10-Q 1 form10q093008.htm AMERIS BANCORP 10Q 0908 form10q093008.htm


 


 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.   20549
FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2008

OR

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

Commission File Number:   001-13901



 
AMERIS BANCORP
(Exact name of registrant as specified in its charter)

GEORGIA
 
58-1456434
(State of incorporation)
 
(IRS Employer ID No.)

24 SECOND AVE., SE  MOULTRIE, GA 31768
(Address of principal executive offices)
 
(229) 890-1111
(Registrant’s telephone number)
 
 
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 x No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer", "accelerated  filer" and "smaller reporting company” in Rule 12b-2 of the Securities Exchange Act. (Check one):
 

Large accelerated filer o
Accelerated filer x
Smaller Reporting Company o
   
                                   Non-accelerated filer o (Do not check if smaller reporting company)
             

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

 
There were 13,565,766 shares of Common Stock outstanding as of November 5, 2008.







 
AMERIS BANCORP

 
PART I - FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
 
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
12
     
Item 3.
23
     
Item 4.
24
     
PART II - OTHER INFORMATION
 
Item 1.
25
     
Item 1A.
25
     
Item 2.
25
     
Item 3.
25
     
Item 4.
26
     
Item 5.
26
     
Item 6.
26
     
 
27
     
     
     
     
     



 




 

AMERIS BANCORP AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(dollars in thousands)
 
                   
   
September 30,
   
December 31,
   
September 30,
 
   
2008
   
2007
   
2007
 
   
(Unaudited)
   
(Audited)
   
(Unaudited)
 
Assets
                 
Cash and due from banks
 
$
43,549
   
$
59,804
   
$
58,281
 
Federal funds sold & interest bearing balances
   
75,458
     
12,022
     
22,910
 
Securities available for sale, at fair value
   
287,790
     
291,170
     
301,977
 
Restricted equity securities, at cost
   
9,836
     
7,559
     
8,729
 
                         
Loans
   
1,710,109
     
1,614,048
     
1,593,014
 
    Less: allowance for loan losses
   
30,144
     
27,640
     
26,434
 
Loans, net
   
1,679,965
     
1,586,408
     
1,566,580
 
                         
Premises and equipment, net
   
65,868
     
59,132
     
54,639
 
Intangible assets, net
   
3,924
     
4,802
     
5,126
 
Goodwill
   
54,813
     
54,813
     
54,675
 
Other assets
   
36,440
     
36,353
     
30,222
 
       Total assets
 
$
2,257,643
   
$
2,112,063
   
$
2,103,139
 
                         
Liabilities and Stockholders' Equity
                       
Deposits:
                       
Noninterest-bearing
 
$
198,900
   
$
197,345
   
$
192,707
 
Interest-bearing
   
1,607,439
     
1,559,920
     
1,515,148
 
Total deposits
   
1,806,339
     
1,757,265
     
1,707,855
 
Federal funds purchased & securities sold under agreements to repurchase
   
63,973
     
14,705
     
32,359
 
Other borrowings
   
138,600
     
90,500
     
116,500
 
Other liabilities
   
13,118
     
16,075
     
15,560
 
Subordinated deferrable interest debentures
   
42,269
     
42,269
     
42,269
 
       Total liabilities
   
2,064,299
     
1,920,814
     
1,914,543
 
                         
Stockholders' Equity
                       
Preferred stock, par value$1; 5,000,000 shares authorized; zero shares issued or outstanding
   
0
     
0
     
0
 
Common stock, par value $1; 30,000,000 shares authorized; 14,895,134, 14,869,924 and 14,867,934 issued
   
14,895
     
14,870
     
14,869
 
Capital surplus
   
83,453
     
82,750
     
82,308
 
Retained earnings
   
105,117
     
103,095
     
103,805
 
Accumulated other comprehensive income(loss)
   
666
     
1,303
     
(1,617
)
Treasury stock, at cost, 1,331,102, 1,329,939 and 1,326,458 shares
   
(10,787
)
   
(10,769
)
   
(10,769
)
       Total stockholders' equity
   
193,344
     
191,249
     
188,596
 
       Total liabilities and stockholders' equity
 
$
2,257,643
   
$
2,112,063
   
$
2,103,139
 
 
See notes to unaudited consolidated financial statements.







AMERIS BANCORP AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
(dollars in thousands, except per share data)
 
(Unaudited)
 
                         
                         
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2008
   
2007
   
2008
   
2007
 
Interest Income
                       
Interest and fees on loans
 
$
28,280
   
$
33,479
   
$
86,752
   
$
95,811
 
Interest on taxable securities
   
3,563
     
3,480
     
10,793
     
10,252
 
Interest on nontaxable securities
   
169
     
175
     
514
     
530
 
Interest on deposits in other banks and federal funds sold
   
100
     
317
     
391
     
2,109
 
      Total Interest Income
   
32,112
     
37,451
     
98,450
     
108,702
 
                                 
Interest Expense
                               
Interest on deposits
   
11,717
     
15,877
     
38,173
     
46,621
 
Interest on other borrowings
   
1,218
     
2,493
     
3,584
     
6,252
 
      Total Interest Expense
   
12,935
     
18,370
     
41,757
     
52,873
 
                                 
     Net Interest Income
   
19,177
     
19,081
     
56,693
     
55,829
 
Provision for Loan Losses
   
8,220
     
2,964
     
15,140
     
4,407
 
     Net Interest Income After Provision for Loan Losses
   
10,957
     
16,117
     
41,553
     
51,422
 
                                 
Noninterest Income
                               
Service charges on deposit accounts
   
3,657
     
3,197
     
10,637
     
9,133
 
Mortgage banking activity
   
745
     
783
     
2,469
     
2,265
 
Other service charges, commissions and fees
   
120
     
203
     
618
     
1,008
 
Gain on sale of securities
   
-
     
(69
)
   
