Ameris Bancorp - 10-Q quarterly report FY

(Mark One)

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

Ameris Bancorp (together with its subsidiaries, the “Company” or “Ameris”) is a financial holding company headquartered in Moultrie, Georgia. Ameris owns and operates four subsidiary banks (the “Banks”), having a total of forty-three branches in Georgia, Florida and Alabama. 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 Banks through a balance of decentralized management responsibilities and efficient centralized operating systems, products and loan underwriting standards. Ameris’s board of directors and senior managers establish corporate policy, strategy and administrative policies. Within Ameris’s established guidelines and policies, each  Bank’s board and senior managers make lending and community-specific decisions. This approach allows the bankers 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 ended September 30, 2006 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, 2005.

In 2005, Ameris Bancorp announced its intentions to begin consolidating its subsidiary bank charters across Georgia, Alabama and northern Florida into a single state-chartered banking subsidiary, American Banking Company. In addition to the charter consolidation effort, Ameris announced intentions to re-brand the Company and its surviving bank subsidiary with a single identity. As of September 30, 2006, the Company has successfully consolidated $1.71 billion of its assets under the charter of American Banking Company. The Company expects to complete the consolidation effort by the end of 2006.

On December 16, 2005, Ameris acquired First National Banc, Inc., a two bank holding company with assets of approximately $265.0 million. The two banking subsidiaries of First National Banc, Inc. included the market leader in St. Marys, Georgia, and the largest community bank in Orange Park, Florida.

On February 17, 2005, Ameris announced that its Board of Directors approved a six-for-five stock split on outstanding shares of common stock of Ameris at the Board’s February meeting. The additional shares were payable March 31, 2005 to shareholders of record at the close of business on March 15, 2005.

All information concerning earnings per share, dividends per share and number of shares outstanding has been adjusted to give effect to this split.

Ameris’s 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’s portfolio and investing philosophy concentrate activities in obligations where the credit risk is limited. For a small portion of Ameris’s 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, 2006, December 31, 2005 and September 30, 2005 are presented below:

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. As of September 30, 2006, Ameris’s loan portfolio consisted of 80.24% real estate-related loans, 3.27% agriculture-related loans, 11.83% commercial and financial loans, and 4.25% 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’s 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. Of the target areas of lending activities, commercial and financial loans are generally considered to have a greater risk of loss than real estate loans or consumer installment loans.

The Company evaluates loans for impairment when a loan's risk is rated as substandard or doubtful. 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’s impaired loans has been measured based on the estimated fair value of the underlying collateral. The Company’s policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy. At the time the contractual payments on a loan are deemed to be uncollectible, Ameris’s policy is to record a charge-off against the allowance for loan losses.

 

Nonperforming assets include loans classified as nonaccrual or renegotiated and foreclosed assets. It is the general policy of the Company to cease 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.  Balances within the major loans receivable categories are represented in the following table:

Activity in the allowance for loan losses for the nine months ended September 30, 2006, for the year ended December 31, 2005 and for the nine months ended September 30, 2005 is as follows:

Earnings per share have been computed based on the following weighted average number of common shares outstanding for the three months and nine months ended September 30:

 

In August 2006, the Company entered into two interest rate swap agreements related to their variable rate loans. The contracts are classified as a hedge of an exposure to changes in the cash flows of a recognized asset which is considered a cash flow hedge. As a cash flow hedge, the portion of a change in the fair value of the derivative that has been deemed highly effective is recognized in other comprehensive income until the related cash flows from the hedged item are recognized in earnings. The swap agreements expire in August 2009 and August 2011 and both have rates of 7.00%. The notional amounts are $35 million on both contracts. The premium paid on these contracts was $147,000 for the three year contract and $350,000 for the five year contract. There is no gain or loss included in other comprehensive income as of September 20, 2006 relating to the fair value of the swap agreements. The Company documented at inception and will continue to document over the life of the hedge, its analysis of actual and expected hedge effectiveness. If the hedge is deemed ineffective is regards to the future cash flows, changes in the fair value of the derivative are recognized in earnings as a component of other non-interest expense.

