches. When choosing branch locations, we also focus on areas that we believe have high growth potential, a high concentration of closely-held businesses and a large number of professionals and executives. Typically, a high growth potential location consists of both commercial and residential development, which provides us with potential commercial and individual customers.

     Reliance Bank, FSB

     The current primary market area of Reliance Bank, FSB is Lee County on the southwest coast of Florida. Reliance Bank, FSB is headquartered in Fort Myers, Florida.

     Reliance Bank, FSB’s original strategy was to expand in Lee County and Collier County, in southwest Florida, as these areas have experienced high growth rates in recent years. However, with the unprecedented downturn in the economy, specifically in the Southwest Florida real estate market, Reliance Bank, FSB has amended its strategy for 2009 and does not plan on establishing any new branches while the economy is recovering. Reliance Bank, FSB plans to work within the community to build stronger customer relationships, deposit growth and loan production.

Competition

     The Company and its subsidiaries operate in highly competitive markets. We face substantial competition in all phases of operations from a variety of different competitors in the St. Louis and Fort Myers markets, including: (i) large national and super-regional financial institutions that have well-established branches and significant market share in the communities we serve; (ii) finance companies, investment banking and brokerage firms, and insurance companies that offer bank-like products; (iii) credit unions, which can offer highly competitive rates on loans and deposits as they receive tax advantages not available to commercial or community banks; (iv) other commercial or community banks, including start-up banks, that can compete with us for customers who desire a high degree of personal service; (v) national and super-regional banks offering mortgage loan application services; (vi) both local and out-of-state trust companies and trust service offices; and (vii) multi-bank holding companies with substantial capital resources and lending capacity.

     Many of the larger banks have established specialized units, which target private businesses and high net worth individuals. Also, the St. Louis market has recently experienced an increase in de novo (i.e., new start-up) banks that have opened within the past three years.

     Many existing community banks with which we compete directly, as well as several new community bank start-ups, have marketing strategies similar to ours. These community banks may open new branches in the communities we serve and compete directly for customers who want the level of service offered by community banks. In addition, these banks compete directly for the same management personnel.

     Reliance Bank and Reliance Bank, FSB have both grown rapidly with aggressive branching in both markets. Because of the Company’s continued use of earnings for this expansion, we have not historically issued dividends and do not anticipate doing so in the foreseeable future. The Company has incurred significant expenses due to its aggressive organic growth plan. This increased expense has negatively impacted our short term earnings per share. Both Reliance Bank and Reliance Bank, FSB are comfortable with the amount of branches they have established in both areas and do not plan to expand in 2009.

Supervision and Regulation

     We are subject to various state, federal and self-regulatory organization banking laws, regulations and policies in place to protect customers and, to some extent, shareholders, which impose specific requirements and restrictions on our operations. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company and its subsidiaries.

     The following is a summary of significant regulations:

     The Holding Company

     Bank Holding Company Act of 1956: The Company is a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). As such, we are subject to regulation and examination by the Federal Reserve Board and are required to file periodic reports of our operations and such additional information as the Federal Reserve may require. Financial holding companies must be well managed and well capitalized pursuant to the standards set by the Federal Reserve and have at least a “satisfactory” rating under the Community Reinvestment Act.

     Under the BHCA, bank holding companies are generally required to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if, after such acquisition, it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company.

     Gramm-Leach Bliley Act of 1999: The Gramm-Leach-Bliley Act of 1999 (“GLBA”) eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies. The GLBA also restricts the Company and the Banks from sharing certain customer personal information with non-affiliated third parties and requires disclosure of the policies and practices regarding such data sharing.

     Source of Strength; Cross-Guarantee: Federal Reserve policy requires that we commit resources to support our subsidiaries and in implementing this policy, the Federal Reserve takes the position that it may require us to provide financial support when we otherwise would not consider it necessary to do so.

     Sarbanes-Oxley Act of 2002: The Sarbanes-Oxley Act of 2002 (“SOX”) generally applies to all publicly-held companies and was enacted to increase corporate responsibility, provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws promulgated by the SEC. SOX requires, among other things, (i) certification of financial statements by the Chief Executive Officer and the Chief Financial Officer and (ii) adoption of procedures designed to ensure the adequacy of the internal controls and financial reporting processes of public companies. Companies with securities listed on national securities exchanges must also comply with strict corporate governance requirements.

Reliance Bank

     Because Reliance Bank is not a member of the Federal Reserve System, the Missouri Division of Finance and the FDIC are its primary regulators. Between these two regulatory authorities, all areas of the Bank’s operations are monitored or regulated, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuance of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. In addition, Reliance Bank must maintain certain capital ratios and is subject to limitations on total investments in real estate, bank premises, and furniture and fixtures.

     Transactions with Affiliates and Insiders: Regulation W, promulgated by the Federal Reserve, imposes regulations on certain transactions with affiliates, including the amount of loans and extensions of credit to affiliates, investments in affiliates and the amount of advances to third parties collateralized by the securities or obligations of affiliates. Regulation W also requires, among other things, that Reliance Bank transact business with affiliates on terms substantially the same, or at least as favorable to Reliance Bank, as those prevailing at the time for comparable transactions with non-affiliates.

     Community Reinvestment Act: The Community Reinvestment Act (the “CRA”) requires that the Company and its subsidiaries take certain steps to meet the credit needs of varying income level households in their

local communities. The Company’s record of meeting such needs is considered by the FDIC when evaluating mergers and acquisitions and applications to open a branch or facility. Both Reliance Bank and Reliance Bank, FSB have satisfactory ratings under the CRA.

     Check 21: The Check Clearing for the 21st Century Act (“Check 21”) is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check clearing. The law facilitates check clearing by creating a new negotiable instrument called a substitute check, which permits banks to clear original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the information contained on the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by Check 21 to create substitute checks.

     USA Patriot Act: The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) requires financial institutions to take certain steps to protect against money laundering, such as establishing anti-money laundering programs and maintaining controls with respect to private and foreign banking matters.

     Limitations on Loans and Transactions: The Federal Reserve Act generally imposes certain limitations on extensions of credit and other transactions by and between banks that are members of the Federal Reserve and other affiliates (which includes any holding company of which a bank is a subsidiary and any other non-bank subsidiary of such holding company). Banks that are not members of the Federal Reserve are also subject to these limitations. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or the furnishing of services.

     Other Regulations: Interest and certain other charges collected or contracted for by the Bank are subject to state usury laws and certain federal laws concerning interest rates. The Bank’s loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978 governing information given to credit reporting agencies; the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies; the Soldiers’ and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying obligations of, persons in military service; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Bank are also subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Deposit Insurance: The Bank is FDIC-insured, and is therefore required to pay deposit insurance premium assessments to the FDIC.

     Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “FDIRA”) in 2006, the previously separate deposit insurance funds for banks and savings associations were merged into a single deposit insurance fund administered by the FDIC. The Bank’s deposits are insured up to applicable limitations by that deposit insurance fund.

     Following the adoption of the FDIRA, the FDIC has the opportunity, through its rulemaking authority, to better price deposit insurance for risk than was previously authorized. The FDIC adopted regulations that

create a system of risk-based assessments. Under the regulations, there are four risk categories, and each insured institution is assigned to a risk category based on capital levels and supervisory ratings. Well-capitalized institutions with composite ratings of 1 or 2 are placed in Risk Category I while other institutions are placed in Risk Categories II, III or IV depending on their capital levels and composite ratings. The assessment rates may be changed by the FDIC as necessary to maintain the insurance fund at the reserve ratio designated by the FDIC, which currently is 1.25% of insured deposits. The FDIC may set the reserve ratio annually at between 1.15% and 1.50% of insured deposits. Deposit insurance assessments will be collected for a quarter, at the end of the next quarter. Assessments are based on deposit balances at the end of the quarter, except for institutions with $1 billion or more in assets, such as the Bank, and any institution that becomes insured on or after January 1, 2007 which will have their assessment base determined using average daily balances of insured deposits.

     As of September 30, 2008, the reserve ratio of the deposit insurance fund fell to 0.76%. On October 7, 2008, the FDIC established a restoration plan to restore the reserve ratio to at least 1.15% within five years (effective February 27, 2009 the FDIC extended this time to seven years) and proposed rules increasing the assessment rate for deposit insurance and making adjustments to the assessment system. On December 16, 2008, the FDIC adopted and issued a final rule increasing the rates banks pay for deposit insurance uniformly by 7 basis points (annualized) effective January 1, 2009. Under the final rule, risk-based rates for the first quarter 2009 assessment will range between 12 and 50 basis points (annualized). The 2009 first quarter assessment rates established by the FDIC provide that the highest rated institutions, those in Risk Category I, will pay premiums of between 12 and 14 basis points and the lowest rated institutions, those in Risk Category IV, will pay premiums of 50 basis points. On February 27, 2009, the FDIC adopted a final rule amending the way that the assessment system differentiates for risk and setting new assessment rates beginning with the second quarter of 2009. Beginning April 1, 2009, for the highest rated institutions, those in Risk Category I, the initial base assessment rate will be between 12 and 16 basis points and for the lowest rated institutions, those in Risk Category IV, the initial base assessment rate will be 45 basis points. The final rule modifies the means to determine a Risk Category I institution’s initial base assessment rate. It also provides for the following adjustments to an institution’s assessment rate: (1) a decrease for long-term unsecured debt, including most senior and subordinated debt and, for small institutions, a portion of Tier 1 capital; (2) an increase for secured liabilities above a threshold amount; and (3) for institutions in risk categories other than Risk Category I, an increase for brokered deposits above a threshold amount. After applying these adjustments, for the highest rated institutions, those in Risk Category I, the total base assessment rate will be between 7 and 24 basis points and for the lowest rated institutions, those in Risk Category IV, the total base assessment rate will be between 40 and 77.5 basis points.