-
     
(61
)
Other noninterest income
   
117
     
477
     
1,070
     
1,414
 
     Total Noninterest Income
   
4,639
     
4,591
     
14,794
     
13,759
 
                                 
Noninterest Expense
                               
Salaries and employee benefits
   
7,113
     
7,438
     
24,392
     
22,662
 
Equipment and occupancy expense
   
1,904
     
1,757
     
5,999
     
5,151
 
Amortization of intangible assets
   
293
     
324
     
878
     
973
 
Data processing fees
   
1,238
     
1,110
     
3,557
     
3,436
 
Other operating expenses
   
4,213
     
4,540
     
11,537
     
11,171
 
     Total Noninterest Expense
   
14,761
     
15,169
     
46,363
     
43,393
 
                                 
     Net Income Before Taxes
   
835
     
5,539
     
9,984
     
21,788
 
                                 
Provision for Income Taxes
   
469
     
1,969
     
3,504
     
7,821
 
                                 
     Net Income
 
$
366
   
$
3,570
   
$
6,480
   
$
13,967
 
                                 
Other Comprehensive Income, Net of Tax
                               
Unrealized holding gain/(loss) arising during period, net of tax
   
856
     
(941)
     
571
     
(316
)
Unrealized gain/(loss) on cashflow hedge arising during period, net of tax
   
100
     
306
     
300
     
98
 
Reclassification for losses included in net income, net of tax
   
-
     
-
     
41
     
203
 
                                 
    Comprehensive Income
 
$
1,322
   
$
2,935
   
$
7,393
   
$
13,952
 
                                 
Basic earnings per share
 
$
0.03
   
$
0.26
   
$
0.48
   
$
1.04
 
                                 
Diluted earnings per share
 
$
0.03
   
$
0.26
   
$
0.48
   
$
1.02
 
                                 
Dividends declared per share
 
$
0.05
   
$
0.14
   
$
0.33
   
$
0.42
 


See notes to unaudited consolidated financial statements.
 
 

 

 

AMERIS BANCORP AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(dollars in thousands)
 
(Unaudited)
 
   
Nine Months Ended
 
   
September 30,
 
   
2008
   
2007
 
Cash Flows From Operating Activities:
           
Net Income
 
$
6,480
   
$
13,967
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
2,400
     
2,299
 
Net loss on sale or disposal of premises and equipment
   
(38
)
   
-
 
Net gain/(loss) on sale of other real estate owned
   
(41
)
   
(2,267
)
Provision for loan losses
   
15,140
     
4,407
 
Amortization of intangible assets
   
878
     
973
 
Other prepaids, deferrals and accruals, net
   
(5,808
)
   
(7,104
)
      Net cash provided by operating activities
   
19,011
     
12,275
 
                 
                 
                 
Cash Flows From Investing Activities:
               
Net decrease/(increase) in federal funds sold & interest bearing deposits
   
(63,437
)
   
112,322
 
Proceeds from maturities of securities available for sale
   
59,800
     
24,379
 
Purchase of securities available for sale
   
(57,843
)
   
(52,273
)
Proceeds from sales of securities available for sale
   
-
     
10,153
 
Net increase in loans
   
(116,705
)
   
(151,623
)
Proceeds from sales of other real estate owned
   
11,266
     
2,267
 
Purchases of premises and equipment
   
(10,753
)
   
(10,333
)
      Net cash used in investing activities
   
(177,672
)
   
(65,108
)
                 
                 
                 
Cash Flows From Financing Activities:
               
Net increase/(decrease) in deposits
   
49,075
     
(2,309
)
Net increase in federal funds purchased & securities sold under agreements to repurchase
   
49,268
     
16,426
 
Net increase in other borrowings
   
48,100
     
41,000
 
Dividends paid
   
(4,476
)
   
(5,685
)
Purchase of treasury shares
   
(18
)
   
(176
)
Decrease in unfunded obligation on Islands acquisition
   
-
     
(5,120
)
Proceeds from exercise of stock options
   
457
     
122
 
        Net cash provided by financing activities
   
142,406
     
44,258
 
                 
Net decrease in cash and due from banks
 
$
(16,255
)
 
$
(8,575
)
                 
Cash and due from banks at beginning of period
   
59,804
     
66,856
 
                 
Cash and due from banks at end of period
 
$
43,549
   
$
58,281
 
 
 
See notes to unaudited consolidated financial statements.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2008
(Unaudited)
 
Note 1 - Basis of Presentation & Accounting Policies
Ameris Bancorp (the “Company” or “Ameris”) is a financial holding company headquartered in Moultrie, Georgia.  Ameris conducts the majority of its operations through its wholly owned banking subsidiary, Ameris Bank (the “Bank”).  Ameris Bank currently operates 50 branches in Georgia, Alabama, Northern Florida and South Carolina.  Our business model capitalizes on the efficiencies of a large financial services company while still providing the community with the personalized banking service expected by our customers.  We manage our Bank through a balance of decentralized management responsibilities and efficient centralized operating systems, products and loan underwriting standards.  Ameris’ board of directors and senior managers establish corporate policy, strategy and administrative policies.  Within Ameris’ established guidelines and policies, each advisory board and senior managers make lending and community-specific decisions.  This approach allows the banker closest to the customer to respond to the differing needs and demands of their unique market.

The accompanying unaudited consolidated financial statements for Ameris have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation.  The interim consolidated financial statements included herein are unaudited, but reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the consolidated financial position and results of operations for the interim periods presented.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The results of operations for the nine months and quarter ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year.  These financial statements should be read in conjunction with the financial statements and notes thereto and the report of our registered independent public accounting firm included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Certain amounts reported for the periods ended September 30, 2007 and December 31, 2007 have been reclassified to conform with the presentation as of September 30, 2008.  These reclassifications had no effect on previously reported net income or stockholders' equity.

Newly Adopted Accounting Pronouncements
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  SFAS 157 has been applied prospectively as of the beginning of the period.
 
SFAS 157 defines fair value as 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.  SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:
 
Level 1 - Quoted prices in active markets for identical assets or liabilities.
 
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
Securities Available for Sale – The fair value of securities available for sale is determined by various valuation methodologies.  Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.  Level 2 securities include certain U.S. agency bonds, collateralized mortgage and debt obligations, and certain municipal securities.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain residual municipal securities and other less liquid securities.

Derivatives – The Company’s current hedging strategies involve utilizing interest rate floors. The fair value of derivatives is recognized as assets or liabilities in the financial statements.  The accounting for the change in the fair value of a derivative depends on the intended use of the derivative instrument at inception.  As of September 30, 2008, the Company had cash flow hedges with a notional amount of $70 million for the purpose of converting floating rate assets to fixed rate.



 
Impaired Loans – Impaired loans are carried at the present value of estimated future cash flows using the loan's existing rate, or the fair value of collateral if the loan is collateral dependent.   A portion of the allowance for loan losses is allocated to impaired loans if the value of such loans is deemed to be less than the unpaid balance.  If these allocations cause the allowance for loan losses to increase, such increase is reported as a component of the provision for loan losses.  Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed.  Throughout the quarter certain impaired loans were partially charged-off or re-evaluated for impairment resulting in a remaining balance for these loans.   The fair value of these impaired loans is considered Level 3, and was computed by analysis of appraisals of the underlying collateral and discounted cash flow analysis.

Other Real Estate Owned – The fair value of other real estate owned ("OREO") is determined using certified appraisals that value the property at its highest and best uses by applying traditional valuation methods common to the industry.  The Company does not hold any OREO for profit purposes and all other real estate is actively marketed for sale.
 
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.  The standard provides companies with an option to report selected financial assets and liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings.  The objective of SFAS No. 159 is to improve financial reporting by providing entities with the chance to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting standards.  This standard is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company has not elected the fair value option for any financial assets or liabilities as of September 30, 2008.
 
The following table presents the fair value measurements of assets and liabilities measured at fair value on a recurring basis and the level within the FAS 157 fair value hierarchy in which the fair value measurements fall as of September 30, 2008:
 
         
Fair Value Measurements Using
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Securities available for sale
 
$
287,790
   
$
535
   
$
283,187
   
$
4,068
 
Derivative financial instruments
   
1,907
             
1,907
         
Impaired loans carried at fair value
   
11,030
                     
11,030
 
Other real estate owned
   
3,734
                     
3,734
 
    Total assets at fair value
 
$
304,461
   
$
535
   
$
285,094
   
$
18,832
 
 






Note 2 - Investment Securities
Ameris’ investment policy blends the needs of the Company’s liquidity and interest rate risk with its desire to improve income and provide funds for expected growth in loans.  Under this policy, the Company generally invests in obligations of the United States Treasury or other governmental or quasi-governmental agencies.  Ameris’ portfolio and investing philosophy concentrate activities in obligations where the credit risk is limited.  For the small portion of Ameris’ portfolio that has been found to present credit risk, the Company has reviewed the investments and financial performance of the obligors and believes the credit risk to be acceptable.

The amortized cost and estimated fair value of investment securities available for sale at September 30, 2008, December 31, 2007 and September 30, 2007 are presented below:
 
 
   
September 30, 2008
 
(dollars in thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Estimated Fair Value
 
U. S. Government sponsored agencies
 
$
58,875
   
$
229
   
$
(736
)
 
$
58,368
 
State and municipal securities
   
18,502
     
244
     
(135
)
   
18,611
 
Corporate debt securities
   
12,709
     
83
     
(1,022
)
   
11,770
 
Mortgage backed securities
   
196,461
     
1,422
     
(630
)
   
197,253
 
Equity securities
   
1,788
     
-
     
-
     
1,788
 
   
$
288,335
   
$
1,978
   
$
(2,523
)
 
$
287,790
 

   
December 31, 2007
 
(dollars in thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Estimated Fair Value
 
U. S. Government sponsored agencies
 
$
69,562
   
$
366
   
$
(5
)
 
$
69,923
 
State and municipal securities
   
18,232
     
181
     
(93
)
   
18,320
 
Corporate debt securities
   
9,812
     
37
     
(351
)
   
9,498
 
Mortgage-backed securities
   
190,896
     
1,281
     
(536
)
   
191,641
 
Equity securities
   
1,788
     
-
     
-
     
1,788
 
   
$
290,290
   
$
1,865
   
$
(985
)
 
$
291,170
 
 
   
September 30, 2007
 
(dollars in thousands)
 
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Estimated Fair Value
 
U. S. Government sponsored agencies
 
$
104,097
   
$
88
   
$
(780
)
 
$
103,405
 
State and municipal securities
   
18,428
     
47
     
(139
)
   
18,336
 
Corporate debt securities
   
9,784
     
34
     
(91
)
   
9,727
 
Mortgage-backed securities
   
170,477
     
243
     
(2,010
)
   
168,710
 
Equity securities
   
1,788
     
11
     
-
     
1,799
 
   
$
304,574
   
$
423
   
$
(3,020
)
 
$
301,977
 






Note 3 - Loans
The Company engages in a full complement of lending activities, including real estate-related loans, agriculture-related loans, commercial and financial loans and consumer installment loans.  Ameris concentrates the majority of its lending activities on real estate loans where the historical loss percentages have been low.  While risk of loss in the Company’s portfolio is primarily tied to the credit quality of the various borrowers, risk of loss may increase due to factors beyond Ameris’ control, such as local, regional and/or national economic downturns.  General conditions in the real estate market may also impact the relative risk in the real estate portfolio.  
 
The Company evaluates loans for impairment when loans are risk rated as substandard or worse.  The Company measures impairment based upon the present value of the loan’s expected future cash flows discounted at the loan’s effective interest rate, except where foreclosure or liquidation is probable or when the primary source of repayment is provided by real estate collateral.  In these circumstances, impairment is measured based upon the estimated fair value of the collateral.  In addition, in certain circumstances, impairment may be based on the loan’s observable estimated fair value.  Impairment with regard to substantially all of Ameris’ impaired loans has been measured based on the estimated fair value of the underlying collateral.  At the time the contractual principal payments on a loan are deemed to be uncollectible, Ameris’ policy is to record a charge-off against the allowance for loan losses.
 
Nonperforming assets include loans classified as nonaccrual or renegotiated and foreclosed or repossessed assets.  It is the general policy of the Company to stop accruing interest income and place the recognition of interest on a cash basis when any commercial, industrial or commercial real estate loan is 90 days or more past due as to principal or interest and/or the ultimate collection of either is in doubt, unless collection of both principal and interest is assured by way of collateralization, guarantees or other security.  When a loan is placed on nonaccrual status, any interest previously accrued but not collected is reversed against current income unless the collateral for the loan is sufficient to cover the accrued interest or a guarantor assures payment of interest.

Loans are stated at unpaid balances, net of unearned income and deferred loan fees. Balances within the major loans receivable categories are represented in the following table:

 
(dollars in thousands)
 
September 30, 2008
   
December 31, 2007
   
September 30, 2007
 
Commercial, financial & agricultural
 
$
205,565
   
$
188,652
   
$
206,584
 
Real estate – residential
   
419,697
     
386,736
     
356,156
 
Real estate – commercial & farmland
   
661,619
     
592,177
     
576,684
 
Real estate – construction & development
   
360,160
     
383,317
     
392,823
 
Consumer installment
   
52,769
     
55,114
     
55,796
 
Other
   
10,299
     
8,052
     
4,971
 
   
$
1,710,109
   
$
1,614,048
   
$
1,593,014
 

 

 





Note 4 - Allowance for Loan Losses
Activity in the allowance for loan losses for the nine months ended September 30, 2008, for the year ended December 31, 2007 and for the nine months ended September 30, 2007 is as follows:

 
(dollars in thousands)
 
September 30, 2008
   
December 31, 2007
   
September 30, 2007
 
Balance, January 1
 
$
27,640
   
$
24,863
   
$
24,863
 
     Provision for loan losses charged to expense
   
15,140
     
11,321
     
4,407
 
     Loans charged off
   
(13,691
)
   
(10,418
)
   
(3,922
)
     Recoveries of loans previously charged off
   
1,055
     
1,874
     
1,086
 
Ending balance
 
$
30,144
   
$
27,640
   
$
26,434
 
 
 
Management performs a detailed review and valuation assessment of impaired loans on a quarterly basis and recognizes losses when permanent impairment is identified.  For the quarter ended September 30, 2008, impaired loans totaled $24.2 million, compared to $18.5 million at December 31, 2007.  The increase is driven by higher levels of non-accrual and past due loans and is reflective of declining real estate values in certain of the Company’s operating markets, particularly values of single family residential building lots and raw land.  For the periods ended September 30, 2008 and December 31 2007, the level of allowance for loan losses related to impaired loans were $4.0 million and $3.0 million, respecivley.
 
Note 5 – Goodwill and Intangible Assets
Goodwill represents the excess of cost over the fair value of the net assets purchased in business combinations.  Goodwill is required to be tested annually for impairment or whenever events occur that may indicate that the recoverability of the carrying amount is not probable.  In the event of an impairment, the amount by which the carrying amount exceeds the fair value is charged to earnings.  The Company performed its annual test of impairment in the fourth quarter and determined that there was no impairment in the carrying value of goodwill assigned to its subsidiary Bank as of December 31, 2007.

Market conditions have deteriorated since the end of 2007 with real estate activity and resulting valuations becoming increasingly stressed and exposing areas of risk for which the Company has had reduced clarity.  Management has evaluated the carrying value of its goodwill in light of these new market conditions and believes that there is no impairment in the goodwill assigned to its subsidiary Bank at September 30, 2008.  Management’s determination regarding potential impairment is based on estimates of the fair value of the subsidiary Bank, using valuation methods based largely on multiples of its earnings.  While the subsidiary Bank’s earnings have been impacted by market conditions and weaker than normal credit quality, the Bank’s earnings and the corresponding multiples indicate that there is no impairment at the end of the third quarter of 2008.  The Company has retained an outside consultant to assess goodwill and intangible assets.  The Company anticipates receipt of the appraisal prior to year end.



Note 6 - Weighted Average Shares Outstanding
Earnings per share have been computed based on the following weighted average number of common shares outstanding:

   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2008
   
2007
   
2008
   
2007
 
   
(share data in thousands)
   
(share data in thousands)
 
Basic shares outstanding
   
13,516
     
13,502
     
13,508
     
13,477
 
     Plus: Dilutive effect of ISOs
   
16
     
117
     
35
     
161
 
     Plus: Dilutive effect of Restricted Grants
   
12
     
1
     
12
     
12
 
Diluted shares outstanding
   
13,544
     
13,620
     
13,555
     
13,650
 





Note 7 – Other Borrowings
The Company has certain borrowing arrangements with various financial institutions that are used in the Company’s operations primarily to fund growth in earning assets when appropriate spreads can be realized.  At September 30, 2008, total other borrowings amounted to $138.6 million compared to $116.5 million at September 30, 2007.  The majority of these balances are comprised in the Company’s borrowing relationship with the FHLB of Atlanta.  Total borrowings at the FHLB were $133.6 million and $111.5 million at September 30, 2008 and 2007, respectively.   The $22.1 million increase in FHLB borrowings was a result of management’s decision to off set changes in loans that occured during the quarter.

Note 8 – Commitments and Contingencies
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments.  The Company uses the same credit policies in making commitments and conditional obligations as are used for on-balance-sheet instruments.

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.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company issues standby letters of credit, which are conditional commitments issued to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements and expire in decreasing amounts with varying terms.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary.

The Company evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.  Collateral held may include accounts receivable, inventory, property, plant and equipment, residential real estate, and income-producing commercial properties on those commitments for which collateral is deemed necessary.

The following table represents the Company’s commitments to extend credit and standby letters of credit:

(dollars in thousands)
 
September 30, 2008
   
September 30, 2007
 
             
Commitments to extend credit
 
$
176,985
   
$
211,111
 
                 
Standby letters of credit
 
$
8,281
   
$
8,275
 
 





Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Certain statements made in this report are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance and involve known and unknown risks, uncertainties and other factors, many of which may be beyond our control and which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

All statements other than statements of historical fact are statements that could be forward-looking statements.  You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.  These forward-looking statements may not be realized due to a variety of factors, including, without limitation, legislative and regulatory initiatives; additional competition in Ameris’ markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by Ameris; state and federal banking regulations; changes in or application of environmental and other laws and regulations to which Ameris is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in Ameris’ filings with the Securities and Exchange Commission under the Exchange Act.

All written or oral forward-looking statements that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice.  Our forward-looking statements apply only as of the date of this report or the respective date of the document from which they are incorporated herein by reference.  We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made, whether as a result of new information, future events or otherwise.


 





The following table sets forth unaudited selected financial data for the previous five quarters.  This data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in this Item 2.

   
2008
   
2007
   
For Nine Months Ended
 
(in thousands, except share data, taxable equivalent)
 
Third Quarter
   
Second Quarter
   
First Quarter
   
Fourth Quarter
   
Third Quarter
   
2008
   
2007
 
Results of Operations:
                                         
Net interest income
 
$
19,177
   
$
19,056
   
$
18,460
   
$
19,248
   
$
19,081
   
$
56,693
   
$
55,829
 
Net interest income (tax equivalent)
   
19,691
     
19,514
     
18,814
     
19,009
     
19,257
     
58,019
     
56,544
 
Provision for loan losses
   
8,220
     
3,720
     
3,200
     
6,914
     
2,964
     
15,140
     
4,407
 
Non-interest income
   
4,639
     
5,313
     
4,842
     
3,833
     
4,591
     
14,794
     
13,759
 
Non-interest expense
   
14,761
     
15,962
     
15,640
     
15,502
     
15,169
     
46,363
     
43,394
 
Net income
   
366
     
3,149
     
2,966
     
1,186
     
3,570
     
6,480
     
13,967
 
Selected Average Balances:
                                                       
Loans, net of unearned income
 
$
1,698,024
   
$
1,650,781
   
$
1,617,991
   
$
1,605,006
   
$
1,569,906
   
$
1,655,599
   
$
1,513,321
 
Investment securities
   
299,564
     
307,304
     
291,708
     
297,380
     
299,925
     
299,525
     
298,251
 
Earning assets
   
2,018,807
     
1,976,321
     
1,933,179
     
1,924,212
     
1,896,044
     
1,976,102
     
1,865,142
 
Assets
   
2,192,501
     
2,141,940
     
2,115,561
     
2,102,579
     
2,069,715
     
2,150,001
     
2,039,664
 
Deposits
   
1,792,821
     
1,764,067
     
1,748,961
     
1,725,383
     
1,695,239
     
1,768,616
     
1,693,501
 
Shareholders’ equity
   
186,541
     
192,605
     
193,971
     
191,124
     
187,290
     
191,039
     
184,829
 
Period-End Balances:
                                                       
Loans, net of unearned income
 
$
1,710,109
   
$
1,678,147
   
$
1,622,437
   
$
1,614,048
   
$
1,593,014
   
$
1,710,109
   
$
1,593,014
 
Earning assets
   
2,083,193
     
2,019,525
     
1,931,411
     
1,924,799
     
1,926,630
     
2,083,193
     
1,926,630
 
Total assets
   
2,257,643
     
2,193,021
     
2,118,243
     
2,112,063
     
2,103,139
     
2,257,643
     
2,103,139
 
Total deposits
   
1,806,339
     
1,770,861
     
1,784,291
     
1,757,265
     
1,707,855
     
1,806,339
     
1,707,855
 
Shareholders’ equity
   
193,344
     
192,555
     
196,308
     
191,249
     
188,596
     
193,344
     
188,596
 
Per Common Share Data:
                                                       
Basic earnings per share
 
$
0.03
   
$
0.23
   
$
0.22
   
$
0.09
   
$
0.26
   
$
0.48
   
$
1.04
 
Diluted earnings per share
   
0.03
     
0.23
     
0.22
     
0.09
     
0.26
     
0.48
     
1.02
 
Book value per share
   
14.25
     
14.20
     
14.48
     
14.12
     
13.93
     
14.25
     
13.93
 
End of period shares outstanding
   
13,564,032
     
13,564,032
     
13,556,770
     
13,539,985
     
13,539,195
     
13,564,032
     
13,539,195
 
Weighted average shares outstanding
                                                       
Basic
   
13,515,767
     
13,510,907
     
13,497,344
     
13,485,765
     
13,501,663
     
13,508,006
     
13,477,065
 
Diluted
   
13,543,612
     
13,563,032
     
13,559,761
     
13,573,626
     
13,620,069
     
13,555,469
     
13,650,217
 
Market Price:
                                                       
High Closing Price
   
15.02
     
16.26
     
16.41
     
18.67
     
23.05
     
16.20
     
27.94
 
Low Closing Price
   
7.79
     
8.70
     
12.49
     
13.73
     
17.72
     
7.79
     
17.72
 
Closing Price for Quarter
   
14.85
     
8.70
     
16.06
     
16.85
     
18.08
     
14.85
     
18.08
 
Trading volume (avg daily)
   
43,464
     
62,739
     
61,780
     
51,604
     
50,547
     
55,903
     
43,565
 
Cash dividends per share
   
0.05
     
0.14
     
0.14
     
0.14
     
0.14
     
0.33
     
0.42
 
Price to earnings
   
*N/M
     
9.45
     
18.25
     
15.18
     
12.38
     
*N/M
     
12.38
 
Price to book value
   
1.04
     
0.61
     
1.11
     
1.19
     
1.30
     
1.04
     
1.30
 
Performance Ratios:
                                                       
       Return on average assets
   
0.07
%
   
0.59
%
   
0.56
%
   
0.23
%
   
0.68
%
   
0.40
%
   
0.92
%
       Return on average equity
   
0.78
%
   
6.58
%
   
6.15
%
   
2.48
%
   
7.56
%
   
4.53
%
   
10.10
%
       Loans/Deposits (average)
   
94.71
%
   
93.58
%
   
92.51
%
   
93.02
%
   
92.61
%
   
93.61
%
   
89.36
%
Net interest margin (tax equivalent)
   
3.87
%
   
3.96
%
   
3.91
%
   
3.92
%
   
4.03
%
   
3.92
%
   
4.05
%
Equity/Assets (average)
   
8.51
%
   
8.99
%
   
9.17
%
   
9.09
%
   
9.05
%
   
8.88
%
   
9.06
%
Efficiency ratio
   
61.98
%
   
65.50
%
   
67.12
%
   
67.21
%
   
64.08
%
   
64.86
%
   
62.36
%

      * N/M = Not Meaningful






Overview
The following is management’s discussion and analysis of certain significant factors which have affected the financial condition and results of operations of the Company as reflected in the unaudited consolidated statement of condition as of September 30, 2008 as compared to December 31, 2007 and operating results for the three-month and nine-month periods ended September 30, 2007.  These comments should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.
 
Results of Operations for the Three Months Ended September 30, 2008 and 2007

Consolidated Earnings and Profitability
Ameris reported net income of $366,000, or $0.03 per share, for the quarter ended September 30, 2008, compared to net income for the same quarter in 2007 of $3.6 million, or $0.26 per share.  The Company’s return on average assets and average shareholders’ equity declined in the third quarter of 2008 to 0.07% and 0.78%, respectively, compared to 0.68% and 7.56% in the third quarter of 2007.  Decreasing credit quality and lower net interest margins are the primary reasons for the declines in earnings and profitability levels.

Net Interest Income and Margins
On a tax equivalent basis, net interest income for the third quarter of 2008 was $19.7 million, an increase of less than one percent compared to the same quarter in 2007.  While the Company’s net interest income increased slightly, the net interest margin declined reflecting the recent declines in short-term rates.  The Company’s net interest margin declined to 3.87% at the end of the third quarter compared to 4.03% in the same period of 2007.

Total interest income during the third quarter of 2008 was $32.1 million compared to $37.5 million in the same quarter of 2007.  Yields on earning assets also fell, declining from 7.87% in the third quarter of 2007 to 6.38% in the third quarter of 2008.  Yields on loans led overall yields lower, declining to 6.67% in the third quarter compared to 8.48% in the same period in 2007.  Declines in loan yields were the result of decreases in the prime rate beginning in November 2007.  At the end of the third quarter, yields on the Company’s variable loan portfolio had decreased to 6.00%, compared to 8.40% for the same quarter of 2007.  When compared to the third quarter of 2007, yields on fixed rate loans in the third quarter of 2008 declined to 7.54% from 8.16%.  Fixed rate loans account for approximately 43.74% of the total portfolio.

Interest expense declined significantly, offsetting declines in interest income.  Total interest expense in the third quarter of 2008 amounted to $12.9 million, reflecting a decline of 29.59% from the same quarter in 2007.  The Company’s cost of funding declined to 2.54% in the current quarter from 3.90% reported during the third quarter of 2007.  Yields on the Company’s CD portfolio declined to 3.79% in the third quarter of 2008 compared to 5.08% in the same quarter of 2007.  Costs of non-deposit funding declined significantly in the third quarter of 2008 to 2.09% compared to 5.78% in the third quarter of 2007.  Declines in the costs of non-deposit borrowings relate mostly to favorable structures in the Company’s borrowings from the FHLB.

Provision for Loan Losses and Credit Quality
The Company’s provision for loan losses during the third quarter of 2008 amounted to $8.2 million compared to $3.0 million for the same quarter of 2007.  The increase in the provision was related to continued credit quality declines in several of the Bank’s markets.  Non-performing assets as a percentage of loans and OREO increased to 2.52% at September 30, 2008 compared to 1.38% at September 30, 2007.  A severe slowdown in real estate activity (sales and valuations) centered primarily in our north Florida markets has exposed weaker borrowers and stressed the financial condition of stronger borrowers.  Strengthening the underlying controls and risk management systems around credit quality has been a priority for the past several quarters and continues today.  These efforts compound the efforts already underway to remove weaker borrowers from the balance sheet and to aggressively work non-performing assets.  The Company believes that these efforts will ultimately result in an improving trend in credit quality but understands that a stronger real estate market is required.

Net charge-offs in the third quarter of 2008 amounted to $6.7 million, or annualized 1.58% of total loans, compared to $1.5 million, or 0.39%, in the third quarter of 2007.  Net charge-offs in the third quarter of 2008 were more geographically widespread than in previous quarters, but were still centered in our north Florida markets.

Noninterest Income
Noninterest income in the third quarter of 2008 increased slightly to $4.64 million from $4.59 million in the same quarter of 2007.  Service charges on deposit accounts increased approximately $460,000 to $3.7 million in the current quarter.  These increases were primarily the result of higher fee and service charge structures implemented during the fourth quarter of 2007.  During the quarter, income from mortgage banking activities decreased 4.9% or $38,000 to end the third quarter at $745,000.  The decrease in mortgage income was related to market turmoil which some of the Bank’s markets continue to experience.

Noninterest Expense
Noninterest expenses in the third quarter of 2008 decreased to $14.8 million compared to $15.2 million in the same quarter of 2007.  Salaries and benefits decreased 4.37% or $7.1 million during the third quarter when compared to the same period a year ago.  This change was due mostly to lower levels of incentive accrual.  During the third quarter of 2008 the Company did not accrue an expense for incentive pay compared to an incentive accrual expense of approximately $277,000 in the third quarter of 2007.  The Company’s continued expansion in South Carolina and Jacksonville, Florida contributed to a larger than normal 7.7% increase in premises and equipment expense to end the quarter at $1.9 million.  Other operating expenses decreased approximately $327,000 to $4.2 million in the third quarter of 2008 when compared to the third quarter of 2007.  The majority of the decrease was a result of a decrease in legal expenses.

Income taxes
Income taxes in the third quarter amounted to $469,000, an effective rate of 56.2%, compared to $1.9 million and 35.5%, respectively, in the same quarter of 2007.  During the third quarter, the company settled certain issues with the Internal Revenue Service resulting in approximately $261,000 in additional tax and an abnormally high effective rate.



Results of Operations for the Nine Months Ended September 30, 2008 and 2007

Interest Income
Interest income for the nine months ended September 30, 2008 was $98.5 million, a decline of 10.4%, compared to $108.7 million for the same period in 2007.  Average earning assets for the nine month period increased 5.9%, to $1.97 billion as of September 30, 2008 compared to $1.86 billion as of September 30, 2007.  Yield on average earning assets declined to 6.73% from 7.84% for the nine months ended September 30, 2008 and 2007, respectively.

Interest Expense
Total interest expense for the nine months ended September 30, 2008 amounted to $41.8 million, reflecting a decline of 21.0% from the same period of 2007.  During the nine month period ended September 30, 2008, the Company’s cost of funding declined to 2.86% from 3.85% reported in the previous year.  In the same period, yields on the Company’s CD portfolio fell to 4.27% compared to 5.06% for the nine months period ended September 30, 2008.  The Company’s non-deposit funding declined significantly to 2.86% from 3.85% in the first nine months of 2007.

Decreases in both interest income and interest expense result from a lower rate environment in the current period than was experienced during the same period in 2007.

Net Interest Income
On a tax equivalent basis, net interest income for the nine months ended September 30, 2008 increased 2.65% to $58.0 million compared to $56.5 million for the same period ending September 30, 2007.  The majority of the increase is the result of an increase in earning assets.  Earning assets increased $156.3 million or 8.15% during the nine month period, which helped offset the impact of a decreasing net interest margin. The Company’s net interest margin decreased to 3.92% for the nine months ended September 30, 2008 compared to 4.05% as of September 30, 2007.

Provision for Loan Losses
The provision for loan losses increased notably to $15.1 million for the nine months ended September 30, 2007 compared to $4.4 million in the same period in 2007.  Total non-performing assets increased to $43.1 million at September 30, 2008 from $21.9 million at September 30, 2007.   For the nine month period ending September 30, 2008, Ameris had net charge-offs of $12.6 million compared to $2.8 million for the same period in 2007.  As a percent of loans, annualized net charge offs were 0.99% and 0.24% for the nine months ending September 30, 2008 and 2007, respectively.
 
Noninterest Income
Noninterest income for the first nine months of 2008 grew $1.0 million, or 7.52%, to $14.8 million, compared to the prior year period.  Service charges on deposit accounts increased 16.48%, or $1.5 million, to end the nine month period at $10.6 million.  Mortgage banking activities include origination fees, service release premiums and gain on the sales of mortgage loans held-for-sale. Mortgage banking activities for the nine months ended September 30, 2008 totaled $2.5 million, an increase of $200,000, or 8.70%, compared to mortgage banking activities of $2.3 million in the nine months ended September 30, 2007.  
 
Noninterest Expense
Non-interest expense for the first nine months of 2008 was $46.4 million.  This represents a $3.0 million increase over the prior year period which totaled $43.4 million.  Salaries and employee benefits of $24.4 million for the nine months ended September 30, 2008 were $1.8 million higher than the $22.6 million reported for the same period in 2007.  The majority of the increase is attributable to new hires across the Company’s newer markets. Occupancy and equipment expense increased approximately $800,000 to $6.0 million for the nine months ended September 30, 2008 compared to the same period of 2007 as a result of new branch offices, primarily in South Carolina and Jacksonville, Florida.  Marketing and advertising expense increased during the first nine months of 2008 to $2.0 million, an increase of approximately $707,000 when compared to the same period in 2007.  This increase relates to aggressive marketing campaigns in new and existing markets and is partially the cause of increases in mortgage and service charge revenues.   At the end of the first nine months of 2008, collection expense related to problem loans increased approximately 18.32% to $840,983 from $710,726 for the same period ended September 30, 2007.

Income Taxes
For the nine months ended September 30, 2008 and 2007, the provision for taxes was $3.5 million and $7.8 million, respectively. The effective tax rate for the nine months ended September 30, 2008 was 35.1% compared to 35.9% for the same period in 2007. The amount of income tax expense is influenced by the amount of taxable income and the amount of tax-exempt income.  Decreases in the tax expense directly correspond to the decrease in taxable income reported at the end of the first nine months of 2008 compared to the first nine months of 2007.





Short-Term Investments
The Company’s short-term investments are comprised of federal funds sold and interest bearing balances.  At September 30, 2008, the Company’s short-term investments were $75.4 million, compared to $12.0 million and $22.9 million at December 31, 2007 and September 30, 2007, respectively.  These balances have historically been distributed between deposits held by the Federal Home Loan Bank, and federal funds sold.

Capital
Capital management consists of providing equity to support both current and anticipated future operations.  The Company is subject to capital adequacy requirements imposed by the Federal Reserve Board (the “FRB”) and the Georgia Department of Banking and Finance (the “GDBF”), and the Bank is subject to capital adequacy requirements imposed by the Federal Deposit Insurance Corporation (the “FDIC”) and the GDBF.

The FRB, the FDIC and the GDBF have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy.  These standards define and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk.  The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profiles among bank holding companies and banks and to account for off-balance sheet exposure.

The minimum requirements established by the regulators for the Bank are set forth in the table below along with the actual ratios at September 30, 2008 and 2007.


 
Well Capitalized Requirement
Adequately Capitalized Requirement
 
September 30, 2008 Actual
 
September 30, 2007 Actual
Tier 1 Capital (to Average Assets)
5%
4%
   
8.30
%
   
8.53
%
Tier 1 Capital (to Risk Weighted Assets)
6%
4%
   
10.08
%
   
10.80
%
Total Capital (to Risk Weighted Assets)
10%
8%
   
11.33
%
   
12.05
%





Loans and Allowance for Loan Losses
At September 30, 2008, gross loans outstanding were $1.71 billion, an increase of $117.1 million, or 7.4%, over balances at September 30, 2007. The growth in the loan portfolio was attributable to a consistent focus on quality loan production and expansion into faster growing markets over the past few years.  The Company regularly monitors the composition of the loan portfolio to evaluate the adequacy of the allowance for loan losses in light of the impact that changes in the economic environment may have on the loan portfolio.

The Company focuses on the following loan categories: (1) commercial, financial & agricultural, (2) residential real estate, (3) commercial and farmland real estate, (4) construction and development related real estate, and (5) consumer.  The Company’s management has strategically located its branches in south and southeast Georgia, north Florida, southeast Alabama and the state of South Carolina and has taken advantage of the growth in these areas.

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses.  The provision for loan losses is based on management’s evaluation of the size and composition of the loan portfolio, the level of non-performing and past due loans, historical trends of charged-off loans and recoveries, prevailing economic conditions and other factors management deems appropriate.  The Company’s management has established an allowance for loan losses which it believes is adequate for the risk of loss inherent in the loan portfolio.  Based on a credit evaluation of the loan portfolio, management presents a monthly review of the allowance for loan losses to the Company’s Board of Directors.  The review that management has developed primarily focuses on risk by evaluating individual loans in certain risk categories.  These categories have also been established by management and take the form of loan grades.   By grading the loan portfolio in this manner the Company’s management is able to effectively evaluate the portfolio by risk, which management believes is the most effective way to analyze the loan portfolio and thus analyze the adequacy of the allowance for loan losses.  The Company’s reserve for loan losses is completely allocated to individual loans through this grading system.

The Company’s risk management processes include a loan review program designed to evaluate the credit risk in the loan portfolio and insure credit grade accuracy.  Through the loan review process, the Company maintains a loan portfolio summary analysis, charge-off and recoveries analysis, trends in accruing problem loan analysis, and problem and past due loan analysis which serve as tools to assist management in assessing the overall quality of the loan portfolio and the adequacy of the allowance for loan losses.  Loans classified as “substandard” are loans which are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged.  These assets exhibit a well-defined weakness or are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.  These weaknesses may be characterized by past due performance, operating losses and/or questionable collateral values.  Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans but have an increased risk of loss.  Loans classified as “loss” are those loans which are considered uncollectible and are in the process of being charged-off.

The allowance for loan losses is established by examining (1) the large classified loans, nonaccrual loans and loans considered impaired and evaluating them individually to determine the specific reserve allocation, and (2) the remainder of the loan portfolio to allocate a portion of the allowance based on past loss experience and the economic conditions for the particular loan category.  The Company will also consider other factors such as changes in lending policies and procedures; changes in national, regional, and/or local economic and business conditions; changes in the nature and volume of the loan portfolio; changes in the experience, ability and depth of either the bank president or lending staff; changes in the volume and severity of past due and classified loans; changes in the quality of the Company’s corporate loan review system; and other factors management deems appropriate.  Historically, we believe our estimates of the level of allowance for loan losses required have been appropriate and our expectation is that the primary factors considered in the provision calculation will continue to be consistent with prior trends.