Ameris Bancorp - 10-Q quarterly report FY

(Mark One)

For the quarterly period ended September 30, 2008

OR

Commission File Number:   001-13901

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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.

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:

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:

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:

Activity in the allowance for loan losses for the nine monthsended September 30, 2008, for the year ended December 31, 2007 and for the nine months ended September 30, 2007 is as follows:

Earnings per share have been computed based on the following weighted average number of common shares outstanding:

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.

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:

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.

      * N/M = Not Meaningful

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.

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.

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.

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 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 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 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.

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.

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.

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.

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 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.  

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.

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.

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 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.

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.

For the nine month period ending September 30, 2008, the Company recorded net charge-offs totaling $12.6 million compared to $2.8 million for the same period in 2007.  The provision for loan losses for the nine months ended September 30, 2008 and 2007 was $15.1 million and $4.4 million, respectively.  The allowance for loan losses totaled $30.1 million, or 1.76% of total loans at September 30, 2008, compared to $26.4 million, or 1.66% of total loans at September 30, 2007.