     On February 27, 2009, the FDIC also adopted an interim rule, with a request for comments, that imposes an emergency special assessment of up to 20 basis points of an institution’s assessment base as of June 30, 2009, which will be collected on September 30, 2009. This interim rule also provides for possible additional special assessments of up to 10 basis points at the end of any calendar quarter whenever the FDIC estimates that the deposit insurance fund reserve ratio will fall to a level that the FDIC believes would adversely affect public confidence or to a level close to zero or negative.

     On November 21, 2008, the FDIC adopted final regulations implementing the Temporary Liquidity Guarantee Program (“TLGP”) pursuant to which depository institutions could elect to participate. Pursuant to the TLGP, the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008 and before June 30, 2009 (the “Debt Guarantee”), and (ii) provide full FDIC deposit insurance coverage for non-interest bearing deposit transaction accounts regardless of dollar amount for an additional fee assessment by the FDIC (the “Transaction Account Guarantee”). These accounts are mainly payment-processing accounts, such as business payroll accounts. The Transaction Account Guarantee will expire on December 31, 2009. Participating institutions will be assessed a 10 basis point surcharge on the portion of eligible accounts that exceeds the general limit on deposit insurance coverage.

     In 2006, the FDIC adopted a final rule allocating a one-time assessment credit among insured financial institutions. This credit may be used to offset deposit insurance assessments (not to include FICO assessments) beginning in 2007.

     The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution (i) has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe or unsound condition to continue operations or (iii) has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance, if the institution has no tangible capital. Management of the Company is not aware of any activity or condition that could result in termination of the deposit insurance of Reliance Bank.

     Reliance Bank, FSB

     Reliance Bank, FSB is a federally chartered thrift, and as such, is regulated by the same agencies as its affiliate, Reliance Bank. The principal difference is that the FSB’s primary regulator is the Office of Thrift Supervision (“OTS”) in lieu of the Missouri Division of Finance. As such, all of the above mentioned federal regulations apply to Reliance Bank, FSB. Additionally, under OTS regulations, Reliance Bank, FSB must maintain its standing as a “qualified thrift lender.” To maintain this status, it is required to comply with restrictions and limitations imposed by OTS regulations on the percentage of its loan portfolio that may be invested in different types of loans; specifically, Reliance Bank, FSB must maintain at least 65% of its loan portfolio in “qualified thrift investments,” which are essentially residential real estate loans. There are a wide variety of loans that qualify for this purpose.

Employees

     As of December 31, 2008, we had approximately 230 full-time equivalent employees. None of the Company’s employees are covered by a collective bargaining agreement. Management believes that its relationship with its employees is good.

Item 1A. Risk Factors

     An investment in shares of our Common Stock involves various risks. Before deciding to invest in our Common Stock, you should carefully consider the risks described below in conjunction with the other information in this annual report. Our business, financial condition and results of operations could be harmed by any of the following risks or by other risks identified throughout this annual report, or by other risks that have not been identified or that we may believe are immaterial or unlikely. The value or market price of our Common Stock could decline due to any of these risks, and you may lose all or part of your investment. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.

The current economic environment poses challenges for us and could adversely affect our financial condition and results of operations.

     We are operating in a challenging and uncertain economic environment, including generally uncertain national conditions and local conditions in our markets. The capital and credit markets have been experiencing volatility and disruption for more than 12 months. In recent weeks, the volatility and disruption has reached unprecedented levels. The risks associated with our business become more acute in periods of a slowing economy or slow growth. Financial institutions continue to be affected by sharp declines in the real estate market and constrained financial markets. We retain direct exposure to the residential and commercial real estate markets, and we are affected by these events.

     Our loan portfolio includes commercial real estate loans, residential mortgage loans, and construction and land development loans. Continued declines in real estate values, home sales volumes and financial stress on

borrowers as a result of the uncertain economic environment, including job losses, could have an adverse effect on our borrowers or their customers, which could adversely affect our financial condition and results of operations. In addition, a deepening of the national economic recession or further deterioration in local economic conditions in our markets could drive losses beyond that which is provided for in our reserve for loan losses and result in the following other consequences: increases in loan delinquencies, problem assets and foreclosures may increase; demand for our products and services may decline; deposits may decrease, which would adversely impact our liquidity position; and collateral for our loans, especially real estate, may decline in value, in turn reducing customers’ borrowing power, and reducing the value of assets and collateral associated with our existing loans.

The impact of recent and future legislation may affect our business.

     Congress and the Treasury Department have recently adopted legislation and taken actions to address the disruptions in the financial system and declines in the housing market. It is not clear at this time what impact the Emergency Economic Stabilization Act (“EESA”), Troubled Asset Relief Program (“TARP”), ARRA, other liquidity and funding initiatives of the Treasury and other bank regulatory agencies that have been previously announced, and any additional programs that may be initiated in the future, will have on the financial markets and the financial services industry. The actual impact that EESA and such related measures undertaken to alleviate the credit crisis will have generally on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced, is unknown. The failure of such measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock. Finally, there can be no assurance regarding the specific impact that such measures may have on us.

     In addition to the legislation mentioned above, federal and state governments could pass additional legislation responsive to current credit conditions. As an example, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that reduces the amount the Bank’s borrowers are otherwise contractually required to pay under existing loan contracts. Also, the Bank could experience higher credit losses because of federal or state legislation or regulatory action that limits its ability to foreclose on property or other collateral or makes foreclosure less economically feasible.

Current levels of market volatility are unprecedented.

     The capital and credit markets have been experiencing volatility and disruption for more than a year. In recent months, the volatility and disruption have reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, our ability to access capital may be adversely affected which, in turn, could adversely affect our business, financial condition and results of operations.

Additional increases in insurance premiums could affect our earnings..

     The FDIC insures the Bank’s deposits up to certain limits. The FDIC charges us premiums to maintain the Deposit Insurance Fund. Current economic conditions have increased the deposit premiums as a result of bank failures. The FDIC takes control of failed banks and ensures payment of deposits up to insured limits using the resources of the Deposit Insurance Fund. The FDIC has designated the Deposit Insurance Fund long-term target reserve ratio at 1.25 percent of insured deposits. Due to recent bank failures, the FDIC insurance fund reserve ratio has fallen below 1.15 percent, the statutory minimum.

     The FDIC expects a higher ratio of insured institution failures in the next few years, which may result in a continued decline in the reserve ratio.  As discussed above, the FDIC has developed a proposed restoration plan that will uniformly increase insurance assessments by 7 basis points (annualized) effective January 1, 2009. Effective April 1, 2009, the plan also has made changes to the deposit insurance assessment system requiring riskier institutions to pay a larger share. Due to the anticipated continued failures of unaffiliated

FDIC-insured depository institutions, the increased premiums noted above, and the full utilization of the Bank’s one-time insurance assessment credit in 2008, we anticipate that our FDIC deposit insurance premiums will be higher in 2009 than in 2008 and could increase significantly in the future which would adversely impact our future earnings.

A future reduction in liquidity in the banking system could increase our costs.

     The Federal Reserve Bank has been providing vast amounts of liquidity into the banking system to compensate for weaknesses in short-term borrowing markets and other capital markets. A reduction in the Federal Reserve’s activities or capacity could reduce liquidity in the markets, thereby increasing funding costs to the Company or reducing the availability of funds to the Company to finance its existing operations.

Difficult market conditions have adversely affected our industry.

     We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and securities and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets have adversely affected our business, financial condition and results of operations. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Our business is impacted by the local economies in which we operate.

     Because the majority of our borrowers and depositors are individuals and businesses located and doing business in the St. Louis and Fort Myers metropolitan areas, our success depends to a significant extent upon economic conditions in the St. Louis and Fort Myers metropolitan areas. Adverse economic conditions in our market areas could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. Conditions such as inflation, recession, unemployment, high interest rates, short money supply, scarce natural resources, international disorder, terrorism, weather-related conditions and other factors beyond our control may adversely affect our profitability. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the St. Louis or Fort Myers metropolitan areas could adversely affect the value of our assets, revenues, results of operations and financial condition. Our loan production offices (“LPOs”) in Phoenix and Houston could also be impacted by local economies in regards to loan production and growth. Moreover, we cannot give any assurance we will benefit from any market growth or favorable economic conditions in our primary market areas if they do occur.

If the value of real estate in the St. Louis and Fort Myers metropolitan areas were to continue to decline materially, a significant portion of our loan portfolio could become under-collateralized, which could have a material adverse effect on us.

     With most of our loans concentrated in the St. Louis and Fort Myers metropolitan areas at this time, a continued decline in local economic conditions could adversely affect the value of the real estate collateral securing our loans. A continued decline in property values would diminish our ability to recover on defaulted loans by selling the real estate collateral, making it more likely that we would suffer losses on defaulted loans.

Additionally, the subsequent decrease in asset quality could require additions to our reserve for possible loan losses through increased provisions for loan losses, which would hurt our profits. Also, a further decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse. Real estate values are affected by various factors in addition to local economic conditions, including, among other things, changes in general or regional economic conditions, governmental rules or policies and natural disasters. A negative development in any of these factors could adversely affect our results of operations and financial condition.

Our reserve for possible loan losses may be insufficient to absorb losses in our loan portfolio.

     Like most financial institutions, we maintain a reserve for possible loan losses to provide for loans in our portfolio that may not be repaid in their entirety. We believe that our reserve for possible loan losses is maintained at a level adequate to absorb probable losses inherent in our loan portfolio as of the corresponding balance sheet date. However, our reserve for possible loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.

     In evaluating the adequacy of our reserve for possible loan losses, we consider numerous quantitative factors, including our historical charge-off experience, growth of our loan portfolio, changes in the composition of our loan portfolio and the volume of delinquent and criticized loans. In addition, we use information about specific borrower situations, including their financial position and estimated collateral values, to estimate the risk and amount of loss for those borrowers. Finally, we also consider many qualitative factors, including general and economic business conditions, duration of the current business cycle, current general market collateral valuations, trends apparent in any of the factors we take into account and other matters, which are by nature more subjective and fluid. Our estimates of the risk of loss and amount of loss on any loan are complicated by the significant uncertainties surrounding our borrowers’ abilities to successfully execute their business models through changing economic environments, competitive challenges and other factors. Because of the degree of uncertainty and susceptibility of these factors to change, our actual losses may vary from our current estimates.

     At December 31, 2008, our reserve for possible loan losses as a percentage of total loans was 1.14%. Federal and state regulators, as an integral part of their examination process, periodically review our reserve for possible loan losses and may require us to increase our reserve for possible loan losses by recognizing additional provisions for loan losses charged to expense, or to decrease our reserve for possible loan losses by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.

Our business strategy includes plans for growth, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

     The Company has, since its inception, embarked on a plan to increase its size and the number of locations at which its subsidiaries offer their services. This has been achieved through, and is intended to continue to be accomplished by, opening new branches, loan production offices and financial related businesses, by chartering new banks and thrifts, and/or by the acquisition of existing banks, thrifts, bank holding companies or other financial related businesses.

     Our assets have increased $1.3 billion, or 425%, from approximately $300 million at December 31, 2003 to approximately $1.6 billion at December 31, 2008, primarily due to increases in commercial real estate loans, construction and land development loans, residential and other commercial loans. Our business strategy includes plans to continue to grow the amount of our assets, the level of our deposits and the scale of our operations. Achieving our growth targets requires us, in part, to attract customers that currently bank at other financial institutions in our markets, thereby increasing our shares in these markets. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth effectively. There can be no

assurance that these growth opportunities will be available or that we will effectively manage our growth. If we do not manage our growth effectively, we may not be able to achieve our business plan, and our business and prospects could be harmed. Our growth strategy includes risks such as:

	•		Lower earnings caused by increased expenses incurred at these new locations;
	•		Inability to achieve a level of growth that is translated into profitable operations;
	•		Inability to access capital to fund growth;
	•		Inaccurate estimates and judgments as to the desirability or profitability of a particular location, market, bank, thrift or business;
	•		Lack of understanding or faulty assessment of new types of businesses or markets where such banks, thrifts or businesses are located;
	•		Potential exposure to liabilities of acquired banks, thrifts or other businesses;
	•		Failure to properly evaluate the credit, operations, locations, management and market risks of acquired banks, thrifts or businesses;
	•		Problems in successfully integrating operations and personnel;
	•		Failure to achieve economies of scale and anticipated cost savings;
	•		Diversion of management’s time and attention and potential disruption of existing business relationships; and
	•		Dilution of Reliance shareholders’ Common Stock ownership if equity is used as the consideration for acquisitions.

Fluctuations in interest rates could reduce our profitability and affect the value of our assets.

     Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets and liabilities and the relationships of various interest rates to each other. Over any defined period of time, our interest-earning assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa. In addition, the individual market interest rates underlying our loan and deposit products (e.g., the prime commercial rate) may not change to the same degree over a given time period. In any event, if market interest rates should move contrary to our position, our earnings may be negatively affected. In addition, loan volume and quality and deposit volume and mix can be affected by market interest rates. Changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, origination volume and overall profitability.

     We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be adversely affected. Changes in the level of interest rates also may negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

We are dependent upon the services of our management team.

     Our future success and profitability is substantially dependent upon the management and banking abilities of our executive management team. We believe that our future results will also depend in part upon our

attracting and retaining highly skilled and qualified senior and middle management. We are especially dependent on a limited number of key management personnel, none of whom has an employment agreement with us, except for our Chief Executive Officer and our Executive Vice President. The loss of the Chief Executive Officer, Executive Vice President or other senior executive officers could have a material adverse impact on our operations because other officers may not have the experience and expertise to readily replace these individuals. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting or retaining such personnel. Changes in key personnel and their responsibilities may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.

Our failure to recruit and retain qualified lenders could adversely affect our ability to compete successfully and affect our profitability.

     Our success and future growth depend heavily on our ability to attract and retain highly skilled and motivated lenders and other banking professionals. We compete against many institutions with greater financial resources both within our industry and in other industries to attract these qualified individuals. Our failure to recruit and retain adequate talent could reduce our ability to compete successfully and could adversely affect our business and profitability.

Competition from financial institutions and other financial service providers may adversely affect our growth and profitability.

     The banking business is highly competitive and we experience competition in each of our markets from many other financial institutions. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds, and other mutual funds, as well as other super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.

     We compete with these institutions both in attracting deposits and in making loans. This competition has made it more difficult for us to make new loans and has occasionally forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. Many of our competitors are larger financial institutions. While we believe we successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller resources and smaller lending limits, lack of geographic diversification and inability to spread our marketing costs across a broader market. In recent years, several new financial institutions have been established in the St. Louis and Fort Myers metropolitan areas. These new financial institutions have and are expected to continue to price their loans and deposits aggressively in order to attract customers. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance this strategy will be successful.

We may have fewer resources than many of our competitors to invest in technological improvements.

     The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

We are subject to security and operational risks relating to our use of technology that could damage our reputation and our business.

     Security breaches in our internet banking activities could expose us to possible liability and damage our reputation. Any compromise of our security also could deter customers from using our internet banking services that involve the transmission of confidential information. We rely on standard internet security systems to provide the security and authentication necessary to effect secure transmission of data. These precautions may not protect our systems from compromises or breaches of our security measures that could result in damage to our reputation and our business. Additionally, we outsource our data processing to a third party. If our third party provider encounters difficulties or if we have difficulty in communicating with such third party, it will significantly affect our ability to adequately process and account for customer transactions, which would significantly affect our business operations.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

     We are subject to extensive regulation, supervision and examination by the Federal Reserve, OTS, the Missouri Division of Finance, its chartering authorities, and by the FDIC, as insurer of our deposits. Such regulation and supervision govern the activities in which we may engage, and are intended primarily for the protection of the insurance fund and for the depositors and borrowers of the Banks. The regulation and supervision by the Federal Reserve, OTS, the Missouri Division of Finance and the FDIC are not intended to protect the interests of investors in our Common Stock. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our reserve for possible loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. As an example, the GLBA eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies. We will incur additional expenses as a publicly reporting company as a result of compliance costs associated with the SEC’s public reporting requirements. In addition, SOX and the related rules and regulations promulgated by the SEC that are now applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the costs of completing our audits and maintaining our internal controls.

ITEM 1b. Unresolved Staff Comments

     None.

Item 2. Properties

     Our executive offices are located at 10401 Clayton Road, Frontenac, Missouri, 63131. As of December 31, 2008, the Company’s subsidiary, Reliance Bank, had twenty banking locations and one freestanding ATM in Missouri and four locations in Illinois. Reliance Bank owns twenty of the banking facilities and leases the remaining five. The leases are ground leases that expire between 2015 and 2026 and include one or more renewal options.

     As of December 31, 2008, the Company’s subsidiary, Reliance Bank, FSB, had four locations in Florida. Reliance Bank, FSB leases two of these locations for temporary branches and owns the other two locations.

     As of December 31, 2008, the Company’s subsidiary, Reliance Loan Center in Phoenix, Arizona had one leased location.

     As of December 31, 2008, the Company’s subsidiary, Reliance Loan Center in Houston, Texas had one leased location.

Item 3. Legal Proceedings

     The Company and its subsidiaries are, from time to time, parties to various legal proceedings arising out of their businesses. Management believes that there are no such proceedings pending or threatened against the Company or its subsidiaries which, if determined adversely, would have a material adverse effect on the business, financial condition, results of operations or cash flows of the Company or any of its subsidiaries.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters were submitted to a vote of security holders in the quarter ended December 31, 2008.

Item 5. Market for Registrant’s common equity, related stockholder matters and issuer purchases of equity securities

     The Class A Common Stock of the Company, par value $0.25 (the “Common Stock”), is not registered under the Securities Act of 1933, as amended, however is registered under Section 12(g) of the Securities Exchange Act of 1934, as amended. The Common Stock is quoted on the Over-the-Counter Bulletin Board under the symbol “RLBS,” but the Company is unaware as to any transactions involving its Common Stock other than occasional trades and private transactions between shareholders and third parties.

     The high and low price per share paid for the Common Stock as determined by reference to offering prices of the Common Stock during the previous two fiscal years are reflected in the following table:

		High				Low
2008
First Quarter		$	12.00			$	7.00
Second Quarter		$	10.10			$	6.25
Third Quarter		$	11.00			$	6.10
Fourth Quarter		$	7.75			$	4.40
2007
First Quarter		$	12.50			$	12.50
Second Quarter		$	15.00			$	12.50
Third Quarter		$	15.00			$	11.00
Fourth Quarter		$	15.00			$	10.50

As of March 26, 2009 there were approximately 739 holders of our Common Stock.

Dividends

     The Company has never paid any cash dividends and has no current intention to pay dividends in the immediate future due to Company’s aggressive growth strategy.