 

At September 30, 2006, the Company had stock-based compensation plans, which are more fully described in Note 14 of the Company's Annual Report on Form 10-K for the year ended December 31, 2005. On January 1, 2006, Ameris adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment ("SFAS 123(R)"), using the modified prospective-transition method. Under that transition method, compensation cost recognized beginning in 2006 includes: (a) the compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of FASB Statement No. 123, and (b) the compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before income taxes and net income for the three months ended September 30, 2006, is $110,000 lower than if the Company had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the three months ended September 30, 2006 would have been $0.47 and $0.46, respectively, if the Company had not adopted Statement 123(R), compared to reported basic and diluted earnings per share of $0.33. and $0.32, respectively, for the same time period in 2005. The Company’s income before income taxes and net income for the three months ended September 30, 2006 is $228,000, lower than if the Company had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the nine months ended September 30, 2006 would have been $1.28 and $1.26 if the Company had not adopted Statement 123(R), compared to reported basic and diluted earnings per share of $0.93 and $0.92, respectively, for the same time period in 2005.

Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123 to stock-based employee compensation:

A summary of the status of the employee stock option plans as of September 30, 2006 and December 31, 2005 and activity during the periods is as follows:

The fair value of the options granted was based upon the discounted value of future cash flows of the options using the Black-Scholes option-pricing model and the following assumptions.

A summary of the status of Ameris’ nonvested shares as of December 31, 2005 and changes during the period ended September 30, 2006, is presented below:

At September 30, 2006, there was $954,000 of unrecognized compensation cost related to stock-based awards which is expected to be recognized over a weighted-average period of 8.82 years.

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 those 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 terms ranging from one to four years. 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 represent the Company’s commitments to extend credit and standby letters of credit:

Certain of the 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’s 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’s filings with the Securities and Exchange Commission under the Exchange Act.

 

Return on average equity for the nine months ended September 30, 2006 and 2005 was 14.33% and 11.87%, respectively, on average equity of $152.8 million and $124.0 million, respectively. Return on average assets for the nine months ended September 30, 2006 and 2005 was 1.24% and 1.14%, respectively.

 

The following table sets forth unaudited selected financial data for the previous five quarters and for the nine month periods ending September 30, 2006 and 2005. This data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in this Item 2.

Interest income for the three months ended September 30, 2006 was $32.6 million, an increase of $12.1 million, or 59.0%, compared to $20.5 million for the same period in 2005. Average earning assets for the three month period increased $459.9 million, or 37.62%, to $1.68 billion as of September 30, 2006, compared to $1.22 billion as of September 30, 2005. Yield on average earning assets increased 105 basis points to 7.73% from 6.68% for the quarters ended September 30, 2006 and 2005, respectively. The Company’s increase in interest income is primarily attributable to the rising interest rate environment of the last year and a half and the purchase of First National Banc, Inc.

Interest expense on deposits and other borrowings for the three months ended September 30, 2006 was $14.7 million, a $7.5 million, or 105.05%, increase from September 30, 2005.  While average interest bearing liabilities increased $479.9 million, or 40.29%, to $1.67 billion for the three months ended September 30, 2006, compared to $1.19 billion for the three months ended September 30, 2005, the yield on average interest bearing liabilities increased 111 basis points to 3.50% from 2.39% as of September 30, 2006 and 2005, respectively.  During 2005 and 2006, Ameris adopted a more aggressive position on deposit acquisition, through the offering of new deposit products, higher than normal rates in certain of our markets and an overall increase in deposit rates.  This more aggressive position is driven primarily by the expectation of continued growth in earning assets and has resulted in increased sales of deposits as well as higher incremental costs.

Net interest income for the three months ended September 30, 2006 increased $4.6 million, or 34.59%, to $17.9 million compared to $13.3 million for the same period ending September 30, 2005. The increase was attributable to internal growth in earning assets and the Company’s acquisition of First National Banc, Inc. The Company’s net interest margin decreased to 4.26% for the three months ended September 30, 2006, compared to 4.35% as of September 30, 2005. Several temporary factors contributed to the decline in the net interest margin, including higher levels of short-term assets and the initial effects of the Company’s balance sheet restructuring.

