10-K 1 rlbsdecember31201210k.htm 10-K RLBS December 31.2012 10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-52588
RELIANCE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction of
incorporation or organization)
 
43-1823071
(I.R.S. Employer
Identification No.)
 
 
 
10401 Clayton Road
Frontenac, Missouri
(Address of principal executive offices)
 
63131
(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: None
Title of Class
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ
No o
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. þ
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:



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, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $8,686,110.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 22,855,044 shares of common stock outstanding as of March 19, 2013.





RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 EX-21.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-99.1
 EX-99.2

3


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.


PART I
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. On March 29, 2013, Reliance Bank, FSB merged into Reliance Bank. As disclosure relates to historical information prior to the merger, 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.

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 that were required to be filed by Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are available or accessible free of charge at our website with the address “www.reliancebancshares.com”. You may also request any materials we have filed 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, please visit our current website at www.reliancebankstl.com.
Recent Developments
Capital Plan
The Company has successfully completed a capital plan on March 29, 2013 to address the need to raise capital in order to comply with the regulatory agreements noted below. The offering raised $30,950,000, which was used to provide the required capital for the Banks and for general working capital purposes of the Company.

  

4


Regulatory Agreements
As previously disclosed, Reliance Bank was a party to a Consent Order (the “Consent Order”) with the FDIC, which was discussed in detail in the Company's 2011 Annual Report on Form 10-K filed with the SEC on March 30, 2012, as amended by Amendment No. 1 filed with the SEC on April 27, 2012. Among other things, the Consent order required Reliance Bank to take certain actions and comply with certain financial covenants relating to improving its capital position. Throughout the past two fiscal years, Reliance Bank has taken steps to comply with the Consent Order, and based on the resulting improved capital position of Reliance Bank and the success of the capital raise discussed above, the FDIC terminated the Consent Order on March 12, 2013.
On June 8, 2011, the OTS issued a Cease and Desist Order (the “OTS Order”) to Reliance Bank, FSB, which was discussed in detail in the Company's 2011 Annual Report on Form 10-K filed with the SEC on March 30, 2012, as amended by Amendment No. 1 filed with the SEC on April 27, 2012. During July 2011, responsibility for the supervision and regulation of federal savings banks was transferred to the Office of the Comptroller of the Currency ("OCC"), and the OTS no longer exists. As such, the Company's obligations under the OTS Order transferred to the OCC. As with the Consent Order discussed above, the OTS Order required Reliance Bank, FSB to take certain actions and maintain certain financial covenants relating to improving its capital position, which Reliance Bank, FSB took steps to achieve during the past two fiscal years. Previously, the Company filed an application with the applicable federal regulatory authorities to merge Reliance Bank, FSB into Reliance Bank under the Missouri banking charter. This merger application was approved and became effective on March 29, 2013. As such, Reliance Bank, FSB was merged into Reliance Bank and no longer exists.
On July 14, 2011, the Company entered into an agreement (the "Fed Agreement") with the Federal Reserve Bank of St. Louis (the "Federal Reserve"). The Fed Agreement requires the Company to (a) take steps to ensure that the Bank complies with Reliance Bank's Consent Order noted above; (b) not, without the prior written approval of the Federal Reserve, (i) declare or pay any dividends, (ii) receive dividends or any other form of payment from Reliance Bank representing a reduction in capital, (iii) incur, increase, or guarantee any debt, or (iv) purchase or redeem any shares of its stock; (c) submit to the Federal Reserve an acceptable written plan to maintain sufficient capital at the Company on a consolidated basis; (d) within 30 days after the end of any quarter in which the Company's capital ratios fall below the approved capital plan's minimum ratios, provide the Federal Reserve with a written notice and plan detailing the Company's planned steps to increase its capital ratios; (e) submit to the Federal Reserve a written statement of planned sources and uses of cash; (f) comply with notice provisions of laws and regulations regarding the appointment of any new directors or senior executive officers; (g) comply with certain banking laws and regulations restricting indemnification of and severance payments to executives and employees; and (h) submit quarterly progress reports to the Federal Reserve.
With the completion of the capital plan discussed above, the necessary actions have been taken toward complying with the provisions of the Fed Agreement.
Suspension of Dividend Payments
(Amounts in thousands)
On February 11, 2011, the Company announced that it had suspended dividends on its preferred stock. The Company has outstanding $40,000 of 5% Series A Fixed Rate Cumulative Perpetual Preferred Stock, $2,000 of 9% Series B Fixed Rate Cumulative Preferred Stock, and $555 of 7% Series C Perpetual Convertible Preferred Stock. The Series A and Series B Preferred Stock were issued to the U. S. Treasury under the federal Troubled Asset Relief Program ("TARP"). The Series C Preferred Stock was issued to various shareholders in a private placement. Deferred dividends totaled $4,652 as of December 31, 2012. The Company does not pay dividends on its common stock.
Deregistration of Common Stock
On April 27, 2012, the Company filed a Form 15 with the SEC to terminate the registration of its Class A Common Stock under Section 12(g) of the Exchange Act. The Company terminated its registration pursuant to a provision of the recently-signed Jumpstart Our Business Startups Act of 2012 (the "JOBS Act") that permits banks, under Section 12(g), and bank holding companies to terminate the registration of a class of securities that is held of record by fewer than 1,200 persons. Upon the expiration of the 90-day deregistration waiting period in late July 2012, the Company's Section 12 registration was terminated. The Company's obligations to file reports pursuant to Section 15(d) of the Exchange Act will suspend upon the filing of this Annual Report on Form 10-K, and as such, the Company will no longer be a publicly reporting company.

5


Market Area and Approach to Geographic Expansion
Reliance Bank
In the greater St. Louis Metropolitan Statistical Area, which includes St. Louis bordering counties in Illinois, Reliance Bank has facilities in 20 locations. 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 have also focused 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 primary market area of Reliance Bank, FSB was Lee County on the southwest coast of Florida. Reliance Bank, FSB had a total of two locations, and was headquartered in Fort Myers, Florida. Reliance Bank had assumed operations at these locations after the merger of Reliance Bank, FSB into Reliance Bank.
Competition
The Company and the Bank 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.
We believe that we successfully compete with these other financial institutions in our primary markets by concentrating our marketing efforts with local advertisements, personal contacts and greater flexibility and responsiveness in working with local customers.
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 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, a bank holding company is 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 Bank 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 subsidiary 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.

6


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 subsidiary 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. Reliance Bank has a satisfactory rating 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 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.

7


Following the adoption of the FDIRA, the FDIC has the opportunity, through its rulemaking authority, to better price deposit insurance for risk than it was previously authorized to do. 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 the highest regulatory composite ratings 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. Currently, Reliance Bank is ranked as Risk Category I. 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.
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.
Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")
The Dodd-Frank Act, which became law in July 2010, significantly changes regulation of financial institutions and the financial services industry, including, but not limited to: creation of the Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation; centralizing responsibility for consumer financial protection by the creation of a new agency, the Consumer Financial Protection Bureau, which is responsible for implementing, examining and enforcing compliance with federal consumer financial laws; permanently raising the current standard maximum deposit insurance amount to $250,000; establishing strengthened capital standards for banks, and disallowing certain trust preferred securities from qualifying as Tier 1 capital (subject to certain grandfather provisions for trust preferred securities); establishing new minimum mortgage underwriting standards; granted the Federal Reserve Board the power to regulate debit card interchange fees; implementing corporate governance changes; and eliminating the OTS. Responsibility for the supervision and regulation of federal savings banks was transferred to the OCC, which is the agency that is currently primarily responsible for the regulation and supervision of national banks, on July 21, 2011. The OCC assumed responsibility for implementing and enforcing many of the laws and regulations applicable to federal savings banks on that date. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making it difficult to assess the impact of the statute on the financial industry, including the Company, at this time.
It is difficult to predict the full and specific impact Dodd-Frank Act and the implementing rules (some of which are yet to be written) will have on community banks. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on the financial institutions operations is presently unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
Employees
As of December 31, 2012, we had approximately 188 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.


8


Regulatory Risks
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, the OCC, 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 Bank. The regulation and supervision by the Federal Reserve, the OCC, 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 Gramm-Leach-Bliley Act eliminates many of the restrictions placed on the activities of certain qualified financial or bank holding companies.
We are subject to the rules and regulations promulgated under the U.S. Treasury's TARP program, which, among other things, may directly affect control of our Company and Board representation.
The Company has issued 40,000 shares of Series A Fixed-Rate Cumulative Perpetual Preferred Stock and 2,000 shares of Series B Fixed-Rate Cumulative Perpetual Preferred Stock to the U.S. Treasury in exchange for $42 million in cash as part of the U.S. Treasury's TARP program. We are required to pay quarterly dividends on this preferred stock, and the terms of the preferred stock provide that if we fail to make six of these dividend payments, the holder of the preferred stock may appoint two directors to our Board. To date, we have failed to make nine dividend payments. Therefore, if the U.S. Treasury executes its rights as a holder of our preferred stock, it may appoint two members to our Board without the approval of existing Board members or our shareholders.
The U.S. Treasury may also sell our preferred stock to private investors at auction. Many purchasers of TARP preferred stock at auction are private equity funds. Any holder of our preferred stock, including private equity funds, would have the right to appoint two members to our Board of Directors pursuant to the terms of the stock. Though the U.S. Treasury has not yet exercised this right as the current holder, a private equity fund or other private purchaser of our preferred stock may exercise this right and assume representation on our Board without the approval of existing Board members or our shareholders. These Board members would have voting rights and, as members of the Board, would have the ability to influence the management and control of the Company and its operations.
We are subject to a regulatory agreement, and any failure to comply with the provisions thereof could adversely affect us.
As further described under “Business-Regulatory Agreements,” we entered into the Fed Agreement with the Federal Reserve in July 2011. The Fed Agreement subjects us to heightened regulatory requirements and increased scrutiny and supervision. The Company is not currently in compliance with certain provisions of the Fed Agreement. Although we believe that the necessary actions have been or are being taken toward complying with the Fed Agreement, we cannot guarantee that our efforts will be successful and we cannot predict the ramifications of the failure to comply with any provision of the Fed Agreement in the future. Any failure to comply could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Regulatory actions may result in negative perceptions that could adversely affect our business, impacting our financial condition, results of operations and cash flows.
Risk of negative perception or publicity is inherent in any business. Although we take steps to minimize reputation risk in dealing with customers and other constituencies, we are inherently exposed to the risk of negative perception by the public and our customers as a result of, but not limited to, actions imposed by our regulators. Negative perception by the public and our customers may adversely affect our ability to maintain and attract customers and employees.
Financial reforms and related regulations may affect our business activities, financial position, and profitability.
The Dodd-Frank Act, signed into law on July 21, 2010, makes extensive changes to the laws regulating financial services firms and requires significant rulemaking. The Dodd-Frank Act charges the federal banking agencies with drafting and implementing enhanced supervision, examination, and capital standards for depository institutions and their holding companies. The enhanced requirements include, among other things, changes to capital, leverage, and liquidity standards, and numerous other requirements. The Dodd-Frank Act also authorizes various new assessments and fees, expands supervision and oversight authority over nonbank subsidiaries, increases the standards for certain covered transactions with affiliates, and requires the establishment of minimum leverage and risk-based capital requirements for insured depository institutions. In addition, the Dodd-Frank Act contains several provisions that change the manner in which deposit insurance premiums are assessed and which could increase the FDIC deposit insurance premiums paid by the Company.

9


U.S. regulatory agencies-banking, securities and commodities-have proposed, and in some cases implemented, regulations required by Dodd-Frank, and new bodies created by Dodd-Frank (including the Financial Stability Oversight Council and the Bureau of Consumer Financial Protection) have commenced operations. Both the regulations proposed and implemented to date and those that have yet to be proposed may impact the profitability of our business activities, require that we change certain of our business practices and plans, impose upon us more stringent capital, liquidity, and leverage ratio requirements, or otherwise adversely affect our business. These changes could also expose us to additional costs (including increased legal and compliance costs) and require us to invest significant management attention and resources to evaluate and make any necessary changes. We continue to monitor the impact of the Dodd-Frank Act and related rulemaking on our business.
Any other future legislation and/or regulation, if adopted, also could have a material adverse effect on our business activities, financial position and profitability. 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.
We are subject to the risk-based capital guidelines issued by the Federal Reserve.
The Federal Reserve's risk-based capital guidelines establish regulatory capital requirements for banking institutions to meet minimum requirements as well as to qualify as “well-capitalized” institutions. The risk-based capital rules have been further supplemented by required leverage ratios, defined as Tier 1 (the highest grade) capital divided by quarterly average total assets, after certain adjustments. If a depository institution fails to maintain well-capitalized status, the Federal Reserve requires it to enter into an agreement to bring the institution back into a well-capitalized state. For the duration of such an agreement, the Federal Reserve may impose more severe restrictions on the activities in which a depository institution may engage, including requiring it to cease and desist in activities permitted under the Bank Holding Act. We are currently subject to the Fed Agreement with the Federal Reserve, as described above and as further described under “Business-Regulatory Agreements.”
On December 20, 2011, the Federal Reserve proposed rules relating to risk-based capital and leverage requirements, liquidity requirements, stress tests, single-counterparty credit limits and early remediation requirements. These rules, when finalized, are likely to influence our regulatory capital and liquidity planning process, and may impose additional operational and compliance costs on us. Any requirement that we increase our regulatory capital, regulatory capital ratios or liquidity could have a material adverse effect on our financial condition and results of operations, as we may need to sell certain assets, perhaps on terms unfavorable to us and contrary to our business plans. Such a requirement could also compel us to issue additional securities, which could dilute our current common stockholders.
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, including a number of recent bank failures, have increased the deposit premiums. 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, but due to bank failures, the FDIC insurance fund reserve ratio fell below 1.15 percent, the statutory minimum, in 2008. In response, the FDIC developed a restoration plan that uniformly increased assessments by 7 basis points (annualized) effective January 1, 2009, and required riskier institutions to pay a larger share. Even though we fully paid our deposit insurance premiums for the year 2009 and prepaid an estimated amount of future deposit insurance premiums for the years 2010, 2011 and 2012, there is no guarantee that the FDIC will not implement further increases despite our prepayment. If these assessments increase significantly, our earnings could be adversely affected.
Market and Economic Risks
Upon the filing of this Annual Report on Form 10-K, we will no longer be a publicly reporting company.
In April 2012, we filed a Form 15 with the SEC to terminate the registration of our Class A common stock under Section 12(g) of the Exchange Act pursuant to the JOBS Act that permits banks and bank holding companies to terminate the registration of a class of securities that is held of record by fewer than 1,200 persons. Upon the expiration of a 90-day waiting period which ended in July 2012, our deregistration under Section 12 of the Exchange Act became effective.
This Annual Report on Form 10-K, filed pursuant to our reporting obligations under Section 15(d) of the Exchange Act, will serve as our last public filing with the SEC pursuant to the Exchange Act. Our obligations to file Exchange Act reports will suspend upon the filing of this Annual Report, and we will no longer be a publicly reporting company.
The reduction and elimination of our SEC reporting obligations will reduce the amount of information accessible by our shareholders and our shareholders' ability to rely on the protections afforded by certain requirements that the SEC imposes on public companies.

10


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 48 months. The volatility and disruption we have experienced are ongoing. 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 those which are provided for in our reserve for loan losses and result in the following other consequences: loan delinquencies may increase; 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.
Difficult conditions in the U.S. housing market have adversely affected us.
We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past several years, 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 to provide 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. It is possible that financial markets may not 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.
Operational and Business Risks
The Company faces significant legal risks, both from regulatory investigations and proceedings and from private actions brought against the Company and its subsidiaries.
The Company and its subsidiaries are from time to time named as a defendant or are otherwise involved in various legal proceedings, including litigation or disputes with third parties. There is no assurance that litigation with private parties will not increase in the future. Actions currently pending against the Company and its subsidiaries may result in judgments, settlements, fines, penalties or other results adverse to the Company and its subsidiaries, which could materially adversely affect the business, financial condition or results of operations, or cause serious reputational harm to the Company and its subsidiaries.
The Company is currently subject to lender liability lawsuits in which certain borrowers allege that representatives of the Company caused the borrowers to sustain significant losses in commercial real estate transactions. Specifically, the borrowers have claimed that representatives of the Company reneged on commitments to extend certain accommodations to the borrowers which would have enabled the borrowers to remain in control of properties on which the Company has subsequently foreclosed. The borrowers claim that as a result of the Company's failure to keep certain alleged commitments, the borrowers have suffered losses in the multiple millions of dollars. While the Company believes it has meritorious defenses to the borrowers' claims, and intends to vigorously defend these lawsuits, there can be no assurance that a judge or jury in a trial setting would not rule in favor of the borrowers.
The Company is also subject to litigation in which the plaintiffs, who purchased tenant in common interests from borrowers of the Company, claim that they were misled by an offering document that contained misrepresentations of which the Company was allegedly aware. The Company believes that it has meritorious defenses to these claims, and intends to vigorously defend itself. There can be no assurance that the Company will prevail in this or any other litigation to which it or its Subsidiaries are a party.

11


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. Moreover, we cannot give any assurance that 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 Company's current market sectors were to continue to decline, a significant portion of our loan portfolio would become under-collateralized, which could have a material adverse effect on us.
A decline in economic conditions in our markets 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.
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. The loss of the Chief Executive Officer 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.
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 are subject to operational risk relating to fraud or error by individuals.
We are exposed to many types of operational risk, including the risk of fraud by employees and outsiders and clerical and record-keeping errors. We are dependent on our employees for the operation of our business, and we could be materially adversely affected if one of our employees caused a significant operational breakdown or failure, either as a result of human

12


error or through an intentional act. The employees of third parties with whom we do business could also be sources of operational risk to us. Any adverse occurrence relating to human error or intentional fraud could result in a diminished ability to operate our business, financial loss, potential liability to clients, inability to secure insurance, reputational damage, and regulatory intervention, any of which could materially adversely affect us.
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. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
Our controls and procedures may fail or be circumvented.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
There may be no market for our common stock.
Effective with the filing of this Annual Report on Form 10-K, we will no longer be a publicly reporting company. In addition, our common stock is no longer registered with the SEC. As such, there is no public market for our common stock, and our common stock will be restricted going forward, significantly impairing its liquidity.
Furthermore, our common stock is currently quoted on the OTC Quote Board tier of the OTC Bulletin Board system, a system that is not highly regulated. Once we become a private company as a result of our deregistration and suspension of public reporting obligations to the SEC, effective upon the filing of this Annual Report on Form 10-K, our common stock may be removed from the OTC Bulletin Board system altogether, or may be moved to a lower tier on the OTC Bulletin Board's system that is reserved for higher risk investments. Our placement within the OTC Bulletin Board system is out of our control. The liquidity of our common stock may be further impaired if our common stock is moved within or removed from the OTC Bulletin Board system.
Our principal shareholders may exert substantial influence over us and may exercise their control in a manner adverse to your interests.
As a result of our recent capital raise, certain investors own a substantial amount of our outstanding common stock. As a result, these shareholders will be able to exercise a significant level of control over all matters requiring shareholder approval, including the election of directors, amendment of our Restated Articles of Incorporation and approval of significant corporate

13


transactions. This ability could have the effect of delaying or preventing a change of control of the Company or changes in management, and will make the approval of certain transactions difficult or impossible without the support of these shareholders.
Risks Related to Liquidity and Capital Requirements
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.
Conditions in the financial markets may limit our access to additional funding to meet our liquidity needs. 
Liquidity is essential to our business, as we must maintain sufficient funds to respond to the needs of depositors and borrowers. An inability to raise funds through deposits, borrowings, the sale or pledging as collateral of loans and other assets could have a substantial adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could negatively affect our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole.
We could be compelled to seek additional capital in the future, but capital may not be available when it is needed.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on our financial statements and our business. A number of financial institutions have recently raised considerable amounts of capital as a result of deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. These market conditions have diminished, and may continue to diminish, our ability to raise additional capital.
Our ability to raise additional capital, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside of our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise additional capital, or on terms acceptable to us. If we are unable to raise additional capital, on terms satisfactory to us, our financial condition, results of operations, business prospects and our regulatory capital ratios may be materially and adversely affected. If we are unable to raise additional capital, we may also be subjected to increased regulatory supervision, which could result in the imposition of additional regulatory restrictions on our operations and/or regulatory enforcement actions and could also potentially limit our future growth opportunities. These restrictions could negatively impact our ability to manage or expand our operations in a manner that we may deem beneficial to our stockholders and debt holders and could result in significant increases in our operating expenses or decreases in our revenues.
Risks Related to Interest Rates and Credit Exposure
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 may be unable to manage interest rate risk that could reduce our net interest income. We cannot predict or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve, affect interest income and interest expense. While we continually take measures intended to manage the risks from changes in market interest rates, changes in interest rates-such as increases in interest rates from their historically low present levels-may have a material adverse effect on our profitability. For example, upward fluctuations in interest rates in the credit market may force us to either pay higher rates on our deposits or risk losing such deposits to other investments. At the same time, we may have loaned funds to customers at long-term fixed rates and thus would not be able to correspondingly

14


increase our interest income. Conversely, during periods of decreasing interest rates, customers with higher rate long term fixed rate loans may seek to refinance their loans, thereby decreasing our interest income.
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.
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 borrowers' 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, 2012, our reserve for possible loan losses as a percentage of total loans was 4.89%. 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.
We are subject to credit risk.
Increased credit risk, due to economic or market disruptions, insufficient credit loss reserves, or concentration of credit risk, may necessitate increased provisions for credit losses and could have an adverse effect on our financial condition and results of operations. When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contracts. A number of our products expose us to credit risk, including loans and lending commitments, and assets held for sale. The credit quality of our portfolio can have a significant impact on our earnings. We estimate and establish reserves for credit risks and credit losses inherent in our credit exposure (including unfunded credit commitments). This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our executive offices are located at 10401 Clayton Road, Frontenac, Missouri, 63131. The Company’s subsidiary, Reliance Bank, has a total of 20 banking locations in Missouri and Illinois. Reliance Bank owns 19 of the bank branch buildings, as well as the underlying real property on 14 of them. One branch operates in a leased building, and the remaining five branch buildings, although owned, are subject to ground leases that expire through 2026 and include one or more renewal options. As a result of the merger of Reliance Bank, FSB discussed above, Reliance Bank owns and operates two Florida branch locations.


15


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 its subsidiary, except as discussed below.
Item 4. Mine Safety Disclosures
None.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock is quoted on the OTC Quote Board tier of the OTC Bulletin Board system 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
2012
 
 
 
 
First Quarter
 
$
1.40

 
$
0.62

Second Quarter
 
$
1.15

 
$
0.55

Third Quarter
 
$
0.98

 
$
0.32

Fourth Quarter
 
$
1.10

 
$
0.40

2011
 
 
 
 
First Quarter
 
$
2.25

 
$
1.06

Second Quarter
 
$
1.15

 
$
0.40

Third Quarter
 
$
1.20

 
$
0.45

Fourth Quarter
 
$
0.99

 
$
0.55


As of February 15, 2013 there were approximately 730 holders of our Common Stock.
Dividends
The Company has never paid any cash dividends and has no current intention to pay dividends on its common stock in the immediate future. In addition, as discussed in Part I, Item 1 above, the Fed Agreement between the Company and the Federal Reserve prohibits the declaration and payment of dividends by the Company without the approval of the Federal Reserve.
On February 11, 2011, the Company announced that it had suspended dividends on its preferred stock. Deferred dividends totaled $4,652 as of December 31, 2012.

16


Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2012, regarding securities issued and to be issued under our equity compensation plans that were in effect during the year ended December 31, 2012:
 
 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan category
 
(a)
 
(b)
 
(c)
Equity compensation plans approved by security holders
 
189,766

 
$
9.20

 
1,194,134

 
 
 
 
 
 
 
Equity compensation plans not approved by security holders
 
387,650

 
$
9.60

 
381,350

 
 
 
 
 
 
 
Total
 
577,416

 
$
9.47

 
1,575,484


Recent Sales of Unregistered Equity Securities
None


17


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, 2012. 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 Annual Report.
 
 
As of and for the
 
 
Years ended December 31,
(Amounts in thousands, except shares and per share)
 
2012
 
2011
 
2010
 
2009
 
2008
Statements of income:
 
 
 
 
 
 
 
 
 
 
   Total interest income
 
$
36,902

 
49,161

 
64,146

 
76,589

 
78,209

   Total interest expense
 
9,369

 
15,286

 
23,637

 
39,005

 
41,715

      Net interest income
 
27,533

 
33,875

 
40,509

 
37,584

 
36,494

   Provision for possible loan losses
 
1,788

 
23,790

 
41,492

 
53,450

 
11,148

      Net interest income after provision for possible loan losses
 
25,745

 
10,085

 
(983
)
 
(15,866
)
 
25,346

   Total noninterest income
 
6,227

 
5,596

 
3,507

 
3,925

 
2,683

   Total noninterest expense
 
30,604

 
41,063

 
39,741

 
34,046

 
29,428

   Income (loss) before income taxes
 
1,368

 
(25,382
)
 
(37,217
)
 
(45,987
)
 
(1,399
)
   Income tax expense (benefit)
 
—

 
8,616

 
11,312

 
(16,630
)
 
(1,080
)
      Net income (loss)
 
$
1,368

 
(33,998
)
 
(48,529
)
 
(29,357
)
 
(319
)
 
 
 
 
 
 
 
 
 
 
 
Common share data:
 
 
 
 
 
 
 
 
 
 
   Basic net loss per share
 
$
(0.04
)
 
(1.61
)
 
(2.32
)
 
(1.49
)
 
(0.02
)
   Diluted net loss per share
 
(0.04
)
 
(1.61
)
 
(2.32
)
 
(1.49
)
 
(0.02
)
   Dividends declared per share
 
—

 
—

 
—

 
—

 
—

   Book value per common share
 
1.09

 
1.13

 
2.74

 
5.12

 
6.73

   Tangible book value per common share
 
1.09

 
1.13

 
2.69

 
5.06

 
6.67

   Weighted average shares-basic
 
22,766,234

 
22,588,755

 
21,867,606.00

 
20,864,483

 
20,669,512

   Weighted average shares-diluted
 
22,766,234

 
22,588,755

 
21,867,606

 
20,881,108

 
21,063,065

   Shares outstanding-end of period
 
22,855,044

 
22,642,491

 
22,481,804

 
20,972,091

 
20,770,781

Period-end balances:
 
 
 
 
 
 
 
 
 
 
   Loans, net
 
$
547,826

 
689,206

 
932,988

 
1,107,998

 
1,238,707

   Investment securities
 
309,757

 
222,207

 
241,599

 
284,120

 
193,888

   Total assets
 
971,456

 
1,046,826

 
1,296,025

 
1,536,708

 
1,573,989

   Deposits
 
824,464

 
886,886

 
1,080,159

 
1,266,060

 
1,228,047

   Short-term borrowings
 
4,235

 
17,243

 
15,178

 
12,697

 
63,919

   Long-term borrowings
 
67,000

 
67,000

 
93,000

 
104,000

 
136,000

   Stockholders' equity
 
$
67,862

 
69,642

 
104,246

 
149,670

 
139,609

Average balances:
 
 
 
 
 
 
 
 
 
 
   Loans, net
 
$
636,783

 
834,916

 
1,066,142

 
1,213,937

 
1,115,216

   Investment securities
 
264,859

 
237,102

 
239,911

 
254,116

 
168,289

   Total assets
 
1,012,386

 
1,202,527

 
1,422,470

 
1,569,548

 
1,366,110

   Deposits
 
860,831

 
998,429

 
1,153,078

 
1,238,968

 
1,006,763

   Short-term borrowings
 
9,247

 
16,078

 
19,701

 
22,477

 
88,749

   Long-term borrowings
 
67,000

 
87,922

 
98,297

 
131,039

 
125,118

   Stockholders' equity
 
$
68,125

 
94,020

 
145,683

 
169,792

 
138,394

Selected ratios:
 
 
 
 
 
 
 
 
 
 
   Net yield on earning assets
 
2.91
%
 
3.03
 %
 
3.08
 %
 
2.55
 %
 
2.88
 %
   Return on average total assets
 
0.14
%
 
(2.83
)%
 
(3.41
)%
 
(1.87
)%
 
(0.02
)%
   Return on average stockholders' equity
 
2.01
%
 
(36.16
)%
 
(33.31
)%
 
(17.29
)%
 
(0.23
)%
   Average stockholders' equity as percent of average total assets
 
6.73
%
 
7.82
 %
 
10.24
 %
 
10.82
 %
 
10.13
 %
   Nonperforming loans as a percent of loans at year-end
 
6.87
%
 
14.48
 %
 
17.63
 %
 
6.32
 %
 
2.78
 %
   Reserve for possible loan losses as a percent of loans at year-end
 
4.89
%
 
4.35
 %
 
3.84
 %
 
2.83
 %
 
1.14
 %


18


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. for each of the years in the three-year period ended December 31, 2012. 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 of Operations
The Company provides a full range of banking services to individual and corporate customers throughout the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida through the 22 locations of its wholly owned subsidiary, Reliance Bank. Since its opening in 1999 through December 31, 2012, Reliance Bank has established a total of 20 branch locations in the St. Louis metropolitan area of Missouri and Illinois, and has total assets, loans, and deposits of $914 million, $553 million, and $772 million, respectively, at December 31, 2012.
On January 17, 2006, the Company opened a new federal savings bank, Reliance Bank, FSB, in Ft. Myers, Florida. At December 31, 2012, Reliance Bank, FSB had two branch locations in southwestern Florida and had total assets, loans, and deposits of $59 million, $23 million, and $52 million, respectively. On March 29, 2013, Reliance Bank, FSB was merged into Reliance Bank, and as such, no longer exists. This event is described in detail under the caption "Recent Developments" in Item 1 above, and the information set forth under that caption is incorporated herein by reference. For purposes of presenting historical financial data and supporting disclosure in this “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Reliance Bank and Reliance Bank, FSB are referred to as the “Banks.” Unless otherwise indicated, the information presented about the Banks does not assume the effectiveness of the merger of Reliance Bank, FSB into Reliance Bank.
The St. Louis metropolitan and southwestern Florida markets in which the Bank operates are highly competitive in the financial services area. The Bank is subject to competition from other financial and nonfinancial institutions providing financial products throughout these markets.
Executive Summary of Results of Operations and Financial Condition
Key Financial Metrics 
•
2012 net income of $1.4 million compared to $34.0 million net loss for 2011
•
Dramatically improved asset quality
•
Major and continued decrease in nonperforming loans
•
Significant reduction in loan loss provision expense
•
Ongoing decline in non-interest expense
The Company reported net income of $1.4 million for 2012 compared to a $34.0 million loss for 2011 and a $48.5 million loss for 2010. The improvement is primarily attributed to major progress made in reducing the level of problem loans, allowing for a significant reduction in provision for loan losses, which declined by $22,002 (92.48%) for the year.
The chart below shows the improvement made in earnings and reduction in provision for loan losses on an annual basis for the fiscal years ended December 31, 2012, 2011 and 2010:

2012
 
2011

2010
Net income (loss):
$1.4 million
 
$(34.0) million
 
$(48.5) million
 
 
 
 
 
 
Provision for possible loan losses:
$1.8 million
 
$23.8 million
 
$41.5 million

Nonperforming loans have fallen for eight consecutive quarters and declined $64.7 million (62.0%) since December 31, 2011.

19


Nonperforming loans as a percentage of outstanding loans declined to 6.9% from 14.5% at December 31, 2011. Nonperforming loans have declined by $131.5 million (76.9%) from a high of $171.1 million at December 31, 2010. Total watch list loans, which include nonperforming loans as well as loans that management considers high risk, have declined by $172.2 million (69.9%) since December 31, 2011.
 
 
As of December 31,
 
 
2012
 
2011
 
2010
Nonperforming loans
 
$39.6 million
 
$104.3 million
 
$171.1 million
Nonperforming assets*
 
$74.8 million
 
$139.4 million
 
$202.1 million
Watch list loans **
 
$74 million
 
$246.2 million
 
$348.9 million
Reserve for possible loan losses
 
$28.1 million
 
$31.4 million
 
$37.3 million

* Nonperforming assets are comprised of nonperforming loans, nonperforming investments, and other real estate owned.
** Watch list loans include nonperforming loans as well as loans that management considers high risk.
Reserves for possible loan losses as a percentage of loans increased to 4.89% on December 31, 2012 compared to 4.35% on December 31, 2011. Contributing to this increase, the Company has made significant decreases in charged-off loans. For 2012, the Company had net charge-offs of $5,015 compared to $29,721 for 2011. The reserve as a percentage of nonperforming loans has increased to 71.07% on December 31, 2012 from 30.08% on December 31, 2011.
Another factor in the Company's improved results was the decline in noninterest expense by $10.5 million (25.5%) for 2012, compared to 2011. The largest drop came from other real estate expense, which declined $5.8 million (45.06%) compared to 2011. Salaries and benefits dropped $2.0 million (15.0%) compared to 2011.
Net interest income declined $6.3 million (18.7%) for the year, compared to 2011. The reduction in net interest income resulted from a shrinking balance sheet due to the Company's successful efforts in reducing its commercial real estate loans. Interest expense declined $5.9 million (38.7%) for 2012 compared to 2011.
As a result of the efforts to improve the quality of the portfolio, loans decreased 20.07%, or $144.6 million, compared to year-end December 2011. Total assets as of December 31, 2012 were $971 million, a 7.2% decrease compared to December 31, 2011.
Noninterest bearing deposits increased 7.16% while interest bearing deposits declined 8.19% over the past year, and total deposits as of December 31, 2012 were $824.5 million. The Company has reduced higher cost deposits compared to noninterest bearing deposits, decreasing interest expense.
The following are certain ratios generally followed in the banking industry:
 
 
As of and for the Years Ended December 31,
 
 
 
2012
 
2011
 
2010
 
Percentage of net income (loss) to:
 
 
 
 
 
 
 
Average total assets
 
0.14
%
 
(2.83
)%
 
(3.41
)%
 
Average stockholders’ equity
 
2.01
%
 
(36.16
)%
 
(33.31
)%
 
  Net interest margin
 
2.91
%
 
3.03
 %
 
3.08
 %
 
  Percentage of average stockholders’ equity to average total assets
 
6.73
%
 
7.82
 %
 
10.24
 %
 

Recent Developments
We have successfully completed a capital plan to address the need to raise capital in order to comply with the various regulatory agreements to which the Company is subject. The Consent Order to which Reliance Bank was subject was terminated by the FDIC on March 12, 2013. Also, the Company previously filed an application with the applicable federal regulatory authorities to merge Reliance Bank, FSB into Reliance Bank under the Missouri banking charter. This merger application was approved and became effective on March 29, 2013. These items are described in detail under the caption "Recent Developments" in Item 1 above, and the information set forth under that caption is incorporated herein by reference.

20


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 are likely to change over time or prove to be different than 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, 2012, 2011, and 2010 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; input from regulators; 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. In addition, 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, or may have particular views of the level of loan loss reserve. 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. In the event that management determines the Company would not be able to realize all or part of net deferred tax assets in the future, deferred tax assets are reduced by a deferred tax asset valuation allowance, which results from 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 and decrease income tax expense, accordingly. At December 31, 2012, the Company has a 100% valuation reserve against its deferred tax assets.
Results of Operations for the Three-Year Period Ended December 31, 2012
(Amounts in thousands)
Net Interest Income
The Company’s net interest income decreased $6,342 (18.72%) to $27,533 for the year ended December 31, 2012 from the $33,875 earned for the years ended December 31, 2011, which was a decrease of $6,634 (16.38%) from the $40,509 earned in 2010. The Company’s net interest margin for the years ended December 31, 2012, 2011, and 2010 was 2.91%, 3.03%, and 3.08%, respectively. The reduction in net interest income is primarily due to a planned decline in commercial real estate loan volumes. The Company has realized a positive impact to earnings as a result of reduced deposit costs and enhanced deposit mix. The Company’s average rate on interest-bearing liabilities for the years ended December 31, 2012, 2011, and 2010 was 1.08%, 1.48%, and 1.96%, respectively. The Company’s average yield on interest earning assets for the years ended December 31, 2012, 2011, and 2010 was 3.89%, 4.38%, and 4.86% respectively.
Average earning assets for 2012 decreased $171,541 (15.20%) to $956,729 from the level of $1,128,270 for 2011. Average earning assets for 2011 decreased $202,381 (15.21%) from the level of $1,330,651 for 2010. The decline can be attributed to the decrease in outstanding loan balances. Total average loans decreased $198,133 (23.73%) in 2012 to $636,783 from the level of $834,916 for 2011, which decreased $231,226 (21.69%) from the level of $1,066,142 for 2010. The decline is the result of the planned shrinkage of the balance sheet and decrease in the reliance on commercial real estate.
Total average investment securities for 2012 increased $26,094 (11.01%) to $263,196 from the level of $237,102 for 2011, which was a decrease of $2,809 (1.17%) from the level of $239,911 for 2010. The Company uses its investment portfolio to (a) provide support for borrowing arrangements for securities sold under repurchase agreements, (b) provide support for pledging purposes for deposits of governmental and municipal deposits over insured limits, (c) provide support for pledging purposes for borrowing agreements with correspondent banks, the Federal Home Loan Banks, and the Federal Reserve, (d) provide a secondary source of liquidity through “laddered” maturities of such securities, and (e) provide increased interest income over that which would be earned on overnight/daily investments. The total carrying value of securities pledged to

21


secure deposits and repurchase agreements and borrowing capabilities through correspondent banks, the Federal Home Loan Banks, and the Federal Reserve Bank was approximately $97,284, $152,752, and $150,544 at December 31, 2012, 2011, and 2010 respectively. The Company also has pledged letters of credit from the Federal Home Loan Bank totaling $7,541, $7,541, $9,119 as additional collateral to secure public funds at December 31, 2012, 2011, 2010, respectively.
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 overnight with various unaffiliated financial institutions. The average balances of such short-term investments for the years ended December 31, 2012, 2011, and 2010 were $56,750, $56,252, and $24,598 respectively.
Total average interest-bearing deposits for 2012 were $794,182, a decrease of $137,393 (14.75%) from the level of $931,575 for 2011, which was a decrease of $157,552 (14.47%) from the level of $1,089,127 for 2010. With the decline in loan demand and low rates available on investments, the Banks have reduced their rate-sensitive deposits.
The Company’s short-term borrowings consist of overnight funds from unaffiliated financial institutions, securities sold under sweep repurchase agreements with larger deposit customers, and borrowings of Reliance Bancshares, Inc. The average balances of such borrowings for the years ended December 31, 2012, 2011, and 2010 totaled $9,247, $16,078, and $19,701, respectively. Short-term borrowings can fluctuate significantly based on short-term liquidity needs and changes in deposit volumes.
The Company has used longer-term advances from the Federal Home Loan Banks to match with longer-term fixed rate assets. During the three-year period ended December 31, 2012, average longer-term borrowings were $67,000, $87,922, and $98,297, for 2012, 2011, and 2010, respectively. The decline is the result of the Company’s efforts to increase core retail deposits and reduce its percentage of wholesale funding.
The overall mix of the Company’s funding sources has a significant impact on the Company’s net interest margin. Following is a summary of the percentage of the various components of average interest-bearing liabilities and noninterest-bearing deposits to the total of all average interest-bearing liabilities and noninterest-bearing deposits:
 
 
2012
 
2011
 
2010
Average deposits:
 
 
 
 
 
 
Noninterest-bearing
 
7.11
%
 
6.06
%
 
5.03
%
 
 
 
 
 
 
 
Interest-bearing:
 
 
 
 
 
 
  Transaction accounts
 
24.04

 
21.01

 
18.01

  Savings
 
21.98

 
25.20

 
25.40

  Time deposits of $100,000 or more
 
18.07

 
13.97

 
17.25

  Other time deposits
 
20.66

 
24.32

 
25.03

Total average interest-bearing deposits
 
84.75

 
84.50

 
85.69

Total average deposits
 
91.86

 
90.56

 
90.72

Average short-term borrowings
 
0.99

 
1.46

 
1.55

Average long-term advances from Federal Home Loan Bank
 
7.15

 
7.98

 
7.73

 
 
100.00
%
 
100.00
%
 
100.00
%

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 and interest-bearing transaction accounts, while reducing time deposits, short-term borrowings and long-term advances. Average balances on noninterest-bearing deposits and interest-bearing transaction accounts have increased as a percentage of total funding over the past three years to 31.15%, 27.07%, and 23.04% for 2012, 2011, and 2010, respectively. Total average balances on time deposits as a percentage of total funding were 38.73%, 38.29%, and 42.28% for 2012, 2011, and 2010, respectively. Average balances as a percentage of total funding on short-term borrowings and long-term advances from the Federal Home Loan Bank were 8.14%, 9.44%, and 9.28% for 2012, 2011, and 2010, respectively.
Management has placed increased focus on growing lower-cost core transaction deposits by concentrating on overall customer deposit relationships, allowing for a reduction in total deposit pricing and increased customer retention.

22


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, 2012
(Amounts in thousands)
 
Average balance
 
Percent of total assets
 
Interest income/expense
 
Average yield/rate
ASSETS
 
 
 
 
 
 
 
 
Loans (1) (2) (3)
 
$
636,783

 
62.90
 %
 
$
32,554

 
5.11
%
Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
248,833

 
24.58

 
3,680

 
1.48

Exempt from federal income taxes (3)
 
14,363

 
1.42

 
822

 
5.72

Short-term investments
 
56,750

 
5.61

 
127

 
0.22

Total earning assets
 
956,729

 
94.51

 
37,183

 
3.89

Nonearning assets:
 
 
 
 
 
 
 
 
Cash and due from banks
 
6,315

 
0.62

 
 
 
 
Reserve for possible loan losses
 
(30,400
)
 
(3.00
)
 
 
 
 
Premises and equipment
 
34,517

 
3.41

 
 
 
 
Other assets
 
43,562

 
4.30

 
 
 
 
Available-for-sale investment market valuation
 
1,663

 
0.16

 
 
 
 
Total nonearning assets
 
55,657

 
5.49

 
 
 
 
Total assets
 
$
1,012,386

 
100.00
 %
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
 
$
225,320

 
22.26
 %
 
999

 
0.44
%
Savings
 
205,955

 
20.34

 
877

 
0.43

Time deposits of $100,000 or more
 
169,318

 
16.72

 
2,108

 
1.24

Other time deposits
 
193,589

 
19.13

 
2,900

 
1.50

Total interest-bearing deposits
 
794,182

 
78.45

 
6,884

 
0.87

Long-term borrowings
 
67,000

 
6.62

 
2,406

 
3.59

Short-term borrowings
 
9,247

 
0.91

 
79

 
0.85

Total interest-bearing liabilities
 
870,429

 
85.98

 
9,369

 
1.08

Noninterest-bearing deposits
 
66,649

 
6.58

 
 
 
 
Other liabilities
 
7,183

 
0.71

 
 
 
 
Total liabilities
 
944,261

 
93.27

 
 
 
 
STOCKHOLDERS’ EQUITY
 
68,125

 
6.73

 
 
 
 
Total liabilities and stockholders’ equity
 
$
1,012,386

 
100.00
 %
 
 
 
 
Net interest income
 
 
 
 
 
$
27,814

 
 
Net yield on earning assets
 
 
 
 
 
 
 
2.91
%
(continued)

23


 
 
Year Ended December 31, 2011
(Amounts in thousands)
 
Average balance
 
Percent of total assets
 
Interest income/expense
 
Average yield/rate
ASSETS
 
 
 
 
 
 
 
 
Loans (1) (2) (3)
 
$
834,916

 
69.43
 %
 
$
42,926

 
5.14
%
Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
221,167

 
18.39

 
5,480

 
2.48

Exempt from federal income taxes (3)
 
15,935

 
1.33

 
942

 
5.91

Short-term investments
 
56,252

 
4.68

 
125

 
0.22

Total earning assets
 
1,128,270

 
93.83

 
49,473

 
4.38

Nonearning assets:
 
 
 
 
 
 
 
 
Cash and due from banks
 
5,596

 
0.47

 
 
 
 
Reserve for possible loan losses
 
(38,877
)
 
(3.23
)
 
 
 
 
Premises and equipment
 
35,335

 
2.94

 
 
 
 
Other assets
 
70,118

 
5.82

 
 
 
 
Available-for-sale investment market valuation
 
2,085

 
0.17

 
 
 
 
Total nonearning assets
 
74,257

 
6.17

 
 
 
 
Total assets
 
$
1,202,527

 
100.00
 %
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
 
$
231,599

 
19.26
 %
 
1,438

 
0.62
%
Savings
 
277,856

 
23.11

 
1,961

 
0.71

Time deposits of $100,000 or more
 
153,989

 
12.81

 
3,045

 
1.98

Other time deposits
 
268,131

 
22.30

 
5,326

 
1.99

Total interest-bearing deposits
 
931,575

 
77.48

 
11,770

 
1.26

Long-term borrowings
 
87,922

 
7.31

 
3,403

 
3.87

Short-term borrowings
 
16,078

 
1.34

 
113

 
0.70

Total interest-bearing liabilities
 
1,035,575

 
86.13

 
15,286

 
1.48

Noninterest-bearing deposits
 
66,854

 
5.55

 
 
 
 
Other liabilities
 
6,078

 
0.50

 
 
 
 
Total liabilities
 
1,108,507

 
92.18

 
 
 
 
STOCKHOLDERS’ EQUITY
 
94,020

 
7.82

 
 
 
 
Total liabilities and stockholders’ equity
 
$
1,202,527

 
100.00
 %
 
 
 
 
Net interest income
 
 
 
 
 
$
34,187

 
 
Net yield on earning assets
 
 
 
 
 
 
 
3.03
%
(continued)

24


 
 
Year Ended December 31, 2010
(Amounts in thousands)
 
Average balance
 
Percent of total assets
 
Interest income/expense
 
Average yield/rate
ASSETS
 
 
 
 
 
 
 
 
Loans (1) (2) (3)
 
$
1,066,142

 
74.95
 %
 
$
56,775

 
5.33
%
Investment securities:
 
 
 
 
 
 
 
 
Taxable
 
213,685

 
15.02

 
6,265

 
2.93

Exempt from federal income taxes (3)
 
26,226

 
1.84

 
1,546

 
5.90

Short-term investments
 
24,598

 
1.73

 
46

 
0.19

Total earning assets
 
1,330,651

 
93.54

 
64,632

 
4.86

Nonearning assets:
 
 
 
 
 
 
 
 
Cash and due from banks
 
5,343

 
0.38

 
 
 
 
Reserve for possible loan losses
 
(36,756
)
 
(2.58
)
 
 
 
 
Premises and equipment
 
41,269

 
2.90

 
 
 
 
Other assets
 
79,456

 
5.58

 
 
 
 
Available-for-sale investment market valuation
 
2,507

 
0.18

 
 
 
 
Total nonearning assets
 
91,819

 
6.46

 
 
 
 
Total assets
 
$
1,422,470

 
100.00
 %
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
 
$
228,870

 
16.09
 %
 
1,971

 
0.86
%
Savings
 
322,853

 
22.70

 
3,649

 
1.13

Time deposits of $100,000 or more
 
219,315

 
15.42

 
5,387

 
2.46

Other time deposits
 
318,089

 
22.36

 
8,739

 
2.75

Total interest-bearing deposits
 
1,089,127

 
76.57

 
19,746

 
1.81

Long-term borrowings
 
98,297

 
6.91

 
3,771

 
3.84

Short-term borrowings
 
19,701

 
1.38

 
120

 
0.61

Total interest-bearing liabilities
 
1,207,125

 
84.86

 
23,637

 
1.96

Noninterest-bearing deposits
 
63,951

 
4.50

 
 
 
 
Other liabilities
 
5,711

 
0.40

 
 
 
 
Total liabilities
 
1,276,787

 
89.76

 
 
 
 
STOCKHOLDERS’ EQUITY
 
145,683

 
10.24

 
 
 
 
Total liabilities and stockholders’ equity
 
$
1,422,470

 
100.00
 %
 
 
 
 
Net interest income
 
 
 
 
 
$
40,995

 
 
Net yield on earning assets
 
 
 
 
 
 
 
3.08
%

(1)
Interest includes loan fees, recorded as discussed in Note 1 to our consolidated financial statements.
(2)
Average balances include nonaccrual loans. The income on such loans is included in interest, but is recognized only upon receipt.
(3)
Interest yields are presented on a tax-equivalent basis. Nontaxable income has been adjusted upward by the amount of federal income tax that would have been paid if the income had been taxed at a rate of 34%, adjusted downward by the disallowance of the interest cost to carry nontaxable loans and securities.




25


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 2011 to 2012 due to
 
Change from 2010 to 2011 due to
(Amounts in thousands)
 
Volume (1)
 
Yield/rate (2)
 
Total
 
Volume (1)
 
Yield/rate (2)
 
Total
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
(10,123
)
 
(249
)
 
(10,372
)
 
(11,894
)
 
(1,955
)
 
(13,849
)
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
621

 
(2,421
)
 
(1,800
)
 
211

 
(996
)
 
(785
)
Exempt from federal income taxes
 
(91
)
 
(29
)
 
(120
)
 
(607
)
 
3

 
(604
)
Short-term investments
 
2

 
—

 
2

 
70

 
9

 
79

Total interest income
 
(9,591
)
 
(2,699
)
 
(12,290
)
 
(12,220
)
 
(2,939
)
 
(15,159
)
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing transaction accounts
 
(37
)
 
(402
)
 
(439
)
 
23

 
(556
)
 
(533
)
Savings accounts
 
(429
)
 
(655
)
 
(1,084
)
 
(461
)
 
(1,228
)
 
(1,689
)
Time deposits of $100,000 or more
 
282

 
(1,219
)
 
(937
)
 
(1,415
)
 
(927
)
 
(2,342
)
Other time deposits
 
(1,287
)
 
(1,139
)
 
(2,426
)
 
(1,237
)
 
(2,176
)
 
(3,413
)
Total deposits
 
(1,471
)
 
(3,415
)
 
(4,886
)
 
(3,090
)
 
(4,887
)
 
(7,977
)
Long-term borrowings
 
(765
)
 
(232
)
 
(997
)
 
(398
)
 
30

 
(368
)
Short-term borrowings
 
(55
)
 
21

 
(34
)
 
(24
)
 
17

 
(7
)
Total interest expense
 
(2,291
)
 
(3,626
)
 
(5,917
)
 
(3,512
)
 
(4,840
)
 
(8,352
)
Net interest income
 
$
(7,300
)
 
927

 
(6,373
)
 
(8,708
)
 
1,901

 
(6,807
)

(1)Change in volume multiplied by yield/rate of prior year.
(2)Change in yield/rate multiplied by volume of prior year.
NOTE: The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Provision for Possible Loan Losses
The provision for possible loan losses charged to earnings for the years ended December 31, 2012, 2011, and 2010 was $1,788, $23,790, and $41,492, respectively. During this same time period, the Company incurred net charge-offs of $5,015 in 2012, $29,721 in 2011, and $36,413 in 2010. At December 31, 2012, 2011, and 2010, the reserve for possible loan losses as a percentage of net outstanding loans was 4.89%, 4.35%, and 3.84%, 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, loans still accruing interest that were 90 days delinquent, and troubled debt restructurings) was 71.13%, 30.06%, and 21.80% as of December 31, 2012, 2011, and 2010, respectively. 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 December 31, 2012, excluding security gains and losses, decreased $353 (10.25%) to $3,090 from the $3,443 earned for the year ended December 31, 2011, which had increased $224 (6.96%) over the $3,219 earned for the year ended December 31, 2010. Income generated from other real estate properties decreased by $400 (28.63%) to $997 for the year ended December 31, 2012 compared to $1,397 for the year ended December 31, 2011. In 2011, income from other real estate properties increased by $814 (139.61%) to $1,397 for the year ended December 31, 2011 as compared to the year ended December 31, 2010. This increase was offset by a decrease of $244 in gains on the sale of loans and a $205 decrease in secondary residential mortgage fees.
Noninterest Expense
Total noninterest expense decreased $10,459 (25.47%) for the year ended December 31, 2012 to $30,604 from the $41,063 incurred for the year ended December 31, 2011, which was a $1,322 (3.33%) increase over the $39,741 of noninterest expense incurred for the year ended December 31, 2010. See below for discussion of detailed expense categories.

26


Total personnel costs decreased $1,986 (15.00%) in 2012 to $11,252 from the $13,238 of personnel costs incurred in 2011, which was a decrease of $364 (2.68%) from the $13,602 of personnel costs incurred in 2010. The decrease is attributed to cost savings initiatives including restructuring of staff and attrition, despite maintaining higher staff levels in the loan workout area.
Total other real estate owned expenses decreased in 2012 to $7,100, a decline of $5,823 (45.06%) as compared with the $12,923 of expenses incurred in 2011, which had decreased by $225 (1.71%) from the $13,148 incurred in 2010. Net losses on sales and write-downs recognized based upon new property valuations for 2012 were $4,285.
Total occupancy and equipment expenses decreased $295 (7.63%) to $3,572 in 2012 from the $3,867 incurred in 2011, which had decreased $348 (8.26%) from the $4,215 incurred in 2010. The Company closed its Houston, Texas and Chandler, Arizona loan production offices as well as a Reliance Bank, FSB branch location. Charges related to these closures were taken during the first quarter of 2011, lowering ongoing occupancy expenses.
FDIC assessment expense decreased $595 (21.11%) in 2012 to $2,223 from the $2,818 paid in 2011, which was a decrease of $42 (1.47%) from the $2,860 paid in 2010. The decline is attributed to the declining balance sheets of Reliance Bank and Reliance Bank, FSB, and the FDIC revision to its general assessment calculation, which was implemented during the third quarter of 2011. This revised calculation lowered the assessment rates for both banks.
Professional fees for 2012 increased $711 (41.53%) to $2,423 as compared with the $1,712 of expenses incurred for 2011, which was an increase of $782 (84.09%) from the $930 paid in 2010. The Company's use of consulting firms to assist in addressing problem assets was higher during 2012 compared to 2011.
Total data processing expenses for 2012 increased $49 (2.92%) to $1,727, from the $1,678 incurred in 2011, which had increased $16 (0.96%) from the $1,662 incurred in 2010.
Other noninterest expenses for 2012 decreased $1,335 (36.82%) to $2,291, as compared with the $3,626 of expenses incurred during 2011, which was an increase of $896 (32.82%) from $2,730 in 2010. During the first quarter 2011, the Company incurred charges related to the closure of the Houston, Texas and Chandler, Arizona loan production offices, as well as the closure of a Reliance Bank, FSB branch location. Also, the Company prepaid $20 million of long term Federal Home Loan Bank advances during 2011 and incurred a prepayment charge of $453.
Income Taxes
Applicable income tax expense totaled $0 for the year ended December 31, 2012, compared with $8,616 and $11,312 for the years ended December 31, 2011 and 2010, respectively. In light of the Company’s cumulative losses that have occurred in preceding years, the Company maintains a 100% valuation reserve for its deferred tax assets. In addition, a tax valuation is being applied on tax benefits or expense created since the valuation was established, resulting in the $0 applicable income tax expense for 2012.
Financial Condition
(Amounts in thousands)
Total assets of the Company decreased $75,370 (7.20%) to $971,456 at December 31, 2012 from a level of $1,046,826 at December 31, 2011.
Total deposits of the Company decreased $62,422 (7.04%) to $824,464 at December 31, 2012 from the level of $886,886 at December 31, 2011. The overall decline is consistent with the decline in total assets as less funding is required. However, the Company has achieved increased average growth in noninterest bearing and interest-bearing transaction accounts. See the "Results of Operations" section of this Annual Report for a discussion of changes in deposit composition.
Short-term borrowings of the Company decreased $13,008 (75.44%) to $4,235 at December 31, 2012 from the level of $17,243 at December 31, 2011. Short-term borrowings will fluctuate significantly based on short-term liquidity needs and certain seasonal deposit trends. Total longer-term advances from the Federal Home Loan Bank remained consistent at $67,000 for both December 31, 2012 and December 31, 2011. These longer-term fixed rate advances were used as an alternative funding source and are matched up with longer-term fixed rate assets.
Other liabilities increased $2,008 (37.31%) to $7,390 at December 31, 2012 from the level of $5,382 at December 31, 2011. The increase relates to the accrual of $2,389 in preferred dividends.
Interest-earning deposits in other financial institutions decreased $22,921 (52.33%) to $20,878 at December 31, 2012 from the level of $43,799 at December 31, 2011. Interest-earning deposits in other financial institutions will fluctuate significantly based on short-term cash flows.
Net loans decreased $141,380 (20.51%) to $547,826 at December 31, 2012 from the level of $689,206 at December 31, 2011. The reduction in nonperforming loans and current economic conditions have lowered the Company’s loan totals. See the "Risk Management" section below for detail discussion of nonperforming loans.

27


Investment securities, all of which are maintained as available-for-sale, increased $87,550 (39.40%) to $309,757 at December 31, 2012 from the $222,207 at December 31, 2011. The Company’s investment portfolio growth is dependent upon the level of deposit growth exceeding opportunities to grow the loan portfolio, and the funding requirements of the Company’s loan portfolio, as described above.
Total stockholders’ equity at December 31, 2012 and 2011 was $67,862 and $69,642, respectively, with capital-to-asset percentages of 6.99% and 6.65%, respectively.
Risk Management
(Amounts in thousands)
Management’s objective in structuring the balance sheet is to maximize the return on average assets while minimizing the associated risks. The major risks concerning the Company are credit, liquidity, and interest rate risks. The following is a discussion concerning the Company’s management of these risks.
Credit Risk Management
Managing risks that the Company’s banking subsidiaries assume in providing credit products to customers is extremely important. Credit risk management includes defining an acceptable level of risk and return, establishing appropriate policies and procedures to govern the credit process, and maintaining a thorough portfolio review process.
Of equal importance in the credit risk management process are the ongoing monitoring procedures performed as part of the Company’s loan review process. Credit policies are examined and procedures reviewed for compliance each year. Loan personnel also continually monitor loans after disbursement in an attempt to recognize any deterioration which may occur so that appropriate corrective action can be initiated on a timely basis.
Net charge-offs for 2012 were $5,015, compared to $29,721 in 2011, and $36,413 in 2010. The decrease in charge-off levels resulted from the decline in nonperforming loans. The Company’s banking subsidiaries had no loans to any foreign countries at December 31, 2012, 2011, and 2010 nor did they have any concentration of loans to any industry on these dates, except that 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.
 
 
December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
 
2009
 
2008
Commercial:
 
 
 
 
 
 
 
 
 
 
   Real estate
 
$
408,523

 
512,094

 
716,774

 
797,054

 
843,312

   Other
 
38,696

 
69,989

 
80,973

 
82,733

 
94,607

Real estate:
 
 
 
 
 
 
 
 
 
 
   Construction
 
56,935

 
71,163

 
100,457

 
172,732

 
190,381

   Residential
 
70,737

 
66,858

 
69,143

 
84,080

 
120,903

Consumer
 
920

 
427

 
2,914

 
3,705

 
4,512

 
 
$
575,811

 
720,531

 
970,261

 
1,140,304

 
1,253,715


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. Commercial real estate loans are mainly for owner-occupied business and industrial properties, multifamily properties, and other commercial properties for 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.
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 loans in its builder portfolio and the Company reviews projects regularly for progress status.

28


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% at loan origination, 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 90% at loan origination. 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 Bank's loan portfolios, but rather are sold into the secondary market. The Bank has not financed, and Reliance Bank does not currently finance, sub-prime mortgage credits.
Consumer and other loans represent loans to individuals of 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.
Following is a summary regarding the Company's nonperforming loans as of and for each of the years in the five year period ended December 31, 2012:
(Amounts in thousands)
 
2012
 
2011
 
2010
 
2009
 
2008
Nonperforming loans:
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans
 
$
23,367

 
88,632

 
151,391

 
57,228

 
33,716

Loans 90 days delinquent and still accruing interest
 
—

 
161

 
—

 
3,560

 
1,180

Restructured loans
 
16,198

 
15,555

 
19,698

 
11,289

 
—

 
 
$
39,565

 
104,348

 
171,089

 
72,077

 
34,896

 
 
 
 
 
 
 
 
 
 
 
Additional interest that would have been earned on nonaccrual loans
 
$
564

 
4,789

 
10,159

 
4,425

 
1,717


Nonperforming loans are defined as loans on nonaccrual status, loans 90 days or more past due but still accruing, and restructured loans. Loans are placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments, unless the loans are well secured and in the process of collection. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed, and income is recorded, only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectability of the principal is in doubt, payments received are applied to loan principal for financial reporting purposes.
Loans past due 90 days or more but still accruing interest are also included in nonperforming loans. Loans past due 90 days or more but still accruing interest are classified as such when the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection. Also included in nonperforming loans are “restructured” loans. Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate, due to the borrower's financial difficulties.
Nonperforming loans have dropped during the past eight quarters from their high at December 31, 2010. At December 31, 2012, nonperforming loans had decreased $64,783 (62.08%) to $39,565 from $104,348 at December 31, 2011, the largest components of which were comprised of the following loan relationships (which comprise approximately 83% of total nonperforming loans):
•
A loan for approximately $19.4 million secured by 90 acres of developed land in Arizona.  The borrower expects to sell a lot within the development and pay down a portion of the balance. The Company and borrower are discussing a potential deed in lieu of foreclosure.
•
Loans for approximately $6.3 million for the purchase of four commercial buildings located in St. Louis County and Jefferson County, Missouri. The loans are again amortizing, following a $1 million principal paydown and improved net operating income. The borrower has been performing on these payments.  The Company removed these loans from troubled debt restructuring status on January 1, 2013.
•
A loan for approximately $7.2 million to a two real estate investors secured by a retail strip center. The Company has restructured the loan to principal and interest payments and the borrower is performing.  The Company removed this loan from troubled debt restructuring status on January 1, 2013. 


29


During this elongated period of declining real estate values, the Company has sought to add loans to its portfolio with increased collateral margins or excess payment capacity from proven borrowers to enhance the quality of the loan portfolio, yet remains focused on reducing overall loan balances. Given the collateral values maintained in 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, 2012. However, should the real estate market decline, the Company may require additional provisions to the reserve for possible loan losses to address such declining collateral values.
The Company also has nonperforming assets in the form of other real estate owned. The Banks maintained other real estate owned totaling $34,819 and $34,565 at December 31, 2012 and December 31, 2011, respectively. Other real estate owned represents property acquired through foreclosure, or deeded to the Banks in lieu of foreclosure, for loans on which borrowers have defaulted as to payment of principal and interest. The following table details the activity within other real estate owned since December 31, 2011:
Other Real Estate Owned
 
(Amounts in thousands)
 
Balance at December 31, 2011
$
34,565

Foreclosures
22,331

Cash proceeds from sales
(6,341
)
Loans made to facilitate sales of other real estate
(9,899
)
Losses and write-downs
(4,285
)
Transfers of other real estate to premises and equipment
(1,552
)
Balance at December 31, 2012
$
34,819


Potential Problem Loans
(Amounts in thousands)
The Company’s credit management policies and procedures focus on identifying, measuring, and controlling credit exposure. The Company holds monthly asset disposition meetings, which is comprised of executive management, including all members of the credit committee. At these meetings, the group makes determinations as to the appropriateness of risk ratings on watch list credits; determines the appropriateness of reserves on individual credits; reviews the performance of watch list credits and determine appropriate action plans; discusses troubled debt restructurings; and reviews valuations of other real estate properties.
Adversely rated credits, including loans requiring close monitoring, are included on a monthly loan watch list. The asset disposition group reviews all credits on the watch list. Watch list loans include loans with identified difficulties such as:
•
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, and reviewed and approved by executive management.
The Company conducts weekly loan committee meetings of all of its loan officers, including the Chief Risk Officer, Chief Lending Officer, Chief Credit Officer, and the Chief Executive Officer. This committee may approve individual credit relationships up to $2,500. 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 $24,172 at December 31, 2012.
At December 31, 2012 and 2011, the reserve for loan losses was $28,143 and $31,370, respectively, or 4.89% and 4.35% of net outstanding loans, respectively. The following table summarizes the Company’s loan loss experience for the past five years ended December 31, 2012. The decrease in the level of the reserve and the decrease in the reserve percentage is attributed to a smaller loan portfolio, particularly with a decline in nonperforming loans. However the economy continues to present challenges to borrowers and it could be likely that others will experience difficulties in meeting obligations.

30


 
 
December 31,
(Amounts in thousands)
 
2012
 
2011
 
2010
 
2009
 
2008
Average loans outstanding
 
$
636,783

 
834,916

 
1,066,142

 
1,213,937

 
1,115,216

Reserve at beginning of period
 
$
31,370

 
37,301

 
32,222

 
14,306

 
9,685

Provision for possible loan losses
 
1,788

 
23,790

 
41,492

 
53,450

 
11,148

 
 
33,158

 
61,091

 
73,714

 
67,756

 
20,833

Charge-offs:
 
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
 
Real estate
 
(6,671
)
 
(21,958
)
 
(14,962
)
 
(18,532
)
 
(2,828
)
Other
 
(255
)
 
(1,686
)
 
(221
)
 
(656
)
 
(77
)
Real estate:
 
 
 
 
 
 
 
 
 
 
Construction
 
(2,211
)
 
(8,557
)
 
(19,878
)
 
(16,042
)
 
(2,262
)
Residential
 
(809
)
 
(1,078
)
 
(1,910
)
 
(1,832
)
 
(1,313
)
Consumer
 
(44
)
 
(42
)
 
(40
)
 
(52
)
 
(73
)
Total charge-offs
 
(9,990
)
 
(33,321
)
 
(37,011
)
 
(37,114
)
 
(6,553
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
Commercial loans:
 
 
 
 
 
 
 
 
 
 
Real estate
 
2,404

 
836

 
462

 
1,033

 
1

Other
 
30

 
123

 
63

 
4

 
9

Real estate:
 
 

 
 
 
 
 
 
 
 
Construction
 
2,465

 
2,551

 
22

 
371

 
1

Residential
 
52

 
79

 
30

 
150

 
—

Consumer
 
24

 
11

 
21

 
22

 
15

     Total recoveries
 
4,975

 
3,600

 
598

 
1,580

 
26

                         Net charge-offs
 
$
(5,015
)
 
(29,721
)
 
(36,413
)
 
(35,534
)
 
(6,527
)
Reserve at end of period
 
$
28,143

 
31,370

 
37,301

 
32,222

 
14,306

Net charge-offs to average loans (annualized)
 
0.79
%
 
3.56
%
 
3.42
%
 
2.93
%
 
0.59
%
Ending reserve to net outstanding loans at end of period
 
4.89
%
 
4.35
%
 
3.84
%
 
2.83
%
 
1.14
%

Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses.
Since its inception in 1999 through 2009, the Company experienced significant loan growth in the St. Louis metropolitan area and in southwestern Florida, with expansion to that area by the Company in 2005. The southwestern Florida area began experiencing economic distress ahead of most of the country, with the long-booming real estate market in Florida beginning its decline in 2007. As a result, the Company began experiencing an increase in troubled asset situations in 2007 and began increasing its reserve for loan losses accordingly, as the Florida real estate market weakened. After several years of declines in Florida real estate values, Company management believes that the Florida real estate market has begun to stabilize. Similarly, management believes the real estate market in the St. Louis metropolitan area has also begun to stabilize.
While considering the level of nonperforming assets when assessing the appropriate level of the reserve for loan losses at a particular point in time, the Company does not use a preassigned coverage ratio of nonperforming assets. Since a significant percentage of the Company’s loan portfolio is concentrated in commercial real estate, the most significant factor when determining an appropriate level for the reserve for loan losses is a detailed analysis of the individual credit relationships and their potential for loss after considering the value of the underlying real estate collateral.
The Company risk-rates all of the loans in its loan portfolio, using a 1-7 risk rating system, with a “1” - rated credit being a high-quality loan and a “7” - rated credit having some level of loss in the credit. Loan officers are responsible for risk-rating their own credits, including maintaining the risk rating on a current basis. Downgrades are discussed at various management and loan committee meetings. The risk ratings are also subject to an ongoing review by an extensive loan review process performed independently of the loan officers. An adequately controlled risk rating process allows Company management to

31


conclude that the Banks’ watch lists (which include all credits risk-rated “4” or greater) are, for all practical purposes, a complete profile of situations with current loss exposure.
All loans included in the watch lists require separate action plans to be developed to reduce the level of risk inherent in the credit relationship. Based on the information included on the watch list and a review of each individual credit relationship thereon, the Company determines whether a credit is impaired. The Company considers a loan to be impaired when all amounts due — both principal and interest — will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value (and marketability), and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
When measuring impairment for loans, the expected future cash flows of impaired loans are discounted at the loan’s effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of collateral for a collateral-dependent loan. However, substantially all of the Company’s presently impaired credit relationships are collateralized by (and derive their ultimate cash flows from) commercial, construction, or residential real estate and, accordingly, virtually all of the Company’s impairment calculations for the present portfolio have been based on the underlying values of the real estate collateral.
The Banks’ watch lists include complete listings of credit relationships that are considered to be impaired, along with an assessment of the estimated impairment loss to be included as specific exposure for impaired loans. Such impairment calculations are based on current appraisals of the underlying real estate collateral. The Company regularly obtains updated appraisals for all of its impaired credit relationships.
The sum of all exposure amounts calculated for impaired loans is included in the reserve for loan losses as the specifically identifiable losses portion of the account balance. This is one portion of the reserve for loan losses. The second portion of the reserve for loan losses is a general reserve for all credit relationships not considered to be specifically impaired. This amount is calculated by first calculating the historical charge-off ratio for each of the particular loan categories and then subjectively adjusting these historical ratios for several economic and environmental factors. The adjusted ratio for each loan category is then applied against the nonimpaired loans in that loan category, resulting in a general reserve for that particular loan category. The sum of these general reserve categories, when added to the amount of specifically identified losses on impaired credits, results in the final reserve for loan losses balance for a particular date. The Company follows this process for calculating the reserve for loan losses on a quarterly basis.
In calculating the general portion of the reserve for possible loan losses, the loan categories used are real estate construction, residential real estate, commercial real estate, commercial and industrial, and consumer loans. Through 2009, historical charge-off ratios were calculated on a rolling three-year basis, which resulted in higher reserve levels with the increased levels of charge-offs experienced during the past three years. This was reduced to a rolling two-year historical charge-off ratio in the fourth quarter of 2010. The economic and environmental factors for which adjustments are made to the historical charge-off ratios include the following:
•
Changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
•
Changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments.
•
Changes in the nature and volume of the portfolio and in the terms of loans.
•
Changes in the experience, ability, and depth of lending management and other relevant staff.
•
Changes in the volume and severity of past-due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
•
Changes in the quality of the Banks’ loan review systems.
•
Changes in the value of underlying collateral for collateral-dependent loans.
•
The existence and effect of any concentrations of credit, and changes in the level of such concentrations.
•
The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Banks’ existing portfolios.
The total reserve for possible loan losses is available to absorb losses from any segment of the portfolio. Management continues to target and maintain the reserve for possible loan losses equal to the allocation methodology outlined above.

32


In determining an adequate balance in the reserve for possible loan losses, management places its emphasis as follows: evaluation of the loan portfolio with regard to potential future exposure on loans to specific customers and industries; reevaluation of each watch list loan or loan classified by supervisory authorities; and an overall review of the remaining portfolio in light of loan loss experience normally experienced in our banking market. Any problems or loss exposure estimated in these categories is provided for in the total current period reserve.
The perception of risk with respect to particular loans within the portfolio will change over time as a result of the characteristics and performance of those loans, overall economic and market trends, and the actual and expected trends in nonperforming loans.
Based on its review for adequacy, management has estimated those portions of the reserve that could be attributable to major categories of loans as detailed in the following table at year-end for each of the years in the five-year period ended December 31, 2012:
 
 
December 31,

 
2012
 
2011
 
2010
 
2009
 
2008
(Amounts in thousands)
 
Reserve
Percent by Category To Total Loans
 
Reserve
Percent by Category To Total Loans
 
Reserve
Percent by Category To Total Loans
 
Reserve
Percent by Category To Total Loans
 
Reserve
Percent by Category To Total Loans
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real Estate
 
$
9,901

70.95
%
 
$
17,277

71.07
%
 
$
21,406

73.87
%
 
$
14,256

69.90
%
 
$
9,623

67.27
%
   Other
 
728

6.72

 
2,063

9.71

 
2,029

8.35

 
965

7.26

 
1,080

7.55

Real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Construction
 
4,545

9.89

 
9,818

9.88

 
11,966

10.35

 
14,897

15.15

 
2,172

15.19

   Residential
 
480

12.28

 
2,197

9.28

 
1,871

7.13

 
1,997

7.37

 
1,380

9.64

Consumer
 
38

0.16

 
15

0.06

 
29

0.30

 
107

0.32

 
51

0.35

Not allocated
 
12,451

—

 
—

—

 
—

—

 
—

—

 
—

—

   Total allowance
 
$
28,143

100.00
%
 
$
31,370

100.00
%
 
$
37,301

100.00
%
 
$
32,222

100.00
%
 
$
14,306

100.00
%

While the Company has no significant specific industry concentration risk, over 93% of the loan portfolio was dependent on real estate collateral at December 31, 2012, including commercial real estate, residential real estate, and construction and land development loans. The following table details the significant categories of real estate loans as a percentage of total regulatory capital:
 
 
Real estate loan balance as a percentage
 
 
of total regulatory capital
 
 
December 31, 2012
 
December 31, 2011
Construction, land development, and other land loans
 
75
%
 
91
%
Nonfarm nonresidential:
 
 
 
 
Owner-occupied
 
81
%
 
115
%
Nonowner-occupied
 
380
%
 
436
%
1- to 4- family closed-end loans
 
79
%
 
69
%
Multifamily
 
74
%
 
97
%
Other
 
22
%
 
26
%

Liquidity and Rate Sensitivity Management
(Amounts in thousands)
Liquidity is a measurement of the Banks’ ability to meet the borrowing needs and the deposit withdrawal requirements of their customers. The composition of assets and liabilities is actively managed to maintain the appropriate level of liquidity in the balance sheet. Management is guided by regularly reviewed policies when determining the appropriate portion of total assets which should be comprised of readily marketable assets available to meet conditions that are reasonably expected to occur.

33


Liquidity is primarily provided to the Banks through earning assets, including deposits in other financial institutions, federal funds sold, and maturities and principal payments in the investment portfolio, all funded through deposits and short-term borrowings. Secondary sources of liquidity available to the Banks include the sale of securities included in the available-for-sale category (with a carrying value of $309,757 at December 31, 2012, of which approximately $97,284 is pledged to secure deposits and repurchase agreements) and borrowing capabilities through correspondent banks, the Federal Home Loan Banks, and the Federal Reserve Bank. Maturing loans also provide liquidity on an ongoing basis. Bank management believes it has the liquidity necessary to meet unexpected deposit withdrawal requirements or increases in loan demand.
The Banks have borrowing capabilities through correspondent banks and the Federal Home Loan Banks of Des Moines and Atlanta. The Banks have federal funds lines of credit totaling $21,000 through correspondent banks, of which $21,000 was available at December 31, 2012. Also, Reliance Bank has a credit line with the Federal Home Loan Bank of Des Moines in the amount of $130,138, and availability under that line was $57,697 at December 31, 2012. Reliance Bank, FSB maintained a credit line with the Federal Home Loan Bank of Atlanta in the amount of $5,940, of which $3,717 was available at December 31, 2012. In addition, Reliance Bank maintained a line of credit with the Federal Reserve Bank of St. Louis in the amount of $21,777, of which $21,777 was available, subject to a collateral and credit review, at December 31, 2012. As of December 31, 2012, the combined availability under these arrangements totaled $104,191. Company management believes it has the liquidity necessary to meet unexpected deposit withdrawal requirements or increases in loan demand.
The asset/liability management process, which involves structuring the balance sheet to allow approximately equal amounts of assets and liabilities to reprice at the same time, is a dynamic process essential to minimize the effect of fluctuating interest rates on net interest income. The following table reflects the Company’s interest rate gap (rate-sensitive assets minus rate-sensitive liabilities) analysis as of December 31, 2012, individually and cumulatively, through various time horizons:
 
 
Remaining maturity if fixed rate;
 
 
earliest possible repricing interval if floating rate
(Amounts in thousands)
 
3 months or less
 
Over 3 months through 12 months
 
Over 1 year through 5 years
 
Over 5 years
 
Total
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
Loans
 
$
130,335

 
119,182

 
292,178

 
34,116

 
575,811

Residential mortgage loans held for sale
 
25

 
111

 
636

 
1,741

 
2,513

Investment securities, at amortized cost
 
54,371

 
63,656

 
128,892

 
62,075

 
308,994

Other interest-earnings assets
 
20,878

 
—

 
—

 
—

 
20,878

Total interest-earning assets
 
$
205,609

 
182,949

 
421,706

 
97,932

 
908,196

Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
Savings and interest-bearing transaction accounts
 
$
428,072

 
—

 
—

 
—

 
428,072

Time certificates of deposit of $100,000 or more
 
25,040

 
65,474

 
66,153

 
171

 
156,838

All other time deposits
 
41,396

 
61,163

 
65,412

 
39

 
168,010

Nondeposit interest-bearing liabilities
 
8,885

 
—

 
20,000

 
42,350

 
71,235

Total interest-bearing liabilities
 
$
503,393

 
126,637

 
151,565

 
42,560

 
824,155

Gap by period
 
$
(297,784
)
 
56,312

 
270,141

 
55,372

 
84,041

Cumulative gap
 
$
(297,784
)
 
(241,472
)
 
28,669

 
84,041

 
84,041

Ratio of interest-sensitive assets to interest-sensitive liabilities
 
$
0.41

 
1.44

 
2.78

 
2.30

 
1.10

Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities
 
$
0.41

 
0.62

 
1.04

 
1.10

 
1.10



34


A gap report is used by Bank management to review any significant mismatch between the repricing points of the Banks’ rate-sensitive assets and liabilities in certain time horizons. A negative gap indicates that more liabilities reprice in that particular time frame and, if rates rise, these liabilities will reprice faster than the assets. A positive gap would indicate the opposite. Management has set policy limits specifying acceptable levels of interest rate risk as measured by the gap report. Gap reports can be misleading in that they capture only the repricing timing within the balance sheet and fail to capture other significant risks such as basis risk and embedded options risk. Basis risk involves the potential for the spread relationship between rates to change under different rate environments, and embedded options risk relates to the potential for the divergence from expectations in the level and/or timing of cash flows given changes in rates. As indicated in the above table, the Company operates on a short-term basis similar to most other financial institutions, as its liabilities, with savings and interest-bearing transaction accounts included, could reprice more quickly than its assets. However, the process of asset/liability management in a financial institution is dynamic. Bank management believes its current asset/liability management program will allow adequate reaction time for trends in the marketplace as they occur, allowing maintenance of adequate net interest margins.
Bank management also uses fair market value of equity analyses to help identify longer-term risk that may reside on the current balance sheet. The fair market value of equity is represented by the present value of all future income streams generated by the current balance sheet. The Company measures the fair market value of equity as the net present value of all asset and liability cash flows discounted at forward rates suggested by the current U.S. treasury curve plus appropriate credit spreads. This representation of the change in the fair market value of equity under different rate scenarios gives insight into the magnitude of risk to future earnings due to rate changes. Management has set policy limits relating to declines in the market value of equity. The results of these analyses at December 31, 2012 indicate that the Company’s fair market value of equity would increase 0.17% and 8.37% from an immediate and sustained parallel decrease in interest rates of 100 and 200 basis points, respectively, and decrease 6.43% and 17.8%, from a corresponding increase in interest rates of 100 and 200 basis points, respectively.
Following is a more detailed analysis of the maturity and interest rate sensitivity of the Banks' loan portfolios at December 31, 2012:
(Amounts in thousands)
 
1 year or less
 
Over 1 through 5 years
 
Over 5 years
 
Total
Commercial:
 
 
 
 
 
 
 
 
   Real estate
 
$
163,439

 
237,846

 
7,238

 
408,523

   Other
 
23,796

 
14,745

 
155

 
38,696

Real estate
 
 
 
 
 
 
 
 
   Construction
 
37,579

 
19,345

 
11

 
56,935

   Residential
 
24,348

 
19,693

 
26,696

 
70,737

Consumer
 
355

 
549

 
16

 
920

Total
 
$
249,517

 
292,178

 
34,116

 
575,811


For all loans maturing or repricing beyond the one year time horizon at December 31, 2012, following is a breakdown of such loans into fixed and floating rates.
 
 
Fixed
 
Floating
 
 
(Amounts in thousands)
 
Rate
 
Rate
 
Total
Due over one but within five years
 
$
280,539

 
11,639

 
292,178

Due after five years
 
33,471

 
645

 
34,116

 
 
$
314,010

 
12,284

 
326,294


The investment portfolio is closely monitored to assure that the Banks have no unreasonable concentration of securities in the obligations of any single debtor. Other than U.S. Government agency securities, the Banks maintain no concentration of investments in any one political subdivision greater than 10% of their total portfolios.

35


The book value and estimated market value of the Company's debt securities at December 31, 2012, 2011, and 2010, all of which are classified as available-for-sale, are summarized in the following table:
 
 
2012
 
2011
 
2010
(Amounts in thousands)
 
Amortized Cost
 
Market Value
 
Amortized Cost
 
Market Value
 
Amortized Cost
 
Market Value
Obligations of U.S. government agencies and corporations
 
$
23,823

 
24,431

 
45,743

 
46,158

 
73,664

 
73,531

Obligations of state and political subdivisions
 
22,197

 
22,613

 
14,608

 
15,293

 
19,638

 
20,112

Trust preferred securities
 
2,993

 
694

 
3,063

 
786

 
3,104

 
511

U.S. agency asset-backed securities
 
24,264

 
24,368

 
—

 
—

 
—

 
—

U.S. agency residential mortgage-backed securities
 
235,717

 
237,651

 
156,620

 
159,970

 
145,148

 
147,445

 
 
$
308,994

 
309,757

 
220,034

 
222,207

 
241,554

 
241,599


36


The following tables summarize maturity and yield information on the Company's investment portfolio at December 31, 2012:
 
 
Amortized
 
Weighted Average Tax-
(Amounts in thousands)
 
Cost
 
Equivalent Yield
Available-for-sale
 
 
 
 
Obligations of U.S. government agencies and corporations:
 
 
 
 
     0 to 1 year
 
$
—

 
—
%
     1 to 5 years
 
5,015

 
1.23

     5 to 10 years
 
18,808

 
1.55

     Over 10 years
 
—

 
—

          Total
 
$
23,823

 
1.48
%
 
 
 
 
 
Obligations of state and political subdivisions:
 
 
 
 
     0 to 1 year
 
$
1,590

 
5.51
%
     1 to 5 years
 
4,727

 
6.09

     5 to 10 years
 
8,106

 
5.01

     Over 10 years
 
7,774

 
2.85

          Total
 
$
22,197

 
4.52
%
 
 
 
 
 
Trust preferred securities:
 
 
 
 
     0 to 1 year
 
$
—

 
—
%
     1 to 5 years
 
—

 
—

     5 to 10 years
 
—

 
—

     Over 10 years
 
2,993

 
2.23

          Total
 
$
2,993

 
2.23
%
 
 
 
 
 
U.S. agency asset-backed securities
 
$
24,264

 
1.59
%
 
 
 
 
 
U.S. agency residential mortgage-backed securities
 
$
235,717

 
1.16
%
 
 
 
 
 
Combined:
 
 
 
 
     0 to 1 year
 
$
1,590

 
5.51
%
     1 to 5 years
 
9,742

 
3.59
%
     5 to 10 years
 
26,914

 
2.59
%
     Over 10 years
 
10,767

 
2.68
%
     U.S. agency asset-backed securities
 
24,264

 
1.59
%
     U.S. agency residential mortgage-backed securities
 
235,717

 
1.16
%
 
 
 
 
 
         Total
 
$
308,994

 
1.47
%

Note: While yields by range of maturity are routinely provided by the Company’s accounting system on a tax equivalent basis, the individual amounts of adjustments are not so provided. In total, at an assumed federal income tax rate of 34%, the adjustment amounted to $260.

37


The Bank's primary source of liquidity to fund growth is ultimately the generation of new deposits. The following table shows the average daily amount of deposits and the average rate paid on each type of deposit for the years ended December 31, 2012, 2011, and 2010:
 
 
Years Ended December 31,
 
 
2012
 
2011
 
2010
(Amounts in thousands)
 
Average Balance
 
Average Rate
 
Average Balance
 
Average Rate
 
Average Balance
 
Average Rate
Noninterest-bearing demand deposits
 
$
66,649

 
—
%
 
$
66,854

 
—
%
 
$
63,951

 
—
%
Interest-bearing transaction accounts
 
225,320

 
0.44

 
231,599

 
0.62

 
228,870

 
0.86

Savings deposits
 
205,955

 
0.43

 
277,856

 
0.71

 
322,853

 
1.13

Time deposits of $100,000 or more
 
169,318

 
1.24

 
153,989

 
1.98

 
219,315

 
2.46

All other time deposits
 
193,589

 
1.50

 
268,131

 
1.99

 
318,089

 
2.75

 
 
$
860,831

 
0.80
%
 
$
998,429

 
1.18
%
 
$
1,153,078

 
1.71
%

As noted in the gap analyses above, at December 31, 2012, a substantial portion of the Company’s time deposits mature within one year, which is common in the present banking market. The following table shows the maturity of time deposits of $100,000 or more and other time deposits at December 31, 2012:
Maturity
 
Time Deposits of $100,000 or more
 
Other Time Deposits
 
Total
(Amounts in thousands)
 
 
 
 
 
 
Three months or less
 
$
25,040

 
41,396

 
66,436

Three to six months
 
27,613

 
24,109

 
51,722

Six to twelve months
 
37,861

 
37,054

 
74,915

Over twelve months
 
66,324

 
65,451

 
131,775

 
 
$
156,838

 
168,010

 
324,848


Capital Adequacy
The Federal Reserve Board established risk-based capital guidelines for bank holding companies, which require bank holding companies to maintain minimum levels of “Tier 1 Capital” and “Total Capital.” Tier 1 Capital consists of common and qualifying preferred stockholders’ equity and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% of investments in unconsolidated subsidiaries. Total Capital consists of, in addition to Tier 1 Capital, mandatory convertible debt, preferred stock not qualifying as Tier 1 Capital, subordinated and other qualifying term debt, and a portion of the reserve for loan losses, less the remaining 50% of qualifying Total Capital. Risk-based capital ratios are calculated with reference to risk-weighted assets, which include both on- and off-balance sheet exposures. The minimum required ratio for qualifying Total Capital is 8%, of which at least 4% must consist of Tier 1 Capital.
In addition, Federal Reserve guidelines require bank holding companies to maintain a minimum ratio of Tier 1 Capital to average total assets (net of goodwill) of 3%. The Federal Reserve guidelines state that all of these capital ratios constitute the minimum requirements for the most highly rated banking organizations, and other banking organizations are expected to maintain capital at higher levels.
Also, as of December 31, 2012, Reliance Bank and Reliance Bank, FSB were required to maintain additional capital, as described in the "Business" section above, under "Regulatory Agreements".
The actual capital amounts and ratios for the Company, Reliance Bank, and Reliance Bank, FSB at December 31, 2012, 2011, and 2010 are presented in the following table:


38


 
 
 
 
 
 
For capital adequacy purposes
 
To be a well-capitalized bank under prompt corrective action provision
(Amounts in thousands)
 
Amount
 
Actual ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
75,649

 
10.88
%
 
$
55,636

 
≥8.0%
 
N/A

 
N/A
Reliance Bank
 
76,968

 
11.52
%
 
53,436

 
≥8.0%
 
$
66,795

 
≥10.0%
Reliance Bank, FSB
 
4,593

 
16.32
%
 
2,252

 
≥8.0%
 
2,815

 
≥10.0%
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
66,715

 
9.59
%
 
$
27,818

 
≥4.0%
 
N/A

 
N/A
Reliance Bank
 
68,414

 
10.24
%
 
26,718

 
≥4.0%
 
$
40,077

 
≥6.0%
Reliance Bank, FSB
 
4,205

 
14.94
%
 
1,126

 
≥4.0%
 
1,689

 
≥6.0%
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
$
66,715

 
6.79
%
 
$
39,285

 
≥4.0%
 
N/A

 
N/A
Reliance Bank
 
68,414

 
7.38
%
 
37,061

 
≥4.0%
 
$
46,327

 
≥5.0%
Reliance Bank, FSB
 
4,205

 
7.10
%
 
2,370

 
≥4.0%
 
2,963

 
≥5.0%
December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 

 
 

 
 

 
 
 
 

 
 
Consolidated
 
$
78,089

 
9.50
%
 
$
65,787

 
≥8.0%
 
N/A

 
N/A
Reliance Bank
 
77,452

 
9.86
%
 
62,865

 
≥8.0%
 
$
78,581

 
≥10.0%
Reliance Bank, FSB
 
3,453

 
9.52
%
 
2,903

 
≥8.0%
 
3,628

 
≥10.0%
Tier 1 capital (to risk-weighted assets):
 
 

 
 
 
 

 
 
 
 

 
 
Consolidated
 
$
67,548

 
8.21
%
 
$
32,893

 
≥4.0%
 
N/A

 
N/A
Reliance Bank
 
67,403

 
8.58
%
 
31,432

 
≥4.0%
 
$
47,149

 
≥6.0%
Reliance Bank, FSB
 
2,963

 
8.17
%
 
1,451

 
≥4.0%
 
2,177

 
≥6.0%
Tier 1 capital (to average assets):
 
 

 
 

 
 
 
 
 
 

 
 
Consolidated
 
$
67,548

 
6.13
%
 
$
44,100

 
≥4.0%
 
N/A

 
N/A
Reliance Bank
 
67,403

 
6.54
%
 
41,215

 
≥4.0%
 
$
51,519

 
≥5.0%
Reliance Bank, FSB
 
2,963

 
4.10
%
 
2,888

 
≥4.0%
 
3,610

 
≥5.0%
December 31, 2010:
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 

 
 

 
 

 
 
 
 

 
 
Consolidated
 
$
108,209

 
10.05
%
 
$
86,168

 
≥8.0%
 
N/A

 
N/A
Reliance Bank
 
102,606

 
10.03
%
 
81,824

 
≥8.0%
 
$
102,280

 
≥10.0%
Reliance Bank, FSB
 
4,033

 
7.53
%
 
4,287

 
≥8.0%
 
5,359

 
≥10.0%
Tier 1 capital (to risk-weighted assets):
 
 

 
 
 
 

 
 
 
 

 
 
Consolidated
 
$
93,896

 
8.72
%
 
$
43,084

 
≥4.0%
 
N/A

 
N/A
Reliance Bank
 
89,574

 
8.76
%
 
40,912

 
≥4.0%
 
$
61,368

 
≥6.0%
Reliance Bank, FSB
 
3,330

 
6.21
%
 
2,144

 
≥4.0%
 
3,215

 
≥6.0%
Tier 1 capital (to average assets):
 
 

 
 

 
 
 
 
 
 

 
 
Consolidated
 
$
93,896

 
7.14
%
 
$
52,589

 
≥4.0%
 
N/A

 
N/A
Reliance Bank
 
89,574

 
7.29
%
 
49,161

 
≥4.0%
 
$
61,451

 
≥5.0%
Reliance Bank, FSB
 
3,330

 
4.01
%
 
3,324

 
≥4.0%
 
4,155

 
≥5.0%

39


Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized banking institutions. The extent of the regulators’ powers depends on whether the banking institution in question is “well-capitalized,” “adequately-capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” which are defined by the regulators as follows:
 
 
Total risk-based ratio
 
Tier 1 risk-based ratio
 
Tier 1 leverage ratio
Well-capitalized
 
10
%
 
6
%
 
5
%
Adequately-capitalized
 
8

 
4

 
4

Undercapitalized
 
<8

 
<4

 
<4

Significantly undercapitalized
 
<6

 
<3

 
<3

Critically undercapitalized
 
*

 
*

 
*


* A critically undercapitalized institution is defined as having a tangible equity to total assets ratio of 2% or less.
Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: requiring the submission of a capital restoration plan; placing limits on asset growth and restrictions on activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions with affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver of the institution. The capital category of an institution also determines in part the amount of the premium assessed against the institution for FDIC insurance.
Contractual Obligations and Contingent Liabilities
Through the normal course of operations, the Banks have entered into certain contractual obligations. Such obligations relate to funding of operations through deposits or debt issuances, as well as leases for premises and equipment.
The required contractual obligations and other commitments at December 31, 2012 are as follows:
(Amounts in thousands)
 
Total cash commitment
 
Less than 1 year
 
Over 1 year less than 5 years
 
Over 5 years
Operating leases
 
$
6,014

 
540

 
1,821

 
3,653

Time deposits
 
324,848

 
193,073

 
131,565

 
210

Federal Home Loan Bank borrowings
 
67,000

 
5,000

 
20,000

 
42,000


Off-Balance Sheet Arrangements
The Banks issue financial instruments with off-balance sheet risk in the normal course of the business of meeting the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit and may involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Banks have in particular classes of these financial instruments. A significant portion of commitments to extend credit may expire without being drawn upon.
The Banks’ exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for financial instruments included on the balance sheets.
Following is a summary of the Banks’ off-balance sheet financial instruments at December 31, 2012:
(Amounts in thousands)
 
Total cash commitment
 
Less than 1 year
 
Over 1 year less than 5 years
 
Over 5 years
Commitments to extend credit
 
$
61,640

 
17,541

 
24,412

 
19,687

Standby letters of credit
 
10,885

 
10,706

 
179

 
—



40


Impact of New and Not Yet Adopted Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-11 “Disclosures About Offsetting Assets and Liabilities”. The ASU amends Topic 210 by requiring additional improved information to be disclosed regarding financial instruments and derivative instruments that are offset in accordance with the conditions under Accounting Standards Codification ("ASC") 210-20-45 or ASC 810-10-45 or subject to an enforceable master-netting arrangement or similar agreement. The amendments are effective for annual and interim reporting periods beginning on or after January 1, 2013. The disclosures required by the amendments should be applied retrospectively for all comparative periods presented. The Company is evaluating the impact of adopting this updated guidance.
In February 2013, the FASB issued ASU No. 2013-02 "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." The ASU requires entities to provide information about amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount being reclassified is required under US GAAP to be reclassified in its entirety to net income. For amounts that are not required under US GAAP to be reclassified in their entirety, entities are required to cross-reference other disclosures required under US GAAP to provide additional detail about those amounts. This ASU is effective for annual and interim reporting periods beginning January 1, 2013. The Company is evaluating the impact of adopting the guidance.
Effects of Inflation
Persistent high rates of inflation can have a significant effect on the reported financial condition and results of operations of all industries. However, the asset and liability structure of a financial institution is substantially different from that of an industrial company, in that virtually all assets and liabilities of a financial institution are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution’s performance. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of other goods and services.
Inflation, however, does have an important impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity-to-assets ratio. One of the most important effects that inflation has had on the banking industry has been to reduce the proportion of earnings paid out in the form of dividends.
Although it is obvious that inflation affects the growth of total assets, it is difficult to measure the impact precisely. Only new assets acquired each year are directly affected, so a simple adjustment of asset totals by use of an inflation index is not meaningful. The results of operations also have been affected by inflation, but again there is no simple way to measure the effect on the various categories of income and expense.
Interest rates in particular are significantly affected by inflation, but neither the timing nor the magnitude of the changes coincide with changes in the consumer price index. Additionally, changes in interest rates on some types of consumer deposits may be delayed. These factors, in turn, affect the composition of sources of funds by reducing the growth of deposits that are less interest sensitive and increasing the need for funds that are more interest sensitive.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Information regarding the market risk of the financial instruments of the Company is included in this report under “Fluctuations in interest rates could reduce our profitability and affect the value of our assets” in Item 1A “Risk Factors” and under “Liquidity and Rate Sensitivity Management” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such information is incorporated in this Item 7A by reference.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are set forth in Item 15 of this report and incorporated by reference here.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s Chief Executive Officer and the Interim Chief Financial Officer, management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended) and concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2012.

41


Changes in Internal Control Over Financial Reporting
There were no changes during the fourth quarter of fiscal 2012 in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Interim Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2012. The framework on which such evaluation was based is contained in the report entitled “Internal Control—Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Chief Executive Officer and Interim Chief Financial Officer concluded that our internal control over financial reporting was effective as of December 31, 2012.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Information Regarding the Directors
Richard M. Demko, DDS, MSD, age 67, has served on the Board of Directors of the Company since 2003, as well as serving on the Board of Directors for Reliance Bank since 1999. He serves as member of the Company's Audit, Nominating and Governance, and Compensation Committees He also serves on the faculty of St. Louis University Center for Advanced Dental Education. He is a member or on the board of numerous civic and professional organizations and on the advisory board of “Bank Director” magazine. Dr. Demko maintained his own private orthodontic practice from 1974 until recently selling the practice. He regularly performs consulting for practices throughout the United States. Dr. Demko’s experience as a business owner for nearly 37 years in St. Louis, our major market area, bring a very useful knowledge of the St. Louis business community and many of its members to the Board. The Company considers Dr. Demko a highly qualified candidate for service on the Board and any committees due to this business experience and his knowledge of the banking industry.
Allan D. Ivie, IV, age 51, joined the Company on June 23, 2010 as president and Chief Executive Officer of the Company and President and Chief Executive Officer of Reliance Bank. Mr. Ivie also became a Director of the Company, and serves as Chairman of the Executive Committee and Chairman of Reliance Bank. He previously served as President and Chief Operating Officer of The PrivateBank from June 2000 to June 2010. Mr. Ivie has been in the banking industry for 29 years. Also, he serves on the Board of Directors of several civic organizations, including The Backstoppers, Beyond Housing/Neighborhood Housing Services, RHCDA, St. Louis Economic Council and the Urban League of Metropolitan St. Louis, Inc. The Company feels Mr. Ivie is very highly qualified for service on the Board and any committee due to his years of experience in the banking industry.
Lawrence P. “Rusty” Keeley, Jr., age 43, has served on the Board of Directors of Reliance Bank since the founding of the Bank in 1999 and the Company since 2009. He serves as Chairman of the the Company's Nominating and Governance Committee as well as a member of the Executive Committee. Mr. Keeley also serves on the advisory Board of Healing the Children Medical Charity as an active host family for children. He is the President and Chief Executive Officer of Keeley Construction Company in Sauget, Illinois, and the President and Chief Executive Officer of ADB Utility Contractors of St. Louis, Missouri. He has served in these positions since 1994 and 1996, respectively. Having been a Director for Reliance Bank for over 13 years, the Company feels Mr. Keeley’s experience within the financial industry makes him an excellent choice to assist the Board of Directors of the Company. Moreover, the Company considers Mr. Keeley to be a qualified candidate for service on the Board of Directors and any committees due to his experience as the President and Chief Executive Officer of successful construction and contracting companies in St. Louis, Missouri, our major market area, and his knowledge of the business community in this area.
Scott A. Sachtleben, age 53, has served on the Board of Directors of Reliance Bank since 2006 and the Company since 2009. He serves as Chairman of the Company's Compensation Committee as well as a member of the Audit Committee. Mr. Sachtleben is Senior Vice President of Development and General Counsel for the DESCO Group, Inc., where he has been employed since 2001. Mr. Sachtleben previously was a partner with the law firm of Greensfelder, Hemker & Gale, P.C., where he practiced for 15 years, primarily in the real estate, corporate and securities areas of law. Mr. Sachtleben has been practicing within the legal areas prudent to the banking industry and the Company for over 21 years. His practice area and current position with DESCO Group, Inc. brings a valuable level of knowledge and expertise to corporate and banking laws and procedures.

42


The Company feels he is highly qualified for service on the Board and any committee due to this experience, along with his education and training as an attorney.
James E. SanFilippo, age 62, has served on the Board of Directors of the Company since 1999, as well as serving on the Board of Directors and Marketing Committee for Reliance Bank until December, 2009. He serves as a member of the Company's Nominating and Governance Committee. Mr. SanFilippo retired in 2011 from Waylan Advertising where he served as President and owner since 2000. He has spent over 35 years serving Fortune 50 accounts as well as premier local accounts. He has volunteered marketing guidance for such charitable organizations as Herbert Hoover Boys & Girls Club and the Semper Fi Injured Marines Fund. His experience in the areas of advertising and marketing has given helpful insight for the Company while guiding its marketing efforts. The Company feels Mr. SanFilippo is highly qualified for service on the Board and any committee due to his marketing and advertising experience.
Robert M. Cox, Jr., age 67, has served on the Board of Directors of the Company since February 2007, and had also served on the Board of Directors for Reliance Bank since 2005. He serves as Chairman of the Company's Audit Committee as well as a member of the Executive and Compensation Committees. Mr. Cox also serves as a Trustee for Drury University in Springfield, Missouri. He is also a member of the Dean’s Advisory Council for the Kelley School of Business at Indiana University in Bloomington, Indiana. Additionally, he is a Director of the St. Louis Club, Kidsmart, and Beyond Housing. Mr. Cox is the retired Senior Vice President in Administration for Emerson Electric Co. in St. Louis, Missouri, where he had been employed since 1975. He currently serves as a consultant to Emerson Electric Co. Mr. Cox is a very respected and well-known business person in the St. Louis community, and his experience and reputation is a valuable contribution to the Board and the Company. His insight into business and administration is a great addition to the Board and the Company feels Mr. Cox is highly qualified for service on the Board and any committees for these reasons.
Gary R. Parker, age 63, has served on the Board of Directors of the Company since its inception in 1998, as well as serving on the Board of Directors for Reliance Bank until stepping down in 2008. He is the owner and founder of Center Oil Company and its subsidiaries and affiliates, located in St. Louis, Missouri, started in 1986. Mr. Parker serves on the Board of Directors of World Point Terminals Inc. and Green Plains Renewal Energy, Inc. Mr. Parker is one of the strongest business owners in St. Louis and brings a wealth of knowledge and business contacts to the Company. Mr. Parker is the Company’s largest shareholder and has a vested interest in the performance of the Company. Therefore, with Mr. Parker’s business acumen and personal interest in the Company, the Company feels he is very highly qualified for service on the Board and any committee.
Barry D. Koenemann, age 64, has served on the Board of Directors of the Company since 1999, as well as serving on the Board of Directors for Reliance Bank until December 2009. He serves as a member of the Company's Audit Committee. Mr. Koenemann serves on the Board of Directors of Wings of Hope, a non-profit humanitarian organization that provides medical assistance/air transportation around the world. He is also a member of the University of Missouri-Rolla Board of Trustees, Engineers Club of St. Louis, Creve Coeur Chamber of Commerce and the Creve Coeur Building Code of Appeals. Mr. Koenemann is Chairman and Chief Executive Officer of United Construction Ent. Co., a general contracting firm he founded in 1991. Mr. Koenemann’s experience as Chairman and Chief Executive Officer of United Construction Ent. Co. has provided him with extensive insight into operating a successful business and the real estate and construction business of St. Louis. Mr. Koenemann brings a strong business background, along with memberships in numerous charitable organizations, which are excellent qualities for the Board. The Company feels Mr. Koenemann is very highly qualified for service on the Board and any committee.
Information Regarding Directors Emeritus
Effective with their resignations as members of the Company's Board of Directors, the Company appointed Fortis M. Lawder and William P. Stiritz as Directors Emeritus. Directors Emeritus are welcome to attend meetings of the Board, but are not counted for purposes of determining whether a quorum is present and are not permitted to vote.
Fortis M. Lawder, age 85, has been Director Emeritus since May 2010 and currently serves as Secretary of the Company. Mr. Lawder had served on the Board of Directors of the Company since 1998, as well as serving on the Board of Directors for Reliance Bank. He had been general counsel for both entities since their inception and had also served on the Company's Nominating and Governance Committee. Mr. Lawder has been a practicing attorney for more than 62 years and has represented over 50 different banks, bank holding companies and thrifts during his years as a lawyer.
Audit Committee
We have a separately designated audit committee that is composed of Mr. Cox, Dr. Demko, and Mr. Sachtleben, with Mr. Cox acting as Chairman. The Board of Directors has determined that all of the current members of the Audit Committee qualify as “audit committee financial experts” as defined under applicable rules of the SEC.
Code of Business Conduct and Ethics
In order to assure the proper and ethical performance of its business and to maintain the confidence of the public, customers, and stockholders, the Board of Directors of Reliance Bancshares, Inc. has established and adopted a Code of Conduct and

43


Ethics (the “Code”). The Code establishes standards of ethical conduct and is applicable to the entire Company’s employees, officers and Directors, including its principal executive, principal financial and principal accounting officers, and the employees of its subsidiaries. Any violation of this Code may result in corrective action, including termination from employment.
The Code is available at www.sec.gov, or by contacting Reliance Bancshares, Inc., at 10401 Clayton Road, Frontenac, Missouri 63131.
Executive Officers
The biography of Mr. Ivie, the Company's Chief Executive Officer, is included in the section “Information Regarding the Directors” above.
David P. Franke, age 42, was hired by Reliance Bank in August 2008 and served as the Chief Accounting Officer of Reliance Bank and Treasurer of Reliance Bank FSB until his appointment as Interim Chief Financial Officer of the Company, Reliance Bank and Reliance Bank, FSB on February 14, 2012. Mr. Franke will serve as Interim Chief Financial Officer until a permanent replacement is named. Before joining the Company, Mr. Franke served as Senior Vice President - Controller of Partners Bank since 2004.
Wendy L. Erhart, age 41, joined the Company in February 2011 as Executive Vice President and Head of Retail Banking.  She has 18 years of retail banking and consumer lending experience.  Ms. Erhart began her career as a management trainee at American General Financial Services.  She joined National City Bank, now PNC Bank, in 2004 and served there as a Regional Manager until joining the Company.  Mrs. Erhart's areas of responsibility include retail marketing, employee development, product development, fee income and source of funds. 
Roy A. Wagman, age 61, was hired by the Company on September 21, 2010 and serves as Executive Vice President and Chief Lending Officer of the Company. Mr. Wagman's primary responsibilities include development of the commercial loan portfolio and assuring the continuance of the performing credit quality of the commercial loan portfolio of the Bank. Mr. Wagman has 39 years of banking experience. Prior to joining the Company, Mr. Wagman served as Vice Chairman and Chief Credit Officer of Excel Bank, headquartered in Sedalia, Missouri, from January 1, 2010 to August 31, 2010. During 2008 and 2009, he served as Director of Private Banking for National City Bank, now PNC Bank. From 2005 to 2007, Mr. Wagman was Chief Credit Officer of National City Bank’s private banking group.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act, requires our executive officers and Directors, and persons who beneficially own more than 10% of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Until July 26, 2012, executive officers, Directors and greater than 10% beneficial shareholders were required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. On July 26, 2012, the Company terminated the registration of our Class A common stock under Section 12(g) of the Exchange Act pursuant to a provision of the JOBS Act.
Based solely upon its review of the forms it received and written representations from reporting persons, the Company believes that during the period of January 1, 2012 to July 26, 2012, all filing requirements applicable to officers, Directors and greater than 10% beneficial owners with respect to Section 16(a) of the Securities Exchange Act of 1934, as amended, were satisfied in a timely manner.
Director Nominations
There have been no changes to the procedures by which shareholders may recommend nominees to our Board of Directors implemented during the fourth quarter of fiscal 2012.
Item 11. Executive Compensation
The information presented below includes information regarding the compensation of our named executive officers for the year ended December 31, 2012.

44


2012 Summary Compensation Table
Name and Principal Position
 
Year
 
Salary ($)
 
Stock Awards ($)
 
All Other Compensation ($) (1)
 
 
 
Total ($)
Allan D. Ivie, IV, President and Chief Executive Officer
 
2012
 
424,948

 
50,050

(2)
18,445

 
 
 
493,443

 
 
2011
 
416,315

 
120,750

(2)
17,374

 
 
 
544,439

Wendy L. Erhart, Executive Vice President and Head of Retail Banking
 
2012
 
175,288

 
35,700

(2)
4,519

 
 
 
215,507

 
 
2011
 
141,424

 
—

 
4,403

 
 
 
145,827

Roy A. Wagman, Executive Vice President and Senior Lending Officer
 
2012
 
199,266

 
14,000

(2)
2,005

 
 
 
215,271

 
 
2011
 
199,561

 
—

 
3,101

 
 
 
202,662


(1)
“All Other Compensation” consists of the following: (i) for all named executive officers, Company matching contributions paid to the Company’s 401(k) plan on behalf of each named executive officer; (ii) for Mr. Ivie, club membership dues; (iii) for Mr. Ivie and Ms. Erhart, cellular phone expenses.
(2)
Mr. Ivie received 65,000 shares of restricted stock valued at $0.77 per share on January 1, 2012 and 75,000 shares of restricted stock valued at $1.61 per share on January 1, 2011. Mr. Wagman received a restricted stock award of 20,000 shares valued at $0.70 per share on December 31, 2012. Ms. Erhart received 30,000 shares of restricted stock valued at $1.19 per share on March 7, 2012. The grant date fair value of these shares was determined using the last reported sales price of the Company's Class A common stock on the date of the grant/award as reported by the OTC Quote Board. The restricted stock awards received by Mr. Ivie and Ms. Erhart are subject to a two-year cliff vesting period and are subject to minimum holding periods as required by TARP regulations.

2012 Outstanding Equity Awards at Fiscal Year-End Table
The following table reflects equity awards outstanding as of December 31, 2012 for the named executive officers. The information below has been restated to reflect a two-for-one stock split in May 2004 and an additional two-for-one stock split in December 2006.
 
 
Number of Shares or Units of Stock that have not Vested
 
Market Value of Shares or Units of Stock that have not Vested
 
Name
 
#
 
(1)
 
Allan D. Ivie, IV (2)
 
75,000

 
$
52,500

 
 
 
65,000

 
$
45,500

 
 
 
140,000

 
$
98,000

 
 
 
 
 
 
 
Wendy L. Erhart (3)
 
30,000

 
$
21,000

 
 
 
 
 
 
 
Roy A. Wagman (4)
 
10,000

 
$
7,000

 

(1)
The market value of the awards reported above has been calculated based on a stock price of $.70, the last sales price of the Company's Class A Common Stock on December 30, 2012.

45


(2)
As part of his employment agreement, Mr. Ivie was granted 75,000 shares of restricted stock on January 1, 2011 and 65,000 shares of restricted stock on January 1, 2012 under the Company's 2010 Restricted Stock Plan. All awards are subject to a two-year cliff vesting period and subject to minimum holding periods as required by TARP regulations.
(3)
Ms. Erhart was granted 30,000 shares of restricted stock on March 7, 2012 under the Company's 2010 Restricted Stock Plan. The awards are subject to a two-year cliff vesting period and subject to a minimum holding period as required by TARP regulations.
(4) Mr. Wagman was granted 30,000 restricted stock units on October 25, 2010, 10,000 of which vested on October 25, 2011, and 10,000 of which vested on October 25, 2012. The remaining 10,000 units vest on October 25, 2013.
The 2010 Restricted Stock Plan is administered by the Company's Compensation Committee. The plan was created to promote the long-term financial success of the Company to attract, retain and reward individuals who can and do contribute to such success and to further align their interests with those of the Company's shareholders. A maximum of 500,000 shares of the Company's Class A Common Stock is able to be issued under the plan. The types of awards that may be granted under the plan include (a) restricted stock and (b) restricted stock units. A restricted stock award is an award entitling the recipient to acquire, at no cost or for a purchase price determined by the Committee, shares of stock subject to such restrictions and conditions as the Committee may determine at the time of grant. Conditions may be based on continuing service and/or achievement of pre-established performance goals and objectives. A restricted stock unit award is an award evidencing the right of the recipient to receive an equivalent number of shares of stock on a specific date or upon the attainment of pre-established performance goals, objectives, and other conditions specified by the Committee. Restricted stock unit awards may be settled in shares of stock, cash or a combination thereof, as may be determined by the Committee.

Compensation Committee Report
Based on risk assessment and other compliance requirements set forth in the TARP Capital Purchase Program, the Compensation Committee met with the Company's Chief Risk Officer and Chief Executive Officer to review how it limited the features of the senior executive officer and employee compensation plans within the Company so that employees are not encouraged to take unnecessary and excessive risks that could threaten the value of the Company.

The review covered the following compensation plans:
•
1999 Incentive Stock Option Plan
•
2001 Incentive Stock Option Plan
•
2001 Non-Qualified Stock Option Plan
•
2003 Incentive Stock Option Plan
•
2003 Non-Qualified Stock Option Plan
•
2004 Non-Qualified Stock Option Plan
•
2005 Incentive Stock Option Plan
•
2005 Non-Qualified Stock Option Plan
•
2007 Non-Qualified Stock Option Plan
•
2010 Restricted Stock Plan
•
Mortgage Loan Commission Plan
•
Employment Agreements and Change-in-Control Agreements

It was the opinion of the Compensation Committee and the Chief Risk Officer that the compensation programs do not encourage executive officers or other employees to take unnecessary or excessive risks that are reasonably likely to have a material adverse effect on the Company.


46


The Compensation Committee certifies that:

(1)
It has reviewed with senior risk officers, the senior executive officer compensation plans and has made all reasonable efforts to ensure that these plans do not encourage senior executive officers to take unnecessary and excessive risks that threaten the value of the Company;
(2)
It has reviewed with senior risk officers the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the Company; and
(3)
It has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of the Company to enhance compensation of any employee.

March 29, 2013
Respectfully submitted by:
Mr. Scott A. Sachtleben, Chairman
Mr. Robert M. Cox, Jr.
Mr. Richard M. Demko

Director Compensation
The following table discloses the compensation earned or paid in cash in 2012 to each Director of the Company in 2012.
Mr. Ivie is not separately compensated for his services as a member of the Board. His compensation for services as the Company's Chief Executive Officer is included in the "Executive Compensation" portion of this Annual Report on Form 10-K.
All non-employee Directors receive $600 per meeting of the Board of Directors of the Company that he attends. Executive Committee members receive $500 per meeting, Audit Committee members receive $650 per meeting, and Compensation Committee members receive $200 per meeting. Committee Chairmen do not receive additional compensation, with the exception of the Audit Committee Chairman, who receives $750 per meeting attended. Reliance Bank Board members also receive $400 for each meeting of Reliance Bank’s Board of Directors he attends. Members of Reliance Bank’s Credit Committee receive $500 per meeting attended, members of Reliance Bank's Watch List Committee receive $650 per meeting attended, members of Reliance Bank’s Regulatory and Compliance Committee receive $400 per meeting attended, and members of Reliance Bank's Asset Liability Committee receive $200 per meeting attended, all of which are included in the amounts below.
Name
 
Fees Earned or
Paid in Cash ($)
 
Total ($)
Robert M. Cox, Jr. (1)
 
24,150

 
24,150

Richard M. Demko (2)
 
23,900

 
23,900

Patrick R. Gideon (3)
 
20,600

 
20,600

Lawrence P. Keeley, Jr. (4)
 
24,000

 
24,000

Barry D. Koenemann (5)
 
8,000

 
8,000

Gary R. Parker (6)
 
8,000

 
8,000

Scott A. Sachtleben (7)
 
20,600

 
20,600

James E. SanFilippo (8)
 
8,000

 
8,000



47


(1) Of this amount, $9,850 relates to fees received for his service as a Director and member of the Credit and Watch List Committees of Reliance Bank. As of December 31, 2012, Mr. Cox held the following vested, unexercised stock options: (i) an option to purchase 6,000 shares of Class A common stock at an exercise price of $9.625 per share, which expires on August 1, 2015; and (ii) an option to purchase 10,000 shares of Class A common stock at an exercise price of $16.50 per share, which expires on May 16, 2017.
(2) Of this amount, $12,850 relates to fees received for his service as a Director and member of the Credit, Watch List, and Regulatory and Compliance Committees of Reliance Bank. As of December 31, 2012, Dr. Demko held the following vested, unexercised stock options: (i) an option to purchase 16,000 shares of Class A common stock at an exercise price of $6.00 per share, which expires on January 15, 2013; and (ii) an option to purchase 16,000 shares of Class A common stock at an exercise price of $7.25 per share, which expires on July 21, 2014; and (iii) an option to purchase 10,000 shares of Class A common stock at an exercise price of $16.50 per share, which expires on May 16, 2017.
(3) Effective, February 25, 2012, Mr. Gideon resigned from the Board of Directors. Before his resignation, Mr. Gideon was elected by the Board of Directors of the Company as Non-Executive Chairman of the Board on April 25, 2011. His agreement was for an initial term of 90 days, subject to extension upon agreement of the parties. During the initial 90-day period, his compensation was fixed at $50,000 per month, plus reimbursement of certain expenses. After the initial 90-day period, Mr. Gideon's compensation was subject to adjustment. Mr. Gideon received $20,600 during 2012 in his position as Non-Executive Chairman. At December 31, 2012, Mr. Gideon held the following vested, unexercised stock options: (i) an option to purchase 8,000 shares of Class A common stock at an exercise price of $6.00 per share, which expires on January 15, 2013; and (ii) an option to purchase 10,000 shares of Class A common stock at an exercise price of $7.25 per share, which expires on July 21, 2014; and (iii) an option to purchase 10,000 shares of Class A common stock at an exercise price of $16.50 per share, which expires on May 16, 2017.
(4) Of this amount, $7,200 relates to fees received for his service as a Director and member of the Credit and Watch List Committees of Reliance Bank. At December 31, 2012, Mr. Keeley held (i) an option to purchase 8,000 shares of Class A common stock at an exercise price of $6.00 per share, which expires on January 15, 2013; and (ii) an option to purchase 6,000 shares of Class A common stock at an exercise price of $7.25 per share, which expires on July 21, 2014. Additionally, as of December 31, 2012, Mr. Keeley held 3,750 earned restricted stock units and 1,250 unearned restricted stock units. All of the restricted stock units will vest on December 31, 2013 if Mr. Keeley remains tenured as a Director on the Board through December 31, 2013.
(5) As of December 31, 2012, Mr. Koenemann held the following vested, unexercised stock options: (i) an option to purchase 16,000 shares of Class A common stock at an exercise price of $6.00 per share, which expires on January 15, 2013; and (ii) an option to purchase 16,000 shares of Class A common stock at $7.25 per share, which expires on July 21, 2014; and (iii) an option to purchase 10,000 shares of Class A common stock at $16.50 per share, which expires on May 16, 2017.
(6) As of December 31, 2012, Mr. Parker held the following vested, unexercised stock options: (i) an option to purchase 16,000 shares of Class A common stock at an exercise price of $6.00 per share, which expires on January 15, 2013; and (ii) an option to purchase 16,000 shares of Class A common stock at $7.25 per share, which expires on July 21, 2014; and (iii) an option to purchase 10,000 shares of Class A common stock at $16.50 per share, which expires on May 16, 2017.
(7) Of this amount, $10,800 relates to fees received for his service as a Director and member of the Credit, Regulatory and Compliance, and Asset Liability Committees of Reliance Bank. As of December 31, 2012, Mr. Sachtleben held an option to purchase 6,000 shares of Class A common stock at $12.375 per share, which expires on August 1, 2015, 4,500 of which vested on October 26, 2008. Pursuant to the terms of the award, the remaining 1,500 options will vest when Mr. Sachtleben holds at least 6,000 shares of the Company's Class A common stock. Additionally, as of December 31, 2012, Mr. Sachtleben held 3,750 earned restricted stock units and 1,250 unearned restricted stock units. All of the restricted stock units will vest on December 31, 2013 if Mr. Sachtleben remains tenured as a Director on the Board through December 31, 2013.
(8) At December 31, 2012, Mr. SanFilippo held the following vested, unexercised stock options: (i) an option to purchase 16,000 shares of Class A common stock at an exercise price of $6.00 per share, which expires on January 15, 2013; and (ii) an option to purchase 16,000 shares of Class A common stock at $7.25 per share, which expires on July 21, 2014; and (iii) an option to purchase 10,000 shares of Class A common stock at $16.50 per share, which expires on May 16, 2017.


48


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The table below sets forth certain information regarding the beneficial ownership of shares of the Company's Class A Common Stock as of February 28, 2013 for (i) each Director; (ii) each of the named executive officers; (iii) all Directors and executive officers of the Company as a group; (iv) and each person known by the Company to own more than 5% of the Company's Class A Common Stock. The amount of Class A Common Stock owned, as reported below and in the footnotes, has been adjusted to reflect the May 2004 and December 2006 two-for-one stock splits. Unless otherwise indicated, to the knowledge of the Company, the listed individuals have shared voting power over shares held in joint tenancy and sole voting power in all other instances.
 
 
Amount and
Nature of
Beneficial
 
Percent of
Common Stock
Beneficially
Beneficial Owner (1)
 
Ownership
 
Owned (2)
Gary R. Parker (3)
 
6,143,945

 
26.9
%
William P. Stiritz (4)
 
2,556,310

 
11.2
%
Richard M. Demko (5)
 
439,467

 
1.9
%
Lawrence P. Keeley, Jr. (6)
 
432,417

 
1.9
%
Barry D. Koenemann (7)
 
299,571

 
1.3
%
Robert M. Cox, Jr. (8)
 
234,020

 
1.0
%
James E. SanFilippo (9)
 
207,714

 
0.9
%
Scott A. Sachtleben (10)
 
12,750

 
0.1
%
Allan D. Ivie, IV (11)
 
193,718

 
0.8
%
Roy A. Wagman (12)
 
34,916

 
0.2
%
Wendy L. Erhart (13)
 
32,747

 
0.1
%
 
 
 
 
 
Directors and all executive officers as a group
 
10,595,460

 
46.0
%

(1) The address for all holders listed below is 10401 Clayton Road, Frontenac, Missouri, 63131.
(2) The percentage of Common Stock owned by the Directors and executive officers is based on 22,855,044 of shares of Common Stock outstanding as of February 28, 2013.
(3) Includes 4,374,956 shares in his name; 933,768 shares held by G.P. & W, Inc., of which Mr. Parker is the sole owner; 666,667 shares in the Gary Parker Family Trust of which he is the trustee; 84,000 shares held by Center Oil Company, of which he is the sole owner; 33,080 shares in his spouse's Exempt Trust; 21,892 shares in an IRA; and 3,582 shares in his spouse's IRA. The amount reported also includes 26,000 shares that Mr. Parker has the right to acquire pursuant to vested stock options.
(4) Includes 2,170,310 shares held by the William P. Stiritz Revocable Trust, of which Mr. Stiritz is the trustee; 188,000 shares held as joint tenant with his spouse; and 188,000 shares in street name. The amount reported also includes 10,000 shares that Mr. Stiritz has the right to acquire pursuant to vested stock options.
(5) Includes 186,896 held by the Richard M. Demko Living Trust, of which Dr. Demko is the co-trustee; 91,000 shares held by his spouse's Revocable Living Trust, of which he is a co-trustee; 72,000 shares held in Dr. Demko's IRA; 48,000 shares in the name of the Demko Family Limited Partnership; and 12,000 shares in his spouse's IRA. The amount reported also

49


includes 26,000 shares that Dr. Demko has the right to acquire pursuant to vested stock options and 3,571 shares that Dr. Demko has a right to receive upon conversion of his Series C Preferred Stock.
(6) Includes 281,304 shares held as joint tenant with his spouse; 42,960 shares owned by the L. Keeley Construction Profit Sharing Plan for the benefit of Mr. Keeley; 20,000 shares owned by the L. Keeley Construction Co. Money Purchase Plan; 18,180 shares owned by the L. Keeley Construction Profit Sharing Plan for the benefit of Mr. Keeley's spouse; 10,000 shares owned by the L. Keeley Construction Co. Profit Sharing Plan, of which Mr. Keeley is the trustee; a total of 3,696 shares for his three sons, each son owning 1,232 shares singularly; 3,000 shares in his name only; and 43,527 in street name. The amount reported also includes 6,000 shares that Mr. Keeley has the right to acquire pursuant to vested stock options and 3,750 shares that Mr. Keeley has the right to acquire pursuant to vested restricted stock units
(7) Includes 104,028 shares held by the Barry D. Koenemann Joint and Mutual Revocable Trust, of which Mr. Koenemann is a co-trustee; 82,972 shares in an IRA; 69,000 shares owned by United Construction Ent. Co.; 12,000 shares held by Mr. Koenemann's spouse's Revocable Trust, of which he is successor trustee; 1,000 shares held by United Construction of Indianapolis; and 1,000 shares by United Construction of St. Louis. Mr. Koenemann is the sole owner of United Construction Ent. Co., United Construction Ent. Co. of Indianapolis, and United Construction Ent. Co. of St. Louis. The amount reported also includes 26,000 shares that Mr. Koenemann has the right to acquire pursuant to vested stock options and 3,571 shares that Mr. Koenemann has a right to receive upon conversion of his Series C Preferred Stock.
(8) Includes 218,020 shares held by the Robert M. Cox, Jr. Revocable Trust, of which Mr. Cox is the trustee. The amount reported also includes 16,000 shares that Mr. Cox has the right to acquire pursuant to vested stock options.
(9) Includes 181,714 held as joint tenant with his spouse. The amount reported also includes 26,000 shares that Mr. SanFilippo has the right to acquire pursuant to vested stock options.
(10) Includes 4,500 shares in his name and 4,500 shares that he has the right to acquire pursuant to vested stock options. The amount reported also includes 3,750 shares that Mr. Sachtleben has the right to acquire pursuant to vested restricted stock units.
(11) Includes 188,718 shares in his name, and 5,000 shares in street name.
(12) Includes 34,916 shares in street name.
(13) Includes 32,747 shares in her name

In conjunction with the capital plan discussed in the "Recent Developments" section of Part I, Item 1 above, Thomas H. Brouster, Sr. has received approval, on February 19, 2013, from the Federal Reserve of his application under the Change in Bank Control Act to acquire a controlling interest in Reliance Bancshares, Inc as a result of the capital plan.

Item 13. Certain Relationships and Related Transactions, and Director Independence
Interest of Management in Certain Transactions
The Company and its Banks have conducted, and expect to continue the practice of conducting, banking transactions in the ordinary course of business with their Directors, executive officers, employees, and affiliates or family members of those entities, including but not limited to corporations, limited liability companies, partnerships or other organizations in which Directors and executive officers have or will have a controlling interest, on substantially the same terms (including pricing, collateral requirements, interest rates and term length) as those then existing at the time and offered to unrelated parties. The Company does not expect these banking transactions to present more than the normal risk of collectability nor present other unfavorable terms to the Company and its subsidiaries. Any loans made to this group of persons or entities comply with Regulation O as promulgated by the Federal Reserve Board, which includes limiting the aggregate amount that can be loaned to the Directors and executive officers in their individual capacities, complying with the lending policies and statutory lending limits, and Directors having a personal interest in a loan application recusing themselves from voting on its approval.
On September 29, 2011, the Company executed a promissory note in favor of Gary R. Parker, a Director, pursuant to which Mr. Parker loaned the Company $200,000 at an interest rate of 7.00% annually. The loan is payable upon demand, or if no demand is made, the Company will pay the loan principal and plus interest on March 31, 2013. If cash is not available to pay the Note in full when due, the Company will issue a number of shares of its Class A common stock equivalent to the then principal and interest amounts due at an agreed price, which will be determined by using the average closing price of the common stock for the last 20 trading days prior to the maturity date. To date, the Company has not paid any interest or principal, since none has been due.

50


Director Independence
The Company's shares are not currently listed on any national securities exchange nor is the Company applying for the initial listing of its securities on any such exchange in connection with this filing. The Company, therefore, is not presently governed by specific corporate governance guidelines or rules imposing independence requirements on the composition of the Board of Directors and its committees.
The Company's Board of Directors has chosen, however, to evaluate the independence of its members according to the definition of “independence” as set forth in The NASDAQ Stock Market Marketplace Rules and has determined that the following members of the Board are independent: Robert M. Cox, Jr., Dr. Richard M. Demko, Gary R. Parker, James E. SanFilippo and Scott A. Sachtleben. The Board has also determined that all members of the Company's Audit Committee are considered independent under SEC rules and regulations and the NASDAQ Stock Market's independence requirements for Audit Committee members.
Item 14. Principal Accountant Fees and Services
Cummings, Ristau & Associates, P.C. served as the Company's independent registered public accounting firm for the fiscal year ended December 31, 2012. The following table presents fees for professional services rendered by Cummings, Ristau & Associates, P.C., for the fiscal years ending December 31, 2012 and 2011:
 
 
Fiscal 2012
 
Fiscal 2011
Audit Fees (1)
 
$
219,000

 
$
254,000

Audit-Related Fees (2)
 
4,000

 
4,000

Tax Fees (3)
 
20,000

 
20,000

All Other Fees (4)
 
6,500

 
15,330

Total Fees
 
$
249,500

 
$
293,330


(1) Includes aggregate fees for the audit of the Company's consolidated financial statements included in our Annual Report on Form 10-K, reviews of our financial statements included in each of our Quarterly Reports on Form 10-Q, and FDIC Improvement Act internal control attestation for Reliance Bank and loan risk assessment.
(2) Includes aggregate fees for audits of pension and other employee benefit plan financial statements.
(3) Includes aggregate fees for tax compliance, including the preparation of and assistance with federal, state and local income tax returns. We engage Cummings, Ristau & Associates, P.C. to assist us with tax compliance services, including preparation and assistance with tax returns and filings, which the Company believes is more cost efficient and effective than to have only our employees conduct those services. The Public Company Accounting Oversight Board and certain investor groups have recognized that the involvement of an independent auditor in providing certain tax services may enhance the quality of an audit because it provides the auditor with better insights into a company’s tax accounting services.
(4) Includes fees for preparation of employee benefit plan annual reports and for a review of Reliance Bancshares, Inc.'s private placement memorandum.
The Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy for pre-approving all audit and permissible non-audit services provided by the independent registered public accounting firm. Pursuant to this policy, all services disclosed in the table above were pre-approved by the Audit Committee.


51


PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
 
The following documents are filed as part of this Annual Report:
 
 
 
 
 
(1) Financial Statements
 
 
 
 
 
The financial statements filed with this Annual Report are listed in the Index to Consolidated Financial Statements on page F-1.
 
 
 
 
 
(2) Schedules
 
 
 
 
 
None.
 
 
 
 
 
(3) Exhibits
 
 
 
 
 
The Exhibits required to be filed as a part of this Annual Report are listed in the attached Index to Exhibits.
 
 
 
(b)
 
The Exhibits required to be filed as a part of this Annual Report are listed in the attached Index to Exhibits.
 
 
 
(c)
 
None.

52


Index to Consolidated Financial Statements
 
 
AUDITED CONSOLIDATED FINANCIAL STATEMENTS — December 31, 2012, 2011, and 2010
Page No.











Report of Independent Registered Public Accounting Firm


The Board of Directors and Stockholders
Reliance Bancshares, Inc.:

We have audited the accompanying consolidated balance sheets of Reliance Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reliance Bancshares, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.



St. Louis, Missouri
March 29, 2013




F- 2


RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2012 and 2011
 
 
December 31,
 
December 31,
(Amounts in thousands, except share and per share data)
 
2012
 
2011
ASSETS
 
 
 
 
Cash and due from banks (note 2)
 
$
11,840

 
9,731

Interest-earning deposits in other financial institutions
 
20,878

 
43,799

Investments in available-for-sale debt securities, at fair value (note 3)
 
309,757

 
222,207

Loans (notes 4 and 9)
 
575,811

 
720,531

Add net deferred loan costs
 
158

 
45

Less reserve for possible loan losses
 
(28,143
)
 
(31,370
)
Net loans
 
547,826

 
689,206

Residential mortgage loans held for sale
 
2,513

 
1,505

Premises and equipment, net (note 5)
 
35,294

 
34,030

Accrued interest receivable
 
2,643

 
3,128

Other real estate owned
 
34,819

 
34,565

Identifiable intangible assets, net of accumulated amortization of $156 and $140 at December 31, 2012 and December 31, 2011, respectively
 
89

 
105

Other assets (note 7)
 
5,797

 
8,550

 
 
$
971,456

 
1,046,826

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits (note 6):
 
 
 
 
Noninterest-bearing
 
$
71,544

 
66,765

Interest-bearing
 
752,920

 
820,121

Total deposits
 
824,464

 
886,886

Short-term borrowings (note 8)
 
4,235

 
17,243

Long-term Federal Home Loan Bank borrowings (note 9)
 
67,000

 
67,000

Accrued interest payable
 
505

 
673

Other liabilities
 
7,390

 
5,382

Total liabilities
 
903,594

 
977,184

Commitments and contingencies (notes 13 and 14)
 


 


Stockholders’ equity (notes 11,12, and 16):
 
 
 
 
Preferred stock, no par value; 2,000,000 shares authorized:
 
 
 
 
Series A, 40,000 shares issued and outstanding
 
40,000

 
40,000

Series B, 2,000 shares issued and outstanding
 
2,000

 
2,000

Series C, 555 shares issued and outstanding
 
555

 
555

Common stock, $0.25 par value; 250,000,000 shares authorized, 22,855,044 and 22,642,491 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively
 
5,714

 
5,661

Surplus
 
120,045

 
122,315

Accumulated deficit
 
(100,955
)
 
(102,323
)
Accumulated other comprehensive income — net unrealized holding gains on available-for-sale debt securities
 
503

 
1,434

Total stockholders’ equity
 
67,862

 
69,642

 
 
$
971,456

 
1,046,826

See accompanying notes to consolidated financial statements.

F- 3


RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2012, 2011, 2010

(Amounts in thousands, except share and per share data)
 
2012
 
2011
 
2010
Interest income:
 
 
 
 
 
 
Interest and fees on loans (note 4)
 
$
32,486

 
42,885

 
56,689

Interest on loans held for sale
 
46

 
20

 
63

Interest on debt securities:
 
 
 
 
 
 
Taxable
 
3,680

 
5,480

 
6,265

Exempt from federal income taxes
 
563

 
651

 
1,083

Interest on short-term investments
 
127

 
125

 
46

Total interest income
 
36,902

 
49,161

 
64,146

Interest expense:
 
 
 
 
 
 
Interest on deposits (note 6)
 
6,884

 
11,770

 
19,746

Interest on short-term borrowings (note 8)
 
79

 
113

 
120

Interest on long-term Federal Home Loan Bank borrowings (note 9)
 
2,406

 
3,403

 
3,771

Total interest expense
 
9,369

 
15,286

 
23,637

Net interest income
 
27,533

 
33,875

 
40,509

Provision for possible loan losses (note 4)
 
1,788

 
23,790

 
41,492

Net interest income (loss) after provision for possible loan losses
 
25,745

 
10,085

 
(983
)
Noninterest income:
 
 
 
 
 
 
Net gains on sales of debt securities (note 3)
 
3,137

 
2,153

 
288

Service charges on deposit accounts
 
594

 
765

 
910

Other real estate owned income
 
997

 
1,397

 
583

Mortgage banking income
 
443

 
262

 
468

Other noninterest income (note 5)
 
1,056

 
1,019

 
1,258

Total noninterest income
 
6,227

 
5,596

 
3,507

Noninterest expense:
 
 
 
 
 
 
Other-than-temporary impairment losses on available-for-sale securities:
 
 
 
 
 
 
Total other-than-temporary impairment losses
 
584

 
570

 
1,628

Portion of other-than-temporary losses recognized in other comprehensive income
 
(584
)
 
(534
)
 
(1,050
)
Net impairment loss realized
 
—

 
36

 
578

Salaries and employee benefits (note 10)
 
11,252

 
13,238

 
13,602

Other real estate owned expense
 
7,100

 
12,923

 
13,148

Occupancy and equipment expense (note 5)
 
3,572

 
3,867

 
4,215

Professional fees
 
2,423

 
1,712

 
930

FDIC assessment
 
2,223

 
2,818

 
2,860

Data processing
 
1,727

 
1,678

 
1,662

Write-down of goodwill
 
—

 
1,149

 
—

Amortization of intangible assets
 
16

 
16

 
16

Other noninterest expenses
 
2,291

 
3,626

 
2,730

Total noninterest expense
 
30,604

 
41,063

 
39,741

Income (loss) before applicable income taxes
 
1,368

 
(25,382
)
 
(37,217
)
Applicable income tax expense (note 7)
 
—

 
8,616

 
11,312

Net income (loss)
 
$
1,368

 
(33,998
)
 
(48,529
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
1,368

 
(33,998
)
 
(48,529
)
Preferred stock dividends
 
(2,389
)
 
(2,263
)
 
(2,208
)
Net loss attributable to common shareholders
 
$
(1,021
)
 
(36,261
)
 
(50,737
)
Per share amounts:
 
 
 
 
 
 
Basic loss per share
 
$
(0.04
)
 
(1.61
)
 
(2.32
)
Basic weighted average common shares outstanding
 
22,766,234

 
22,588,755

 
21,867,606

Diluted loss per share
 
$
(0.04
)
 
(1.61
)
 
(2.32
)
Diluted weighted average common shares outstanding
 
22,766,234

 
22,588,755

 
21,867,606

See accompanying notes to consolidated financial statements.

F- 4


RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2012, 2011, and 2010

(Amounts in thousands)
 
2012
 
2011
 
2010
Net income (loss)
 
$
1,368

 
(33,998
)
 
(48,529
)
Other comprehensive income (loss) before tax:
 
 
 
 
 
 
Change in unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings, net of reclassification
 
—

 
(82
)
 
(282
)
Change in unrealized gains on other securities available-for-sale, net of reclassification
 
1,727

 
4,326

 
661

Reclassification adjustments for:
 
 
 
 
 
 
Available-for-sale security gains included in net income (loss)
 
(3,137
)
 
(2,153
)
 
(288
)
Write-down of investment securities included in net income (loss)
 
—

 
36

 
578

Other comprehensive income (loss) before tax
 
(1,410
)
 
2,127

 
669

Income tax related to items of other comprehensive income (loss)
 
(479
)
 
723

 
227

Other comprehensive income (loss), net of tax
 
(931
)
 
1,404

 
442

Total comprehensive income (loss)
 
$
437

 
(32,594
)
 
(48,087
)

See accompanying notes to consolidated financial statements.

F- 5


RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years ended December 31, 2012, 2011, and 2010

 
 
 Preferred stock
 
Common stock
 
Surplus
 
Accumulated deficit
 
Treasury stock
 
Accumulated other comprehensive income
 
Total stockholders' equity
(Amounts in thousands)
 
 
 
 
 
 
 
Balance at December 31, 2009
 
$
42,300

 
5,243

 
122,335

 
(19,796
)
 
—

 
(412
)
 
149,670

Net loss
 
—

 
—

 
—

 
(48,529
)
 
—

 
—

 
(48,529
)
Other activity (note 11)
 
255

 
377

 
2,031

 
—

 
—

 
—

 
2,663

Change in valuation of available-for-sale securities, net of related tax effect
 
—

 
—

 
—

 
—

 
—

 
442

 
442

Balance at December 31, 2010
 
42,555

 
5,620

 
124,366

 
(68,325
)
 
—

 
30

 
104,246

Net loss
 
—

 
—

 
—

 
(33,998
)
 
—

 
—

 
(33,998
)
Other activity (note 11)
 
—

 
41

 
(2,051
)
 
—

 
—

 
—

 
(2,010
)
Change in valuation of available-for-sale securities, net of related tax effect
 
—

 
—

 
—

 
—

 
—

 
1,404

 
1,404

Balance at December 31, 2011
 
42,555

 
5,661

 
122,315

 
(102,323
)
 
—

 
1,434

 
69,642

Net income
 
—

 
—

 
—

 
1,368

 
—

 
—

 
1,368

Other activity (note 11)
 
—

 
53

 
(2,270
)
 
—

 
—

 
—

 
(2,217
)
Change in valuation of available-for-sale securities, net of related tax effect
 
—

 
—

 
—

 
—

 
—

 
(931
)
 
(931
)
Balance at December 31, 2012
 
$
42,555

 
5,714

 
120,045

 
(100,955
)
 
—

 
503

 
67,862

See accompanying notes to consolidated financial statements.


F- 6


RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2012, 2011, and 2010

(Amounts in thousands)
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
1,368

 
(33,998
)
 
(48,529
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
7,728

 
4,341

 
3,656

Provision for possible loan losses
 
1,788

 
23,790

 
41,492

Deferred income tax expense, net of valuation reserve
 
—

 
8,616

 
11,312

Net gains (losses) on sales and write-downs of available-for-sale debt securities
 
(3,137
)
 
(2,117
)
 
290

Write-downs of premises and equipment, net of gains (losses) on sales
 
—

 
104

 
—

Net losses on sales and write-downs of other real estate owned
 
4,285

 
9,632

 
10,902

Write-down of goodwill
 
—

 
1,149

 
—

Stock option compensation cost
 
—

 
20

 
215

Amortization of restricted stock expense
 
107

 
165

 
91

Mortgage loans originated for sale in the secondary market
 
(28,950
)
 
(16,961
)
 
(34,952
)
Mortgage loans sold in the secondary market
 
27,942

 
17,295

 
33,691

Decrease in accrued interest receivable
 
485

 
321

 
2,199

Decrease in accrued interest payable
 
(168
)
 
(647
)
 
(875
)
(Gain) loss on sale of loans
 
—

 
219

 
(244
)
Other operating activities, net
 
2,395

 
2,654

 
4,530

Net cash provided by operating activities
 
13,843

 
14,583

 
23,778

Cash flows from investing activities:
 
 
 
 
 
 
Purchase of available-for-sale debt securities
 
(267,876
)
 
(164,751
)
 
(172,941
)
  Proceeds from maturities and issuer calls and principal payments on available-for-sale debt securities
 
54,520

 
95,593

 
193,430

Proceeds from sales of available-for-sale debt securities
 
121,406

 
90,303

 
20,848

Net decrease in loans
 
127,160

 
182,736

 
115,598

Proceeds from sale of other real estate owned
 
6,341

 
17,524

 
5,934

Redemption of Federal Home Loan Bank stock
 
455

 
1,541

 
965

Proceeds from sale of premises and equipment
 
—

 
62

 
6

Proceeds from sale of loans
 
—

 
6,166

 
4,012

Purchase of premises and equipment
 
(1,296
)
 
(251
)
 
(100
)
Net cash provided by investing activities
 
40,710

 
228,923

 
167,752

Cash flows from financing activities:
 
 
 
 
 
 
Net decrease in deposits
 
(62,422
)
 
(193,273
)
 
(185,901
)
Net increase (decrease) in short-term borrowings
 
(13,008
)
 
2,065

 
2,481

Payments of long-term Federal Home Loan Bank borrowings
 
—

 
(26,000
)
 
(11,000
)
Issuance of preferred stock
 
—

 
—

 
255

 Dividends paid on preferred stock
 
—

 
—

 
(2,208
)
 Issuance of common stock
 
65

 
64

 
4,338

Proceeds from sale of treasury stock
 
—

 
4

 
—

Payment of stock issuance costs
 
—

 
—

 
(28
)
 Net cash used in financing activities
 
(75,365
)
 
(217,140
)
 
(192,063
)
Net increase (decrease) in cash and cash equivalents
 
(20,812
)
 
26,366

 
(533
)
Cash and cash equivalents at beginning of year
 
53,530

 
27,164

 
27,697

Cash and cash equivalents at end of year
 
$
32,718

 
53,530

 
27,164

See accompanying notes to consolidated financial statements.

F- 7
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)



NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reliance Bancshares, Inc. (the “Company”) provides a full range of banking services to individual and corporate customers throughout the St. Louis metropolitan area in Missouri and Illinois and southwestern Florida through its wholly owned subsidiaries, Reliance Bank and Reliance Bank, FSB (hereinafter referred to as the "Banks").
The Company and Banks are subject to competition from other financial and nonfinancial institutions providing financial products throughout the St. Louis metropolitan area and southwestern Florida. Additionally, the Company and Banks are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies.
The accounting and reporting policies of the Company and Banks conform to generally accepted accounting principles within the banking industry. In compiling the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates that are particularly susceptible to change in a short period of time include the determination of the reserve for possible loan losses and valuation of other real estate owned and deferred tax assets. Actual results could differ from those estimates.
Following is a description of the more significant accounting policies of the Company and Banks.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and Banks. All significant intercompany accounts and transactions have been eliminated in consolidation.
Basis of Accounting
The Company and Banks utilize the accrual basis of accounting, which includes in the total of net income all revenues earned and expenses incurred, regardless of when actual cash payments are received or paid. The Company is also required to report comprehensive income, of which net income is a component. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources, including all changes in equity during a period, except those resulting from investments by, and distributions to, owners, and cumulative effects of any changes in accounting principles, tax benefits, or capital transactions recorded directly to capital accounts.
The components of accumulated other comprehensive income are as follows at December 31, 2012, 2011, and 2010:
 
2012
 
2011
 
2010
Net unrealized gain on available-for-sale securities
$
763

 
2,173

 
45

Deferred tax effect
(260
)
 
(739
)
 
(15
)
 
$
503

 
1,434

 
30


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

F- 8
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Following is certain supplemental information relating to the Company's consolidated statements of cash flows for the years ended December 31, 2012, 2011, and 2010:
 
 
2012
 
2011
 
2010
Cash paid for:
 
 
 
 
 
 
Interest
 
$
9,537

 
15,933

 
24,511

Income taxes (refund)
 
—

 
—

 
(1,952
)
Noncash transactions:
 
 
 
 
 
 
Transfers to other real estate owned in settlement of loans
 
22,331

 
40,302

 
15,856

Transfer of bank premises to other real estate owned
 
—

 
—

 
4,448

Loans made to facilitate the sale of other real estate owned
 
9,899

 
9,432

 
1,703

Forfeiture of restricted stock
 
—

 
4

 
—

Accrual of preferred dividends
 
2,389

 
2,263

 
—

Issuance of restricted stock
 
30

 
19

 
10

     Transfer of other real estate to premises and equipment
 
1,552

 
—

 
—


Investments in Debt Securities
The Banks classify their debt securities into one of three categories at the time of purchase: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities which the Banks have the ability and intent to hold until maturity. All other debt securities not included in trading or held-to-maturity, and any equity securities, are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities (for which no securities were so designated at December 31, 2012 and 2011) would be recorded at amortized cost, adjusted for the amortization of premiums or accretion of discounts. Holding gains and losses on trading securities (for which no securities were so designated at December 31, 2012 and 2011) would be included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and reported as a component of other comprehensive income in stockholders’ equity until realized. Transfers of securities between categories would be recorded at fair value at the date of transfer. Unrealized holding gains and losses would be recognized in earnings for transfers into the trading category.
Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Amortization of premiums and accretion of discounts for mortgage-backed securities are recognized as interest income using the interest method, which considers the timing and amount of prepayments of the underlying mortgages in estimating future cash flows for individual mortgage-backed securities. For other debt securities in the available-for-sale and held-to-maturity categories, premiums and discounts are amortized or accreted over the lives of the respective securities, with consideration of historical and estimated prepayment rates, as an adjustment to yield using the interest method. Interest income is recognized when earned. Realized gains and losses from the sale of any securities classified as available-for-sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Declines in the fair value of securities below their cost that are deemed to be other-than-temporary are reflected in operations as realized losses. In estimating other-than-temporary impairment losses, management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. The analysis requires management to consider various factors, which include (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security; (2) duration and magnitude of the decline in value; (3) the financial condition of the issuer or issuers; (4) structure of the security; and (5) the intent to sell the security or whether it is more likely than not that the Company would be required to sell the security before its anticipated recovery in market value.
If the fair value of a debt security is less than its amortized cost basis at the balance sheet date, the Company assesses whether the impairment is other-than-temporary. If the Company intends to sell the debt security, an other-than-temporary impairment shall be considered to have occurred. If the Company does not intend to sell the debt security, the Company considers available evidence to assess whether it is more likely than not will be required to sell the security before the recovery of its amortized cost basis. If the Company more likely than not it will be required to sell the security before recovery of its amortized cost basis, an other-than-temporary impairment shall be considered to have occurred.

F- 9
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


If the Company does not expect to recover the entire amortized cost basis of the security, an other-than-temporary impairment shall be considered to have occurred. Similarly, if the present value of cash flows expected to be collected is less than the amortized cost basis of the security, the entire amortized cost basis of the security will not be recovered (i.e., a credit loss exists), and an other-than-temporary impairment shall be considered to have occurred. In such situations, the credit loss is recorded through earnings as an other-than-temporary impairment.
Loans
Interest on loans is credited to income based on the principal amount outstanding. Loans are considered delinquent whenever interest and/or principal payments have not been received when due. The recognition of interest income is discontinued when, in management’s judgment, the interest will not be collectible in the normal course of business. Subsequent payments received on such loans are applied to principal if any doubt exists as to the collectibility of such principal; otherwise, such receipts are recorded as interest income. Loans are returned to accrual status when management believes full collectibility of principal and interest is expected. The Banks consider a loan impaired when all amounts due — both principal and interest — will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. When measuring impairment for loans, the expected future cash flows of an impaired loan are discounted at the loan’s effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan; however, the Banks would measure impairment based on the fair value of the collateral, using observable market prices, if foreclosure was probable.
Loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment to interest income over the lives of the related loans using the interest method.
The reserve for loan losses is available to absorb loan charge-offs. The reserve is increased by provisions charged to operations and is reduced by loan charge-offs less recoveries. Loans are partially or fully charged off when Bank management believes such amounts are uncollectible, either through collateral liquidation or cash payment. Management utilizes a systematic, documented approach in determining the appropriate level of the reserve for possible loan losses. The level of the reserve reflects management's continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and probable losses inherent in the current loan portfolio. The determination of the appropriate level of the reserve for possible loan losses inherently involves a degree of subjectivity and requires the Banks to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of the Banks' control, may require an increase in the reserve for possible loan losses.
Management believes the reserve for possible loan losses is adequate to absorb losses in the loan portfolio based upon information available. While management uses available information to recognize losses on loans, future additions to the reserve may be necessary based on changes in economic conditions. Additionally, various regulatory agencies, as an integral part of the examination process, periodically review the Banks’ reserves for possible loan losses. Such agencies may require the Banks to add to their reserves for possible loan losses based on their judgments and interpretations about information available to them at the time of their examinations.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation of premises and equipment is computed over the expected lives of the assets, using the straight-line method. Estimated useful lives are 40 years for bank buildings and 3 to 10 years for furniture, fixtures, and equipment. Expenditures for major renewals and improvements of bank premises and equipment (including related interest expense) are capitalized, and those for maintenance and repairs are expensed as incurred.
Certain long-lived assets, such as premises and equipment, and certain identifiable intangible assets must be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. In such situations, recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets, using observable market prices. Assets to be disposed of would be reported at the lower of the carrying amount or estimated fair value, less estimated selling costs.

F- 10
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Other Real Estate Owned
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. Properties acquired are initially recorded at the lower of the Banks’ carrying amount of the related loan or fair value, using observable market prices, less estimated selling costs. Valuations are performed periodically by management, and an allowance for losses is established by means of a charge to noninterest expense if the carrying value of a property exceeds its fair value, using observable market prices, less estimated selling costs. Subsequent increases in the fair value (less estimated selling costs) are recorded through a reversal of the allowance, but not below zero. Costs related to development and improvement of property are capitalized, while costs relating to holding the property are expensed.
Intangible Assets
Identifiable intangible assets include the core deposit premium relating to the Company’s acquisition of The Bank of Godfrey, which is being amortized into noninterest expense on a straight-line basis over 15 years. Amortization of the core deposit intangible assets existing at December 31, 2012 will be $16 for each of the next five years and $8 thereafter.
The excess of the Company’s consideration given in its acquisition of The Bank of Godfrey over the fair value of the net assets acquired was recorded as goodwill, an intangible asset on the consolidated balance sheets. Goodwill was the Company’s only intangible asset with an indefinite useful life, and the Company is required to test the intangible asset for impairment on an annual basis. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. During 2011, the Company recorded an impairment write-down for the full amount of goodwill.
Federal Home Loan Bank Stock
Included in other assets at December 31, 2012 and 2011 are equity securities totaling $4,260 and $4,715, respectively, representing common stock of the Federal Home Loan Bank of Des Moines and the Federal Home Loan Bank of Atlanta, which are administered by the Federal Housing Finance Agency. As members of the Federal Home Loan Bank system, the Banks must maintain minimum investments in the capital stock of their respective district Federal Home Loan Banks. The stock is recorded at cost, which represents redemption value.
Securities Sold Under Agreements to Repurchase
The Banks enter into sales of securities under agreements to repurchase at specified future dates. Such repurchase agreements are considered financing arrangements and, accordingly, the obligation to repurchase assets sold is reflected as a short-term borrowing liability in the consolidated balance sheets. Repurchase agreements are collateralized by debt securities which are under the control of the Banks.
Reserve for Unfunded Commitments
A reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities (including unfunded loan commitments and letters of credit) and is included in other liabilities in the consolidated balance sheets. The determination of the appropriate level of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience and credit risk grading. Net adjustments to the reserve for unfunded commitments are included in other noninterest expense in the consolidated statements of operations.
Income Taxes
The Company and Banks file consolidated federal and state income tax returns. Applicable income tax expense is computed based on reported income and expenses, adjusted for permanent differences between reported and taxable income. Penalties and interest assessed by income taxing authorities are included in income tax expense in the year assessed, unless such amounts relate to an uncertain tax position. The Company had no uncertain tax positions at December 31, 2012 or 2011.
The Company and Banks use the asset and liability method of accounting for income taxes, in which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period which includes the enactment date.
The Company’s consolidated federal income tax returns for the years ended December 31, 2009 and 2008 were audited by the Internal Revenue Service, with no material differences noted. The Company’s consolidated Illinois state income tax returns for the years ended December 31, 2009 and 2008 were audited by the state of Illinois, with no material differences noted. The

F- 11
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Company’s other state income tax returns have never been examined by the applicable state taxing authorities. The Company’s federal and state income tax returns are subject to examination generally for three years after such returns are filed.
Mortgage Banking Operations
The Banks’ mortgage banking operations include the origination of long-term, fixed-rate residential mortgage loans for sale in the secondary market. Upon receipt of an application for a residential real estate loan, the Banks generally lock in an interest rate with the applicable investor and, at the same time, lock into an interest rate with the customer. This practice minimizes the Banks’ exposure to risk resulting from interest rate fluctuations. Upon disbursement of the loan proceeds to the customer, the loan is delivered to the applicable investor. Sales proceeds are generally received shortly thereafter. Therefore, no loans held for sale are included in the Banks’ loan portfolios at any point in time, except those loans for which the sale proceeds have not yet been received. Such loans are maintained at the lower of cost or fair value, based on the outstanding commitments from the applicable investors for such loans.
Loan origination fees are recognized upon the sale of the related loans and included in the consolidated statements of operations as other noninterest income. The Banks do not retain the servicing rights for any such loans sold in the secondary market.
Stock Issuance Costs
The Company incurs certain costs associated with the issuance of its common stock. Such costs are recorded as a reduction of equity capital.
Earnings per Share
Basic earnings per share data is calculated by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the potential dilution of earnings per share which could occur under the treasury stock method if contracts to issue common stock, such as stock options, were exercised. The following table presents a summary of per share data and amounts for the periods indicated.
 
 
Years ended December 31,
 
 
2012
 
2011
 
2010
Basic
 
 
 
 
 
 
Net loss attributable to common shareholders
 
$
(1,021
)
 
(36,261
)
 
(50,737
)
Weighted average common shares outstanding
 
22,766,234

 
22,588,755

 
21,867,606

Basic loss per share
 
$
(0.04
)
 
(1.61
)
 
(2.32
)
Diluted
 
 
 
 
 
 
Net loss attributable to common shareholders
 
$
(1,021
)
 
(36,261
)
 
(50,737
)
Weighted average common shares outstanding
 
22,766,234

 
22,588,755

 
21,867,606

Effect of dilutive stock options
 
—

 
—

 
—

Diluted weighted average common shares outstanding
 
$
22,766,234

 
22,588,755

 
21,867,606

Diluted loss per share
 
$
(0.04
)
 
(1.61
)
 
(2.32
)

Stock Options
Compensation costs relating to share-based payment transactions are recognized in the Company’s consolidated financial statements over the period of service to which such compensation relates (generally the vesting period), and are measured based on the fair value of the equity instruments issued. The grant date fair values of share options are estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost would be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.
No stock options were granted during 2012 and 2011. Stock options were granted in 2009, however, no value was ascribed to these options, as the option price exceeded the market value of the stock on the grant date. The Company’s common stock is not actively traded on any exchange. Accordingly, the availability of fair value information for the Company’s common stock is limited. In using the Black-Scholes option pricing model to value the options, several assumptions have been made in arriving at the estimated fair value of the options granted, including minimal or no volatility in the Company’s common stock price,

F- 12
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


expected forfeitures of 10%, no dividends paid on the common stock, an expected weighted average option life of six years, and a risk-free interest rate approximating the U.S. treasury rates for the applicable duration period. Any change in these assumptions could have a significant impact on the effects of determining compensation costs.
Financial Instruments
For purposes of information included in note 14 regarding disclosures about financial instruments, financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract that both (a) imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with the second entity, and (b) conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity.
Fair Value Measurements
The Company uses fair value measurements to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income, and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
•
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
•
Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
•
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or value assigned to such assets or liabilities.
Reclassifications
Certain reclassifications have been made to the 2011 and 2010 consolidated financial statement amounts to conform to the 2012 presentation. Such reclassifications have no effect on the previously reported consolidated net loss or stockholders’ equity.
Subsequent Events
The Company has considered all events occurring subsequent to December 31, 2012 for possible disclosures through the filing date of this Annual Report on Form 10-K.
NOTE 2 — CASH AND DUE FROM BANKS
The Banks are required to maintain certain daily reserve balances of cash and due from banks in accordance with regulatory requirements. The reserve balances maintained in accordance with such requirements at December 31, 2012 and 2011 were $278 and $579, respectively.

F- 13
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


NOTE 3 — INVESTMENTS IN DEBT SECURITIES
The amortized cost, gross unrealized gains and losses, and estimated fair value of the Banks’ available-for-sale debt securities at December 31, 2012 and 2011 are as follows:
 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
December 31, 2012
 
 
 
 
 
 
 
Obligations of U.S. government agencies and corporations
$
23,823

 
629

 
(21
)
 
24,431

Obligations of state and political subdivisions
22,197

 
568

 
(152
)
 
22,613

Trust preferred securities
2,993

 
—

 
(2,299
)
 
694

U.S. agency asset-backed securities
24,264

 
140

 
(36
)
 
24,368

U.S. agency residential mortgage-backed securities
235,717

 
2,881

 
(947
)
 
237,651

 
$
308,994

 
4,218

 
(3,455
)
 
309,757

 
Amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
December 31, 2011
 
 
 
 
 
 
 
Obligations of U.S. government agencies and corporations
$
45,743

 
424

 
(9
)
 
46,158

Obligations of state and political subdivisions
14,608

 
700

 
(15
)
 
15,293

Trust preferred securities
3,063

 
—

 
(2,277
)
 
786

U.S. agency residential mortgage-backed securities
156,620

 
3,573

 
(223
)
 
159,970

 
$
220,034

 
4,697

 
(2,524
)
 
222,207


The amortized cost and estimated fair value of debt securities classified as available-for-sale at December 31, 2012, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because certain issuers have the right to call or prepay obligations with or without prepayment penalties.
 
 
Amortized cost
 
Estimated fair value
Due one year or less
 
$
1,590

 
1,600

Due one year through five years
 
9,742

 
9,982

Due five years through ten years
 
26,914

 
27,809

Due after ten years
 
10,767

 
8,347

U.S. agency asset-backed securities
 
24,264

 
24,368

U.S. agency residential mortgage-backed securities
 
235,717

 
237,651

 
 
$
308,994

 
309,757



F- 14
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Provided below is a summary of available-for-sale investment securities which were in an unrealized loss position at December 31, 2012 and 2011:
 
December 31, 2012
 
Less than 12 months
 
12 months or more
 
Total
 
Estimated fair value
 
 Unrealized losses
 
Estimated fair value
 
Unrealized losses
 
Estimated fair value
 
Unrealized losses
Obligations of U.S. government agencies and corporations
$
3,109

 
(21
)
 
—

 
—

 
3,109

 
(21
)
Obligations of state and political subdivisions
7,817

 
(143
)
 
571

 
(9
)
 
8,388

 
(152
)
Trust preferred securities
—

 
—

 
694

 
(2,299
)
 
694

 
(2,299
)
U.S. agency asset-backed securities
2,786

 
(36
)
 
—

 
—

 
2,786

 
(36
)
U.S. agency residential mortgage-backed securities
91,499

 
(947
)
 
—

 
—

 
91,499

 
(947
)
 
$
105,211

 
(1,147
)
 
1,265

 
(2,308
)
 
106,476

 
(3,455
)
 
December 31, 2011
 
Less than 12 months
 
12 months or more
 
Total
 
Estimated fair value
 
Unrealized losses
 
Estimated fair value
 
Unrealized losses
 
Estimated fair value
 
Unrealized losses
Obligations of U.S. government agencies and corporations
$
4,201

 
(9
)
 
—

 
—

 
4,201

 
(9
)
Obligations of state and political subdivisions
565

 
(15
)
 
—

 
—

 
565

 
(15
)
Trust preferred securities
—

 
—

 
786

 
(2,277
)
 
786

 
(2,277
)
U.S. agency residential mortgage-backed securities
24,255

 
(223
)
 
—

 
—

 
24,255

 
(223
)
 
$
29,021

 
(247
)
 
786

 
(2,277
)
 
29,807

 
(2,524
)

The obligations of U.S. government agencies and corporations and U.S. agency residential mortgage-backed securities with unrealized losses are primarily issued from and guaranteed by the Federal Home Loan Bank, Federal National Mortgage Association, or Federal Home Loan Mortgage Corporation. The U.S. agency asset-backed securities with unrealized losses are issued from and guaranteed by the U.S. Small Business Administration. The obligations of state and political subdivisions with unrealized losses are primarily comprised of municipal bonds with adequate credit ratings, underlying collateral, and/or cash flow projections. The unrealized losses associated with these securities are not believed to be attributed to credit quality, but rather to changes in interest rates and temporary market movements. In addition, the Banks do not intend to sell the securities with unrealized losses, and it is not more likely than not that the Banks will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
Trust preferred securities are comprised of trust preferred collateralized debt obligations issued by banks, thrifts, and insurance companies. The market for trust preferred securities at December 31, 2012 was not active, and markets for similar securities were also not active. The new issue market is also inactive as a minimal number of trust preferred securities have been issued since 2007. Very few market participants are willing and/or able to transact for these securities. The market values for the securities are very depressed relative to historical levels. The Banks do not intend to sell the trust preferred securities, and it is not more likely than not that the Banks will be required to sell them.

F- 15
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


The Banks’ trust preferred securities consist of the following issues:
 
Pools
(Amounts in thousands, except banks/insurers)
I PreTsl III

PreTsl XXVIII

PreTsl XIV

T Pref I

Total

Class
C
B
B-1
B
 
Original par
$
1,000

1,000

1,000

2,000

 
Book value
1,000

934

550

509

2,993

Fair value
254

110

12

318

694

Discounted cash flows
1,004

948

620

544

 
Year-to-date 2012 impairment
—

—

—

—

—

Lowest credit rating assigned to security:
 
 
 
 
 
Moody's
NR
Ca
Ca
Ca
 
Fitch
CCC
CC
C
NR
 
Number of banks/insurers
24

55

61

16

 
Banks/insurers currently performing
23

38

32

11

 
Actual deferrals and defaults as a percentage of
 
 
 
 
 
the original collateral
7.63
%
25.22
%
37.71
%
11.87
%
 
Excess subordination as a percentage of the
 
 
 
 
 
remaining performing collateral
8.78
%
2.61
%
(45.89
)%
(68.54
)%
 

The Company has reviewed its trust preferred security pools and determined that the collateral should be divided between two specific industries for credit analysis — banks and insurance companies. The Company then determined the industry-specific default rates for the two industries. The bank rate was determined by reviewing each individual institution and its performance using publicly available information. The insurance company rate was determined by examining a study by a well-known rating agency that displayed the average one-year impairment rate.
To determine a pool-specific loss rate, the Company determined that a common indicator was needed for each issuer. For banks, the Company obtained an estimated regulatory rating from a well-known financial institution rating service to use as an indicator of default probability. The Company then adjusted the default rate from 0.20% to 1.00% based on the regulatory rating obtained. For insurance companies, the Company obtained the rating for the primary insurance company to use as an indicator of default probability and modified the default rate from 0.25% to 1.25% based on the ratings.
To obtain the expected annual default rate for the pool, the Company computed the weighted average rating for each issuer based on the remaining issuance amount as a percentage of the total remaining collateral. Any issuer with a specific default rate was weighted only by the portion of the issuance remaining after the application of the specific default rate. The Company reviews the assumptions quarterly for reasonableness and will update those assumptions that management believes have changed given market conditions, changes in deferrals and defaults, as well as other factors that can impact these assumptions. Based on the results of this analysis, the Company ensures that actual deferrals/defaults, as well as forecasted deferrals/defaults of specific institutions, are appropriately factored into the cash flow projections for each security.
In the tables above, “Excess subordination as a percentage of the remaining performing collateral” (Excess Subordination Ratio) was calculated as follows: (total face value of performing collateral less face value of all outstanding note balances not subordinate to the Company’s investment) ÷ total face value of performing collateral. The Excess Subordination Ratio measures the extent to which there may be tranches within each pooled trust preferred structure available to absorb credit losses before the Company’s securities would be impacted. A positive Excess Subordination Ratio signifies there is some support from subordinate tranches available to absorb losses before the Company’s investment would be impacted, while a negative Excess Subordination Ratio for each of the mezzanine tranche securities indicates there is no support. A negative Excess Subordination Ratio is not definitive, in isolation, for determining whether or not an other-than-temporary credit loss should be recorded for a pooled trust preferred security. Other factors affect the timing and amount of cash flows available for payments to the note holders (investors), including the excess interest paid by the issuers (the issuers typically pay higher rates of interest than are paid out to the note holders).

F- 16
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


As noted in the above table, some of the Company’s investments in trust preferred securities have experienced fair value deterioration due to credit losses but are not otherwise considered to be other-than-temporarily impaired (“OTTI”). The following table provides information about those trust preferred securities for which only a credit loss was recognized in income, and other losses are recorded in other comprehensive loss for the years ended December 31, 2012 and 2011:
 
December 31,
2012
 
December 31,
2011
Accumulated credit losses on trust preferred securities:
 
 
 
Beginning of year
$
955

 
919

Additions related to OTTI losses not previously recognized
—

 
—

Reductions due to sales
—

 
—

Reductions due to change in intent or likelihood of sale
—

 
—

Additions related to increases in previously recognized OTTI losses
—

 
36

Reductions due to increases in expected cash flows
—

 
—

End of year
$
955

 
955


For the years ended December 31, 2012, 2011, and 2010 certain available-for-sale securities were sold for proceeds totaling $121,406, $90,303, $20,848 respectively, resulting in gross gains of $3,137, $2,240, and $295 respectively, and gross losses of $0, $87, and $7 respectively.
The carrying value of debt securities pledged to secure public funds, securities sold under repurchase agreements, certain borrowings, and for other purposes amounted to approximately $97,284 and $152,752 at December 31, 2012 and 2011, respectively. The Banks have also pledged letters of credit from the Federal Home Loan Banks totaling $7,541 as additional collateral to secure public funds at both December 31, 2012 and 2011.
NOTE 4 — LOANS
The composition of the loan portfolio at December 31, 2012 and 2011 is as follows:
 
December 31,
2012
 
December 31,
2011
Commercial:
 
 
 
Real estate
$
408,523

 
512,094

Other
38,696

 
69,989

Real estate:
 
 
 
Construction
56,935

 
71,163

Residential
70,737

 
66,858

Consumer
920

 
427

 
$
575,811

 
720,531


The Banks grant commercial, industrial, residential, and consumer loans (including overdrafts totaling $40 and $52 at December 31, 2012 and 2011, respectively) throughout the St. Louis, Missouri metropolitan area and southwestern Florida. The Banks do not have any particular concentration of credit in any one economic sector, except that a substantial portion of the portfolio is concentrated in and secured by real estate in the St. Louis, Missouri metropolitan area and southwestern Florida, particularly commercial real estate and construction of commercial and residential real estate. The ability of the Banks’ borrowers to honor their contractual obligations is dependent upon the local economies and their effect on the real estate market.

F- 17
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


The aggregate amount of loans to executive officers and directors and loans made for the benefit of executive officers and directors was $16,055 and $14,986 at December 31, 2012 and 2011, respectively. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectibility. A summary of activity for loans to executive officers and directors for the year ended December 31, 2012 is as follows:
Balance, December 31, 2011
 
$
14,986

New loans made
 
2,616

Payments received
 
(1,302
)
Other
 
(245
)
Balance, December 31, 2012
 
$
16,055


Other changes represent changes in the composition of executive officers, directors, and loans made for the benefit of executive officers and directors which occurred in 2012.
Transactions in the reserve for possible loan losses for the years ended December 31, 2012, 2011, and 2010 are summarized as follows:
 
2012
 
2011
 
2010
Balance, January 1
$
31,370

 
37,301

 
32,222

Provision charged to operations
1,788

 
23,790

 
41,492

Charge-offs
(9,990
)
 
(33,321
)
 
(37,011
)
Recoveries of loans previously charged off
4,975

 
3,600

 
598

Balance, December 31
$
28,143

 
31,370

 
37,301


The Company risk-rates all of the loans in its loan portfolio, using a 1-7 risk rating system, with a “1”-rated credit being a high-quality loan and a “7”-rated credit having some level of loss in the credit. Loan officers are responsible for risk-rating their own credits, including maintaining the risk rating on a current basis. Downgrades are discussed at various management and loan committee meetings. The risk ratings are also subject to an ongoing review by an extensive loan review process performed independently of the loan officers. An adequately controlled risk rating process allows Company management to conclude that the Banks’ watch lists (which include all credits risk-rated “4” or greater) are, for all practical purposes, a complete profile of situations with current loss exposure.
All loans included in the watch lists require separate action plans to be developed to reduce the level of risk inherent in the credit relationship. Based on the information included on the watch list and a review of each individual credit relationship thereon, the Company determines whether a credit is impaired. The Company considers a loan to be impaired when all amounts due — both principal and interest — will not be collected in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value (and marketability), and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of shortfall in relation to the principal and interest owed.
When measuring impairment for loans, the expected future cash flows of impaired loans are discounted at the loan’s effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of collateral for a collateral-dependent loan. However, substantially all of the Company’s presently impaired credit relationships are collateralized by (and derive their ultimate cash flows from) commercial, construction, or residential real estate and, accordingly, virtually all of the Company’s impairment calculations for the present portfolio have been based on the underlying values of the real estate collateral.
The Banks’ watch lists include complete listings of credit relationships that are considered to be impaired, along with an assessment of the estimated impairment loss to be included as specific exposure for impaired loans. Such impairment calculations are based on current (less than six months old) appraisals of the underlying real estate collateral. The Company

F- 18
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


regularly obtains updated appraisals for all of its impaired credit relationships. As noted above, the continued decline in real estate values experienced by the Company during the past three years has resulted in an increased level of the reserve for loan losses for these specifically identifiable impairment losses.
The sum of all exposure amounts calculated for impaired loans is included in the reserve for loan losses as the specifically identifiable losses portion of the account balance. This is one portion of the reserve for loan losses. The second portion of the reserve for loan losses is a general reserve for all credit relationships not considered to be specifically impaired. This amount is calculated by first calculating the historical charge-off ratio for each of the particular loan categories and then subjectively adjusting these historical ratios for several economic and environmental factors. The adjusted ratio for each loan category is then applied against the nonimpaired loans in that loan category, resulting in a general reserve for that particular loan category. The sum of these general reserve categories, when added to the amount of specifically identified losses on impaired credits, results in the final reserve for loan losses balance for a particular date. The Company follows this process for calculating the reserve for loan losses on a quarterly basis.
In calculating the general portion of the reserve for possible loan losses, the loan categories used are real estate construction, residential real estate, commercial real estate, commercial and industrial, and consumer loans. Historical charge-off ratios are calculated on a rolling two-year historical charge-off ratio. The economic and environmental factors for which adjustments are made to the historical charge-off ratios include the following:
•
changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses.
•
changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments.
•
changes in the nature and volume of the portfolio and in the terms of loans.
•
changes in the experience, ability, and depth of lending management and other relevant staff.
•
changes in the volume and severity of past-due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans.
•
changes in the quality of the Banks’ loan review systems.
•
changes in the value of underlying collateral for collateral-dependent loans.
•
the existence and effect of any concentrations of credit, and changes in the level of such concentrations.
•
the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the Banks’ existing portfolios.

F- 19
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Following is an analysis of the reserve for loan losses by loan type and those loans that have been specifically evaluated or evaluated in aggregate at December 31, 2012 and 2011:
 
December 31, 2012
 
Commercial real estate
 
Commercial other
 
Real estate construction
 
Residential real estate
 
Consumer
 
Unallocated
 
Total
Reserve for possible loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
17,277

 
2,063

 
9,818

 
2,197

 
15

 
—

 
31,370

Charge-offs
(6,671
)
 
(255
)
 
(2,211
)
 
(809
)
 
(44
)
 
—

 
(9,990
)
Recoveries
2,404

 
30

 
2,465

 
52

 
24

 
—

 
4,975

Provision
(3,109
)
 
(1,110
)
 
(5,527
)
 
(960
)
 
43

 
12,451

 
1,788

Ending balance
$
9,901

 
728

 
4,545

 
480

 
38

 
12,451

 
28,143

Individually evaluated for impairment
$
525

 
—

 
3,076

 
—

 
—

 
—

 
3,601

Collectively evaluated for impairment
$
9,376

 
728

 
1,469

 
480

 
38

 
12,451

 
24,542

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
2,398

 
—

 
20,914

 
55

 
—

 
 
 
23,367

Collectively evaluated for impairment
406,125

 
38,696

 
36,021

 
70,682

 
920

 
 
 
552,444

Ending balance
$
408,523

 
38,696

 
56,935

 
70,737

 
920

 
 
 
575,811


 
December 31, 2011
 
Commercial real estate
 
Commercial other
 
Real estate construction
 
Residential real estate
 
Consumer
 
Total
Reserve for possible loan losses:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
21,406

 
2,029

 
11,966

 
1,871

 
29

 
37,301

Charge-offs
(21,958
)
 
(1,686
)
 
(8,557
)
 
(1,078
)
 
(42
)
 
(33,321
)
Recoveries
836

 
123

 
2,551

 
79

 
11

 
3,600

Provision
16,993

 
1,597

 
3,858

 
1,325

 
17

 
23,790

Ending balance
$
17,277

 
2,063

 
9,818

 
2,197

 
15

 
31,370

Individually evaluated for impairment
$
4,084

 
1,072

 
2,179

 
91

 
—

 
7,426

Collectively evaluated for impairment
$
13,193

 
991

 
7,639

 
2,106

 
15

 
23,944

 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
72,347

 
16,062

 
17,176

 
2,805

 
3

 
108,393

Collectively evaluated for impairment
439,747

 
53,927

 
53,987

 
64,053

 
424

 
612,138

Ending balance
$
512,094

 
69,989

 
71,163

 
66,858

 
427

 
720,531



F- 20
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Following is a summary of past-due loans by accrual status, by type, and by number of days delinquent at December 31, 2012 and 2011:
 
30-59 days past due
 
60-89 days past due
 
Greater than 90 days
 
Total past due
 
Current
 
Total loans
 
Recorded investment > 90 days past due and accruing
2012 Accrual
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Real estate
$
—

 
—

 
—

 
—

 
406,125

 
406,125

 
—

  Other
—

 
—

 
—

 
—

 
38,696

 
38,696

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Construction
—

 
—

 
—

 
—

 
36,021

 
36,021

 
—

  Residential
—

 
—

 
—

 
—

 
70,682

 
70,682

 
—

Consumer
—

 
—

 
—

 
—

 
920

 
920

 
—

Total accrual
—

 
—

 
—

 
—

 
552,444

 
552,444

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012 Nonaccrual
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Real estate
—

 
1,313

 
1,085

 
2,398

 
—

 
2,398

 
—

  Other
—

 
—

 
—

 
—

 
—

 
—

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Construction
—

 
—

 
20,914

 
20,914

 
—

 
20,914

 
—

  Residential
—

 
—

 
—

 
—

 
55

 
55

 
—

Consumer
—

 
—

 
—

 
—

 
—

 
—

 
—

Total nonaccrual
—

 
1,313

 
21,999

 
23,312

 
55

 
23,367

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2012 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Real estate
—

 
1,313

 
1,085

 
2,398

 
406,125

 
408,523

 
—

  Other
—

 
—

 
—

 
—

 
38,696

 
38,696

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Construction
—

 
—

 
20,914

 
20,914

 
36,021

 
56,935

 
—

  Residential
—

 
—

 
—

 
—

 
70,737

 
70,737

 
—

Consumer
—

 
—

 
—

 
—

 
920

 
920

 
—

Total
$
—

 
1,313

 
21,999

 
23,312

 
552,499

 
575,811

 
—




F- 21
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)



 
30-59 days past due
 
60-89 days past due
 
Greater than 90 days
 
Total past due
 
Current
 
Total loans
 
Recorded investment > 90 days past due and accruing
2011 Accrual
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Real estate
$
4,708

 
1,846

 
—

 
6,554

 
437,509

 
444,063

 
—

  Other
—

 
4

 
—

 
4

 
68,432

 
68,436

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Construction
—

 
—

 
61

 
61

 
54,833

 
54,894

 
61

  Residential
—

 
—

 
100

 
100

 
63,982

 
64,082

 
100

Consumer
—

 
—

 
—

 
—

 
424

 
424

 
—

Total accrual
4,708

 
1,850

 
161

 
6,719

 
625,180

 
631,899

 
161

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011 Nonaccrual
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Real estate
2,010

 
2,449

 
32,542

 
37,001

 
31,030

 
68,031

 
—

  Other
—

 
—

 
117

 
117

 
1,436

 
1,553

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Construction
—

 
—

 
15,801

 
15,801

 
468

 
16,269

 
—

  Residential
—

 
—

 
973

 
973

 
1,803

 
2,776

 
—

Consumer
—

 
—

 
3

 
3

 
—

 
3

 
—

Total nonaccrual
2,010

 
2,449

 
49,436

 
53,895

 
34,737

 
88,632

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011 Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Real estate
6,718

 
4,295

 
32,542

 
43,555

 
468,539

 
512,094

 
—

  Other
—

 
4

 
117

 
121

 
69,868

 
69,989

 
—

Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Construction
—

 
—

 
15,862

 
15,862

 
55,301

 
71,163

 
61

  Residential
—

 
—

 
1,073

 
1,073

 
65,785

 
66,858

 
100

Consumer
—

 
—

 
3

 
3

 
424

 
427

 
—

Total
$
6,718

 
4,299

 
49,597

 
60,614

 
659,917

 
720,531

 
161



F- 22
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)



Following is a summary of impaired loans by type at December 31, 2012 and 2011:
 
Recorded investment with no reserve
 
Recorded investment with reserve
 
Total recorded investment
 
Unpaid principal balance
 
Related reserve
2012
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
  Real estate
$
—

 
2,398

 
2,398

 
2,475

 
525

  Other
—

 
—

 
—

 
—

 
—

Real estate:
 
 
 
 
 
 
 
 
 
  Construction
—

 
20,914

 
20,914

 
22,448

 
3,076

  Residential
55

 
—

 
55

 
57

 
—

Consumer
—

 
—

 
—

 
—

 
—

Total
$
55

 
23,312

 
23,367

 
24,980

 
3,601

 
 
 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
  Real estate
$
40,329

 
32,018

 
72,347

 
89,977

 
4,084

  Other
1,787

 
14,275

 
16,062

 
16,723

 
1,072

Real estate:
 
 
 
 
 
 
 
 
 
  Construction
723

 
16,453

 
17,176

 
35,077

 
2,179

  Residential
2,466

 
339

 
2,805

 
3,614

 
91

Consumer
—

 
3

 
3

 
3

 
—

Total
$
45,305

 
63,088

 
108,393

 
145,394

 
7,426


Following is a summary of impaired loans by type for the years ended December 31, 2012 and 2011:
 
Year ended December 31, 2012
 
Year ended December 31, 2011
 
Average recorded investment
 
Interest income recognized
 
Average recorded investment
 
Interest income recognized
Commercial:
 
 
 
 
 
 
 
  Real estate
$
20,062

 
49

 
101,600

 
833

  Other
1,590

 
2

 
14,084

 
547

Real estate:
 
 
 
 
 
 
 
  Construction
25,912

 
6

 
24,934

 
130

  Residential
1,757

 
—

 
3,839

 
1

Consumer
2

 
—

 
3

 
—

Total
$
49,323

 
57

 
144,460

 
1,511



F- 23
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Following is a summary of loans segregated based on credit quality indicators at December 31, 2012 and 2011:
2012 Grade
 
Commercial real estate
 
Commercial other
 
Real estate construction
 
Residential real estate
 
Consumer
 
Total
Pass
 
$
393,751

 
35,979

 
35,852

 
67,808

 
920

 
534,310

Special mention
 
9,949

 
2,717

 
169

 
2,766

 
—

 
15,601

Substandard
 
4,823

 
—

 
20,914

 
163

 
—

 
25,900

Doubtful
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
408,523

 
38,696

 
56,935

 
70,737

 
920

 
575,811

 
 
 
 
 
 
 
 
 
 
 
 
 
2011 Grade
 
Commercial real estate
 
Commercial other
 
Real estate construction
 
Residential real estate
 
Consumer
 
Total
Pass
 
$
398,900

 
50,900

 
32,808

 
61,182

 
422

 
544,212

Special mention
 
31,910

 
3,008

 
21,179

 
2,600

 
2

 
58,699

Substandard
 
81,284

 
16,081

 
17,176

 
3,007

 
3

 
117,551

Doubtful
 
—

 
—

 
—

 
69

 
—

 
69

Total
 
$
512,094

 
69,989

 
71,163

 
66,858

 
427

 
720,531


The Company classifies loan modifications as troubled debt restructurings (“TDRs”) when a borrower is experiencing financial difficulties and a concession has been granted to the borrower. The Company's modifications generally include interest rate adjustments, payment relief, and amortization and maturity date extensions. These modifications allow the debtor short-term cash relief to allow them to improve their financial condition. The Company's restructured loans are individually evaluated for impairment and evaluated as part of the reserve for possible loan losses.

F- 24
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


The following table shows the pre- and post-modification recorded investment in TDR loans by loan segment that have occurred during the years ended December 31, 2012, 2011, and 2010 (in thousands of dollars, except number of loans):
 
Years ended December 31,
2012
Number of loans
 
Pre-modification outstanding recorded investment
 
Post-modification outstanding recorded investment
Commercial:
 
 
 
 
 
  Real estate
5

 
$
3,568

 
3,568

  Other
—

 
—

 
—

Real estate:

 

 

  Construction
—

 
—

 
—

  Residential
2

 
773

 
773

Consumer
—

 
—

 
—

 
7

 
$
4,341

 
4,341

 
 
 
 
 
 
2011
 
 
 
 
 
Commercial:
 
 
 
 
 
  Real estate
5

 
$
10,484

 
9,124

  Other
—

 
—

 
—

Real estate:

 

 

     Construction
1

 
116

 
116

  Residential
1

 
22

 
22

Consumer
—

 
—

 
—

 
7

 
$
10,622

 
9,262

 
 
 
 
 
 
2010
 
 
 
 
 
Commercial:
 
 
 
 
 
  Real estate
21

 
$
45,688

 
45,688

  Other
8

 
9,490

 
9,490

Real estate:
 
 
 
 
 
     Construction
5

 
3,713

 
3,713

  Residential
—

 
—

 
—

Consumer
—

 
—

 
—

 
34

 
$
58,891

 
58,891



F- 25
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


The following table shows the recorded investment in TDR loans by segment that have been modified within the previous twelve months and have subsequently had a payment default during the years ended December 31, 2012, 2011, and 2010 (in thousands of dollars, except number of loans):
 
Years ended December 31,
2012
Number of loans
 
Recorded investment
Commercial:
 
 
 
  Real estate
—

 
$
—

  Other
—

 
—

Real estate:

 

  Construction
—

 
—

  Residential
—

 
—

Consumer
—

 
—

 
—

 
$
—

 
 
 
 
2011
 
 
 
Commercial:
 
 
 
  Real estate
—

 
$
—

  Other
—

 
—

Real estate:

 

  Construction
—

 
—

  Residential
—

 
—

Consumer
—

 
—

 
—

 
$
—

 
 
 
 
2010
 
 
 
Commercial:
 
 
 
  Real estate
11

 
$
18,982

  Other
4

 
9,343

Real estate:
 
 
 
  Construction
1

 
560

  Residential
—

 
—

Consumer
—

 
—

 
16

 
$
28,885




F- 26
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


NOTE 5 — PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 2012 and 2011 is as follows:
 
 
2012
 
2011
Land
 
$
8,492

 
7,978

Buildings and improvements
 
32,142

 
29,949

Furniture, fixtures, and equipment
 
9,319

 
9,219

 
 
49,953

 
47,146

Less accumulated depreciation
 
14,659

 
13,116

 
 
$
35,294

 
34,030


Amounts charged to noninterest expense for depreciation aggregated $1,577, $1,833, and $2,078 for the years ended December 31, 2012, 2011, and 2010, respectively.
Reliance Bank leases certain premises under noncancelable operating lease agreements that expire at various dates through 2026, with various options to extend the leases. Minimum rental commitments for payments under all noncancelable operating lease agreements at December 31, 2012, for each of the next five years, and in the aggregate, are as follows:
 
 
Minimum lease payments
Year ending December 31:
 
 
2013
 
$
540

2014
 
436

2015
 
445

2016
 
470

2017
 
470

Thereafter
 
3,653

Total minimum payments required
 
$
6,014


Total rent paid by the Company in 2012, 2011, and 2010 was $547, $595, and $711, respectively.
Reliance Bank leases out a portion of certain of its banking facilities to unaffiliated companies under noncancelable leases that expire at various dates through 2016. Minimum rental income under these noncancelable leases at December 31, 2012, for each of the next four years, and in the aggregate, is as follows:
 
 
Minimum rental income
Year ending December 31:
 
 
2013
 
$
171

2014
 
153

2015
 
65

2016
 
5

Total minimum payments required
 
$
394


Total rental income recorded by Reliance Bank in 2012, 2011, and 2010 totaled $211, $243, and $262, respectively.

F- 27
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


NOTE 6 — DEPOSITS
A summary of interest-bearing deposits at December 31, 2012 and 2011 is as follows:
 
2012
 
2011
Interest-bearing transaction accounts
$
250,969

 
201,977

Savings
177,103

 
234,991

Time deposits:
 
 
 
Less than $100,000
168,010

 
226,909

$100,000 and over
156,838

 
156,244

 
$
752,920

 
820,121


Deposits of executive officers, directors, and their related interests at December 31, 2012 and 2011 totaled $9,209 and $12,590, respectively.
Interest expense on deposits for the years ended December 31, 2012, 2011, and 2010 is summarized as follows:
 
2012
 
2011
 
2010
Interest-bearing transaction accounts
$
999

 
1,438

 
1,971

Savings
877

 
1,961

 
3,649

Time deposits:
 
 
 
 
 
Less than $100,000
2,900

 
5,326

 
8,739

$100,000 and over
2,108

 
3,045

 
5,387

 
$
6,884

 
11,770

 
19,746


Following are the maturities of time deposits for each of the next five years, and in the aggregate at December 31, 2012:
Year ending December 31:
 
 
2013
 
$
193,073

2014
 
71,945

2015
 
31,288

2016
 
16,052

2017
 
12,280

Thereafter
 
210

 
 
$
324,848


NOTE 7 — INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31, 2012, 2011, and 2010 are as follows:
 
2012
 
2011
 
2010
Current:
 
 
 
 
 
Federal income taxes
$
—

 
—

 
—

State income taxes
—

 
—

 
—

Deferred income taxes
563

 
(8,664
)
 
(14,765
)
Valuation reserve
(563
)
 
17,280

 
26,077

 
$
—

 
8,616

 
11,312


F- 28
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)



A reconciliation of expected income tax expense (benefit) computed by applying the federal statutory rate of 34% to loss before applicable income tax expense (benefit) for the years ended December 31, 2012, 2011, and 2010 is as follows:
 
2012
 
2011
 
2010
Expected statutory federal income tax expense (benefit)
$
465

 
(8,630
)
 
(12,653
)
State income taxes, net of federal benefit
—

 
—

 
—

Tax-exempt interest and dividend income
(195
)
 
(220
)
 
(354
)
Incentive stock options
—

 
9

 
49

Other, net
293

 
177

 
(1,807
)
Valuation reserve
(563
)
 
17,280

 
26,077

 
$
—

 
8,616

 
11,312


The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2012 and 2011 are presented below:
 
2012
 
2011
Deferred tax assets:
 
 
 
Amortization of start-up costs for tax reporting purposes
$
28

 
32

Reserve for possible loan losses
11,243

 
12,994

Operating loss carryforwards
24,218

 
21,283

Tax credit carryforwards
684

 
522

Stock option expense
298

 
298

Other real estate owned
6,312

 
7,031

Nonaccrual loan interest
402

 
2,131

Investment write-down
354

 
354

Other, net
—

 
70

Total deferred tax assets
43,539

 
44,715

 
 
 
 
Deferred tax liabilities:
 
 
 
Bank premises and equipment
(672
)
 
(1,317
)
Purchase adjustments
(33
)
 
(41
)
Unrealized net holding gains on available-for-sale securities
(260
)
 
(739
)
Other net deferred tax liabilities
(40
)
 
—

Total deferred tax liabilities
(1,005
)
 
(2,097
)
Net deferred tax assets
42,534

 
42,618

Valuation reserve
(42,794
)
 
(43,357
)
Net deferred tax liabilities after valuation reserve
$
(260
)
 
(739
)

The Company is required to provide a valuation reserve on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. At December 31, 2012, the Company has deferred tax assets of $22,788 for net operating loss carryforwards for federal tax reporting purposes totaling $67,984 which will expire beginning in 2029, if unused. The Company also has deferred tax assets for operating loss carryforwards for Florida state income tax reporting purposes totaling $1,430 for losses incurred by Reliance Bank, FSB. Such operating losses totaled $25,994 at December 31, 2012, and will begin to expire, if unused, by 2023. Given the Company's cumulative losses that had occurred through 2011, the Company has established a valuation reserve of $42,794 for its deferred tax assets, with $26,077 recorded in 2010, $17,280 recorded in 2011, and $563

F- 29
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


relieved in 2012. This valuation reserve will be reversed when the Company demonstrates a consistent earnings trend and begins using the net operating loss for tax reporting purposes.

NOTE 8 — SHORT-TERM BORROWINGS
Following is a summary of short-term borrowings at December 31, 2012 and 2011:
(Amounts in thousands)
 
2012
 
2011
Securities sold under repurchase agreements
 
$
3,885

 
16,913

Short-term notes payable
 
350

 
330

 
 
$
4,235

 
17,243


The Banks also purchase funds from the Federal Home Loan Banks of Des Moines and Atlanta and other financial institutions on a overnight basis, when needed for liquidity. At December 31, 2012, Reliance Bank also maintained a line of credit with availability, subject to a collateral and credit review, in the amount of $21,777 with the Federal Reserve Bank of St. Louis.
At December 31, 2012, the Company held eight short-term unsecured notes payable for $350, executed with seven directors of either Reliance Bancshares, Inc. or Reliance Bank, and one former director of Reliance Bank, which bear interest at 7.00%. The notes mature March 31, 2013.
The average balances, maximum month-end amounts outstanding, average rates paid during the year, and average rates at year-end for funds purchased and securities sold under repurchase agreements and total short-term borrowings as of and for the years ended December 31, 2012, 2011, and 2010 were as follows:
 
2012
 
2011
 
2010
Funds purchased and securities sold under repurchase agreements:
 
 
 
 
 
Average balance
$
8,889

 
15,859

 
19,674

Maximum amount outstanding at any month-end
$
18,466

 
26,750

 
37,550

Average rate paid during the year
0.60
%
 
0.67
%
 
0.61
%
Average rate at end of year
0.32
%
 
0.68
%
 
0.62
%

 
2012
 
2011
 
2010
Total short-term borrowings:
 
 
 
 
 
Average balance
$
9,247

 
16,078

 
19,701

Maximum amount outstanding at any month-end
$
18,816

 
26,750

 
37,550

Average rate paid during the year
0.85
%
 
0.70
%
 
0.61
%
Average rate at end of year
0.87
%
 
0.80
%
 
0.62
%


F- 30
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


NOTE 9 — LONG-TERM FEDERAL HOME LOAN BANK BORROWINGS
At December 31, 2012, the Banks had fixed-rate advances outstanding with the Federal Home Loan Bank of Des Moines and the Federal Home Loan Bank of Atlanta, maturing as follows:
 
Amount
 
Weighted average rate
Due in 2013
$
5,000

 
2.50
%
Due in 2014
—

 
—
%
Due in 2015
—

 
—
%
Due in 2016
10,000

 
4.19
%
Due in 2017
10,000

 
3.92
%
Thereafter
42,000

 
3.41
%
 
$
67,000

 
3.53
%

At December 31, 2012, Reliance Bank maintained a line of credit in the amount of $130,138 with the Federal Home Loan Bank of Des Moines and had availability under that line of $57,697. Federal Home Loan Bank of Des Moines advances are secured under a blanket agreement which assigns all Federal Home Loan Bank of Des Moines stock, and one- to four-family and multi-family mortgage and commercial real estate loans totaling $276,295 at December 31, 2012. Additionally, at December 31, 2012, Reliance Bank, FSB maintained a line of credit in the amount of $5,940 (of which $3,717 was available) with the Federal Home Loan Bank of Atlanta, secured by one- to four-family residential loans totaling $8,271.
NOTE 10 — EMPLOYEE BENEFITS
The Company sponsors a contributory 401(k) savings plan to provide retirement benefits to eligible employees. Contributions made by the Company in 2012, 2011, and 2010 totaled $179, $207, and $86, respectively.
NOTE 11 — CAPITAL STOCK
The composition of the stockholders' equity at December 31, 2012 and 2011 is as follows:
 
 
December 31,
 
December 31,
(Amounts in thousands)
 
2012
 
2011
Stockholders’ equity:
 
 
 
 
Preferred stock, no par value; 2,000,000 shares authorized:
 
 
 
 
Series A, 40,000 shares issued and outstanding
 
40,000

 
40,000

Series B, 2,000 shares issued and outstanding
 
2,000

 
2,000

Series C, 555 shares issued and outstanding
 
555

 
555

Common stock, $0.25 par value; 250,000,000 shares authorized, 22,855,044 and 22,642,491 shares issued and outstanding at December 31, 2012 and December 31, 2011, respectively
 
5,714

 
5,661

Surplus
 
$
120,045

 
122,315

Accumulated deficit
 
(100,955
)
 
(102,323
)
Accumulated other comprehensive income — net unrealized holding gains on available-for-sale debt securities
 
503

 
1,434

Total stockholders’ equity
 
$
67,862

 
69,642


The Company has accrued $2,389 in preferred dividends since December 31, 2011, attributing to a significant portion of the $2,270 (1.86%) decrease in Surplus and $1,780 (2.56%) decrease in total stockholders' equity since December 31, 2011.

F- 31
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Other Activity in Stockholders' Equity
Following is a summary of other activity in the consolidated statements of stockholders’ equity for the years ended December 31, 2012, 2011, and 2010:
 
 
Common stock
 
Surplus
 
Total stockholders' equity
2012
 
 
 
 
 
 
Sale of 90,886 shares of common stock in connection with employee stock purchase plan
 
$
23

 
42

 
65

Issuance of 121,667 common shares of restricted stock to officers
 
30

 
(30
)
 
—

Accrual of dividends on preferred stock
 
—

 
(2,389
)
 
(2,389
)
Amortization of restricted stock
 
—

 
107

 
107

 
 
$
53

 
(2,270
)
 
(2,217
)

 
 
Common stock
 
Surplus
 
Treasury stock
 
Total stockholders' equity
2011
 
 
 
 
 
 
 
 
Sale of 87,353 shares of common stock in connection with employee stock purchase plan (1,666 shares from treasury)
 
$
22

 
42

 
4

 
68

Issuance of 75,000 common shares of restricted stock to officers
 
19

 
(19
)
 
—

 
—

Accrual of dividends on preferred stock
 
—

 
(2,263
)
 
—

 
(2,263
)
Compensation cost recognized for stock options granted
 
—

 
20

 
—

 
20

Amortization of restricted stock
 
—

 
165

 
—

 
165

Forfeiture of 1,666 shares of restricted stock
 
—

 
4

 
(4
)
 
—

 
 
$
41

 
(2,051
)
 
—

 
(2,010
)

 
 
Preferred Stock
 
Common Stock
 
Surplus
 
Total stockholders' equity
2010
 
 
 
 
 
 
 
 
Issuance of 255 shares of Series C preferred stock
 
$
255

 
—

 
—

 
255

Issuance of 1,400,517 shares of common stock
 
—

 
350

 
3,852

 
4,202

Sale of 69,196 common shares of stock in connection with employee stock purchase plan
 
—

 
17

 
119

 
136

Issuance of 40,000 common shares of restricted stock to officers
 
—

 
10

 
(10
)
 
—

Dividends on preferred stock
 
—

 
—

 
(2,208
)
 
(2,208
)
Stock issuance costs
 
—

 
—

 
(28
)
 
(28
)
Compensation cost recognized for stock options granted
 
—

 
—

 
215

 
215

Amortization of restricted stock
 
—

 
—

 
91

 
91

 
 
$
255

 
377

 
2,031

 
2,663



F- 32
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


The Company has authorized 250,000,000 shares of common stock with a par value of $0.25 per share. At December 31, 2012, 22,855,044 shares were issued and outstanding, with 2,152,900 shares reserved for issuance under the Company’s stock option programs. Holders of the Company’s common stock are entitled to one vote per share on all matters submitted to a shareholder vote. Holders of the Company’s common stock are entitled to receive dividends when, as, and if declared by the Company’s Board of Directors. In the event of liquidation of the Company, the holders of the Company’s common stock are entitled to share ratably in the remaining assets after payment of all liabilities and preferred shareholders as described below.
The Company has authorized 2,000,000 shares of no par preferred stock, with 42,555 shares issued and outstanding at December 31, 2012. Preferred stock may be issued by the Company’s Board of Directors from time to time, in series, at which time the terms of such series (par value per share, dividend rates and dates, cumulative or noncumulative, liquidation preferences, etc.) shall be fixed by the Board of Directors. 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, and 2,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series B for no additional funds, to the United States Department of the Treasury under its Troubled Assets Relief Program Capital Purchase Program authorized by the Emergency Economic Stabilization Act of 2008.
On November 10, 2009, the Company authorized 25,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, no par value, Series C for sale with an offering price of $1,000 per share. The offering was extended to existing shareholders who were accredited investors (as such term is defined in Regulation D of the Securities Act of 1933, as amended) and to other accredited investors to subscribe for and purchase shares of this series. During 2009 and 2010, the Company sold 555 shares for proceeds totaling $555.
The Series A preferred stock pays 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 and is paid in liquidation prior to the Company’s common stock. The Series B preferred stock pays 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 Series C preferred stock pays a dividend at the rate of 7% per annum, payable quarterly, and includes other provisions similar to the Series A preferred stock with liquidation at $1,000 per share.
Beginning in January 18, 2011, the Company’s Board of Directors has authorized the deferral of the Company’s dividend payments on its preferred stock, which deferred payments totaled $4,652 as of December 31, 2012.
Stock-Based Compensation
Various stock option plans have been adopted (both incentive stock option plans and nonqualified stock option plans) under which options to purchase shares of Company common stock may be granted to officers, employees, and directors of the Company and the Banks. All options were authorized and granted at prices approximating or exceeding the fair value of the Company’s common stock at the date of grant. Various vesting schedules have been authorized for the options granted to date by the Company’s Board of Directors, including certain performance measures used to determine vesting of certain options granted. Options expire up to ten years from the date of grant if not exercised. For certain of the options granted, the Company’s Board of Directors has the ability, at its sole discretion, to grant to key officers of the Company and Banks the right to surrender their options held to the Company, in whole or in part, and to receive in exchange for payment by the Company an amount equal to the excess of the fair value of the shares subject to such options over the exercise price to acquire such options. Such payments may be made in cash, shares of Company common stock, or a combination thereof.
The Company may issue common stock with restrictions to certain key employees. The shares are restricted as to transfer, but are not restricted as to dividend payment or voting rights. The transfer restrictions lapse over time depending upon whether the awards are service-based or performance-based. Service-based awards are contingent upon continued employment, and performance-based awards are based on the Company meeting specified net income goals and continued employment.
At December 31, 2012, 1,575,484 shares of Company stock were available for future grants under the various plans.

F- 33
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Following is a summary of the Company’s stock option activity for the years ended December 31, 2012 and 2011:
 
 
Weighted average option price per share
 
 Number of shares
 
Remaining contractual term (years)
 
 Aggregate intrinsic value

 
 
 
 
 
 
 
 
Balance at December 31, 2010
 
$
7.98

 
1,969,916

 
 
 
 
Forfeited
 
7.22

 
(1,298,400
)
 
 
 
 
Balance at December 31, 2011
 
9.45

 
671,516

 
3.11
 
—

   Exercisable, end of year
 
9.47

 
665,266

 
3.07
 
—


 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
$
9.45

 
671,516

 
 
 
 
Forfeited
 
9.34

 
(94,100
)
 
 
 
 
Balance at December 31, 2012
 
9.47

 
577,416

 
2.06
 
—

Exercisable, end of year
 
9.47

 
577,416

 
2.06
 
—


A summary of the activity of nonvested options for the years ended December 31, 2012 and 2011 is as follows:
 
 
Shares
 
Weighted average grant date fair value
Nonvested at December 31, 2010
 
77,139

 
$
0.61

Granted
 
—

 
—

Vested
 
(50,222
)
 
0.94

Forfeited
 
(20,667
)
 
—

Nonvested at December 31, 2011
 
6,250

 
—

Granted
 
—

 
—

Vested
 
(6,250
)
 
—

Forfeited
 
—

 
—

Nonvested at December 31, 2012
 
—

 
—


The total fair value of shares (based on the fair value of the options at their respective grant dates) subject to options that vested during the years ended December 31, 2012 and 2011 was $0 and $47, respectively.
As of December 31, 2012, there was no remaining unrecognized compensation expense related to nonvested stock options granted. During the years ended December 31, 2012, 2011, and 2010, the Company recognized stock option expense of $0, $20, and $215 respectively.
During 2012, 2011, and 2010 the Company awarded 121,667, 75,000, and 40,000 shares, respectively, of the Company’s common stock on a restricted basis to certain officers which will vest over varying periods up to three years. The awarded shares are being amortized over the estimated vesting periods.

F- 34
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


A summary of the activity of the Company’s restricted stock for the years ended December 31, 2012 and 2011 is as follows:
 
 
Number of shares
 
Weighted average grant date fair value
Outstanding at December 31, 2010
 
191,366

 
$
1.28

Granted
 
77,750

 
1.55

Vested
 
(23,667
)
 
3.27

Forfeited
 
(32,816
)
 
0.12

Outstanding at December 31, 2011
 
212,633

 
1.34

Granted
 
97,750

 
0.88

Vested
 
(10,000
)
 
2.15

Forfeited
 
(30,733
)
 
0.93

Outstanding at December 31, 2012
 
269,650

 
1.19


The Company amortizes the expense related to restricted stock as compensation expense over the requisite vesting period specified in the grant. Restricted stock awards granted to senior executive officers will vest in two or three years after the grant date, and when all funds received under the Troubled Assets Relief Program Capital Purchase Program have been paid in full. Expense for restricted stock of $107, $165, and $91 was recorded for the years ended December 31, 2012, 2011, and 2010 respectively. As of December 31, 2012, the total unrecognized compensation expense related to restricted stock awards was $77, and the related weighted average period over which it was expected to be recognized was approximately 22 months.
NOTE 12 — PARENT COMPANY FINANCIAL INFORMATION
Subsidiary bank dividends are the principal source of funds for the payment of dividends by the Company to its stockholders and for debt servicing. The Banks are subject to regulation by regulatory authorities that require the maintenance of minimum capital requirements. The Banks are also operating under regulatory agreements which restrict the payment of dividends without prior written consent from their regulators. As of December 31, 2012, there are no regulatory restrictions other than the maintenance of minimum capital standards (as discussed in note 16), as to the amount of dividends the Banks may pay.
Following are condensed balance sheets as of December 31, 2012 and 2011 and the related condensed schedules of operations and cash flows for each of the years in the three-year period ended December 31, 2012 of the Company (parent company only):
 
2012
 
2011
Condensed Balance Sheets
 
 
 
Assets:
 
 
 
Cash
$
16

 
51

Investment in subsidiary banks
73,212

 
71,907

Premises and equipment
35

 
40

Other assets
428

 
300

Total assets
$
73,691

 
72,298

 
 
 
 
Liabilities:
 
 
 
Dividends payable
$
4,652

 
2,263

Other liabilities
1,177

 
393

Total liabilities
5,829

 
2,656

Total stockholders' equity
67,862

 
69,642

Total liabilities and stockholders' equity
$
73,691

 
72,298



F- 35
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


 
2012
 
2011
 
2010
Condensed Schedules of Operations
 
 
 
 
 
Revenue:
 
 
 
 
 
Interest on interest-earning deposits in subsidiary banks
$
—

 
3

 
63

Total revenues
—

 
3

 
63

 
 
 
 
 
 
Expenses:
 
 
 
 
 
Directors fees
100

 
380

 
68

Salaries and employee benefits
175

 
366

 
854

Professional fees
331

 
200

 
209

Interest expense
24

 
5

 
—

Other real estate expense
1

 
4

 
606

Other expenses
130

 
162

 
218

Total expenses
761

 
1,117

 
1,955

Loss before income tax and equity in undistributed loss of subsidiary banks
(761
)
 
(1,114
)
 
(1,892
)
Income tax expense
—

 
288

 
205

 
(761
)
 
(1,402
)
 
(2,097
)
Equity in undistributed income (loss) of subsidiary banks
2,129

 
(32,596
)
 
(46,432
)
Net income (loss)
$
1,368

 
(33,998
)
 
(48,529
)

 
2012
 
2011
 
2010
Condensed Schedules of Cash Flows
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
1,368

 
(33,998
)
 
(48,529
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
 
 
Undistributed (income) loss of subsidiary banks
(2,129
)
 
32,596

 
46,432

Write-down of other real estate owned
—

 
—

 
606

Depreciation
5

 
5

 
5

Stock option compensation cost
—

 
—

 
71

Other, net
636

 
184

 
1,118

Net cash used in operating activities
(120
)
 
(1,213
)
 
(297
)
Cash flows used in investing activities - capital injections into subsidiary banks
—

 
(500
)
 
(8,000
)
Cash flows from financing activities:
 
 
 
 
 
Increase in notes payable
20

 
330

 
—

Proceeds from sale of treasury stock
—

 
4

 
—

Sale of common stock
65

 
64

 
4,338

Sale of preferred stock
—

 
—

 
255

Preferred stock dividends
—

 
—

 
(2,208
)
Payment of stock issuance costs
—

 
—

 
(28
)
Net cash provided by financing activities
85

 
398

 
2,357

Net decrease in cash
(35
)
 
(1,315
)
 
(5,940
)
Cash at beginning of year
51

 
1,366

 
7,306

Cash at end of year
$
16

 
51

 
1,366


F- 36
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)



NOTE 13 — LITIGATION
During the normal course of business, various legal claims have arisen which, in the opinion of management, will not result in any material liability to the Company.
NOTE 14 — DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Banks issue financial instruments with off-balance sheet risk in the normal course of the business of meeting the financing needs of their customers. These financial instruments include commitments to extend credit and standby letters of credit and may involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Banks have in particular classes of these financial instruments.
The Banks’ exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Banks use the same credit policies in making commitments and conditional obligations as they do for financial instruments included on the balance sheets. Following is a summary of the Banks’ off-balance sheet financial instruments at December 31, 2012 and 2011:
 
2012
 
2011
Financial instruments for which contractual amounts represent:
 
 
 
Commitments to extend credit
$
61,640

 
49,815

Standby letters of credit
10,885

 
10,598

 
$
72,525

 
60,413


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Of the total commitments to extend credit at December 31, 2012, $18,896 was made at fixed rates of interest. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but is generally residential or income-producing commercial property or equipment on which the Banks generally have a superior lien.
Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party, for which draw requests have historically not been made. Such guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
NOTE 15 — FAIR VALUE MEASUREMENTS
The Company uses fair value measurements to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income, and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
•
Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
•
Level 2 — Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

F- 37
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


•
Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or value assigned to such assets or liabilities.
The following table summarizes financial instruments measured at fair value on a recurring basis as of December 31, 2012 and 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 
Quoted prices in active markets for identical assets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total fair value
December 31, 2012
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
Obligations of U.S. government agencies and corporations
 
$
—

 
24,431

 
—

 
24,431

Obligations of state and political subdivisions
 
—

 
22,613

 
—

 
22,613

Trust preferred securities
 
—

 
—

 
694

 
694

U.S. agency asset-backed securities
 
—

 
24,368

 
—

 
24,368

U.S. agency residential mortgage-backed securities
 
—

 
237,651

 
—

 
237,651

Total available for sale securities
 
—

 
309,063

 
694

 
309,757

 
 
 
 
 
 
 
 
 
Loans held for sale
 
2,513

 
—

 
—

 
2,513

Total recurring fair value measurements
 
$
2,513

 
309,063

 
694

 
312,270

 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
 
  Obligations of U.S. government agencies and corporations
 
$
—

 
46,158

 
—

 
46,158

  Obligations of state and political subdivisions
 
—

 
15,293

 
—

 
15,293

  Trust preferred securities
 
—

 
—

 
786

 
786

  U.S. agency residential mortgage-backed securities
 
—

 
159,970

 
—

 
159,970

Total available for sale securities
 
—

 
221,421

 
786

 
222,207

 
 
 
 
 
 
 
 
 
  Loans held for sale
 
1,505

 
—

 
—

 
1,505

Total recurring fair value measurements
 
$
1,505

 
221,421

 
786

 
223,712


Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying interim condensed consolidated balance sheets, as well as the general classification of those instruments under the valuation hierarchy:
Investments in Available-for-Sale Debt Securities — The Company’s available-for-sale debt securities are measured at fair value using Levels 2 and 3 valuations. For all debt securities other than the trust preferred securities described below, the market valuation utilizes several sources, primarily pricing services, which include observable inputs rather than “significant unobservable inputs” and, therefore, fall into the Level 2 category.
Trust preferred securities are valued using Level 3 valuation inputs as described in note 3 because significant adjustments are required to determine fair value at the measurement date, particularly regarding estimated default probabilities based on the credit quality of the specific issuer institutions for the trust preferred securities. The trust preferred securities are the only assets measured on a recurring basis using Level 3 inputs.

F- 38
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Loans Held for Sale — Loans held for sale, which consist generally of certain fixed-rate, first-lien residential mortgage loans, are carried at the lower of cost or fair value. The fair value of the Banks' residential mortgage loans held for sale is based on the actual commitments to purchase such loans at the balance sheet date.
For the years ended December 31, 2012 and 2011, the changes in assets, consisting solely of trust preferred securities, measured at fair value on a recurring basis and classified within Level 3 of the fair value hierarchy were as follows:
 
2012
 
2011
 
2010
Balance, at fair value on December 31
$
786

 
511

 
1,238

Transfers into Level 3
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

Total gains (losses) for the period:
 
 
 
 
 
Net unrealized gain (loss) arising through December 31
(22
)
 
316

 
(134
)
Impairment write-downs recognized through December 31
—

 
(36
)
 
(578
)
Purchases, issues, sales, and settlements:
 
 
 
 
 
  Accreted discount
—

 
—

 
1

  Payments in kind
—

 
—

 
20

Principal payments received through December 31
(70
)
 
(5
)
 
(36
)
Balance, at fair value on December 31
$
694

 
786

 
511


The following table summarizes financial instruments measured at fair value on a nonrecurring basis as of December 31, 2012 and December 31, 2011, segregated by the level of valuation inputs within the fair value hierarchy utilized to measure fair value:
 
 
Quoted prices in active markets for identical assets
(Level 1)
 
Significant other observable inputs
(Level 2)
 
Significant unobservable inputs
(Level 3)
 
Total fair value
December 31, 2012
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Impaired loans
 
$
—

 
—

 
19,766

 
19,766

Other real estate owned
 
—

 
—

 
34,819

 
34,819

Total nonrecurring fair value measurements
 
$
—

 
—

 
54,585

 
54,585

 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Impaired loans
 
$
—

 
—

 
100,967

 
100,967

Other real estate owned
 
—

 
—

 
34,565

 
34,565

Total nonrecurring fair value measurements
 
$
—

 
—

 
135,532

 
135,532


Following is a description of the inputs and valuation methodologies used for instruments measured at fair value on a nonrecurring basis, as well as the general classification of these instruments under the valuation hierarchy:
Impaired Loans — At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the reserve for possible loan losses. For collateral-dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data

F- 39
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and the client's business, resulting in a Level 3 fair value classification.
Other Real Estate Owned — Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches, including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
 
Fair value
 
Valuation technique
 
Significant unobservable inputs
 
Range (Weighted average)
Trust preferred securities
$
694

 
Discounted cash flows
 
Prepayment rate
 
0.0%-1.0% (0.5%)
Impaired loans
19,766

 
Appraisal value
 
N/A
 
N/A
Other real estate owned
34,819

 
Appraisal value
 
N/A
 
N/A


F- 40
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


Following is a summary of the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2012 and December 31, 2011:
 
 
 
Fair value measurements using
 
 
 
Carrying amount
 
Level 1
 
Level 2
 
Level 3
 
Total fair value
December 31, 2012
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
32,718

 
32,718

 
—

 
—

 
32,718

Investments in debt securities
309,757

 
—

 
309,063

 
694

 
309,757

Loans, net
547,826

 
—

 
—

 
543,153

 
543,153

Loans held for sale
2,513

 
2,513

 
—

 
—

 
2,513

Accrued interest receivable
2,643

 
2,643

 
—

 
—

 
2,643

 
$
895,457

 
37,874

 
309,063

 
543,847

 
890,784

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
824,464

 
499,616

 
—

 
328,008

 
827,624

Short-term borrowings
4,235

 
4,235

 
—

 
—

 
4,235

Long-term Federal Home Loan Bank borrowings
67,000

 
—

 
—

 
75,823

 
75,823

Accrued interest payable
505

 
505

 
—

 
—

 
505

 
$
896,204

 
504,356

 
—

 
403,831

 
908,187

 
 
 
 
 
 
 
 
 
 
December 31, 2011
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and due from banks
$
53,530

 
53,530

 
—

 
—

 
53,530

Investments in debt securities
222,207

 
—

 
221,421

 
786

 
222,207

Loans, net
689,206

 
—

 
—

 
692,936

 
692,936

Loans held for sale
1,505

 
1,505

 
—

 
—

 
1,505

Accrued interest receivable
3,128

 
3,128

 
—

 
—

 
3,128

 
$
969,576

 
58,163

 
221,421

 
693,722

 
973,306

Financial liabilities:
 

 
 

 
 
 
 
 
 
Deposits
$
886,886

 
503,733

 
—

 
384,875

 
888,608

Short-term borrowings
17,243

 
17,243

 
—

 
—

 
17,243

Long-term Federal Home Loan Bank borrowings
67,000

 
—

 
—

 
71,407

 
71,407

Accrued interest payable
673

 
673

 
—

 
—

 
673

 
$
971,802

 
521,649

 
—

 
456,282

 
977,931


The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Cash and Other Short-Term Instruments — For cash and due from banks (including interest-earning deposits in other financial institutions), federal funds sold, accrued interest receivable (payable), and short-term borrowings, the carrying amount is a reasonable estimate of fair value, as such instruments are due on demand and/or repriced in a short time period.
Investments in Available-for-Sale Debt Securities — The Company’s available-for-sale debt securities are measured at fair value using Levels 2 and 3 valuations. For all debt securities other than the trust preferred securities described below, the market valuation utilizes several sources, primarily pricing services, which include observable inputs rather than “significant unobservable inputs” and, therefore, fall into the Level 2 category.
Trust preferred securities are valued using Level 3 valuation inputs as described in note 3 because significant adjustments are required to determine fair value at the measurement date, particularly regarding estimated default probabilities based on the

F- 41
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


credit quality of the specific issuer institutions for the trust preferred securities. The trust preferred securities are the only assets measured on a recurring basis using Level 3 inputs.
Loans — The fair value of loans is estimated by discounting future cash flows using current rates for loans with similar characteristics and maturities. The Banks' current loan rates are comparable with rates offered by other financial institutions. The reserve for possible loan losses is considered to be a reasonable estimate of discount for credit quality concerns.
Loans Held for Sale — Loans held for sale, which consist generally of certain fixed-rate, first-lien residential mortgage loans, are carried at the lower of cost or fair value. The fair value of the Banks' residential mortgage loans held for sale is based on the actual commitments to purchase such loans at the balance sheet date.
Deposits — The fair value of demand deposits, savings accounts, and interest-bearing transaction account deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Long-Term Borrowings — Rates currently available to the Company with similar terms and remaining maturities are used to estimate the fair value of existing long-term debt.
Commitments to Extend Credit and Standby Letters of Credit — The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates.
NOTE 16 — REGULATORY MATTERS
The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the Company's and Banks’ assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Banks to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The Banks are also required to maintain additional capital as described below under agreements with the banking regulators. Company management believes that, as of December 31, 2012, the Company and Banks meet all capital adequacy requirements to which they are subject, with the exception of the increased capital levels required by the regulatory agreements.
As of December 31, 2012, the most recent notification from the applicable regulatory authorities categorized the Banks as adequately capitalized banks under the regulatory framework for prompt corrective action. To be categorized as a well-capitalized bank, the Banks must maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. With the termination of the regulatory agreements under which the Banks were operating, the Banks have returned to a well-capitalized status.

F- 42
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


The actual capital amounts and ratios for the Company, Reliance Bank, and Reliance Bank, FSB at December 31, 2012, 2011, and 2010 are presented in the following table:
 
 
Actual
 
For capital adequacy purposes
 
To be a well-capitalized bank under prompt corrective action provision
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
75,649

 
10.88
%
 
$
55,636

 
≥8.0%
 
N/A

 
N/A
   Reliance Bank
 
$
76,968

 
11.52
%
 
$
53,436

 
≥8.0%
 
$
66,795

 
≥10.0%
   Reliance Bank, FSB
 
$
4,593

 
16.32
%
 
$
2,252

 
≥8.0%
 
$
2,815

 
≥10.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
66,715

 
9.59
%
 
$
27,818

 
≥4.0%
 
N/A

 
N/A
   Reliance Bank
 
$
68,414

 
10.24
%
 
$
26,718

 
≥4.0%
 
$
40,077

 
≥6.0%
   Reliance Bank, FSB
 
$
4,205

 
14.94
%
 
$
1,126

 
≥4.0%
 
$
1,689

 
≥6.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
66,715

 
6.79
%
 
$
39,285

 
≥4.0%
 
N/A

 
N/A
   Reliance Bank
 
$
68,414

 
7.38
%
 
$
37,061

 
≥4.0%
 
$
46,327

 
≥5.0%
   Reliance Bank, FSB
 
$
4,205

 
7.10
%
 
$
2,370

 
≥4.0%
 
$
2,963

 
≥5.0%

 
 
Actual
 
For capital adequacy purposes
 
To be a well-capitalized bank under prompt corrective action provision
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2011:
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
78,089

 
9.50
%
 
$
65,787

 
≥8.0%
 
N/A

 
N/A
   Reliance Bank
 
$
77,452

 
9.86
%
 
$
62,865

 
≥8.0%
 
$
78,581

 
≥10.0%
   Reliance Bank, FSB
 
$
3,453

 
9.52
%
 
$
2,903

 
≥8.0%
 
$
3,628

 
≥10.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
67,548

 
8.21
%
 
$
32,893

 
≥4.0%
 
N/A

 
N/A
   Reliance Bank
 
$
67,403

 
8.58
%
 
$
31,432

 
≥4.0%
 
$
47,149

 
≥6.0%
   Reliance Bank, FSB
 
$
2,963

 
8.17
%
 
$
1,451

 
≥4.0%
 
$
2,177

 
≥6.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
67,548

 
6.13
%
 
$
44,100

 
≥4.0%
 
N/A

 
N/A
   Reliance Bank
 
$
67,403

 
6.54
%
 
$
41,215

 
≥4.0%
 
$
51,519

 
≥5.0%
   Reliance Bank, FSB
 
$
2,963

 
4.10
%
 
$
2,888

 
≥4.0%
 
$
3,610

 
≥5.0%


F- 43
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


 
 
Actual
 
For capital adequacy purposes
 
To be a well-capitalized bank under prompt corrective action provision
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
December 31, 2010:
 
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
108,209

 
10.05
%
 
$
86,168

 
≥8.0%
 
N/A

 
N/A
   Reliance Bank
 
$
102,606

 
10.03
%
 
$
81,824

 
≥8.0%
 
$
102,280

 
≥10.0%
   Reliance Bank, FSB
 
$
4,033

 
7.53
%
 
$
4,287

 
≥8.0%
 
$
5,359

 
≥10.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to risk-weighted assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
93,896

 
8.72
%
 
$
43,084

 
≥4.0%
 
N/A

 
N/A
   Reliance Bank
 
$
89,574

 
8.76
%
 
$
40,912

 
≥4.0%
 
$
61,368

 
≥6.0%
   Reliance Bank, FSB
 
$
3,330

 
6.21
%
 
$
2,144

 
≥4.0%
 
$
3,215

 
≥6.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital (to average assets):
 
 
 
 
 
 
 
 
 
 
 
 
   Consolidated
 
$
93,896

 
7.14
%
 
$
52,589

 
≥4.0%
 
N/A

 
N/A
   Reliance Bank
 
$
89,574

 
7.29
%
 
$
49,161

 
≥4.0%
 
$
61,451

 
≥5.0%
   Reliance Bank, FSB
 
$
3,330

 
4.01
%
 
$
3,324

 
≥4.0%
 
$
4,155

 
≥5.0%

The Company has successfully completed a capital plan on March 29, 2013 to address the need to raise capital in order to comply with the regulatory agreements noted below. The offering raised $30,950,000, which was used to provide the required capital for the Banks and for general working capital purposes of the Company.
As previously disclosed, Reliance Bank was a party to a Consent Order (the “Consent Order”) with the FDIC, which was discussed in detail in the Company's 2011 Annual Report on Form 10-K filed with the SEC on March 30, 2012, as amended by Amendment No. 1 filed with the SEC on April 27, 2012. Among other things, the Consent order required Reliance Bank to take certain actions and comply with certain financial covenants relating to improving its capital position. Throughout the past two fiscal years, Reliance Bank has taken steps to comply with the Consent Order, and based on the resulting improved capital position of Reliance Bank and the success of the capital raise discussed above, the FDIC terminated the Consent Order on March 12, 2013.
On June 8, 2011, the OTS issued a Cease and Desist Order (the “OTS Order”) to Reliance Bank, FSB, which was discussed in detail in the Company's 2011 Annual Report on Form 10-K filed with the SEC on March 30, 2012, as amended by Amendment No. 1 filed with the SEC on April 27, 2012. During July 2011, responsibility for the supervision and regulation of federal savings banks was transferred to the Office of the Comptroller of the Currency ("OCC"), and the OTS no longer exists. As such, the Company's obligations under the OTS Order transferred to the OCC. As with the Consent Order discussed above, the OTS Order required Reliance Bank, FSB to take certain actions and maintain certain financial covenants relating to improving its capital position, which Reliance Bank, FSB took steps to achieve during the past two fiscal years. Previously, the Company filed an application with the applicable federal regulatory authorities to merge Reliance Bank, FSB into Reliance Bank under the Missouri banking charter. This merger application was approved and became effective on March 29, 2013. As such, Reliance Bank, FSB was merged into Reliance Bank and no longer exists.
On July 14, 2011, the Company entered into an agreement (the "Fed Agreement") with the Federal Reserve Bank of St. Louis (the "Federal Reserve"). The Fed Agreement requires the Company to (a) take steps to ensure that the Bank complies with Reliance Bank's Consent Order noted above; (b) not, without the prior written approval of the Federal Reserve, (i) declare or pay any dividends, (ii) receive dividends or any other form of payment from Reliance Bank representing a reduction in capital, (iii) incur, increase, or guarantee any debt, or (iv) purchase or redeem any shares of its stock; (c) submit to the Federal Reserve an acceptable written plan to maintain sufficient capital at the Company on a consolidated basis; (d) within 30 days after the end of any quarter in which the Company's capital ratios fall below the approved capital plan's minimum ratios, provide the Federal Reserve with a written notice and plan detailing the Company's planned steps to increase its capital ratios; (e) submit to

F- 44
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


the Federal Reserve a written statement of planned sources and uses of cash; (f) comply with notice provisions of laws and regulations regarding the appointment of any new directors or senior executive officers; (g) comply with certain banking laws and regulations restricting indemnification of and severance payments to executives and employees; and (h) submit quarterly progress reports to the Federal Reserve.
With the completion of the capital plan discussed above, the necessary actions have been taken toward complying with the provisions of the Fed Agreement.
NOTE 17 — QUARTERLY FINANCIAL INFORMATION (unaudited)
Following is a summary of quarterly financial information for the years ended December 31, 2012, 2011, and 2010:
 
First
 
Second
 
Third
 
Fourth
 
For the
 
quarter
 
quarter
 
quarter
 
quarter
 
year
2012:
 
 
 
 
 
 
 
 
 
Total interest income
$
9,619

 
9,645

 
9,145

 
8,493

 
36,902

Total interest expense
2,600

 
2,380

 
2,253

 
2,136

 
9,369

Net interest income
7,019

 
7,265

 
6,892

 
6,357

 
27,533

Provision for possible loan losses
2,598

 
1,280

 
10

 
(2,100
)
 
1,788

Noninterest income
3,165

 
811

 
1,246

 
1,005

 
6,227

Noninterest expense
6,867

 
8,339

 
7,854

 
7,544

 
30,604

Loss before applicable income taxes
719

 
(1,543
)
 
274

 
1,918

 
1,368

Applicable income taxes
—

 
—

 
—

 
—

 
—

Net income (loss)
719

 
(1,543
)
 
274

 
1,918

 
1,368

 
 
 
 
 
 
 
 
 
 
Preferred stock dividends
(584
)
 
(595
)
 
(601
)
 
(609
)
 
(2,389
)
Net loss attributable to common shareholders
$
135

 
(2,138
)
 
(327
)
 
1,309

 
(1,021
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
22,714,304

 
22,756,718

 
22,788,700

 
22,804,545

 
22,766,234

Diluted
22,714,304

 
22,756,718

 
22,788,700

 
22,804,545

 
22,766,234

 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
Basic
$
0.01

 
(0.09
)
 
(0.01
)
 
0.06

 
(0.04
)
Diluted
$
0.01

 
(0.09
)
 
(0.01
)
 
0.06

 
(0.04
)



F- 45
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


 
First
 
Second
 
Third
 
Fourth
 
For the
 
quarter
 
quarter
 
quarter
 
quarter
 
year
2011:
 
 
 
 
 
 
 
 
 
Total interest income
$
13,797

 
12,755

 
11,697

 
10,912

 
49,161

Total interest expense
4,462

 
4,253

 
3,535

 
3,036

 
15,286

Net interest income
9,335

 
8,502

 
8,162

 
7,876

 
33,875

Provision for possible loan losses
5,100

 
6,816

 
5,144

 
6,730

 
23,790

Noninterest income
719

 
1,037

 
869

 
2,971

 
5,596

Noninterest expense
10,146

 
10,908

 
8,095

 
11,914

 
41,063

Loss before applicable income taxes
(5,192
)
 
(8,185
)
 
(4,208
)
 
(7,797
)
 
(25,382
)
Applicable income taxes
—

 
—

 
—

 
8,616

 
8,616

Net loss
(5,192
)
 
(8,185
)
 
(4,208
)
 
(16,413
)
 
(33,998
)
 
 
 
 
 
 
 
 
 
 
Preferred stock dividends
(554
)
 
(555
)
 
(581
)
 
(573
)
 
(2,263
)
Net loss attributable to common shareholders
$
(5,746
)
 
(8,740
)
 
(4,789
)
 
(16,986
)
 
(36,261
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
22,556,804

 
22,580,672

 
22,597,772

 
22,619,024

 
22,588,755

Diluted
22,556,804

 
22,580,672

 
22,597,772

 
22,619,024

 
22,588,755

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
(0.25
)
 
(0.39
)
 
(0.21
)
 
(0.75
)
 
(1.61
)
Diluted
$
(0.25
)
 
(0.39
)
 
(0.21
)
 
(0.75
)
 
(1.61
)


F- 46
RELIANCE BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except shares and per share data)


 
First
 
Second
 
Third
 
Fourth
 
For the
 
quarter
 
quarter
 
quarter
 
quarter
 
year
2010:
 
 
 
 
 
 
 
 
 
Total interest income
$
17,608

 
16,657

 
15,687

 
14,194

 
64,146

Total interest expense
6,790

 
6,446

 
5,500

 
4,901

 
23,637

Net interest income
10,818

 
10,211

 
10,187

 
9,293

 
40,509

Provision for possible loan losses
7,692

 
9,628

 
17,203

 
6,969

 
41,492

Noninterest income
655

 
786

 
1,121

 
945

 
3,507

Noninterest expense
7,755

 
7,565

 
8,918

 
15,503

 
39,741

Loss before applicable income taxes
(3,974
)
 
(6,196
)
 
(14,813
)
 
(12,234
)
 
(37,217
)
Applicable income taxes
(1,475
)
 
(2,693
)
 
(5,960
)
 
21,440

 
11,312

Net loss
(2,499
)
 
(3,503
)
 
(8,853
)
 
(33,674
)
 
(48,529
)
 
 
 
 
 
 
 
 
 
 
Preferred stock dividends
(549
)
 
(551
)
 
(554
)
 
(554
)
 
(2,208
)
Net loss attributable to common shareholders
$
(3,048
)
 
(4,054
)
 
(9,407
)
 
(34,228
)
 
(50,737
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
20,972,091

 
21,221,753

 
22,569,372

 
22,680,721

 
21,867,606

Diluted
20,972,091

 
21,221,753

 
22,569,372

 
22,680,721

 
21,867,606

 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
Basic
$
(0.15
)
 
(0.19
)
 
(0.42
)
 
(1.51
)
 
(2.32
)
Diluted
$
(0.15
)
 
(0.19
)
 
(0.42
)
 
(1.51
)
 
(2.32
)

F- 47


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
RELIANCE BANCSHARES, INC.
 
 
 
By:  
/s/ Allan D. Ivie, IV  
 
 
 
Allan D. Ivie, IV 
 
 
 
Chief Executive Officer 
 
 
 
 
 
 
 
 
 
 
By:  
/s/ David P. Franke 
 
 
 
David P. Franke
 
 
 
Interim Chief Financial Officer 
 
Date: March 29, 2013


53


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
Title
Date
 
 
 
/s/ Allan D. Ivie, IV
President, Chief Executive Officer and Director (Principal Executive Officer)
March 29, 2013
Allan D. Ivie, IV
 
 
 
 
 
/s/ David P. Franke
Interim Chief Financial Officer (Principal Financial and Principal Accounting Officer)
March 29, 2013
David P. Franke
 
 
 
 
 
/s/ Robert M. Cox, Jr.
Director
March 29, 2013
Robert M. Cox, Jr.
 
 
 
 
 
/s/ Richard M. Demko
Director
March 29, 2013
Richard M. Demko
 
 
 
 
 
/s/ Scott A. Sachtleben
Director
March 29, 2013
Scott A. Sachtleben
 
 
 
 
 
/s/ Barry D. Koenemann
Director
March 29, 2013
Barry D. Koenemann
 
 
 
 
 
/s/ Gary R. Parker
Director
March 29, 2013
Gary R. Parker
 
 
 
 
 
/s/ James E. SanFilippo
Director
March 29, 2013
James E. SanFilippo
 
 
 
 
 
/s/ Lawrence P. Keeley, Jr.
Director
March 29, 2013
Lawrence P. Keeley, Jr.
 
 

54


Index to Exhibits
Exhibit
 
 
number
 
Description
 
 
 
3.1
 
Restated Articles of Incorporation of Reliance Bancshares, Inc. (filed as Exhibit 3.1 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
3.2
 
Bylaws of Reliance Bancshares, Inc. (filed as Exhibit 3.2 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
3.3
 
Amendment No. 1 to the Bylaws of Reliance Bancshares, Inc. (filed as Exhibit 3.3 to the registrant's Form 8-K filed on April 27, 2012 and incorporated herein by reference).
 
 
 
3.4
 
Certificate of Designation establishing Fixed Rate Cumulative Perpetual Preferred Stock, No Par Value, Series A, of Reliance Bancshares, Inc. (filed as Exhibit 4.1 to the registrant's Form 8-K filed on February 23, 2009 and incorporated herein by reference).
 
 
 
3.5
 
Certificate of Designation establishing Fixed Rate Cumulative Perpetual Preferred Stock, No Par Value, Series B, of Reliance Bancshares, Inc. (filed as Exhibit 4.2 to the registrant's Form 8-K filed on February 23, 2009 and incorporated herein by reference).
 
 
 
3.6
 
Corrected Certificate of Designation establishing Fixed Rate Cumulative Perpetual Preferred Stock, No Par Value, Series B, of Reliance Bancshares, Inc. (filed as Exhibit 4.3 to the registrant's Form 8-K filed on February 23, 2009 and incorporated herein by reference).
 
 
 
3.7
 
Notice of Exempt Offerings of Securities for the issuance of Perpetual Convertible Preferred Stock, No Par Value, Series C. (Filed as Form D with the SEC on December 18, 2009 and incorporated herein by reference).
 
 
 
10.5
 
2001 Incentive Stock Option Plan (filed as Exhibit 10.8 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.6
 
2001 Non-Qualified Stock Option Plan (filed as Exhibit 10.9 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.7
 
First Amendment of the 2001 Non-Qualified Stock Option Plan (filed as Exhibit 10.10 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.8
 
Second Amendment of the 2001 Non-Qualified Stock Option Plan (filed as Exhibit 10.11 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.9
 
2003 Incentive Stock Option Plan (filed as Exhibit 10.12 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.10
 
2003 Non-Qualified Stock Option Plan (filed as Exhibit 10.13 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.11
 
First Amendment of the 2003 Non-Qualified Stock Option Plan (filed as Exhibit 10.14 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.12
 
Second Amendment of the 2003 Non-Qualified Stock Option Plan (filed as Exhibit 10.15 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 

55


10.13
 
2004 Non-Qualified Stock Option Plan (filed as Exhibit 10.16 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.14
 
2005 Incentive Stock Option Plan (filed as Exhibit 10.17 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.15
 
2005 Non-Qualified Stock Option Plan (filed as Exhibit 10.18 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.16
 
First Amendment of the 2005 Non-Qualified Stock Option Plan (filed as Exhibit 10.19 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.18
 
Reliance Bancshares, Inc. 2005 Employee Stock Purchase Plan (filed as Exhibit 10.21 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
10.19
 
Reliance Bancshares, Inc. 2005 Employee Stock Purchase Plan, as amended effective June 29, 2012 (filed as Exhibit 99.1 to the registrant's registration statement on Form S-8 filed on June 29, 2012 and incorporated herein by reference).
 
 
 
10.20
 
2007 Non-Qualified Stock Option Plan (filed as Exhibit 10.26 to the registrant's Amendment No. 2 to its Form 10 filed on July 19, 2007 and incorporated herein by reference).
 
 
 
10.21
 
Letter Agreement dated February 13, 2009 including the Securities Purchase Agreement - Standard Terms incorporated by reference therein between the Company and the U.S. Treasury (filed as Exhibit 10.1 to the registrant's Form 8-K filed on February 23, 2009 and incorporated herein by reference).
 
 
 
10.22
 
Employment Agreement between Reliance Bancshares, Inc. and Allan D. Ivie, IV dated June 4, 2010 (filed as Exhibit 10.1 to the registrant's Form 8-K filed on June 24, 2010 and incorporated herein by reference).
 
 
 
10.23
 
Written Agreement by and between Reliance Bancshares, Inc. and the Federal Reserve Bank of St. Louis, effective July 14, 2011 (filed as Exhibit 10.1 to the registrant's Form 8-K filed on July 20, 2011 and incorporated herin by reference).
 
 
 
10.24
 
Written Agreement between Reliance Bancshares, Inc. and Patrick R. Gideon dated April 26, 2011 (filed as Exhibit 10.25 to the registrant's Form 10-K/A filed April 27, 2012 and incorporated herin by reference).
 
 
 
10.25
 
Promissory Note between Gary R. Parker and Reliance Bancshares, Inc. dated September 29, 2011 (filed as Exhibit 10.26 to the registrant's Form 10-K/A filed April 27, 2012 and incorporated herein by reference).
 
 
 
14.1
 
Reliance Bancshares, Inc. Code of Conduct and Ethics (filed as Exhibit 14.1 to the registrant's Form 10 filed on April 27, 2007 and incorporated herein by reference).
 
 
 
21.1
 
Subsidiaries of Reliance Bancshares, Inc.
 
 
 
31.1
 
Chief Executive Officer’s Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Chief Financial Officer’s Certification pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Chief Executive Officer's Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 

56


32.2
 
Chief Financial Officer's Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
99.1
 
Certification for Years Following First Fiscal Year Certification Reliance Bancshares, Inc.
 
 
 
99.2
 
Certification for Years Following First Fiscal Year Certification Reliance Bancshares, Inc.
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

 
 
 



57