     The following Stock Performance Graph and related information should not be deemed “soliciting material” or to be “filed” with the SEC nor shall such performance be incorporated by reference into any future filings under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

     The following graph compares the Company’s cumulative stockholder return on its common stock from June 26, 2007 through December 31, 2008, the measurement period. The graph compares the Company’s common stock with the NASDAQ Composite and the SNL $1B-$5B Bank Index. The graph assumes an investment of $100.00 in the Company’s common stock and each index on June 26, 2007 and reinvestment of

all quarterly dividends. The investment is measured as of the fiscal year end. There is no assurance that the Company’s common stock performance will continue in the future with the same or similar results as shown in the graph.

Stock Performance Graph

			Period Ending
	Index			06/26/07			09/30/07			12/31/07			03/31/08			06/30/08			09/30/08			12/31/08
	Reliance Bancshares, Inc.			100.00			102.22			93.33			88.98			62.22			66.67			45.24
	NASDAQ Composite			100.00			104.95			103.03			88.54			89.08			81.26			61.26
	SNL $1B-$5B Bank Index			100.00			97.66			84.90			85.03			66.04			84.60			70.42

Recent Sales of Unregistered Equity Securities

     On November 5, 2008, we issued options to purchase 500 shares of Common Stock each to two of our Directors pursuant to our 2005 Non-Qualified Stock Option Plan. The options vest in three equal annual installments beginning with the first anniversary of the date of grant, have an exercise price of $8.15 per share and expire ten years from the date of grant. On the same date, we issued an option to purchase 20,000 shares of Common Stock to an employee pursuant to our 2005 Incentive Stock Option Plan in connection with the terms of his employment. The option vests in three equal annual installments beginning with the first anniversary of the date of grant, has an exercise price of $7.40 per share and expires ten years from the date of grant. These grants were made in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”).

     In addition, on December 31, 2008, we sold 6,377 shares of our Common Stock to certain officers and employees of the Company under our employee stock purchase program in reliance on Section 4(2) of the Securities Act. These shares were sold at $4.4625 per share, totaling $28,457.36 in proceeds.

Item 6. selected financial data

     The following consolidated selected financial data is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2008. This information should be read in connection with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.

		As of and for the
		Years ended December 31,
		2008				2007				2006				2005				2004
		(in thousands, except per share data and ratios)
Statements of income:
Total interest income		$	78,442			$	63,864			$	48,024			$	31,293			$	16,870
Total interest expense			41,715				37,609				26,227				15,236				6,946
Net interest income			36,727				26,255				21,797				16,057				9,924
Provision for possible loan losses			11,148				3,187				2,200				2,333				1,066
Net interest income after provision for possible loan losses			25,579				23,068				19,597				13,724				8,858
Total noninterest income			2,450				1,799				1,247				511				696
Total noninterest expense			29,428				22,290				16,605				11,449				7,490
Income (loss) before income taxes			(1,399	)			2,577				4,239				2,786				2,064
Income tax expense (benefit)			(1,080	)			462				1,223				863				642
Net Income (loss)		$	(319	)		$	2,115			$	3,016			$	1,923			$	1,422
Common share data:
Basic net income (loss) per share			(0.02	)		$	0.10			$	0.16			$	0.12			$	0.11
Diluted net income (loss) per share			(0.02	)			0.10				0.15				0.12				0.10
Dividends declared per share			—				—				—				—				—
Book value per share			6.73				6.76				6.31				5.06				4.89
Tangible book value per share			6.67				6.70				6.24				4.98				4.80
Weighted average shares-basic			20,670				20,343				18,685				16,095				13,258
Weighted average shares-diluted			21,063				21,337				19,548				16,681				13,600
Shares outstanding-end of period			20,771				20,682				19,571				18,242				14,957
Period-end balances:
Loans, net		$	1,240,191			$	902,053			$	660,318			$	467,402			$	297,248
Investment securities			202,724				163,645				191,866				189,779				121,510
Total assets			1,573,989				1,136,152				900,799				702,462				443,769
Deposits			1,228,047				834,576				678,597				576,425				331,683
Short-term borrowings			63,919				88,325				70,463				16,847				31,809
Long-term borrowings			136,000				68,000				24,300				14,300				5,800
Stockholders’ equity			139,609				139,891				123,497				92,216				73,206
Average balances:
Loans		$	1,115,216			$	770,523			$	546,122			$	397,584			$	240,550
Investment securities			176,914				177,572				202,273				145,887				108,909
Total assets			1,366,110				1,006,628				786,014				588,312				377,481
Deposits			1,006,763				777,450				629,588				473,540				296,698
Short-term borrowings			88,749				49,422				26,475				17,155				13,110
Long-term borrowings			125,118				39,403				15,881				11,423				5,800
Stockholders’ equity			138,394				134,548				109,940				83,324				60,662
Selected ratios:
Net yield on earning assets			2.87	%			2.80	%			2.94	%			2.90	%			2.82	%
Return on average total assets			(0.02	%)			0.21	%			0.38	%			0.33	%			0.38	%
Return on average stockholders’ equity			(0.23	%)			1.57	%			2.74	%			2.31	%			2.34	%
Average stockholders’ equity as a percent of average total assets			10.13	%			13.37	%			13.99	%			14.16	%			16.07	%
Nonperforming loans as a percent of loans at year-end			2.94	%			1.95	%			0.77	%			0.65	%			0.87	%
Reserve for possible loan losses as a percent of loans at year-end			1.14	%			1.06	%			1.06	%			1.10	%			1.04	%

Note:		All share and per share information has been retroactively restated for a two-for-one stock split and concurrent reduction in par value of $0.50 to $0.25, effective December 29, 2006.

Item 7.		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 each of the years in the three-year period ended December 31, 2008. All share and per share information has been restated for the two-for-one stock split and concurrent 50% reduction in the par value of the Company’s Common Stock approved by the Company’s shareholders on December 22, 2006. This discussion and analysis is intended to review the significant factors affecting the financial condition and results of operations of the Company, and provides a more comprehensive review which is not otherwise apparent from the consolidated financial statements alone. This discussion should be read in conjunction with “Selected Financial Data,” the Company’s consolidated financial statements and the notes thereto and other financial data appearing elsewhere herein.

     The Company has prepared all of the consolidated financial information in this report in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. No assurances can be given that actual results will not differ from those estimates.

Overview

     The Company provides a full range of banking services to individual and corporate customers throughout the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida through the twenty-four locations of its wholly-owned subsidiaries, Reliance Bank and Reliance Bank, FSB (hereinafter referred to as the “Banks”). The Company also operates loan production offices in the Houston, Texas and Phoenix, Arizona. The Company was incorporated and began its development stage activities on July 24, 1998. Such development stage activities (i.e., applying for a banking charter, raising capital, acquiring property, and developing policies and procedures, etc.) led to the opening of Reliance Bank (as a new bank) upon receipt of all regulatory approvals on April 16, 1999. Since its opening in 1999 through December 31, 2008, Reliance Bank has added twenty branch locations and one freestanding automated teller machine in the St. Louis metropolitan area of Missouri and Illinois and has grown its total assets, loans and deposits to $1.4 billion, $1.2 billion, and $1.1 billion, respectively at December 31, 2008. Included in the twenty branch locations noted above, effective May 31, 2003, the Company purchased The Bank of Godfrey, a Godfrey, Illinois state banking institution. This Godfrey bank was merged with and into Reliance Bank on October 31, 2005. Reliance Bank also opened a loan production office in Ft. Myers, Florida on July 1, 2004. During the fourth quarter of 2007, Reliance Bank opened loan production offices in Houston, Texas and Phoenix, Arizona. 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 loan production office were transferred to Reliance Bank, FSB. During 2007, Reliance Bank, FSB added three additional branch locations in southwestern Florida.

     At December 31, 2008, Reliance Bank’s total assets and total revenues represented 92.04% and 93.36%, respectively, of the Company’s consolidated total assets and total revenues. Reliance Bank, FSB’s total assets and total revenues represented 7.87% and 6.77%, respectively, of the Company’s consolidated totals as of and for the year ended December 31, 2008. Reliance Bank recorded net income of $3,124,814 and Reliance Bank, FSB incurred a net loss of $2,860,264 for the year ended December 31, 2008.

     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 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, 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 $1.6 billion at December 31, 2008, with loans and deposits increasing to $1.3 billion and $1.2 billion, respectively, at the end of 2008, 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 Reliance Bank branch was opened in 2005, and four Reliance Bank branches were opened in 2004. Three Reliance Bank, FSB branches were opened in 2007, one branch was opened in 2006.

     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 20,770,781 shares of Company Common Stock for a total of $129.4 million through December 31, 2008.

     The Company’s consolidated net income/(loss) for the years ended December 31, 2008, 2007, and 2006 totaled $(319,230), $2,114,947, and $3,016,265, respectively. While the Company’s consolidated total assets and net interest income continue to grow, the Company has continued to experience pricing pressures on its loans and deposits, and the provision for possible loan losses was increased due to an increase in nonperforming loans, resulting from a decline in real estate market values 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 for the years ended December 31, 2008, 2007, and 2006 totaled $36,727,292, $26,254,464, and $21,797,105, respectively. This growth in net interest income resulted from the growth in interest income on 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. Total interest income was $78,442,560, $63,863,512, and $48,024,271, for the years ended December 31, 2008, 2007, and 2006, respectively.

     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 years ended December 31, 2008, 2007, and 2006 totaled $41,715,268, $37,609,048, and $26,277,166, respectively.

     The decline of the real estate market that has transpired over the past several 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 in prior years. As a result, the Company has experienced an increase in nonperforming assets (which include nonperforming loans and other real estate owned). Nonperforming assets totaled $52.2 million at December 31, 2008, compared with $22.7 million at December 31, 2007. The reserve for possible loan losses as a percentage of net outstanding loans was 1.14% and 1.06% at December 31, 2008 and 2007, respectively. Net charge-offs for the year ended December 31, 2008 totaled $6,527,189 compared with $602,520 for the year ended December 31, 2007. The provision for possible loan losses charged to expense for the years ended December 31, 2008 and 2007 was $11,148,000 and $3,186,500, respectively. The increase in the provision for loan losses was a direct reaction to the declining real estate market. 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 2008, 2007, and 2006 was $2,449,182, $1,799,256, and

$1,247,168, respectively. During each of the three annual periods, the Company sold certain of its investment securities to eliminate mismatches in its asset/liability mix as the Banks were growing. In 2006, interest rates stabilized after a period of increasing rates and the Company had gains on investment sales of only $13,586. In 2007, in a declining rate environment, the Company had net gains on investments sales of $157,011. In 2008, interest rates continued their decline and the Company had gains on investment sales of $321,113. Securities that were sold in 2007, 2006, and 2005 to more effectively align the Company’s asset/liability mix totaled $35,428,956, $9,584,621, and $8,411,900, respectively.

     The Company’s fixed rate mortgage lending operation was established to arrange for long-term fixed rate commercial real estate financing with institutional investors. Such transactions resulted in commission income of $233,095 in 2008 and $442,327 in 2007. 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 for these secondary market activities was $391,849 in 2008 and $226,870 in 2007. Deposit service charge income also increased due to a larger deposit base. Deposit service charge revenues for 2008, 2007 and 2006 were $796,653, $509,352, and $379,242, respectively.

     Noninterest expenses have increased significantly during the three-year period ended December 31, 2008, resulting from the Company’s branch expansion program and increased level of problem assets. Total noninterest expense was $29,427,590, $22,290,307, and $16,605,255, for the years ended December 31, 2008, 2007, and 2006, respectively.

     The Company’s effective tax rate for the years ended December 31, 2008, 2007, and 2006 was 77.18%, 17.93%, and 28.85%, respectively. The change in effective tax rates during these periods is a result of an increasing level of tax-exempt interest income and its effect on a relatively small pre-tax income/loss.

     The Company’s basic and diluted earnings per share during the three-year period ended December 31, 2008 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. Basic earnings (loss) per share for the years ended December 31, 2008, 2007, and 2006 were $(0.02), $0.10, and $0.16, respectively. On a diluted basis, earnings (loss) per share for the years ended December 31, 2008, 2007, and 2006 were $(0.02), $0.10, and $0.15, respectively.

     Following are certain ratios generally followed in the banking industry for Reliance Bancshares, Inc. for the years ended December 31, 2008, 2007, and 2006:

		As of and for the
		Years Ended December 31,
		2008				2007				2006
Percentage of net income (loss) to:
Average total assets			(0.02	)%			0.21	%			0.38	%
Average stockholders’ equity			(0.23	)%			1.57	%			2.74	%
Percentage of common dividends declared to net income per common share			—				—				—
Percentage of average stockholders’ equity to average total assets			10.13	%			13.37	%			13.99	%

Critical Accounting Policies

     The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to our critical accounting policies on our business operations are discussed throughout this “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 Note 1 to our Consolidated Financial Statements for the years ended December 31, 2008, 2007, and 2006 included elsewhere herein.

     Reserve for Possible Loan Losses

     Subject to the use of estimates, assumptions, and judgments, management’s evaluation process used to determine the adequacy of the reserve for possible loan losses combines several factors: management’s ongoing review of the loan portfolio; consideration of past loan loss experience; trends in past due and nonperforming loans; risk characteristics of the various classifications of loans, existing economic conditions; the fair value of underlying collateral; and other qualitative and quantitative factors which could affect probable credit losses. Because current economic conditions can change and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the adequacy of the reserve, could change significantly. As an integral part of their examination process, various regulatory agencies also review the reserve for possible loan losses. Such agencies may require that certain loan balances be charged off when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examinations. The Company believes the reserve for possible loan losses is adequate and properly recorded in the consolidated financial statements.

     Deferred Tax Assets

     The Company recognizes deferred tax assets and liabilities for the estimated future tax effects of temporary differences, net operating loss carryforwards and tax credits. Deferred tax assets are recognized subject to management’s judgment based upon available evidence that realization is more likely than not. Deferred tax assets would be reduced if necessary, by a deferred tax asset valuation allowance. In the event that management determines it would not be able to realize all or part of net deferred tax assets in the future, the Company would need to adjust the recorded value of our deferred tax assets, which would result in a direct charge to income tax expense in the period that such determination is made. Likewise, the Company would reverse the valuation allowance when realization of the deferred tax asset is expected.

Results of Operations for the Three-Year Period Ended December 31, 2008

     Net Interest Income

     The Company’s net interest income increased by $10,472,828 (39.89%) to $36,727,292 for the year ended December 31, 2008 from the $26,254,464 earned for the year ended December 31, 2007, which was an increase of $4,457,359 (20.45%) from the $21,797,105 earned in 2006. The Company’s net interest margin for the years ended December 31, 2008, 2007, and 2006 was 2.83%, 2.80%, and 2.94%, respectively.

     Average earning assets for 2008 increased $343,181,328 (35.86%) to $1,300,080,569 from the level of $956,899,241 for 2007. Average earning assets for 2007 increased $201,367,849 (26.65%) from the level of $755,531,392 for 2006. This strong growth in interest-earning assets was primarily due to the growth in the loan portfolio. Total average loans grew $344,693,406 (44.73%) in 2008 to $1,115,216,426 from the level of $770,523,020 for 2007, which was an increase of $224,400,803 (41.09%) from the level of $546,122,217 for 2006. The Company’s addition of LPO’s in Houston and Phoenix, the expanding branch program and the economies of the markets in which such branches are located, were the primary reasons for this strong growth in the Company’s loan portfolio during this three-year period.

     Total average investment securities for 2008 decreased $658,241 (0.37%) to $176,913,690 from the level of $177,571,931 for 2007, which was a decrease of $24,701,073 (12.21%) from the level of $202,273,004 for 2006. 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 FDIC insurance limits, (c) provide a secondary source of liquidity through “laddered” maturities of such securities, and (d) provide increased interest income over that which would be earned on overnight/daily fund investments. As the Company’s deposits grow, a certain

percentage of such deposits are invested in investment securities for these specific purposes. The total carrying value of securities pledged to secure public funds and repurchase agreements was approximately $180,767,000, $156,904,000, and $150,797,000 at December 31, 2008, 2007, and 2006, respectively. The Banks have also pledged letters of credit from the Federal Home Loan Banks totaling $42,940,000 as additional collateral to secure public funds at December 31, 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 years ended December 31, 2008, 2007, and 2006 were $7,334,498, $8,804,290, and $7,136,171 respectively.

     A key factor in increasing 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 85.78% for 2008, which was a 526 basis point increase over the 80.52% percentage achieved in 2007, which was a 824 basis point increase over the 72.28% percentage achieved in 2006.

     Funding the Company’s growth in interest-earning assets has been a challenge in the markets in which the Company’s banking subsidiaries operate. With the stock market rebounding through 2007 from its depressed levels in 2004 and 2003, deposits were not as plentiful in the banking market overall, until the second half of 2007, when a declining real estate economy significantly reduced loan demand. The stock market has since also declined from its record levels in 2007. Additionally, the St. Louis metropolitan area has added ten new banks in the past three years (as well as several institutions such as Reliance Bank adding numerous branches), resulting in an intensely competitive environment for customer deposits. Competition for deposits in southwestern Florida is equally as intense as the market for deposits in the St. Louis metropolitan area. 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 2008 increased $217,930,791 (29.75%) to $950,539,070 from the level of $732,608,279 for 2007, which was an increase of $138,029,991 (23.21%) from the level of $594,578,288 for 2006. This increase in deposits over the three-year period 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, securities sold under sweep repurchase agreements with larger deposit customers, and a short term note payable obtained in 2008 by the Company in the amount of $7,000,000. The average balances of such borrowings for the years ended December 31, 2008, 2007, and 2006 totaled $88,748,506, $49,178,929, and $26,474,859, 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 Banks have also borrowed more funds on an overnight basis from unaffiliated financial institutions to fund their short term liquidity needs due to favorable wholesale borrowing rates.

     The Company also increased its longer-term advances from the Federal Home Loan Bank as a less expensive alternative to the intensely competitive deposit market, particularly when such longer-term fixed rate advances can be matched up with longer-term fixed rate assets. During the three year period ended December 31, 2008. Average longer-term borrowings were $125,117,708, $39,646,040, and $15,880,822, for 2008, 2007, and 2006, respectively.

     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):

		2008				2007				2006
Average deposits:
Noninterest-bearing			4.61	%			5.18	%			5.21	%
Interest-bearing:
Transaction accounts			13.29				18.39				11.30
Savings			4.30				6.97				16.46
Time deposits of $100,000 or more			27.85				25.95				23.12
Other time deposits			32.43				33.26				37.61
Total average interest-bearing deposits			77.87				84.57				88.49
Total average deposits			82.48				89.75				93.70
Short-term borrowings:			7.27				5.67				3.94
Longer-term advances from Federal Home Loan Bank			10.25				4.58				2.36
			100.00	%			100.00	%			100.00	%

     The composition of the Company’s deposit portfolio has fluctuated as new branches were added, which has 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 not been achieved. Throughout the three-year period ended December 31, 2008, the Company’s most significant funding source has been certificates of deposit, which comprised 60.28% of total average funding sources in 2008, as compared with 59.21% in 2007, and 60.73% in 2006. Certificates of deposit have a lagging effect with interest rate changes, as most certificates of deposit have longer maturities at fixed rates. The use of Federal Home Loan Bank borrowings has increased significantly in the second half of 2008, as the rates on such instruments were more attractive than retail deposits.

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

		Amount of Increase (Decrease)
		Change From 2008 to 2007 Due to												Change From 2007 to 2006 Due to
						Yield/												Yield/
		Volume (1)				Rate (2)				Total				Volume (1)				Rate (2)				Total
Interest income:
Loans		$	22,321,195			$	(7,082,820	)		$	15,238,375			$	16,031,765				205,025				16,236,790
Investment securities:
Taxable			11,848				(360,164	)			(348,316	)			(1,615,119	)			578,284				(1,036,835	)
Exempt from Federal income taxes			(16,286	)			122,591				106,305				435,587				(407,001	)			28,586
Short-term investments			(71,243	)			(229,499	)			(300,742	)			83,042				89,628				172,670
Total interest income			22,245,514				(7,549,892	)			14,695,622				14,935,275				465,936				15,401,211
Interest expense:
Interest bearing transaction accounts			123,783				(3,086,475	)			(2,962,692	)			3,508,501				311,632				3,820,133
Savings accounts			(212,642	)			(642,000	)			(854,642	)			(1,560,898	)			(522,317	)			(2,083,215	)
Time deposits of $100,000 or more			4,978,501				(2,678,056	)			2,300,445				3,196,604				2,095,747				5,292,351
Other time deposits			4,564,626				(1,832,573	)			2,732,053				1,633,732				582,535				2,216,267
Total deposits			9,454,269				(8,239,104	)			1,215,164				6,777,939				2,467,597				9,245,536
Short-term borrowings			1,339,160				(1,429,732	)			(90,572	)			1,107,574				(47,335	)			1,060,239
Long-term borrowings			3,299,642				(318,014	)			2,981,628				1,069,676				6,431				1,076,107
Total interest expense			14,093,070				(9,986,850	)			4,106,220				8,955,189				2,426,693				11,381,882
Net interest income		$	8,152,443				2,436,959			$	10,589,402			$	5,980,086				(1,960,757	)			4,019,329

NOTE:		The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

     Provision for Possible Loan Losses

     The provision for possible loan losses charged to earnings for the years ended December 31, 2008, 2007, and 2006 totaled $11,148,000, $3,186,500, and $2,200,000, respectively. During this same time period, the Company incurred net charge-offs of $6,527,189 in 2008, $602,520 in 2007, and $312,001 in 2006. During Reliance Bank’s first three years of existence (1999, 2000, and 2001), it was required by the Missouri Division of Finance to maintain a minimum reserve for possible loan losses of at least 1.0% 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. At December 31, 2008, 2007, and 2006, the reserve for possible loan losses as a percentage of net outstanding loans was 1.14%, 1.06%, and 1.06%, respectively. The reserve for possible loan losses as a percentage of nonperforming loans (comprised of loans for which the accrual of interest has been discontinued and loans still accruing interest that were 90 days delinquent) was 38.72%, 54.57%, and 137.94% at December 31, 2008, 2007, and 2006, respectively. The decline of the real estate market has resulted in an increase in the level of nonperforming loans and a higher provision for loan losses during 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 year ended December 31, 2008 excluding security sale gains and losses, increased $485,824 (29.58%) to $2,128,069 from the $1,642,245 earned for the year ended December 31, 2007, which had increased $408,663 (33.13%) over the $1,233,582 earned for the year ended December 31, 2006. Additionally, service charges on deposits increased significantly in 2008, increasing $287,301 (56.41%) to $796,653 in 2008 from the $509,352 earned in 2007, which was an increase of $130,110 (34.31%) from the $379,242 earned in 2006, due to the increased level of customer deposits and the fees generated by the Banks’ overdraft privilege programs. Other noninterest income for 2008 increased $198,523 (17.52%) to $1,331,416 from the $1,132,893 earned in 2007, which was an increase of $278,553 (32.60%) from the $854,340 earned in 2006, due to income generated from the Company’s residential mortgage lending operations. Total revenues from these activities for the years ended December 31, 2008 and 2007 was $391,849 and $226,870, respectively. Even with the decline of the real estate market, the secondary market has continued to remain relatively strong, but only at certain price points.

     Reliance Bank recorded net security sale gains of $321,113 in 2008, compared with net security sale gains of $157,011 and $13,586 in 2007 and 2006, respectively. From time to time, the Company will sell certain of its available-for-sale investment securities for short-term liquidity purposes or longer-term asset/liability management reasons. See further discussion below in the section entitled “Liquidity and Rate Sensitivity Management.”

     Noninterest Expense

     Noninterest expense increased $7,137,283 (32.02%) for the year ended December 31, 2008 to $29,427,590 from the $22,290,307 incurred for the year ended December 31, 2007, which was a $5,685,052 (34.24%) increase over the $16,605,255 of noninterest expenses incurred for the year ended December 31, 2006. Most of the categories of noninterest expense increased during 2008 and 2007 due to the addition of six new branches and two loan production offices during that time period. The largest single component of the increase in noninterest expense for 2008, 2007, and 2006 was the category of salaries and employee benefits. Total personnel costs increased $2,841,931 (21.74%) in 2008 to $15,915,090 from the $13,073,159 of personnel costs incurred in 2007, which was an increase of $2,993,558 (29.70%) from the $10,079,601 of personnel costs incurred for 2006. Due to the slowing economy, the Company has placed the opening of any new branches on hold.

     The increased number of branches has resulted in a growing level of occupancy and equipment expenses (including leases for temporary facilities during construction) during the three years ended December 31, 2008. Total occupancy and equipment expenses increased $1,114,798 (32.90%) to $4,503,125 in 2008 from the $3,388,327 incurred in 2007, which had increased $927,585 (37.70%) from the $2,460,742 incurred in 2006.

     Total data processing expenses for 2007 increased $381,769 (25.46%) to $1,880,968, from the $1,499,199 incurred in 2007, which had increased $425,010 (39.57%) from the $1,074,189 incurred in 2006. The increased number of customer accounts and additional new products offered has resulted in an increase in data processing expenses during the three years ended December 31, 2008.

     Other real estate expense increased significantly in 2008 to $1,582,598, which was an increase of $1,276,061 (416.28%) over the $306,537 of other real estate expenses incurred in 2007. The decline of the real estate market has resulted in the Company foreclosing on several loans to secure the underlying collateral. This increase in expense is consistent with the significant increase in other real estate owned properties on the Company’s books during this time. Other real estate owned totaled $15,289,170 on the consolidated balance sheet at December 31, 2008.

     The Company’s FDIC assessment has increased significantly during the three year period ended December 31, 2008, and is expected to increase even more significantly in 2009. This assessment increased $350,435 (62.40%) in 2008 to $912,093, from the $561,579 paid in 2007, which was an increase of $479,226 (580.51%) from the $32,353 paid in 2006. The increased assessments result from a combination of the Bank’s deposit growth and increased assessment rates due to the problems currently facing the banking industry.

     Income Taxes

     Applicable income tax expenses (benefits) totaled $(1,079,886) for the year ended December 31, 2008, compared with $461,966 and $1,222,753 for the years ended December 31, 2007 and 2006, respectively. The effective tax rates for 2007, 2006, and 2005 were 77.18%, 17.93%, and 28.85%. The changes in effective tax rates during the three-year period ended December 31, 2008 is a result of an increasing level of investment income that is exempt from Federal income taxes and its overall effect on a relatively small pretax income or loss amount.

Financial Condition

     Total assets of Reliance Bancshares, Inc. grew $437,836,796 (38.54%) to $1,573,989,218 at December 31, 2008, from $1,136,152,422 at December 31, 2007, which had increased $235,353,213 (26.13%) in 2007 from $900,799,209 at December 31, 2006. 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 Reliance Bancshares, Inc. grew $393,470,850 (47.15%) to $1,228,047,299 at December 31, 2008, from $834,576,449 at December 31, 2007, which had increased $155,979,444 (22.99%) from $678,597,005 at December 31, 2006. This growth in deposits resulted from the Company’s aggressive branch expansion program and competitive pricing on deposit products.

     Total short-term borrowings of Reliance Bancshares, Inc. declined $24,406,071 (27.63%) to $63,918,844 at December 31, 2008, from $88,324,915 at December 31, 2007, which had increased $17,862,394 (25.35%) from $70,462,521 at December 31, 2006. Short-term borrowings will fluctuate significantly based on short-term liquidity needs. Longer-term borrowings have increased significantly during 2008. Total longer-term advances from the Federal Home Loan Bank grew $68,000,000 (100.0%) to $136,000,000 at December 31,

2008, from $68,000,000 at December 31, 2007, which had increased $43,700,000 (179.84%) from $24,300,000 at December 31, 2006. These longer-term fixed rate advances are used as an alternative funding source and are matched up with longer-term fixed rate assets.

     Total loans increased $343,238,704 (37.64%) to $1,255,198,940 at December 31, 2008, from $911,960,236 at December 31, 2007, which had increased $244,258,597 (36.58%) from the $667,701,639 of total loans at December 31, 2006. 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.

     Investment securities, all of which are maintained as available-for-sale, increased $39,078,846 (23.88%) to $202,724,064 at December 31, 2008, from the $163,645,218 at December 31, 2007, which had decreased $28,221,082 (14.71%) from the $191,866,300 of investment securities maintained at December 31, 2006. 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.

     Total capital at December 31, 2008, 2007, and 2006 was $139,608,880, $139,890,973, and $123,496,592, respectively, with capital-to-asset percentages of 8.87%, 12.31%, and 13.71%, respectively. Since its inception, the Company has had thirteen 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.

		Year Ended December 31, 2008
						Percent				Interest				Average
		Average				of Total				Income/				Yield/
		Balance				Assets				Expense				Rate
ASSETS
Loans (1) (2) (3)		$	1,115,216,426				81.63	%		$	70,359,648				6.31	%
Investment securities:
Taxable			140,303,564				10.27				6,392,737				4.56
Exempt from Federal income taxes (3)			37,226,081				2.72				2,149,879				5.78
Short-term investments			7,334,498				0.55				188,793				2.57
Total earning assets			1,300,080,569				95.17				79,091,057				6.03
Nonearning assets:
Cash and due from banks			14,090,695				1.03
Reserve for possible loan losses			(11,776,516	)			(0.86	)
Premises and equipment			44,063,019				3.23
Other assets			20,267,994				1.48
Available-for-sale investment market valuation			(615,955	)			(0.05	)
Total nonearning assets			66,029,237				4.83
Total assets		$	1,366,109,806				100.00	%
LIABILITIES
Interest-bearing liabilities
Interest-bearing transaction accounts		$	162,299,967				11.88	%			3,787,690				2.33	%
Savings			52,455,044				3.84				942,446				1.80
Time deposits of $100,000 or more			339,942,549				24.88				13,668,035				4.02
Other time deposits			395,841,510				28.98				16,252,548				4.11
Total interest-bearing deposits			950,539,070				69.58				34,650,719				3.65
Long-term borrowings			125,117,708				9.16				4,774,541				3.82
Short-term borrowings			88,748,506				6.49				2,290,008				2.58
Total interest-bearing liabilities			1,164,405,284				85.23				41,715,268				3.58
Noninterest-bearing deposits			56,223,479				4.12
Other liabilities			7,087,530				0.52
Total liabilities			1,227,716,293				89.87
STOCKHOLDERS’ EQUITY			138,393,513				10.13
Total liabilities and stockholders’ equity		$	1,366,109,806				100.00	%
Net interest income										$	37,375,789
Net yield on earning assets															2.87	%

		Year Ended December 31, 2007
						Percent				Interest				Average
		Average				of Total				Income/				Yield/
		Balance				Assets				Expense				Rate
ASSETS
Loans (1) (2) (3)		$	770,523,020				76.54	%		$	55,121,273				7.15	%
Investment securities:
Taxable			140,049,973				13.91				6,741,053				4.81
Exempt from Federal income taxes (3)			37,521,958				3.73				2,043,574				5.45
Short-term investments			8,804,290				0.88				489,535				5.56
Total earning assets			956,899,241				95.06				64,395,435				6.73
Nonearning assets:
Cash and due from banks			10,345,818				1.03
Reserve for possible loan losses			(7,846,708	)			(0.78	)
Premises and equipment			37,758,227				3.75
Other assets			10,185,896				1.01
Available-for-sale investment market valuation			(714,086	)			(0.07	)
Total nonearning assets			49,729,147				4.94
Total assets		$	1,006,628,388				100.00	%
LIABILITIES
Interest-bearing liabilities
Interest-bearing transaction accounts		$	159,338,600				15.83	%			6,750,382				4.24	%
Savings			60,373,225				6.00				1,797,088				2.98
Time deposits of $100,000 or more			224,805,601				22.33				11,367,590				5.06
Other time deposits			288,090,853				28.62				13,520,495				4.69
Total interest-bearing deposits			732,608,279				77.78				33,435,555				4.56
Long-term borrowings			39,646,040				3.91				1,792,913				4.52
Short-term borrowings			49,178,929				4.91				2,380,580				4.84
Total interest-bearing liabilities			821,433,248				81.60				37,609,048				4.58
Noninterest-bearing deposits			44,841,777				4.45
Other liabilities			5,805,815				0.58
Total liabilities			872,080,840				86.63
STOCKHOLDERS’ EQUITY			134,547,548				13.37
Total liabilities and stockholders’ equity		$	1,006,628,388				100.00	%
Net interest income										$	26,786,387
Net yield on earning assets															2.80	%

     (continued)

		Year Ended December 31, 2006
						Percent				Interest				Average
		Average				of Total				Income/				Yield/
		Balance				Assets				Expense				Rate
ASSETS
Loans (1) (2) (3)		$	546,122,217				69.48	%		$	38,835,279				7.11	%
Investment securities:
Taxable			174,199,518				22.16				7,777,888				4.46
Exempt from Federal income taxes (3)			28,073,486				3.57				1,505,372				5.36
Short-term investments			7,136,171				0.91				316,865				4.44
Total earning assets			755,531,392				96.12				48,435,404				6.41
Nonearning assets:
Cash and due from banks			5,206,097				0.66
Reserve for possible loan losses			(6,070,112	)			(0.77	)
Premises and equipment			26,210,820				3.33
Other assets			7,549,996				0.96
Available-for-sale investment market valuation			(2,414,445	)			(0.30	)
Total nonearning assets			30,482,356				3.88
Total assets		$	786,013,748				100.00	%
LIABILITIES
Interest-bearing liabilities
Interest-bearing transaction accounts		$	75,942,634				9.66	%			2,930,249				3.86	%
Savings			110,596,058				14.07				3,880,303				3.51
Time deposits of $100,000 or more			155,327,781				19.76				6,075,239				3.91
Other time deposits			252,711,815				32.15				11,304,228				4.47
Total interest-bearing deposits			594,578,288				75.64				24,190,019				4.07
Long-term borrowings			15,880,822				2.02				716,806				4.51
Short-term borrowings			26,474,859				3.37				1,320,341				4.99
Total interest-bearing liabilities			636,933,969				81.03				26,227,166				4.12
Noninterest-bearing deposits			35,009,785				4.45
Other liabilities			4,129,745				0.53
Total liabilities			676,073,499				86.01
STOCKHOLDERS’ EQUITY			109,940,249				13.99
Total liabilities and stockholders’ equity		$	786,013,748				100.00	%
Net interest income										$	22,208,238
Net yield on earning assets															2.94	%

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 Reliance Bancshares, Inc. 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 polices 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.

     Prior to 2007, the Company’s banking subsidiaries had incurred a minimal level of charge-offs, when compared with the volume of loans generated; however, in 2008, the Banks incurred net charge-offs of $6,527,189, compared to $602,520 in 2007, and $312,001 in 2006. The Company’s banking subsidiaries had no loans to any foreign countries at December 31, 2008, 2007 and 2006, nor did they have any concentration of loans to any industry on these dates, although a significant portion of the Company’s loan portfolio is secured by real estate in the St. Louis metropolitan and southwestern Florida areas. The Company has also refrained from financing speculative transactions such as highly leveraged corporate buyouts, or thinly-capitalized speculative start-up companies. Additionally, the Company had no other interest-earning assets which were considered to be risk-element assets at December 31, 2008, 2007, and 2006.

     A summary of loans by type at December 31, 2008, 2007, 2006, 2005 and 2004 is as follows:

		December 31,
		2008				2007				2006				2005				2004
Commercial:
Real estate		$	734,298,982			$	514,752,151			$	394,469,137			$	254,262,184			$	146,655,674
Other			94,606,918				61,519,983				53,152,775				66,790,693				63,306,878
Real estate:
Construction			190,381,178				184,167,532				108,408,270				56,525,290				26,716,989
Residential			229,916,257				146,488,402				105,094,409				88,949,636				60,150,980
Held for Sale			1,483,500				211,250				—				—				—
Consumer			4,485,070				4,786,747				6,541,351				6,196,062				3,313,320
Overdrafts			27,035				34,171				35,697				81,464				256,003
		$	1,255,198,940			$	911,960,236			$	667,701,639			$	472,805,329			$	300,399,844

     Commercial loans are made based on the borrower’s character, experience, general credit strength, and ability to generate cash flows for repayment from income sources, even though such loans may also be secured by real estate or other assets. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations.

     Real estate loans, including commercial real estate, residential real estate, and construction loans, are also based on the borrower’s character, but more emphasis is placed on the estimated collateral values. Real estate commercial loans are mainly for owner-occupied business and industrial properties, multifamily properties, and other commercial properties of which income from the property is the primary source of repayment. Credit risk of these loan types is managed in a similar manner to commercial loans and real estate construction loans by employing sound underwriting guidelines.  These loans are underwritten based on the

cash flow coverage of the property, typically meet the Company’s loan-to-value guidelines, and generally require either the limited or full guarantee of principal sponsors of the credit. The Company’s real estate loan portfolio at December 31, 2008 included $111,529,000 of loans collateralized by real estate in southwestern Florida, with the remaining portfolio primarily collateralized by real estate in the St. Louis metropolitan area. The Florida loans include $8,559,000 for speculative construction of single family homes, including lot loans and homes built for immediate sale, $86,473,000 of commercial real estate loans, and the remaining real estate loans of owner-occupied residential properties.

     Real estate construction loans, relating to residential and commercial properties, represent financing secured by real estate under construction for eventual sale. The Company requires third party disbursement on the majority of its builder portfolio and the Company reviews projects regularly for progress status.

     Residential real estate loans are predominantly made to finance single-family, owner-occupied properties in the St. Louis metropolitan area and southwestern Florida. Loan-to-value percentage requirements for collateral are based on the lower of the purchase price or appraisal and are normally limited to 80%, unless credit enhancements are added. Appraisals are required on all owner-occupied residential real estate loans and private mortgage insurance is required if the loan to value percentage exceeds 85%. These loans generally have a short duration of three years or less, with some loans repricing more frequently. Long-term, fixed rate mortgages are generally not retained in the Banks’ loan portfolios, but rather are sold into the secondary market. In 2006, the choice was made to include a small number of long term loans that met certain underwriting criteria to the Banks’ portfolios, but they are de-minimis. The Banks have not financed, and do not currently finance, sub-prime mortgage credits.

     Consumer and other loans represent loans to individuals on both a secured and unsecured nature.  Credit risk is controlled by thoroughly reviewing the credit worthiness of the borrowers on a case-by-case basis.

     As noted above, the Company experienced an increased level of charge-offs and non-performing loans in 2008. Following is a summary of information regarding the Bank’s nonperforming loans as of and for each of the years in the five-year period ended December 31, 2008:

		2008				2007				2006				2005				2004
Nonperforming loans:
Nonaccrual loans		$	35,763,110			$	15,810,222			$	5,082,784			$	3,050,351			$	1,622,164
Loans 90 days delinquent and still accruing interest			1,180,360				1,937,388				65,000				24,000				998,000
Total nonperforming loans		$	36,943,470			$	17,747,610			$	5,147,784			$	3,074,351			$	2,620,164
Interest income that would have been earned on nonaccrual loans		$	4,857,011			$	2,552,163			$	499,442			$	216,477			$	85,551
Actual interest income recorded on non-accrual loans		$	3,140,166			$	1,623,404			$	321,755			$	74,533			$	29,608

     Nonperforming loans are defined as loans on non-accrual status, loans 90 days or more past due but still accruing, and restructured loans. Loans are placed on non-accrual status when contractually past due 90 days or more as to interest or principal payments, unless the loans are well secured and in process of collection. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on non-accrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectability of the principal is in doubt, payments received are applied to loan principal.

     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 are classified as such where 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.

     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 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.

     No particular trends have been noted from a review of the various loan relationships comprising these nonaccrual loans during the five year period ended December 31, 2008. At December 31, 2004, nonaccrual loans consisted primarily of two borrowing relationships, a construction contractor whose development was slow in selling and a retailer. These two credit relationships totaled $1,338,000 of the $1,622,164 of nonaccrual loans. By December 31, 2005, the retailer had refinanced the Company’s loans with an unaffiliated financial institution at no loss to the Company. The construction contractor’s nonaccrual loans carried forward to December 31, 2005, to which another large construction contractors’ loans were added to the nonaccrual total. At December 31, 2005, these two credit relationships totaled $2,750,000 of the nonaccrual loans of $3,050,351. By December 31, 2006, the Company had foreclosed on one of the contractors and sold the property at no further loss to the Company. By December 31, 2006, the other contractor had sold its property and the Company was paid off with no loss incurred.

     At December 31, 2006, the Company’s nonaccrual loans of $5,082,784 were comprised primarily of two borrowing relationships totaling $3,312,496. One of the nonaccrual loan relationships included commercial and residential real estate loans to a small business owner whose various businesses had been struggling for some time. The Company foreclosed on the various properties during the first quarter of 2007 and incurred additional charge-offs of $274,740 on this credit relationship. The other large nonaccrual loan relationship was to a real estate investor with several single family residential properties that he was renting out. This real estate investor declared bankruptcy in November 2006 after several properties incurred significant storm damage. The Company had foreclosed on these properties after additional charge-offs of $175,000 in 2007.

     The decline of the real estate market in the St. Louis metropolitan and southwestern Florida areas has caused a significant increase in the Company’s nonperforming loans in 2007 and 2008. At December 31, 2008, nonperforming loans have grown to $36,943,470 and the Company has allocated $10.7 million of the reserve for possible loan losses for these impaired loans, the largest components of which were primarily comprised of the following loan relationships:

	•		Loans totaling approximately $4.6 million to entities controlled by a Florida real estate investor that were in default and for which foreclosure proceedings have commenced. These loans are secured by commercial real estate properties in southwestern Florida for which the values have declined.
	•		A loan for approximately $12.6 million to a single purpose entity, controlled by a group of Florida investors, that is in default. The loan is secured by a mixed-use undeveloped real estate parcel in Southwest Florida. The proposed entitlements have been completed but development has not been started. The Bank and borrower are continuing discussions regarding future plans for site.
	•		A loan for approximately $5.1 million to a single purpose entity controlled by an individual Florida investor, for which the borrower is in default and the loan is in the process of foreclosure. The loan is secured by a newly constructed retail commercial property in southwestern Florida.
	•		A loan for approximately $2.4 million to a Florida real estate development company. The loan is secured by an undeveloped real estate parcel in southwestern Florida. The proposed entitlements and development have not been completed. The Bank and borrower are continuing discussions regarding future plans for the site.
	•		A loan for approximately $1.6 million to an individual Florida investor that is in default and in the process of foreclosure. The loan is secured by an undeveloped real estate parcel in southwestern Florida. The proposed entitlements and development have not been completed.

	•		Two loans totaling approximately $1.3 million to a St. Louis area home builder for the construction of a single family display home and lots. The loans are secured by the property and a $280,000 certificate of deposit. The Company is negotiating several alternatives that could produce a resolution in early 2009 involving obtaining a deed in lieu of foreclosure and/or sale of the lots.
	•		Two loans totaling approximately $2 million to a single purpose entity controlled by a group of Florida investors, for which the borrower is in default and the loans are in the process of foreclosure. The loan is secured by newly constructed single tenant commercial property, located in southwestern Florida, formerly operated by the borrower.

     The Company also has nonperforming assets in the form of other real estate owned. The Banks maintained other real estate owned totaling $15,289,170 and $4,937,285 at December 31, 2008 and 2007, 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.

     During this period of a depressed real estate market, the Company has sought to add loans to its portfolio with increased collateral margins or excess payment capacity from proven borrowers, and has often had to offer a lower interest rate on such loans to maintain the quality of the loan portfolio. Given the collateral margins maintained on its loan portfolio, including the nonperforming loans discussed above, the Company believes the reserve for possible loan losses is adequate to absorb losses in the portfolio existing at December 31, 2008; however, should the residential and commercial real estate market continue to decline, the Company may require additional provisions to the reserve for possible loan losses to address the declining collateral values.

     Potential Problem Loans

     As of December 31, 2008, the Company had 12 loans with a total principal balance of $14,159,668 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 less than 90 days past due on any scheduled payments. However, various concerns, including, but not limited to, payment history, loan agreement compliance, adequacy of collateral coverage, and borrowers’ overall financial condition caused management to believe that these loans may result in reclassification at some future time as nonaccrual, past due or restructured. Such loans are not necessarily indicative of future nonaccrual loans, as the Company continues to work on resolving issues with both nonperforming and potential problem credits on its watch list.

     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, which would normally not be considered criticized credits by regulators, are included on a monthly loan watch list. Other loans are added whenever any adverse circumstances are detected which might affect the borrower’s ability to meet the terms of the loan. This could be initiated by any of the following:

	•		Delinquency of a scheduled loan payment;
	•		Deterioration in the borrower’s financial condition identified in a review of periodic financial statements;
	•		Decrease in the value of collateral securing the loan; or
	•		Change in the economic environment in which the borrower operates.

     Loans on the watch list require periodic detailed loan status reports, including recommended corrective actions, prepared by the responsible loan officer, which are discussed at each monthly loan committee meeting.

     Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan review, the Watch List Committee, the Loan Committee or senior lending personnel at any time. Upgrades of certain risk ratings may only be made with the concurrence of both the Chief Lending 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 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 $36,761,654 at December 31, 2008.

     At December 31, 2008, 2007, 2006, 2005, and 2004, the reserve for possible loan losses was $14,305,822, $9,685,011, $7,101,031, $5,213,032, and $3,112,382, respectively, or 1.14%, 1.06%, 1.06%, 1.10%, and 1.04% of net outstanding loans, respectively. The following table summarizes the Company’s loan loss experience for each of the years in the five-year period ended December 31, 2008. Bank management believes that the strong underwriting process implemented at the Company’s inception and consistently applied throughout the Company’s existence will allow for continued maintenance of adequate asset quality.

		December 31,
(in thousands of dollars)		2008				2007				2006				2005				2004
Average loans outstanding		$	1,115,216			$	770,523			$	546,122			$	397,584			$	240,550
Reserve at beginning of of year		$	9,685			$	7,101			$	5,213			$	3,112			$	2,090
Provision for possible loan losses			11,148				3,187				2,200				2,333				1,066
			20,833				10,288				7,413				5,445				3,156
Charge-offs:
Commercial loans:
Real estate			(2,828	)			(317	)			—				(7	)			—
Other			(77	)			(25	)			(62	)			(24	)			—
Real estate:
Construction			(2,262	)			—				(3	)			(50	)			—
Residential			(1,313	)			(279	)			(220	)			(178	)			(40	)
Consumer			(21	)			(5	)			(48	)			—				(5	)
Overdrafts			(52	)			(25	)			—				—				—
Total charge-offs			(6,553	)			(651	)			(333	)			(259	)			(45	)
Recoveries:
Commercial loans:
Real estate			1				10				—				—				—
Other			9				20				2				2				1
Real estate:
Construction			1				—				—				—				—
Residential			—				13				8				23				—
Consumer			3				—				11				2				—
Overdrafts			12				5				—				—				—
Total recoveries			26				48				21				27				1
Reserve at end of year		$	14,306			$	9,685			$	7,101			$	5,213			$	3,112
Net charge-offs to average loans			0.59	%			0.08	%			0.06	%			0.06	%			0.02	%
Ending reserve to net out- standing loans at end of year			1.14	%			1.06	%			1.06	%			1.10	%			1.04	%

     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, if they are collateral dependent for collection. Otherwise, discounted cash flows are estimated and used to assign loss.

     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. Loans are rated and assigned a loss allocation factor for each category that is consistent with historical losses normally experienced in our banking market, adjusted for environmental factors. The higher the rating assigned to a loan, the greater the allocation percentage that is applied.

     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.