The provision for loan losses was $713,000 for the three months ended September 30, 2006, compared to $718,000 for the same period ending September 30, 2005.  The increase in the provision is due to the increase in the size of the loan portfolio.  Management believes that the present allowance for loan losses is adequate at September 30, 2006.

Non-interest income was $5.3 million for the three months ended September 30, 2006, an increase of $1.6 million, or 43.2%, from non-interest income of $3.7 million for the three months ended September 30, 2005. There was an increase in service charges on deposits of $288,000 and an increase in other non-interest income of $1.3 million. The increase in other non-interest income is due to a $1 million gain related to the sale of one of our banking charters.

Non-interest expenses for the three months ended September 30, 2006 were $13.5 million, or 30.0%, higher compared to the same period a year ago. The increase in non-interest expense is attributable to salaries and employee benefits increasing $1.5 million, net occupancy and equipment increasing $235,000, and other expenses increasing $1.3 million. The increase in salaries and employee benefits is related to normal increases in salaries and employee benefits during the course of business and additional employees added in connection with the Company’s acquisition of First National Banc, Inc., which was completed in the fourth quarter of 2005. The acquisition of First National Banc, Inc. accounted for approximately $1.6 million of the increase in non-interest expenses, which are expenses that are attributable to normal banking operations and conversion costs related to this transaction.

The amount of income tax expense is influenced by the amount of taxable income and the amount of tax-exempt income. For the three months ended September 30, 2006 and 2005, the provision for taxes was $3.0 million and $2.0 million, respectively. The effective tax rate for the three months ended September 30, 2006 and 2005 was 33.5%.

Interest income for the nine months ended September 30, 2006 was $89.6 million, an increase of $33.0 million, or 58.3%, compared to $56.6 million for the same period in 2005. Average earnings assets for the nine month period increased $416.6 million, or 35.13%, to $1.60 billion as of September 30, 2006 compared to $1.19 billion as of September 30, 2005. Yield on average earning assets increased 109 basis points to 7.50% from 6.41% for the nine months ended September 30, 2006 and 2005, respectively.

 

Interest expense on deposits and other borrowings for the nine months ended September 30, 2006 was $37.6 million, a $19.0 million, or 101.8%, increase from September 30, 2005. While average interest bearing liabilities increased $436.3 million, or 37.7% to $1.59 billion for the nine months ended September 30, 2006 compared to $1.16 billion for the nine months ended September 30, 2005, the yield on average interest bearing liabilities increased 101 basis points to 3.16 % from 2.15% as of September 30, 2006 and 2005, respectively. The increases in interest expense are driven primarily by a higher interest rate environment and a more aggressive stance on deposit sales.

Net interest income for the nine months ended September 30, 2006 increased $14.0 million, or 36.73%, to $52.0 million compared to $38.0 million for the same period ending September 30, 2005. The increase was mainly attributable to growth. The Company’s net interest margin increased to 4.36% for the nine months ended September 30, 2006 compared to 4.31 % as of September 30, 2005.

Non-interest income for the first nine months of 2006 was up $1.9 million, or 17.3%, compared to the same time period a year ago.  Service charges on deposit accounts increased 10.4%, or $802,000 due to higher number of deposit accounts.  Other service charges, commissions and fees decreased $205,000 compared to the same time period a year ago. The decrease is due to mortgage fee income decreasing from 2005 to 2006 due to fewer customers refinancing their homes during that time. During the second quarter of 2006, the Company recognized a $315,000 loss on the sale of securities to restructure a portion of the investment portfolio. Other non-interest income increased $1.6 million. During the third quarter of 2006, the Company recognized a gain of $1.0 million related to the sale of one of its bank charters. This sale did not impact the Company’s customers, employees or fixed assets.

Non-interest expense for the first nine months of 2006 was $37.9 million.  This represents a $7.2 million increase over the prior year period which totaled $30.7 million.  The increase in non-interest expense is attributable to salaries and employee benefits increasing $2.5 million, net occupancy and equipment increasing $657,000, amortization expense increasing $172,000 and other expense increasing $3.8 million.

At September 30, 2006, Ameris had 588 full-time equivalent employees compared to 523 full-time equivalent employees at September 30, 2005.  The Company continues to be successful in its efforts to hire seasoned professionals in production and management positions. Recruiting efforts were successful in Jacksonville, Florida with the hiring of commercial lending and mortgage bankers to staff the Company’s new branch opening December 1, 2006. Initial efforts also were successful in South Carolina as Ameris hired several very seasoned bankers to lead the Company’s efforts in both the greater Columbia and Charleston markets. The Company is also continuing its efforts to expand production capacity and build greater market share in its larger, more metropolitan markets while reducing the number of back office and non-customer contact roles. The First National Banc, Inc. acquisition added 65 full-time equivalent employees during the fourth quarter of 2005.

Salaries and employee benefits for the nine months ended September 30, 2006 were $2.5 million higher than during the same period in 2005.  The majority of this increase is attributable to the acquisition of First National Banc, Inc.

Occupancy and equipment expense increased $657,000 to $4.6 million for the nine months ended September 30, 2006 as compared to the same period of 2005. The majority of this increase related to the acquisition of First National Banc, Inc.

Other expenses for the nine months ended September 30, 2006 increased $3.8 million when compared to the same time period for 2005.  Approximately $1.3 million is attributable to the acquisition of First National Banc, Inc.  The remainder of this increase resulted primarily from increases in public relations and marketing expense as well as professional fees related to the rebranding initiative.

The Company’s efficiency ratio (operating expenses as a percent of total revenue) decreased to 58.57% for the nine months ended September 30, 2006 from 62.82% for the nine months ended September 30, 2005.

The amount of income tax expense is influenced by the amount of taxable income and the amount of tax-exempt income. For the nine months ended September 30, 2006 and 2005, the provision for taxes was $8.3 million and $5.5 million, respectively. The effective tax rate for the nine months ended September 30, 2006 was 33.6% compared to 33.4% for the same period in 2005.

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 Banks are subject to capital adequacy requirements imposed by the Federal Deposit Insurance Corporation (the “FDIC”), the GDBF and the Florida Office of Financial Regulation (the “FOFR”).

The FRB, the FDIC, the GDBF and the FOFR 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 are set forth in the table below, along with the actual ratios at September 30, 2006 and 2005.

Management believes, as of September 30, 2006, that the Company and the Banks met all capital requirements to which they are subject. The Company has included the subordinated debentures that were issued by the Company in September 2006 and the acquired First National Banc Statutory Trust in Tier 1 Capital.

At September 30, 2006, loans, net of unearned income, were $1.37 billion, an increase of $368.5 million, or 36.68%, over net loans at September 30, 2005 of $1.00 billion. The growth in the loan portfolio was attributable to a consistent focus on quality loan production. Real estate loans increased $334.9 million, or 43.67%, from September 30, 2005. The Company continues to monitor 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 primarily focuses on the following loan categories: (1) commercial and financial, (2) real estate construction, (3) residential mortgage, (4) commercial real estate, (5) agricultural, and (6) consumer loans. The Company’s management has strategically located its branches in South and Southeast Georgia, North Florida and Southeast Alabama and has taken advantage of the growth in these areas.

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. The department performing this review examines each of our banks at least two to four times per year. The loan review department is independent of the loan function and reports to the Company’s Director of Internal Audit. 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 debt 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 necessary. 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.

For the nine month period ending September 30, 2006, the Company recorded net charge-offs totaling $513,000, or 0.05%, annualized of average loans outstanding for the period compared to net recoveries of $145,000 for the same period in 2005.  The provision for loan losses for the nine months ended September 30, 2006 was $2.1 million, compared to $1.6 million for the same period in 2005.  The allowance for loan losses totaled $23.9 million, or 1.74% of total loans, at September 30, 2006, compared to $17.3 million, or 1.72% of total loans, at September 30, 2005.

The following table presents an analysis of the allowance for loan losses for the nine month periods ended September 30, 2006 and 2005:

Non-performing assets include nonaccrual loans, accruing loans contractually past due 90 days or more, repossessed personal property, and other real estate. Loans are placed on nonaccrual status when management has concerns relating to the ability to collect the principal and interest and generally when such loans are 90 days or more past due. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is reversed against current income.

Non-performing assets were as follows: