Form 10-K
Table of Contents
Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-K

 


 

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

For the fiscal year ended December 31, 2005

or

 

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

For the transition period from              to             .

Commission file number: 001-13901

 


AMERIS BANCORP (A GEORGIA CORPORATION)

I.R.S. EMPLOYER IDENTIFICATION NUMBER 58-1456434

24 2nd AVENUE, S.E., MOULTRIE, GEORGIA 31768

TELEPHONE NUMBER: (229) 890-1111

 


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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $1 Per Share

 


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

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

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    or    No  ¨

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

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.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

As of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant was approximately $230.189 million. As of March 1, 2006, the registrant had outstanding 12,951,718 shares of common stock, $1.00 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report is incorporated by reference from the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report.

 



Table of Contents
Index to Financial Statements

AMERIS BANCORP

TABLE OF CONTENTS

 

              Page
PART I      
  Item 1.    Business    1
  Item 1A.    Risk Factors    16
  Item 1B.    Unresolved Staff Comments    20
  Item 2.    Properties    20
  Item 3.    Legal Proceedings    21
  Item 4.    Submission of Matters to a Vote of Security Holders    21
PART II      
  Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    22
  Item 6.    Selected Financial Data    22
  Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    25
  Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    44
  Item 8.    Financial Statements and Supplementary Data    44
  Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    44
  Item 9A.    Controls and Procedures    45
  Item 9B.    Other Information    48
PART III      
  Item 10.    Directors and Executive Officers of the Registrant    49
  Item 11.    Executive Compensation    50
  Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    50
  Item 13.    Certain Relationships and Related Transactions    50
  Item 14.    Principal Accounting Fees and Services    50
PART IV      
  Item 15.    Exhibits and Financial Statement Schedules    52

 

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CAUTIONARY NOTICE REGARDING

FORWARD-LOOKING STATEMENTS

Certain of the statements made herein under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), 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, those described in Part I, Item 1A. “Risk Factors,” and elsewhere in this report and those described from time to time in our future reports filed with the Securities and Exchange Commission (the “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.

PART I

As used in this document, the terms “we,” “us,” “our,” “Ameris Bancorp,” “Ameris” and the “Company” mean Ameris Bancorp and its subsidiaries (unless the context indicates another meaning).

ITEM 1. BUSINESS

GENERAL OVERVIEW

We are a financial holding company whose business is conducted primarily through our wholly-owned subsidiaries which provide a full range of banking services to retail and commercial customers located primarily in southern Georgia, southeastern Alabama and northern Florida. Ameris was incorporated on December 18, 1980 as a Georgia corporation. The Company’s executive office is located at 24 2nd Avenue, S.E., Moultrie, Georgia 31768, its telephone number is (229) 890-1111 and its Internet address is http://www.amerisbank.com. We operate 45 banking offices and 39 ATMs throughout our footprint. The Company has no foreign activities. At December 31, 2005, we had approximately $1.7 billion in total assets, $1.187 billion in total loans, $1.375 billion in total deposits and shareholders’ equity of $148.70 million. The Company’s deposits are insured by the Federal Deposit Insurance Corporation up to applicable limits.

 

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THE PARENT COMPANY

Our primary business as a bank holding company is to manage the business and affairs of our banking subsidiaries (each a “Bank”). As a bank holding company, we perform central data processing functions, purchasing and other common functions and provide certain management services for our Banks. Traditional banking services are conducted by our Banks.

BANKS

Following is a list of our Banks and the market areas served by the Banks:

 

Subsidiary Bank

  

Principal Market Area

American Banking Company d/b/a Ameris    Moultrie and Colquitt County, Georgia; Quitman and Brooks County, Georgia; Valdosta and Lowndes County, Georgia; Tifton and Tift County, Georgia; Ocilla and Irwin County, Georgia; Douglas and Coffee County, Georgia; Cordele and Crisp County, Georgia; Albany and Dougherty County, Georgia; Lee County, Georgia; Donalsonville and Seminole County, Georgia; Colquitt and Miller County, Georgia; Brunswick, St. Simons Island, Jekyll Island and Glynn County, Georgia; St. Marys, Kingsland and Camden County, Georgia; Dothan, Abbeville, Clayton, Eufaula and Headland, Alabama; Orange Park and Clay County, Florida
Bank of Thomas County d/b/a Ameris    Coolidge, Thomasville and Thomas County, Georgia
Cairo Banking Company d/b/a Ameris    Cairo and Grady County, Georgia; Meigs and Thomas County, Georgia
Tri-County Bank d/b/a Ameris    Trenton and Gilchrist County, Florida and Newberry and Alachua County, Florida
Citizens Bank – Wakulla d/b/a Ameris    Crawfordville, Panacea, Sopchoppy and Wakulla County, Florida

INSURANCE SUBSIDIARY

In December 2005, the Company acquired First National Insurance Agency, Inc. First National Insurance Agency operates out of Ameris’s branch office located in St. Marys, Georgia. The insurance agency offers both personal and commercial insurance products through major insurance carriers.

CAPITAL TRUST

On August 30, 2001, the Company formed ABC Bancorp Capital Trust I, a Delaware statutory trust and a wholly-owned subsidiary of Ameris (the “Trust”), for the purpose of (i) issuing and selling its common securities to the Company and its trust preferred securities to the public, and (ii) using the proceeds from the sale of the trust preferred securities to purchase 9.00% Subordinated Debentures (the “Subordinated Debentures”) from the Company. In the quarter ended December 31, 2001, the Trust sold its securities and used the proceeds to purchase the Subordinated Debentures, which are the sole assets of the Trust. Ameris pays interest on the Subordinated Debentures to the Trust at the end of each quarter at an annual rate of 9.00%, which is equal to the dividend rate payable by the Trust to the holders of its preferred securities. The cost of the issuance of the Trust’s preferred securities is treated as a deferred asset and will be amortized over a period of five years to September 30, 2006, the earliest redemption date. Following the offer and sale of the Trust’s securities, the Company owned and currently holds all of the outstanding common securities of the Trust, its only voting securities, and as a result the Trust is a subsidiary of Ameris. See Notes to Ameris’s Consolidated Financial Statements included in this Annual Report for a further discussion regarding the issuance of the Trust’s preferred securities.

 

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On December 16, 2005, Ameris purchased First National Banc, Inc., which during 2004 had formed First National Banc Statutory Trust I, a subsidiary whose sole purpose was to issue $5,000,000 principal amount of trust preferred securities at a rate per annum equal to the 3-Month LIBOR plus 2.80% through a pool sponsored by a national brokerage firm. These trust preferred securities have a maturity of 30 years and are redeemable at the Company’s option on any quarterly interest payment date after five years. There are certain circumstances (as described in the trust agreement) under which the securities may be redeemed within the first five years at the Company’s option. The proceeds from the offering were used to fund the expected capital needs of the banking subsidiaries of First National Banc, Inc. See Notes to Ameris’s Consolidated Financial Statements included in this Annual Report for a further discussion regarding the issuance of these trust preferred securities.

BUSINESS STRATEGY

Our business strategy is to establish Ameris as a major financial institution in Georgia, Alabama and northern Florida. Management has pursued this objective through an acquisition-oriented growth strategy and a prudent operating strategy. Ameris is in the process of consolidating all of our banking operations into a single charter. Our new operating model will allow the Company to shift people resources from operationally-centered duties to sales and customer related duties. Our strategy allows the lending and community-specific marketing decisions to be made primarily by each Bank, thus permitting the Bank to respond to the differing needs and demands of its own market. Within this framework, our Banks’ continued focus will be on providing personalized services and quality products to their customers so that they continue to meet the needs of the communities they serve. Decentralized decision-making which reflects our knowledge of our local markets and customers will provide continued asset growth and profitability.

We have maintained a long-term focus on a strategy that includes expanding and diversifying our franchise in regards to revenues, profitability and asset size. Our growth over the past several years has been enhanced significantly by mergers and acquisitions. We expect to continue to take advantage of the consolidation in the financial services industry and further enhance our franchise through future mergers and acquisitions. We intend to grow within our existing markets, to branch into or acquire financial institutions in existing markets and to branch into or acquire financial institutions in other markets consistent with our capital availability and management capabilities.

We seek opportunities to acquire banks at acceptable prices using cash or Ameris stock or some combination thereof. The amount of consideration paid in connection with these acquisitions may be in excess of the fair value of the underlying net assets acquired, which could have a dilutive effect on our earnings and/or book value per share. In addition, although there may be cost savings and revenue enhancements associated with these acquisitions, they can also result in significant front-end charges against earnings.

BANKING SERVICES

Lending Activities

General. The Company maintains a diversified loan portfolio by providing a broad range of commercial and retail lending services to business entities and individuals. We provide agricultural loans, commercial business loans, commercial and residential real estate construction and mortgage loans, consumer loans, revolving lines of credit and letters of credit. The Company also originates first mortgage residential mortgage loans and enters into a commitment to sell these loans in the secondary market. We make no foreign or energy-related loans.

At December 31, 2005, Ameris’s loan portfolio totaled $1.187 billion, representing approximately 69.95% of our total assets of $1.697 billion. For a discussion of our loan portfolio, see “Management’s Discussion of Financial Condition and Results of Operations – Loan Portfolio”

 

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Commercial Real Estate Loans. The commercial real estate portion of our loan portfolio has grown significantly over the past few years and represents the largest portion of our loan portfolio. These loans are generally extended for acquisition, development or construction of commercial properties. The loans are underwritten with an emphasis on the viability of the project, the borrower’s ability to meet certain minimum debt service requirements and an analysis and review of the collateral and guarantors.

Residential Real Estate Mortgage Loans. Ameris originates adjustable and fixed-rate residential mortgage loans. These mortgage loans are generally originated under terms and conditions consistent with secondary market guidelines. Some of these loans will be placed in the Company’s loan portfolio; however, a majority is sold to the secondary mortgage market. The residential real estate mortgage loans that are placed in the Company’s loan portfolio are usually owner-occupied and generally amortized over a 10- to 20-year period with three- to five-year maturity or repricing.

Agricultural Loans. Our agricultural loans are extended to finance crop production, the purchase of farm-related equipment or farmland and the operations of dairies and poultry producers. Agricultural loans typically involve seasonal fluctuations in amounts. Although we typically look to an agricultural borrower’s cash flow as the principal source of repayment, agricultural loans are also generally secured by a security interest in the crops or the farm-related equipment and, in some cases, an assignment of crop insurance and mortgage on real estate. The lending officer visits the borrower regularly during the growing season and re-evaluates the loan in light of the borrower’s updated cash flow projections. A portion of our agricultural loans are guaranteed by the FSA Guaranteed Loan Program.

Commercial and Industrial Loans. General commercial and industrial loans consist of loans made primarily to manufacturers, wholesalers and retailers of goods, service companies and other industries. These loans are made for acquisition, expansion and working capital purposes and may be secured by real estate, accounts receivable, inventory, equipment, personal guarantees or other assets. The Company monitors these loans by requesting submission of corporate and personal financial statements and income tax returns. The Company has also generated loans which are guaranteed by the U. S. Small Business Administration (“SBA”). SBA loans are generally underwritten in the same manner as conventional loans generated for the Bank’s portfolio. Periodically, a portion of the loans that are secured by the guaranty of the SBA will be sold in the secondary market. Management believes that making such loans helps the local community and also provides Ameris with a source of income and solid future lending relationships as such businesses grow and prosper. The primary repayment risk for commercial loans is the failure of the business due to economic or financial factors.

Consumer Loans. Our consumer loans include motor vehicle, home improvement, home equity, student and signature loans and small personal credit lines. The terms of these loans typically range from 12 to 60 months and vary based upon the nature of collateral and size of the loan. These loans are generally secured by various assets owned by the consumer.

Credit Administration

We have sought to maintain a comprehensive lending policy that meets the credit needs of each of the communities served by our Banks, including low- and moderate-income customers, and to employ lending procedures and policies consistent with this approach. All loans are subject to our corporate loan policy, which is reviewed annually and updated as needed and which provides that lending officers have sole authority to approve loans of various amounts commensurate with their seniority and experience. Our Bank Presidents have discretion to approve loans in varying principal amounts up to established limits. Our Regional Executives review and approve loans that exceed the Bank President’s lending authority.

 

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Individual lending authorities are assigned by the holding company, as are the maximum limit of new extensions of credit each Bank can approve. Those approval limits are reviewed annually by Ameris and adjusted as needed. All extensions of credit in excess of the Banks’ approval limits are reviewed by the respective Bank’s Regional Executive. Further approval by Ameris’s senior credit officer or the Company’s Loan Committee may also be needed. Under our ongoing loan review program, all loans are subject to sampling and objective review by an assigned loan reviewer who is independent of the originating loan officer.

A Bank’s lending officers have authority to make loans only in the market area in which the Bank is located and its contiguous counties. Occasionally, Ameris’s Loan Committee will approve a loan for purposes outside of the market area of our Banks, provided the Bank has a previously established relationship with the borrower. Our lending policy requires analysis of the borrower’s projected cash flow and ability to service the debt.

We actively market our services to qualified lending customers in both the commercial and consumer sectors. Our commercial lending officers actively solicit the business of new companies entering the market as well as longstanding members of that market’s business community. Through personalized professional service and competitive pricing, we have been successful in attracting new commercial lending customers. At the same time, we actively advertise our consumer loan products and continually seek to make our lending officers more accessible.

Each Bank continually monitors its loan portfolio to identify areas of concern and to enable management to take corrective action when necessary. Bank presidents, lending officers and Boards of Directors meet periodically to review all past due loans, the status of large loans and certain other matters. Individual lending officers are responsible for reviewing collection of past due amounts and monitoring any changes in the financial status of the borrowers.

Investment Activities

Our investment policy is designed to maximize income from funds not needed to meet loan demand in a manner consistent with appropriate liquidity and risk objectives. Under this policy, we may invest in federal, state and municipal obligations, corporate obligations, public housing authority bonds, industrial development revenue bonds, Government Sponsored Entities (“GSEs”) securities and satisfactorily rated trust preferred obligations. Investments in our portfolio must satisfy certain quality criteria. Our investments must be rated at least “BAA” by either Moody’s or Standard and Poor’s. Securities rated below “A” are periodically reviewed for creditworthiness. We may purchase non-rated municipal bonds only if the issuer of such bonds is located in the Company’s general market area and we have determined that such bonds have a credit risk no greater than the minimum ratings referred to above. Industrial development authority bonds, which normally are not rated, are purchased only if the issuer is located in the purchasing company’s market area and if the bonds are considered to possess a high degree of credit soundness. Typically, we have not purchased a significant amount of GNMA securities, which normally have higher yields than our other investments.

While our investment policy permits us to trade securities to improve the quality of yields or marketability or to realign the composition of the portfolio, our Banks historically have not done so to any significant extent.

Our investment committee implements the investment policy and portfolio strategies and monitors the portfolio. Reports on all purchases, sales, net profits or losses and market appreciation or depreciation of the bond portfolio are reviewed by our Boards of Directors each month. Once a year, the written investment policy is reviewed by our Board of Directors.

Our securities are kept in safekeeping accounts at correspondent banks.

 

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Deposits

The Company provides a full range of deposit accounts and services to both retail and commercial customers. These deposit accounts have a variety of interest rates and terms and consist of interest-bearing and non-interest-bearing accounts, including commercial and retail checking accounts, regular interest-bearing savings accounts, money market accounts, individual retirement accounts and certificate of deposits. Our Banks obtain most of their deposits from individuals and businesses in their respective market areas.

Our Banks have not had to attract new or retain old deposits by paying depositors rates of interest on certificates of deposit, money market and other interest-bearing accounts significantly above rates paid by other banks in our respective market areas. In the future, increasing competition among banks in our market areas may cause our Banks’ interest margins to shrink.

Brokered time deposits are deposits obtained by utilizing an outside broker that is paid a fee. These deposits usually have a higher interest rate than the deposits obtained locally. A Bank will utilize the brokered deposits to accomplish several purposes such as (1) acquiring a certain maturity and dollar amount without repricing the Bank’s current customers which could decrease the overall cost of deposits, and (2) acquiring certain maturities and dollar amounts to help manage interest rate risk.

Other Funding Sources

The Federal Home Loan Bank (“FHLB”) allows the Banks to obtain advances through its credit program. These advances are secured by securities owned by the Banks and held in safekeeping by the FHLB, FHLB stock owned by the Banks and certain qualifying residential mortgages.

The Banks also enter into repurchase agreements. These repurchase agreements are treated as short-term borrowings and are reflected on the balance sheet as such.

CORPORATE RESTRUCTURING AND BUSINESS COMBINATIONS

On December 16, 2005, Ameris acquired First National Banc, Inc., a two bank holding company with assets of $270.6 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 August 31, 2005, Ameris announced its intentions to begin consolidating its subsidiary banks across Georgia, Alabama and northern Florida into a single state-chartered banking subsidiary, American Banking Company. The first two phases of the charter consolidation effort were completed on February 10, 2006 and March 3, 2006. On February 10, 2006, Heritage Community Bank, Citizens Security Bank, Southland Bank, Central Bank & Trust, First National Bank of South Georgia and Merchants & Farmers Bank were merged with and into American Banking Company. On March 3, 2006, The First Bank of Brunswick and First National Bank, Orange Park, Florida were also merged with and into American Banking Company. The Company anticipates completing its consolidation during the summer of 2006.

In addition to the charter consolidation effort, the Company announced its intentions to re-brand the Company and each of its banking locations with a single identity – “Ameris.” In connection with these efforts, the Company recorded a charge to earnings during the fourth quarter of $2,838,000. These costs are necessary to reengineer procedures to accommodate a more efficient single bank, rename the Company and aggressively market the uniform brand in and around our existing markets and begin realizing efficiencies through improved utilization of employees.

 

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MARKET AREAS AND COMPETITION

Our market area is presently located in Georgia, Alabama and northern Florida. The Banks’ main offices and branches are located in the Georgia cities of Albany, Brunswick, Cairo, Colquitt, Cordele, Donalsonville, Douglas, Jekyll Island, Kingsland, Moultrie, Ocilla, Quitman, St. Simons Island, St. Marys, Thomasville, Tifton and Valdosta, the Alabama cities of Abbeville, Clayton, Dothan, Eufaula and Headland and the northern Florida cities of Crawfordville, Newberry, Orange Park, Panacea, Sopchoppy and Trenton.

We have operations in several market areas that offer favorable growth and profitability potential, including Banks in the cities of Valdosta, Tifton and Cordele, which are located along the I-75 corridor of Georgia, and Brunswick, Kingsland, St. Marys, St. Simons Island, Georgia, and Orange Park, Florida, which are located along the I-95 corridor, a major north-south transportation artery. We also have operations in Albany, Georgia and Dothan, Alabama, both of which are developing commercial and industrial “hubs” where residents of the numerous smaller, surrounding cities find jobs, entertainment, consumer products and services and medical services.

The banking industry in general and in Georgia, Alabama and Florida specifically, is highly competitive and dramatic changes continue to occur throughout the industry. In recent years, intense market demands, economic pressures, fluctuating interest rates and increased customer awareness of product and service differences among financial institutions have forced banks to diversify their services and become more cost effective. Each of our Banks faces strong competition in attracting deposits and making loans. Their most direct competition for deposits comes from other commercial banks, thrift institutions, mortgage bankers, finance companies, credit unions and issuers of securities such as brokerage firms. Interest rates, convenience of office locations and marketing are all significant factors in our Banks’ competition for deposits.

Competition for loans comes from other commercial banks, thrift institutions, savings banks, insurance companies, consumer finance companies, credit unions and other institutional lenders. Our Banks compete for loan originations through the interest rates and loan fees they charge and the efficiency and quality of services they provide. Competition is affected by the general availability of lendable funds, general and local economic conditions, current interest rate levels and other factors that are not readily predictable.

Competition among providers of financial products and services continues to increase with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The industry continues to rapidly consolidate, which affects competition by eliminating some regional and local institutions, while strengthening the franchise of acquirers. Management expects that competition will become more intense in the future due to changes in state and federal laws and regulations and the entry of additional bank and nonbank competitors. See “Supervision and Regulation.”

EMPLOYEES

At December 31, 2005, Ameris and our Banks employed approximately 585 full time equivalent employees. We consider our relationship with our employees to be satisfactory.

We have adopted one retirement plan for our employees, the Ameris Bancorp 401(k) Profit Sharing Plan. This plan provides deferral of compensation by our employees and contributions by Ameris. Ameris and our Banks made contributions for all eligible employees in 2005. We also maintain a comprehensive employee benefits program providing, among other benefits, hospitalization and major medical insurance and life insurance. Management considers these benefits to be competitive with those offered by other financial institutions in our market areas. Our employees are not represented by any collective bargaining group.

 

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RELATED PARTY TRANSACTIONS

The Company makes loans to our directors and their affiliates and to banking officers. These loans are made on substantially the same terms as those prevailing at the time for comparable transactions and do not involve more than normal credit risk. At December 31, 2005, we had $1.187 billion in total loans outstanding of which $40 million was outstanding to certain of our directors and executive directors.

SUPERVISION AND REGULATION

General

We are extensively regulated under federal and state law. Generally, these laws and regulations are intended to protect depositors and not shareholders. The following is a summary description of certain provisions of certain laws that affect the regulation of bank holding companies and banks. The discussion is qualified in its entirety by reference to applicable laws and regulations. Changes in such laws and regulations may have a material effect on our business and prospects.

Federal Bank Holding Company Regulation and Structure

As a bank holding company, we are subject to regulation under the Bank Holding Company Act and to the supervision, examination and reporting requirements of the Federal Reserve Board of Governors. As a result of the recent charter consolidation efforts, all of our Banks are state-chartered banks. As such, they are subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”) and by state bank regulatory authorities in their respective home states. These authorities include the Florida Office of Financial Regulation in the case of Tri-County Bank and Citizens Bank~Wakulla and the Georgia Department of Banking and Finance in the case of all of our other Banks.

The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve before:

 

    it may acquire direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than 5% of the voting shares of the bank;

 

    it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or

 

    it may merge or consolidate with any other bank holding company.

The Bank Holding Company Act further provides that the Federal Reserve may not approve any transaction that would result in a monopoly or that would substantially lessen competition in the banking business, unless the public interest in meeting the needs of the communities to be served outweighs the anti-competitive effects. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks involved and the convenience and needs of the communities to be served. Consideration of financial resources generally focuses on capital adequacy, and consideration of convenience and needs issues focuses, in part, on the performance under The Community Reinvestment Act of 1977, both of which are discussed in more detail.

 

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The Bank Holding Company Act generally prohibits a bank holding company from engaging in activities other than:

 

    banking;

 

    managing or controlling banks or other permissible subsidiaries; and

 

    acquiring or retaining direct or indirect control of any company engaged in any activities other than activities closely related to banking or managing or controlling banks.

The activities in which holding companies and their affiliates are permitted to engage were substantially expanded by the Gramm-Leach-Bliley Act, which was signed on November 12, 1999. The Gramm-Leach-Bliley Act repeals the anti-affiliation provisions of the Glass-Steagall Act to permit the common ownership of commercial banks, investment banks and insurance companies. The Gramm-Leach-Bliley Act also amends the Bank Holding Company Act to permit a financial holding company to, among other things, engage in any activity that the Federal Reserve determines to be (i) financial in nature or incidental to such financial activity or (ii) complementary to a financial activity and not a substantial risk to the safety and soundness of depository institutions or the financial system generally. The Federal Reserve must consult with the Secretary of the Treasury in determining whether an activity is financial in nature or incidental to a financial activity. Holding companies may continue to own companies conducting activities which had been approved by federal order or regulation on the day before The Gramm-Leach-Bliley Act was enacted. Effective August 24, 2000, pursuant to a previously-filed election with the Federal Reserve, Ameris became a financial holding company.

In determining whether a particular activity is permissible, the Federal Reserve considers whether performing the activity can be expected to produce benefits to the public that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve has the power to order a bank holding company or its subsidiaries to terminate any activity or control of any subsidiary when the continuation of the activity or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company.

Our Banks are also subject to numerous state and federal statutes and regulations that affect their business, activities and operations, and each is supervised and examined by one or more state or federal bank regulatory agencies. The FDIC and applicable state regulators regularly examine the operations of our Banks and are given the authority to approve or disapprove mergers, consolidations, the establishment of branches and similar corporate actions. These agencies also have the power to prevent the continuance or development of unsafe or unsound banking practices or other violations of law.

Payment of Dividends and Other Restrictions

Ameris is a legal entity separate and distinct from its subsidiaries. While there are various legal and regulatory limitations under federal and state law on the extent to which our subsidiaries can pay dividends or otherwise supply funds to Ameris, the principal source of Ameris’s cash revenues is dividends from its subsidiaries. The prior approval of applicable regulatory authorities, as the case may be, is required if the total dividends declared by any subsidiary Bank in any calendar year exceeds the Bank’s net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfers to surplus or a fund for the retirement of any preferred stock, or 50% of the Bank’s net profits for the previous year in the case of Georgia banks. The relevant federal and state regulatory agencies also have authority to prohibit a state member bank or bank holding company, which would include Ameris and its Banks, from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of the subsidiary, be deemed to constitute an unsafe or unsound practice in conducting its business.

 

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Under Georgia law (which would apply to any payment of dividends by the Georgia Banks to Ameris), the prior approval of the Georgia Department of Banking and Finance is required before any cash dividends may be paid by a state bank if: (i) total classified assets at the most recent examination of such bank exceed 80% of the equity capital (as defined, which includes the reserve for loan losses) of such bank; (ii) the aggregate amount of dividends declared or anticipated to be declared in the calendar year exceeds 50% of the net profits (as defined) for the previous calendar year; or (iii) the ratio of equity capital to adjusted total assets is less than 6%.

Retained earnings of our Banks available for payment of cash dividends under all applicable regulations without obtaining governmental approval were approximately $10.5 million as of December 31, 2005.

In addition, our Banks are subject to limitations under Section 23A of the Federal Reserve Act with respect to extensions of credit to, investments in and certain other transactions with Ameris. Furthermore, loans and extensions of credit are also subject to various collateral requirements.

The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if one or more of the holding company’s bank subsidiaries are classified as undercapitalized.

Bank holding companies are required to give the Federal Reserve prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve order or any condition imposed by, or written agreement with, the Federal Reserve. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a “2” and is not subject to any unresolved supervisory issues. As of December 31, 2005, Ameris met these requirements.

Capital Adequacy

We must comply with the Federal Reserve’s established capital adequacy standards, and our Banks are required to comply with the capital adequacy standards established by the FDIC. The Federal Reserve has promulgated two basic measures of capital adequacy for bank holding companies: a risk-based measure and a leverage measure. A bank holding company must satisfy all applicable capital standards to be considered in compliance.

The risk-based capital standards are designed to:

 

    make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies;

 

    account for off-balance sheet exposure; and

 

    minimize disincentives for holding liquid assets.

Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.

 

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The minimum guideline for the ratio of total capital to risk-weighted assets is 8%. At least half of total capital must be comprised of Tier 1 Capital, which is common stock, undivided profits, minority interests in the equity accounts of consolidated subsidiaries and noncumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remainder may consist of Tier 2 Capital, which is subordinated debt, other preferred stock and a limited amount of loan loss reserves. During 2001, we increased our consolidated ratios by issuing trust preferred securities in the amount of $34,500,000. At December 31, 2005, $33,330,000 of the trust preferred securities (25% of total Tier 1 Capital) was included in Tier 1 Capital and the balance included in Tier 2 Capital. In connection with the acquisition of First National Banc, Inc., the Company acquired $5,000,000 in trust preferred securities, all of which have been included in Tier 2 capital. At December 31, 2005, Ameris’s total risk-based capital ratio and its Tier 1 risk-based capital ratio were 12.79% and 10.93%, respectively. At December 31, 2004, $30,823,000 of the trust preferred securities (25% of total Tier 1 Capital) was included in Tier 1 Capital and the balance included in Tier 2 Capital. At December 31, 2004, Ameris’s total risk-based capital ratio and its Tier 1 risk-based capital ratio were 14.95% and 13.30%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, of 3% for bank holding companies that meet specified criteria. All other bank holding companies generally are required to maintain a minimum leverage ratio of 4%. Ameris’s ratio at December 31, 2005 was 9.74% and at December 31, 2004 was 10.43%. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has indicated that it will consider a “tangible Tier 1 Capital leverage ratio” and other indicia of capital strength in evaluating proposals for expansion or new activities. The Federal Reserve has not advised Ameris of any specific minimum leverage ratio or tangible Tier 1 Capital leverage ratio applicable to it.

Our Banks are subject to risk-based and leverage capital requirements adopted by the FDIC that are substantially similar to those adopted by the Federal Reserve for bank holding companies. All of our Banks were in compliance with applicable minimum capital requirements as of December 31, 2005.

Neither Ameris nor any of our Banks has been advised by any federal banking agency of any specific minimum capital ratio requirement applicable to it.

In January 2001, the Basel Committee on Banking Supervision issued a consultative paper entitled “Proposal for a New Basel Capital Accord” and, subsequently, the Basel Committee, which is comprised of bank supervisors and central banks from the major industrialized countries, issued a number of working papers supplementing various aspects of the 2001 paper (the “New Accord”). Based on these documents, the New Accord would adopt a three-pillar framework for addressing capital adequacy. These pillars would include minimum capital requirements, more emphasis on supervisory assessment of capital adequacy and greater reliance on market discipline. Under the New Accord, minimum capital requirements would be more differentiated based upon perceived distinctions in creditworthiness. Such requirements would be based either on ratings assigned by rating agencies or on the organization’s internal credit ratings in the case of a banking organization that met certain supervisory standards. The minimum capital requirements in the New Accord would also include a separate capital requirement for operational risk. In June 2004, the Basel Committee published new international guidelines for calculating regulatory capital, and since that time the U.S. banking regulators have published draft guidance of their interpretation of the new guidelines. We will be required to calculate regulatory capital under the New Accord, in parallel with the existing capital rules, beginning in 2007. In 2008, we will calculate regulatory capital solely under the New Accord.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on taking brokered deposits and certain other restrictions on its business. As described below, the FDIC can impose substantial additional restrictions upon FDIC-insured depository institutions that fail to meet applicable capital requirements.

 

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Acquisitions

As an active acquirer, we must comply with numerous laws related to our acquisition activity. Under the Bank Holding Company Act, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, as long as neither of the states has opted out of such interstate merger authority prior to such date, and subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years, and to certain deposit market-share limitations. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

FDIC Insurance Assessments

The FDIC insures the deposits of the Bank up to prescribed limits for each depositor. The amount of FDIC assessments paid by each Bank Insurance Fund (BIF) member institution is based on its relative risks of default as measured by regulatory capital ratios and other factors. Specifically, the assessment rate is based on the institution’s capitalization risk category and supervisory subgroup category. An institution’s capitalization risk category is based on the FDIC’s determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution’s supervisory subgroup category is based on the FDIC’s assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. The FDIC may terminate insurance of deposits upon a finding that a institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

The Federal Deposit Insurance Act (the “FDI Act”) requires the federal regulatory agencies to take “prompt corrective action” if a depository institution does not meet minimum capital requirements. The FDI Act establishes five capital tiers: “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized” and “critically undercapitalized”. A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.

The federal bank regulatory agencies have adopted regulations establishing relevant capital measurers and relevant capital levels applicable to FDIC-insured banks. The relevant capital measures are the Total Capital ratio, Tier 1 Capital ratio and the leverage ratio. Under the regulations, a FDIC-insured bank will be:

 

    “well capitalized” if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater and a leverage ratio of 5% or greater and is not subject to any order or written directive by the appropriate regulatory authority to meet and maintain a specific capital level for any capital measure;

 

    “adequately capitalized” if it has a Total Capital ratio of 8% or greater, a Tier 1 Capital ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances) and is not “well capitalized”;

 

    “undercapitalized” if it has a Total Capital ratio of less than 8%, a Tier 1 Capital ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances);

 

    “significantly undercapitalized” if it has a Total Capital ratio of less than 6%, a Tier 1 Capital ratio of less than 3% or a leverage ratio of less than 3%; and

 

    “critically undercapitalized” if its tangible equity is equal to or less than 2% of average quarterly tangible assets.

 

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An institution may be downgraded to, or deemed to be in, a capital category that is lower than is indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. As of December 31, 2005, all of our Banks had capital levels that qualify as “well capitalized” under such regulations.

The FDI Act generally prohibits an FDIC-insured bank from making a capital distribution (including payment of a dividend) or paying any management fee to its holding company if the bank would thereafter be “undercapitalized.” “Undercapitalized” banks are subject to growth limitations and are required to submit a capital restoration plan. The federal regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the bank’s capital. In addition, for a capital restoration plan to be acceptable, the bank’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company is limited to the lesser of: (i) an amount equal to 5% of the bank’s total assets at the time it became “undercapitalized”; and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” insured banks may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized”, requirements to reduce total assets and the cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. A bank that is not “well capitalized” is also subject to certain limitations relating to so-called “brokered” deposits.

Community Reinvestment Act

The Community Reinvestment Act requires federal bank regulatory agencies to encourage financial institutions to meet the credit needs of low- and moderate-income borrowers in their local communities. An institution’s size and business strategy determines the type of examination that it will receive. Large, retail-oriented institutions are examined using a performance-based lending, investment and service test. Small institutions are examined using a streamlined approach. All institutions may opt to be evaluated under a strategic plan formulated with community input and pre-approved by the bank regulatory agency.

The Community Reinvestment Act regulations provide for certain disclosure obligations. Each institution must post a notice advising the public of its right to comment to the institution and its regulator on the institution’s Community Reinvestment Act performance and to review the institution’s Community Reinvestment Act public file. Each lending institution must maintain for public inspection a file that includes a listing of branch locations and services, a summary of lending activity, a map of its communities and any written comments from the public on its performance in meeting community credit needs. The Community Reinvestment Act requires public disclosure of a financial institution’s written Community Reinvestment Act evaluations. This promotes enforcement of Community Reinvestment Act requirements by providing the public with the status of a particular institution’s community reinvestment record.

 

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The Gramm-Leach-Bliley Act made various changes to The Community Reinvestment Act. Among other changes, Community Reinvestment Act agreements with private parties must be disclosed and annual Community Reinvestment Act reports must be made available to a bank’s primary federal regulator. A bank holding company will not be permitted to become a financial holding company and no new activities authorized under The Gramm-Leach-Bliley Act may be commenced by a holding company or by a bank financial subsidiary if any of its bank subsidiaries received less than a “satisfactory” Community Reinvestment Act rating in its latest Community Reinvestment Act examination.

Consumer Protection Laws

The Banks are each subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act, and state law counterparts.

Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

Legislative and Regulatory Changes

On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”). Among its other provisions, the USA PATRIOT Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts involving foreign individuals and certain foreign banks; and (iii) to avoid establishing, maintaining, administering or managing correspondent accounts in the United States for, or on behalf of, foreign banks that do not have a physical presence in any country. The USA PATRIOT Act also requires the Secretary of the Treasury to prescribe by regulation minimum standards that financial institutions must follow to verify the identity of customers, both foreign and domestic, when a customer opens an account. In addition, the USA PATRIOT Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”), which mandated a variety of reforms intended to address corporate and accounting fraud. The Sarbanes Act also provided for the establishment of the Public Company Accounting Oversight Board (“PCAOB”), which enforces auditing, quality control and independence standards for firms that audit Securities and Exchange Commission (“SEC”) reporting companies. The Sarbanes Act imposes higher standards for auditor independence and restricts provision of consulting services by auditing firms to companies they audit, and in addition, under the Sarbanes Act certain audit partners must be rotated periodically. The Sarbanes Act requires chief executive officers and chief financial officers, or their equivalents, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Sarbanes Act, counsel is required to report specific violations. Directors and executive officers must report most changes in their ownership of a company’s securities and executives have restrictions on trading and loans. The Sarbanes Act also increases the oversight and authority of audit committees of publicly traded companies. Although Ameris has incurred and will continue to incur additional expense in complying with the provisions of the Sarbanes Act and the related rules, management does not expect that such compliance will have a material impact on the Company’s financial condition or results of operation.

 

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Fiscal and Monetary Policy

Banking is a business which depends on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and its other borrowings, and the interest received by a bank on its loans and securities holdings, constitutes the major portion of a bank’s earnings. Thus, our earnings and growth will be subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The Federal Reserve regulates the supply of money through various means, including open market dealings in United States government securities, the discount rate at which banks may borrow from the Federal Reserve and the reserve requirements on deposits. The nature and timing of any changes in such policies and their effect on Ameris cannot be predicted.

Current and future legislation and the policies established by federal and state regulatory authorities will affect our future operations. Banking legislation and regulations may limit our growth and the return to our investors by restricting certain of our activities.

In addition, capital requirements could be changed and have the effect of restricting our activities or requiring additional capital to be maintained. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our business.

Federal Home Loan Bank System

Our Company has a correspondent relationship with the Federal Home Loan Bank of Atlanta (“FHLB Atlanta”), which is one of 12 regional Federal Home Loan Banks (or “FHLBs”) that administer the home financing credit function of savings companies. Each FHLB serves as a reserve or central bank for its members within its assigned region. FHLBs are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system and make loans to members (i.e., advances) in accordance with policies and procedures, established by the Board of Directors of the FHLB which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing.

FHLB Atlanta provides certain services to our Company, including processing checks and other items, buying and selling Federal funds, handling money transfers and exchanges, shipping coin and currency, providing security and safekeeping of funds or other valuable items and furnishing limited management information and advice. As compensation for these services, we maintain certain balances with FHLB Atlanta in interest-bearing accounts.

Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings companies and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects.

Title 6 of the Gramm-Leach-Bliley Act, entitled the Federal Home Loan Bank System Modernization Act of 1999 (called the “FHLB Modernization Act”), amended the Federal Home Loan Bank Act to allow voluntary membership and modernized the capital structure and governance of the FHLBs. The capital structure established under the FHLB Modernization Act sets forth leverage and risk-based capital requirements based on permanence of capital. It also requires some minimum investment in the stock of the FHLBs of all member entities. Capital includes retained earnings and two forms of stock: Class A stock redeemable within six months upon written notice and Class B stock redeemable within five years upon written notice. The FHLB Modernization Act also reduced the period of time in which a member exiting the FHLB system must stay out of the system.

 

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Real Estate Lending Evaluations

The federal regulators have adopted uniform standards for evaluations of loans secured by real estate or made to finance improvements to real estate. Banks are required to establish and maintain written internal real estate lending policies consistent with safe and sound banking practices and appropriate to the size of the institution and the nature and scope of its operations. The regulations establish loan to value ratio limitations on real estate loans. Our loan policies establish limits on loan to value ratios that are equal to or less than those established in such regulations.

Changing Regulatory Structure

The laws and regulations affecting banks and bank holding companies are in a state of change. The rules and the regulatory agencies in this area have changed significantly over recent years, and there is reason to expect that similar changes will continue in the future. It is not possible to predict the outcome of these changes.

One of the major additional burdens imposed on the banking industry is the increased authority of federal agencies to regulate the activities of federal and state banks and their holding companies. The Federal Reserve and the FDIC have extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding companies. These agencies can assess civil money penalties. Other laws such as the Sarbanes Act have expanded the agencies’ authority in recent years, and the agencies have not yet fully tested the limits of their powers. In addition, the Georgia Department of Banking and Finance and the Florida Office of Financial Regulation possess broad enforcement powers to address violations of their banking laws by banks chartered in their respective states.

Economic Environment

The policies of regulatory authorities, including the monetary policy of the Federal Reserve, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

The Federal Reserve’s monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of these policies on the business and earnings of our Company cannot be predicted.

ITEM 1A. RISK FACTORS

An investment in the common stock of Ameris is subject to risks inherent in the Company’s business. The material risks and uncertainties that management believes affect Ameris are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this Annual Report. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This Annual Report is qualified in its entirety by these risk factors.

If any of the following risks actually occurs, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the common stock of Ameris could decline significantly, and you could lose all or part of your investment.

 

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Changes in interest rates could adversely impact the Company’s financial condition and results of operations.

The Company’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the control of Ameris, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board of Governors. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Company receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect the Company’s ability to originate loans and obtain deposits, the fair value of the Company’s financial assets and liabilities and the average duration of the Company’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Company’s net interest income and, therefore, its earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Company’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations.

If the Company has higher loan losses than it has allowed for, its earnings could materially decrease.

The Company’s loan customers may not repay loans according to their terms, and the collateral securing the payment of loans may be insufficient to assure repayment. Ameris may therefore experience significant credit losses which could have a material adverse effect on its operating results. Ameris makes various assumptions and judgments about the collectibility of its loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the size of the allowance for loan losses, the Company relies on its experience and its evaluation of economic conditions. If its assumptions prove to be incorrect, its current allowance for loan losses may not be sufficient to cover losses inherent in its loan portfolio and adjustment may be necessary to allow for different economic conditions or adverse developments in its loan portfolio. Consequently, a problem with one or more loans could require the Company to significantly increase the level of its provision for loan losses. In addition, federal and state regulators periodically review the Company’s allowance for loan losses and may require it to increase its provision for loan losses or recognize further loan charge-offs. Material additions to the allowance would materially decrease the Company’s net income.

Ameris has a high concentration of loans secured by real estate and a downturn in the real estate market, for any reason, could result in losses and materially and adversely affect business, financial condition, results of operations and future prospects.

A significant portion of the Company’s loan portfolio is dependent on real estate. In addition to the financial strength and cash flow characteristics of the borrower in each case, often loans are secured with real estate collateral. At December 31, 2005, approximately 53.85% of loans have commercial or residential real estate as a component of collateral. The real estate in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. An adverse change in the economy affecting values of real estate generally or in Ameris’s primary markets specifically could significantly impair the value of collateral and ability to sell the collateral upon foreclosure. Furthermore, it is likely that, in a decreasing real estate market, Ameris would be required to increase its allowance for loan losses. If the Company is required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase its allowance for loan losses, its profitability and financial condition could be adversely impacted.

 

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Ameris operates in a highly regulated environment and may be adversely impacted by changes in law and regulations.

Ameris, primarily through its Banks, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial, unpredictable and adverse ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

Ameris relies on dividends from its subsidiaries for most of its revenue.

Ameris Bancorp is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its revenue from dividends from the Banks. These dividends are the principal source of funds to pay dividends on the Company’s common stock and interest and principal on the Company’s debt. Various federal and/or state laws and regulations limit the amount of dividends that the Banks may pay to the Company. Also, the Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors. In the event the Banks are unable to pay dividends to the Company, the Company may not be able to service debt, pay obligations or pay dividends on the Company’s common stock and its business, financial condition and results of operations may be adversely affected.

Ameris operates in a highly competitive industry and market areas.

Ameris faces substantial competition in all areas of its operations from a variety of different competitors, many of whom are larger and may have more financial resources. Such competitors primarily include national, regional and community banks within the various markets in which the Banks operate. Ameris also faces competition from many other types of financial institutions, including, without limitation, savings and loan institutions, credit unions, finance companies, brokerage firms, insurance companies, factoring companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Company’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Company can.

 

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The Company’s ability to compete successfully depends on a number of factors, including, among other things:

 

    the ability to develop, maintain and build upon long-term customer relationships based on quality service, high ethical standards and safe, sound assets;

 

    the ability to expand the Company’s market position;

 

    the scope, relevance and pricing of products and services offered to meet customer needs and demands;

 

    the rate at which the Company introduces new products and services relative to its competitors;

 

    customer satisfaction with the Company’s level of service; and

 

    industry and general economic trends.

Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

Potential acquisitions may disrupt the Company’s business and dilute shareholder value.

Acquiring other banks, businesses or branches involves various risks commonly associated with acquisitions, including, among other things:

 

    potential exposure to unknown or contingent liabilities of the target company;

 

    exposure to potential asset quality issues of the target company;

 

    difficulty and expense of integrating the operations and personnel of the target company;

 

    potential disruption to the Company’s business;

 

    potential diversion of the Company’s management’s time and attention;

 

    the possible loss of key employees and customers of the target company;

 

    difficulty in estimating the value of the target company; and

 

    potential changes in banking or tax laws or regulations that may affect the target company.

Ameris has recently acquired other financial institutions and often evaluates additional merger and acquisition opportunities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities of the Company may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits and synergies from an acquisition could have a material adverse effect on the Company’s financial condition and results of operations.

 

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Index to Financial Statements

Ameris continually encounters technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Ameris may not be able to attract and retain skilled people.

The Company’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by the Company can be intense and the Company may not be able to hire people or to retain them. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the Company’s business because of their skills, knowledge of the Company’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

Financial services companies depend on the accuracy and completeness of information about customers and counterparties.

In deciding whether to extend credit or enter into other transactions, the Company may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. The Company may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Ameris’s corporate campus is located at 24 Second Avenue, SE, Moultrie, Georgia 31768. The Company occupies approximately 43,348 square feet at and around this location including 3,524 square feet used by American Banking Company. In addition to executive offices and American Banking Company, the corporate campus includes mostly support services for banking operations including credit, sales and operational support and audit and loan review services. One of these buildings is subject to a lease.

In addition to its corporate headquarters, Ameris operates 45 office or branch locations, of which 41 are owned and four are subject to either building or ground leases. At December 31, 2005, there were no significant encumbrances on the offices, equipment or other operational facilities owned by Ameris and its subsidiaries.

 

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Index to Financial Statements

ITEM 3. LEGAL PROCEEDINGS

Neither Ameris nor any of our Banks is a party to, nor is any of their property the subject of, any material pending legal proceedings, other than ordinary routine proceedings incidental to the business of our Banks, nor to the knowledge of the management of Ameris are any such proceedings contemplated or threatened against it or our Banks. From time to time, the Ameris and its subsidiaries are parties to legal proceedings in the ordinary course of business to enforce its security interest. Management, after consultation with legal counsel, does not anticipate that current litigation will have a material adverse effect on the Company’s financial position or results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our shareholders during the fourth quarter of 2005.

 

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Ameris’s common stock, $1.00 par value per share (the “Common Stock”), is listed on the Nasdaq National Market System (or “Nasdaq-NMS”) under the symbol “ABCB”. The following table sets forth: (i) the high and low bid prices for the Common Stock as quoted on Nasdaq-NMS during 2005 and 2004; and (ii) the amount of quarterly dividends declared on the Common Stock during the periods indicated. The high and low bid prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.

 

     High    Low    Close    Dividend

Quarter Ended 2005

           

March 31

   $ 20.00    $ 15.22    $ 16.89    $ .14

June 30

     19.20      16.42      18.08      .14

September 30

     20.32      17.60      19.19      .14

December 31

     20.99      17.57      19.84      .14

Quarter Ended 2004

           

March 31

   $ 16.50    $ 13.22    $ 15.81    $ .12

June 30

     17.30      14.05      16.95      .12

September 30

     16.88      14.67      16.81      .12

December 31

     18.61      15.89      17.43      .12

As of March 1, 2006, there were approximately 2,104 holders of record of the Common Stock. The Company believes that a large portion of the outstanding shares of Common Stock are held either in nominee name or street name brokerage accounts. As a result, the Company is unable to determine the number of beneficial owners of the Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected consolidated financial information for Ameris. The data set forth below is derived from the audited consolidated financial statements of the Company. The acquisitions of Citizens Bank~Wakulla on November 30, 2004 and First National Banc, Inc. on December 16, 2005 have significantly affected the comparability of our selected financial data. Specifically, since these acquisitions were accounted for using the purchase method of accounting, the assets of the acquired institutions were recorded at their fair values, the excess purchase price over the net fair value of the assets was recorded as goodwill and the results of operations of these businesses have been included in the Company’s results since the effective dates of the acquisitions. Discussion of these acquisitions can be found in the “Corporate Restructuring and Business Combinations” portion of Part1, Item 1 of this report and in Note 3 – “Business Combinations” in the Notes to Consolidated Financial Statements. The selected financial data should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

 

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Index to Financial Statements
     Year Ended December 31,
     2005    2004    2003    2002    2001
     (Dollars in Thousands, Except Per Share Data)

Selected Balance Sheet Data:

              

Total assets

   $ 1,697,209    $ 1,267,993    $ 1,169,111    $ 1,193,406    $ 1,177,953

Total loans

     1,186,601      877,074      840,539      833,447      805,076

Total deposits

     1,375,232      986,224      906,524      916,047      931,156

Investment securities

     243,742      221,741      196,289      184,081      156,835

Shareholders’ equity

     148,703      120,939      113,613      107,484      104,148

Selected Income Statement Data:

              

Interest income

   $ 79,539    $ 64,365    $ 64,479    $ 71,347    $ 72,913

Interest expense

     26,934      19,375      22,141      28,240      34,928
                                  

Net interest income

     52,605      44,990      42,338      43,107      37,985

Provision for loan losses

     1,651      1,786      3,945      5,574      4,566

Other income

     13,530      13,023      14,718      15,706      11,749

Other expenses

     43,607      36,505      35,147      37,807      30,843
                                  

Income before tax

     20,877      19,722      17,964      15,432      14,325

Income tax expense

     7,149      6,621      5,954      5,077      4,692
                                  

Net income

   $ 13,728    $ 13,101    $ 12,010    $ 10,355    $ 9,633
                                  

Per Share Data:

              

Net income - basic

   $ 1.15    $ 1.12    $ 1.03    $ 0.87    $ 0.87

Net income - diluted

     1.14      1.11      1.02      0.87      0.87

Book value

     11.48      10.28      9.68      9.17      8.68

Tangible book value

     7.64      7.90      7.76      7.16      6.57

Dividends

     0.56      0.47      0.43      0.40      0.40

 

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Index to Financial Statements
     Year Ended December 31,  
     2005     2004     2003     2002     2001  
     (Dollars in Thousands, Except Per Share Data)  

Profitability Ratios:

          

Net income to average total assets

   1.04 %   1.12 %   1.04 %   0.90 %   1.00 %

Net income to average stockholders’ equity

   10.87     11.19     10.85     9.81     10.30  

Net interest margin

   4.31     4.15     3.96     4.07     4.27  

Efficiency ratio

   65.94     62.93     61.60     64.28     62.02  

Loan Quality Ratios:

          

Net charge-offs to total loans

   .03 %   0.22 %   0.46 %   0.68 %   0.54 %

Reserve for loan losses to total loans and OREO

   1.88     1.77     1.78     1.78     1.85  

Nonperforming assets to total loans and OREO

   0.90     0.70     0.95     1.11     1.67  

Reserve for loan losses to nonperforming loans

   232.57     274.70     231.20     196.64     124.97  

Reserve for loan losses to total nonperforming assets

   207.68     253.32     187.58     160.74     111.00  

Liquidity Ratios:

          

Loans to total deposits

   86.28 %   88.93 %   92.72 %   90.98 %   86.46 %

Loans to average earnings assets

   97.33     80.91     78.63     78.76     90.56  

Non-interest-bearing deposits to total deposits

   14.60     15.22     15.63     14.38     13.48  

Capital Adequacy Ratios:

          

Common stockholders’ equity to total assets

   8.76 %   9.54 %   9.72 %   9.01 %   8.84 %

Average total stockholders’ equity to average total assets

   9.55     9.98     9.56     9.17     9.74  

Dividend payout ratio

   48.70     41.96     41.75     45.98     45.98  

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

OVERVIEW

The Company’s results for the year ended December 31, 2005 reflect a successful execution of our goals and objectives that were set during 2004. The year was both exciting and quite challenging. The Company continued its growth strategy by acquiring First National Banc, Inc. during the year. This acquisition of First National Banc, Inc. will enable the Company to increase its revenue and market share on the coasts of Georgia and Florida during the foreseeable future.

In addition to this acquisition, the Company also announced in the third quarter of 2005 its intention to consolidate its charters and to adopt a single brand for the Company and its bank subsidiaries. The branding initiative was substantially completed as of December 31, 2005. The charter consolidation initiative will be completed over 2006, with the majority of the consolidation effort completed by the end of the first quarter of 2006.

The 2005 results reflect (1) double digit growth on the balance sheet, (2) growth in net interest income, (3) improvement in net interest margin, (4) continued improvement in efficiency, and (5) continued positive trends.

The Company reported net income of $13.7 million, or $1.14 per diluted share, for the year ended December 31, 2005, compared to net income in 2004 of $13.1 million, or $1.11 per diluted share. During the fourth quarter of 2005, the Company recorded nonrecurring expenses of $1.87 million (net of tax) for the Company’s re-branding effort. Excluding this nonrecurring charge, the Company’s return on average assets was 1.25% and the return on equity was 13.12% for the year ended December 31, 2005 compared to the Company’s return on average assets of 1.12% and the return on average equity of 11.19% for the year ended December 31, 2004.

Total assets at December 31, 2005 were approximately $1.7 billion, an increase of $429 million, or 33.9%, from the same period in 2004. This level includes approximately $271 million of total assets related to the purchase of First National Banc, Inc. on December 16, 2005. During 2005, the pace of growth in loans and deposits from existing markets continued to accelerate as new producers and a re-invigorated sales culture began to take hold. Internal growth in loans for 2005, excluding the acquisition of First National Banc, Inc., was $116.2 million, or 13.2%, while internal growth of deposits was $147.5 million, an increase of 15.0%.

Net interest income for the year grew solidly as the Company benefited from growth in earning assets and a significant amount of lower cost core deposits. For the year ended December 31, 2005, net interest income was $52.6 million compared to $45.0 million for 2004, an increase of 16.92%. The Company’s net interest margin expanded during the year. For the year ended December 31, 2005, the Company’s net interest margin improved to 4.31% from 4.15% in 2004. Ameris attributes much of the expansion in net interest margin to the consistent balance sheet growth experienced during 2005 and the lower cost core deposit base managed in many of our markets.

Operating expenses grew during 2005 to $40.8 million (excluding the restructuring charges taken in the fourth quarter) from $36.5 million in 2004. The majority of this growth in operating expenses related to the addition of Citizens Bank~Wakulla in November 2004 and the expansion of loan and deposit production personnel in several Banks during 2005. The Company’s efficiency ratio improved during the year as the Company focused its efforts on improving operational processes and productivity levels of customer contact employees. Ameris’s efficiency ratio (excluding non-recurring amounts discussed earlier) was 61.2% and 62.9%, respectively, for the years ended December 31, 2005 and 2004.

 

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Ameris’s credit quality declined slightly, reflecting the purchase of First National Banc, Inc. Non-performing assets as a percentage of total loans at the end of 2005 were 0.90%, an increase from 0.70% a year ago. The Company has concentrated significant resources towards improving credit quality and has seen the pace of improvement accelerate. For the year ended December 31, 2005, Ameris had charge-offs of 0.03% compared to 0.22% in 2004. The Company’s loan loss reserve as a percentage of loans grew to 1.88% at December 31, 2005 from 1.77% at December 31, 2004; however, this increase in the reserve levels is mainly attributable to the acquired loan loss reserves in the First National Banc, Inc. transaction.

CRITICAL ACCOUNTING POLICIES

Ameris has established certain accounting and financial reporting policies to govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in the Notes to the Consolidated Financial Statements. Certain accounting policies involve significant judgments and assumptions by management which has a material impact on the carrying value of certain assets and liabilities; management considers these accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from the judgments and estimates adopted by management, which could have a material impact on the carrying values of assets and liabilities and the results of Ameris’s operations. We believe the following accounting policies applied by Ameris represent critical accounting policies.

Allowance for Loan Losses

We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of our consolidated financial statements. The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Calculation of the allowance for loan losses represents a critical accounting estimate due to the significant judgment, assumptions and estimates related to the amount and timing of estimated losses, consideration of current and historical trends and the amount and timing of cash flows related to impaired loans.

Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowances for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Considering current information and events regarding a borrower’s ability to repay its obligations, management considers a loan to be impaired when the ultimate collectibility of all amounts due, according to the contractual terms of the loan agreement, is in doubt. When a loan is considered to be impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate. If the loan is collateral-dependent, the fair value of the collateral is used to determine the amount of impairment. Impairment losses are included in the allowance for loan losses through a charge to the provision for losses on loans.

Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income.

 

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The accounting for impaired loans described above applies to all loans, except for large pools of smaller-balance, homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value and debt securities. The allowance for loan losses for large pools of smaller-balance, homogeneous loans is established through consideration of such factors as changes in the nature and volume of the portfolio, overall portfolio quality, adequacy of the underlying collateral, loan concentrations, historical charge-off trends and economic conditions that may affect the borrowers’ ability to pay.

Certain economic and interest rate factors could have a material impact on the determination of the allowance for loan losses. The national economy has rebounded during 2005. If the economy’s momentum continues, certain factors could evolve which would continue to positively impact our net interest margin. An increase in interest rates by the Federal Reserve would favorably impact our net interest margin. An improving economy could result in the expansion of businesses and creation of jobs which would positively affect Ameris’s loan growth and improve our gross revenue stream. Conversely, certain factors could result from an expanding economy which could increase our credit costs and adversely impact our net earnings. A significant rapid rise in interest rates could create higher borrowing costs and shrinking corporate profits, which could have a material impact on borrowers’ ability to pay. We will continue to concentrate on maintaining a high quality loan portfolio through strict administration of our loan policy.

Another factor that we have considered in the determination of the allowance for loan losses is loan concentrations to individual borrowers or industries. At December 31, 2005, we had 14 credit relationships that exceeded $5 million.

A substantial portion of our loan portfolio is in the commercial real estate and residential real estate sectors. Those loans are secured by real estate in Ameris’s primary market area. A substantial of portion of other real estate owned is located in those same markets. Therefore, the ultimate collectibility of a substantial portion of our loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes to market conditions in Ameris’s primary market area.

Income Taxes

SFAS No. 109, “Accounting for Income Taxes,” requires the asset and liability approach for financial accounting and reporting for deferred income taxes. We use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences. See Note 13 to the Notes to Consolidated Financial Statements for additional details.

As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation and the provision for loan losses, for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet.

We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. To the extent we establish a valuation allowance or adjust this allowance in a period, we must include an expense within the tax provisions in the statement of income.

We have recorded on our consolidated balance sheet net deferred tax assets of $4.8 million, which includes amounts relating to loss carryforwards. We believe there will be sufficient taxable income in the future to allow us to utilize these loss carryforwards in the tax jurisdictions where they exist.

 

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Long-Lived Assets, Including Intangibles

In our financial statements, we have recorded $49.7 million of goodwill and other intangible assets, which represents the amount by which the price we paid for acquired businesses exceeds the fair value of tangible assets acquired plus the liabilities assumed. We evaluate long-lived assets, such as property and equipment, specifically identifiable intangibles and goodwill, when events or changes in circumstances indicate that the carrying value of such assets might not be recoverable. Factors that could trigger impairment include significant underperformance relative to historical or projected future operating results, significant changes in the manner of our use of the acquired assets and significant negative industry or economic trends.

The determination of whether impairment has occurred is based on an estimate of undiscounted cash flows attributable to the assets as compared to the carrying value of the assets. If impairment has occurred, the amount of the impairment loss recognized would be determined by estimating the fair value of the assets and recording a loss if the fair value was less than the book value.

In determining the existence of impairment factors, our assessment is based on market conditions, operational performance and legal factors of our Company. Our review of factors present and the resulting appropriate carrying value of our goodwill, intangibles and other long-lived assets are subject to judgments and estimates that management is required to make. Future events could cause us to conclude that impairment indicators exist and that our goodwill, intangibles and other long-lived assets might be impaired. In accordance with accounting rules promulgated by the Financial Accounting Standards Board (“FASB”), no amount of goodwill was expensed in 2005, 2004, or 2003, except for the impairment charge of $9,000 in 2003.

NET INCOME AND EARNINGS PER SHARE

We reported net income of $13.7 million, or $1.14 per diluted common share, in 2005, compared to net income of $13.1 million, or $1.11 per diluted common share, in 2004 and net income of $12.0 million, or $1.02 per diluted common share, in 2003. The return on average assets was 1.04% in 2005 compared to 1.12% in 2004, 1.04% in 2003 and .90% in 2002. The return on average common stockholders’ equity was 10.87% in 2005 compared to 11.19% in 2004, 10.85% in 2003.

EARNING ASSETS AND LIABLITIES

Average earning assets in 2005 increased 13.13% over 2004 principally due to an 11.39% increase in total loans and a 16.03% increase in securities. Average interest-bearing liabilities increased $118.7 million, or 12.97%, to $1.0 billion as of December 31, 2005. The earning asset and interest-bearing liability mix is consistently monitored to increase net interest margin and therefore increase profitability.

The following statistical information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and the financial statements and related notes included elsewhere in this Annual Report and in the documents incorporated herein by reference.

The following tables set forth the amount of the our interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities, and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets. Federally tax-exempt income is presented on a taxable-equivalent basis assuming a 34% federal tax rate.

 

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Index to Financial Statements
    Year Ended December 31,  
    2005     2004     2003  
    Average
Balance
    Interest
Income/
Expense
  Average
Yield/
Rate Paid
    Average
Balance
    Interest
Income/
Expense
  Average
Yield/
Rate Paid
    Average
Balance
    Interest
Income/
Expense
  Average
Yield/
Rate Paid
 
    (Dollars in Thousands)  

ASSETS

                 

Interest-earning assets:

                 

Loans, net of unearned interest

  $ 952,647     $ 69,238   7.27 %   $ 855,205     $ 56,433   6.60 %   $ 841,857     $ 57,707   6.85 %

Investment securities:

                 

Taxable

    219,640       8,547   3.89       186,989       7,216   3.86       179,925       6,079   3.38  

Nontaxable

    3,993       247   6.19       3,654       256   7.01       3,133       236   7.53  

Interest-bearing deposits in banks

    40,173       1,502   3.74       31,471       542   1.72       42,482       537   1.26  

Federal funds sold

    2,711       89   3.28       311       5   1.61       —         —     —    
                                               

Total interest- earning assets

    1,219,164       79,623   6.53       1,077,630       64,452   5.98       1,067,397       64,559   6.05  
                                               

Non-interest-earning assets:

                 

Cash

    44,506           37,303           37,387      

Allowance for loan losses

    (16,862 )         (15,394 )         (15,867 )    

Unrealized gain on available for sale Securities

    (2,139 )         257           1,524      

Other assets

    77,926           73,416           67,261      
                                   

Total non-interest- earning other assets

    103,431           95,582           90,305      
                                   

Total assets

  $ 1,322,595         $ 1,173,212         $ 1,157,702      
                                   

 

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Index to Financial Statements
    Year Ended December 31,  
    2005     2004     2003  
    Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate Paid
    Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate Paid
    Average
Balance
  Interest
Income/
Expense
  Average
Yield/
Rate Paid
 
    (Dollars in Thousands)  

LIABILITIES AND STOCKHOLDERS’ EQUITY

                 

Interest-bearing liabilities:

                 

Savings and interest-bearing demand deposits

  $ 393,592   $ 4,013   1.02 %   $ 357,893   $ 2,604   0.73 %   $ 324,819   $ 2,691   0.83 %

Time deposits

    498,036     15,016   3.02       406,467     8,702   2.14       439,873     11,492   2.61  

Other short-term borrowings

    6,521     103   1.58       5,235     67   1.28       6,547     68   1.04  

Other borrowings

    100,456     4,296   4.28       110,977     4,496   4.05       106,809     4,392   4.11  

Trust preferred securities

    35,779     3,506   9.80       35,567     3,506   9.86       35,567     3,498   9.83  
                                         

Total interest-bearing liabilities

    1,034,084     26,934   2.60       916,139     19,375   2.11       913,615     22,141   2.42  
                                         

Non-interest-bearing liabilities and stockholders’ equity:

                 

Demand deposits

    154,326         133,546         124,972    

Other liabilities

    7,895         6,463         8,421    

Stockholders’ equity

    126,290         117,064         110,694    
                             

Total non-interest-bearing liabilities and stockholders’ equity

    288,511         257,073         244,087    
                             

Total liabilities and stockholders’ equity

  $ 1,322,595       $ 1,173,212       $ 1,157,702    
                             

Interest rate spread

      3.93 %       3.87 %       3.63 %
                             

Net interest income

    $ 52,689       $ 45,077       $ 42,418  
                             

Net interest margin

      4.32 %       4.18 %       3.97 %
                             

 

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RESULTS OF OPERATIONS

Net Interest Income

Net interest income represents the amount by which interest income on interest-bearing assets exceeds interest expense incurred on interest-bearing liabilities. Net interest income is the largest component of our income and is affected by the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, investment securities, interest-bearing deposits in banks and federal funds sold. Our interest-bearing liabilities include deposits, other short-term borrowings, FHLB advances and subordinated debentures.

2005 Compared With 2004

Interest income for the year ended December 31, 2005 was $79.6 million, an increase of $15.1 million, or 23.6%, compared to $64.3 million for the same period in 2004. Average earning assets increased $141.2 million, or 13.13%, to $1.22 billion for the year ended December 31, 2005 compared to $1.08 billion as of December 31, 2004. Yield on average earning assets on a taxable equivalent basis increased 55 basis points to 6.53% from 5.98% for the years ended December 31, 2005 and 2004, respectively. The Company’s increase in interest income is equally attributable to both an increase average earning assets and the 200 basis point increase in the prime rate from December 2004 to December 2005.

Interest expense on deposits and other borrowings for the year ended December 31, 2005 was $26.9 million, a $7.6 million, or 39.0%, increase from the year ended December 31, 2004. While average interest-bearing liabilities increased $117.9 million, or 12.87%, to $1.03 billion as of December 31, 2005 compared to $916.1 million for the year ended December 31, 2004, the yield on average interest-bearing liabilities increased 49 basis points to 2.60% from 2.11% as of December 31, 2005 and 2004, respectively. Our Company has successfully managed our cost of deposits during the rapid increase in interest rates over the recent 18 month period. The Company’s core deposits are increasingly targeted by competition in all of our markets. The Company’s sales strategies and customer retention plans have been very successful in protecting our base of deposits at very attractive pricing levels.

Net interest income for 2005, on a taxable-equivalent basis, was $52.7 million compared to $45.1 million in 2004, an increase of $7.6 million, or 16.89%. The increase was primarily attributable to the growth in the balance sheet. The Company’s net interest margin, on a tax equivalent basis, increased to 4.32% for the year ended December 31, 2005 compared to 4.18% as of December 31, 2004.

2004 Compared With 2003

Net interest income, on a taxable-equivalent basis, increased 6.37% in 2004 to $45.1 million from $42.4 million in 2003. Net interest income in 2004 reflected a decrease in the average yield on earning assets of 7 basis points, while the average cost of interest-bearing liabilities decreased 31 basis points. The significant increase in net interest income in 2004 is attributable to lower cost of funds. Cost of funds decreased 12.22% to $19.4 million in 2004 from $22.1 million in 2003. The net interest margin increased 21 basis points to 4.18% in 2004 from 3.97% in 2003. Increases in funding costs relate mostly to a trend toward higher rates that began during 2004.

 

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Index to Financial Statements

The following table reflects the changes in net interest income resulting from changes in interest rates and from asset and liability volume. Federally tax-exempt interest is presented on a taxable-equivalent basis assuming a 34% federal tax rate. The change in interest attributable to rate has been determined by applying the change in rate between years to average balances outstanding in the later year. The change in interest due to volume has been determined by applying the rate from the earlier year to the change in average balances outstanding between years. Thus, changes that are not solely due to volume have been consistently attributed to rate.

 

     Year Ended December 31,  
     2005 vs. 2004     2004 vs. 2003  
    

Increase

(Decrease)

    Changes Due To    

Increase

(Decrease)

    Changes Due To  
       Rate     Volume       Rate     Volume  
     (Dollars in Thousands)  

Increase (decrease) in:

            

Income from earning assets:

            

Interest and fees on loans

   $ 12,805     $ 6,375     $ 6,430     $ (1,274 )   $ (2,189 )   $ 915  

Interest on securities:

            

Taxable

     1,331       71       1,260       1,137       898       239  

Tax exempt

     (9 )     (33 )     24       20       (19 )     39  

Interest-bearing deposits in banks

     960       810       150       5       144       (139 )

Interest on federal funds

     84       45       39       5       —         5  
                                                

Total interest income

     15,171       7,268       7,903       (107 )     (1,166 )     1,059  
                                                

Expense from interest-bearing liabilities:

            

Interest on savings and interest-bearing demand deposits

     1,409       1,149       260       (87 )     (361 )     274  

Interest on time deposits

     6,314       4,354       1,960       (2,790 )     (1,917 )     (873 )

Interest on short-term borrowings

     36       20       16       (1 )     13       (14 )

Interest on other borrowings

     (200 )     226       (426 )     104       (67 )     171  

Interest on trust preferred securities

     —         —         —         8       8       —    
                                                

Total interest expense

     7,559       5,749       1,810       (2,766 )     (2,324 )     (442 )
                                                

Net interest income

   $ 7,612     $ 1,519     $ 6,093     $ 2,659     $ 1,158     $ 1,501  
                                                

Provision for Loan Losses

The allowance for loan losses is a charge 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 nonperforming and past due loans, historical trends of charged-off loans and recoveries, prevailing economic conditions and other factors management deems appropriate. As these factors change, the level of loan loss provision changes. Our provision for loan losses totaled $1.7 million in 2005, $1.8 million in 2004 and $3.9 million in 2003. The allowance for loan losses represented 1.88% and 1.77% of total loans outstanding at December 31, 2005 and 2004, respectively, and 1.78% of total loans outstanding at December 31, 2003. The decrease in the provision expense is the result of a concentrated effort at improving the Company’s credit quality. The increase in the allowance for loan losses to total loans outstanding at December 31, 2005 from December 31, 2004 of 11 basis points is solely attributable to the acquired reserves of First National Banc, Inc. 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.

 

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Index to Financial Statements

Noninterest Income

Following is a comparison of noninterest income for 2005, 2004 and 2003.

 

     Years Ended December 31,  
     2005     2004    2003  
     (Dollars in Thousands)  

Service charges on deposit accounts

   $ 10,428     $ 10,210    $ 10,638  

Mortgage origination fees

     1,614       1,427      1,637  

Other service charges, commissions and fees

     926       737      917  

Gain (loss) on sale of securities

     (391 )     —        (5 )

Other income

     953       649      1,531  
                       
   $ 13,530     $ 13,023    $ 14,718  
                       

2005 Compared With 2004

For 2005, noninterest income totaled $13.5 million, an increase of $.51 million over noninterest income of $13.0 million in 2004, which represented a 3.89% increase. The growth in fee income of $407,000 from 2004 to 2005 was primarily attributable to the growth in demand deposit accounts. During 2005, the Company sold securities at a loss of $391,000 as part of an ongoing strategic long-term plan of restructuring the investment portfolio to help minimize the potential reduction in earnings or capital caused by changes in interest rates. The increase in noninterest income without the nonrecurring securities loss was $898,000 from 2004 to 2005, which represents a 6.90% increase. Other income increased $304,000 from 2004 to 2005. The Company recorded approximately $127,000 in OREO losses in 2004.

2004 Compared With 2003

Noninterest income decreased 11.56% to $13.0 million in 2004 compared to $14.7 million in 2003. The decrease of $1.7 million in 2004 resulted from a decrease of $.7 million in service charges and other fees and commissions, a decrease of $.2 million in mortgage origination fees and a decrease in credit card income. The Company sold its credit card portfolio in 2002 and final income of approximately $.6 million was recorded in 2003, representing gains on the sale of bank property and the reversal of contingent liabilities recorded in 2002 in connection with the sale of the credit card portfolio.

Noninterest Expense

Following is a comparison of noninterest expense for 2005, 2004 and 2003.

 

     Years Ended December 31,
     2005    2004    2003
     (Dollars in Thousands)

Salaries and employee benefits

   $ 22,483    $ 20,893    $ 19,599

Equipment and occupancy

     4,931      4,770      4,725

Amortization of intangible assets

     819      789      1,032

Data processing fees

     1,899      1,680      1,587

Business restructuring

     2,838      —        —  

Other expense

     10,637      8,373      8,204
                    
   $ 43,607    $ 36,505    $ 35,147
                    

 

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Index to Financial Statements

2005 Compared With 2004

Noninterest expense for 2005 was $7.1 million, or 19.45%, higher compared to 2004. In 2005 we recorded a business restructuring charge of $2.8 million related to the Company’s corporate restructuring plan and re-branding efforts to consolidate and streamline the Company’s operations.

Excluding the above nonrecurring expense, noninterest expense increased $4.3 million, or 11.68%, over 2004. The majority of the increase in 2005 was related to salaries and employee benefits. In compliance with the requirements of FASB Statement No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases”, we allocated $3.5 million of salaries to loan costs in 2005. After adjusting salaries and benefits for amounts allocated to loan costs, total salaries and benefits increased $2.1 million or 8.82% to $25.9 million in 2005 compared with $23.8 million in 2004. These increases are due to the acquisition of Citizens Bank~Wakulla in November 2004 as well as general staffing increases concurrent with the expansion of business in some of our markets. At December 31, 2005, total full-time equivalent employees were approximately 585.

2004 Compared With 2003

Noninterest expense increased $1.4 million to $36.5 million in 2004 from $35.1 million in 2003. Salaries and employee benefits increased $1.3 million and all other expenses increased a net of $.1 million.

In compliance with FASB 91, as described above, we allocated $2.9 million of salaries to loan costs in 2004 and $3.4 million in 2003. After adjusting salaries and benefits for amounts allocated to loan costs, total salaries and benefits increased $.8 million, or 3.48%, to $23.8 million in 2004 compared to $23.0 million in 2003. This increase was due to normal salary and benefits increases for the year. Total full-time equivalent employees were approximately 530 for 2004 and approximately 500 for 2003.

Equipment and occupancy expense remained stable at $4.8 million in 2004 compared to $4.7 million in 2003.

As required by FASB, we discontinued the amortization of goodwill in 2002. We periodically test goodwill to determine whether the carrying value of our goodwill is impaired. We continue to amortize core deposit premiums and other identifiable intangibles as a non-cash charge that increases our operating expenses. Intangible asset amortization included as an operating expense amounted to $.8 million and $1.0 million in 2004 and 2003, respectively. The decrease of $.2 million in amortization of intangible assets in 2004 resulted from a reduction in amortization of core deposit premiums paid on prior acquisitions.

Data processing fees increased $.1 million in 2004 and were attributable to increased volume of transactions processed.

All other noninterest expense increased $.2 million to $8.4 million in 2004 compared to $8.2 million in 2003. The increase in other noninterest expense is attributable primarily to increases in legal, accounting and consulting fees resulting from new rules and regulations established by regulatory authorities, executive search fees and merger and acquisition expenses.

Income Taxes

Federal income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income and the amount of non-deductible expenses. Income taxes totaled $7.1 million in 2005, $6.6 million in 2004 and $6.0 million in 2003. The effective tax rate was 34% for the years ended December 31, 2005 and 2004 and 33% for the year ended December 31, 2003.

 

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Index to Financial Statements

LOANS

Management believes that our loan portfolio is adequately diversified. The loan portfolio contains no foreign or energy-related loans or significant concentrations in any one industry, with the exception of residential and commercial real estate mortgages, which constituted approximately 53.85% of our loan portfolio as of December 31, 2005. The amount of loans outstanding at the indicated dates is shown in the following table according to type of loans.

 

     December 31,
     2005    2004    2003    2002    2001
     (Dollars in Thousands)

Commercial and financial

   $ 152,715    $ 136,229    $ 157,594    $ 172,429    $ 152,097

Agricultural

     30,437      28,198      22,051      34,007      39,878

Real estate - construction

     224,230      94,043      60,978      23,020      24,650

Real estate - mortgage, farmland

     74,023      64,245      65,433      63,093      63,533

Real estate - mortgage, commercial

     321,443      253,001      250,247      243,037      225,470

Real estate - mortgage, residential

     317,593      235,431      209,172      209,485      202,447

Consumer installment loans

     62,508      60,884      68,230      78,535      91,557

Other

     3,652      5,043      6,834      9,841      5,444
                                  
     1,186,601      877,074      840,539      833,447      805,076

Less reserve for possible loan losses

     22,294      15,493      14,963      14,868      14,944
                                  

Loans, net

   $ 1,164,307    $ 861,581    $ 825,576    $ 818,579    $ 790,132
                                  

Total loans as of December 31, 2005 are shown in the following table according to maturity or repricing opportunities (1) one year or less, (2) after one year through five years, and (3) after five years.

 

     (Dollars in
Thousands)

Maturity or Repricing Within:

  

One year or less

   $ 745,840

After one year through five years

     393,955

After five years

     46,806
      
   $ 1,186,601
      

The following table summarizes loans at December 31, 2005 with the due dates after one year which (1) have predetermined interest rates and (2) have floating or adjustable interest rates.

 

     (Dollars in
Thousands)

Predetermined interest rates

   $ 427,972

Floating or adjustable interest rates

     12,789
      
   $ 440,761
      

Records were not available to present the above information in each category listed in the first paragraph above and could not be reconstructed without undue burden.

 

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ALLOWANCE AND PROVISION FOR LOAN LOSSES

The allowance for loan losses represents a reserve for potential losses in the loan portfolio. The adequacy of the allowance for loan losses is evaluated periodically based on a review of all significant loans, with a particular emphasis on nonaccruing, past due and other loans that management believes require attention. We segregate our loan portfolio by type of loan and utilize this segregation in evaluating exposure to risks within the portfolio. In addition, based on internal reviews and external reviews performed by independent auditors and regulatory authorities, we further segregate our loan portfolio by loan classifications within each type of loan based on an assessment of risk for a particular loan or group of loans. Certain reviewed loans require specific allowances. Allowances are provided for other types and classifications of loans based on anticipated loss rates. Allowances are also provided for loans that are reviewed by management and considered creditworthy and loans for which management determines no review is required. In establishing allowances, management considers historical loan loss experience with an emphasis on current loan quality trends, current economic conditions and other factors in the markets where the subsidiary banks operate. Factors considered include, among others, unemployment rates, effect of weather on agriculture and significant local economic events, such as major plant closings.

We have developed a methodology for determining the adequacy of the loan loss reserve, which is monitored by the Company’s senior credit officer and internal audit staff. Procedures provide for the assignment of a risk rating for every loan included in our total loan portfolio, with the exception of credit card receivables and overdraft protection loans which are treated as pools for risk rating purposes. The risk rating schedule provides seven ratings of which three ratings are classified as pass ratings and four ratings are classified as criticized ratings. Each risk rating is assigned a percent factor to be applied to the loan balance to determine the adequate amount of reserve. Many of the larger loans require an annual review by an independent loan officer. As a result of loan review, certain loans may be assigned specific reserve allocations. Other loans that surface as problem loans may also be assigned specific reserves. Past due loans are assigned risk ratings based on the number of days past due.

The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. Management believes the allowance can be allocated only on an approximate basis. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other category.

 

     At December 31,  
     2005     2004     2003     2002     2001  
     Amount    % of
Total
Loans
    Amount    % of
Total
Loans
    Amount    % of
Total
Loans
    Amount    % of
Total
Loans
    Amount    % of
Total
Loans
 
     (Dollars in Thousands)  

Commercial, financial, industrial and agricultural

   $ 9,926    15 %   $ 6,876    19 %   $ 6,289    21 %   $ 5,892    25 %   $ 6,009    24 %

Real estate

     2,953    79       2,036    74       2,431    70       2,651    65       2,825    64  

Consumer

     5,402    6       3,792    7       3,550    9       3,649    10       3,420    12  

Unallocated

     4,013    —         2,789    —         2,693    —         2,676    —         2,690    —    
                                                                 
   $ 22,294    100 %   $ 15,493    100 %   $ 14,963    100 %   $ 14,868    100 %   $ 14,944    100 %
                                                                 

 

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Index to Financial Statements

The following table presents an analysis of our loan loss experience for the periods indicated:

 

     December 31,  
     2005     2004     2003     2002     2001  
     (Dollars in Thousands)  

Average amount of loans outstanding

   $ 952,647     $ 855,205     $ 841,857     $ 827,939     $ 698,292  
                                        

Balance of reserve for possible loan losses at beginning of period

   $ 15,493     $ 14,963     $ 14,868     $ 14,944     $ 9,832  
                                        

Charge-offs:

          

Commercial, financial and agricultural

     (649 )     (1,639 )     (3,114 )     (2,576 )     (3,534 )

Real estate

     (543 )     (382 )     (781 )     (2,491 )     (626 )

Consumer

     (963 )     (1,555 )     (1,443 )     (2,092 )     (1,328 )

Recoveries:

          

Commercial, financial and agricultural

     601       464       963       502       203  

Real estate

     644       483       46       492       546  

Consumer

     532       718       479       515       361  
                                        

Net charge-offs

     (378 )     (1,911 )     (3,850 )     (5,650 )     (4,378 )
                                        

Additions to reserve charged to operating expenses

     1,651       1,786       3,945       5,574       4,566  
                                        

Allowance for loan losses of acquired subsidiary

     5,528       655       —         —         4,924  
                                        

Balance of reserve for possible loan losses at end of period

   $ 22,294     $ 15,493     $ 14,963     $ 14,868     $ 14,944  
                                        

Ratio of net loan charge-offs to average loans

     0.04 %     0.22 %     0.46 %     0.68 %     0.63 %
                                        

NONPERFORMING LOANS

A loan is placed on nonaccrual status when, in management’s judgment, the collection of the interest income appears doubtful. Interest receivable that has been accrued in prior years and is subsequently determined to have doubtful collectibility is charged to the allowance for possible loan losses. Interest on loans that are classified as non-accrual is recognized when received. Past due loans are loans whose principal or interest is past due 90 days or more. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms significantly different from the original contractual terms.

 

     December 31,
     2005    2004    2003    2002    2001
     (Dollars in Thousands)

Loans accounted for on a nonaccrual basis

   $ 9,586    $ 5,640    $ 6,472    $ 7,561    $ 11,958

Installment loans and term loans contractually past due ninety days or more as to interest or principal payments and still accruing

     —        44      25      171      691

Loans, the terms of which have been renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower

     —        —        —        —        —  

Loans now current about which there are serious doubts as to the ability of the borrower to comply with present loan repayment terms

     —        —        —        —        —  

 

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Index to Financial Statements

In the opinion of management, any loans classified by regulatory authorities as doubtful, substandard or special mention that have not been disclosed above do not (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. Any loans classified by regulatory authorities as loss have been charged off.

LIQUIDITY AND RATE SENSITIVITY

Liquidity management involves the matching of the cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs, and the ability of our Company to meet those needs. We seek to meet liquidity requirements primarily through management of short-term investments (principally interest-bearing deposits in banks) and monthly amortizing loans. Another source of liquidity is the repayment of maturing single payment loans. In addition, our Company maintains relationships with correspondent banks which could provide funds to them on short notice, if needed.

A principal objective of our asset/liability management strategy is to minimize its exposure to changes in interest rates by matching the maturity and repricing horizons of interest-earning assets and interest-bearing liabilities. This strategy is overseen in part through the direction of our Asset and Liability Committee (the “ALCO Committee”) which establishes policies and monitors results to control interest rate sensitivity.

As part of our interest rate risk management policy, the ALCO Committee examines the extent to which its assets and liabilities are “interest rate sensitive” and monitors its interest rate-sensitivity “gap”. An asset or liability is considered to be interest rate sensitive if it will reprice or mature within the time period analyzed, usually one year or less. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal.

A simple interest rate “gap” analysis by itself may not be an accurate indicator of how net interest income will be affected by changes in interest rates. Accordingly, the ALCO Committee also evaluates how the repayment of particular assets and liabilities is impacted by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may not react identically to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market interest rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps”) which limit changes in interest rates on a short-term basis and over the life of the asset. In the event of a change in interest rates, prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the interest rate gap. The ability of many borrowers to service their debts also may decrease in the event of an interest rate increase.

 

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Index to Financial Statements

The following table sets forth the distribution of the repricing of our earning assets and interest-bearing liabilities as of December 31, 2005, the interest rate sensitivity gap (i.e., interest rate sensitive assets divided by interest rate sensitivity liabilities), the cumulative interest rate sensitivity gap ratio (i.e., interest rate sensitive assets divided by interest rate sensitive liabilities) and the cumulative sensitivity gap ratio. The table also sets forth the time periods in which earning assets and liabilities will mature or may reprice in accordance with their contractual terms. However, the table does not necessarily indicate the impact of general interest rate movements on the net interest margin since the repricing of various categories of assets and liabilities is subject to competitive pressures and the needs of our customers. In addition, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times within such period and at different rates.

 

     At December 31, 2005
     Maturing or Repricing Within
     Zero to
Three
Months
   Three
Months to
One Year
   

One to
Five

Years

  

Over

Five

Years

    Total
     (Dollars in Thousands)

Earning assets:

            

Interest-bearing deposits in banks

   $ 70,854    $ —       $ —      $ —       $ 70,854

Federal funds sold

     28,927      —         —        —         28,927

Restricted stock

     8,597      —         —        —         8,597

Investment securities

     3,343      10,429       180,539      40,834       235,145

Loans

     607,575      138,265       393,955      46,806       1,186,601
                                    
     719,296      148,694       574,494      87,640       1,530,124
                                    

Interest-bearing liabilities:

            

Interest-bearing deposits (1)

     493,516      —         —        —         493,516

Certificates of deposit

     144,751      393,106       142,667      352       680,876

Other short-term borrowings

     10,307      —         —        —         10,307

Other borrowings

     5,000      3,522       7,500      90,000       106,022

Trust preferred securities

     5,155      35,567       —        —         40,722
                                    
     658,729      432,195       150,167      90,352       1,331,443
                                    

Interest rate sensitivity gap

   $ 60,567    $ (283,501 )   $ 424,327    $ (2,712 )   $ 198,681
                                    

Cumulative interest rate sensitivity gap

   $ 60,567    $ (222,934 )   $ 201,393    $ 198,681    
                                

Interest rate sensitivity gap ratio

     1.09      0.34       3.83      0.97    
                                

Cumulative interest rate sensitivity gap ratio

     1.09      0.80       1.16      1.15    
                                

(1) While interest-bearing deposits (including NOW accounts, MMDA and savings accounts) have the ability to reprice immediately, it is our experience that these reprice with much less intensity than the indexes to which they follow. Although we show the entire balance of these accounts in the zero- to three-month period, we believe that these will reprice over a period longer than the contractual period.

INVESTMENT PORTFOLIO

We manage the mix of asset and liability maturities in an effort to control the effects of changes in the general level of interest rates on net interest income. Except for its effect on the general level of interest rates, inflation does not have a material impact on the portfolio due to the rate variability and short-term maturities of its earning assets. In particular, approximately 63% of the loan portfolio is comprised of loans which mature or reprice within one year or less. Mortgage loans, primarily with five to fifteen year maturities, are also made on a variable rate basis with rates being adjusted every one to five years. Additionally, 6% of the investment portfolio matures or reprices within one year or less.

 

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Following is a summary of the carrying value of investments, including restricted equity securities, as of the end of each reported period:

 

     December 31,
     2005    2004    2003
     (Dollars in Thousands)

U. S. Government and agency securities

   $ 92,461    $ 78,227    $ 79,545

State and municipal securities

     7,968      4,212      3,733

Corporate debt securities

     7,113      18,131      23,468

Mortgage-backed securities

     126,870      112,640      83,108

Marketable equity securities

     733      738      741

Restricted equity securities

     8,597      7,793      5,694
                    
   $ 243,742    $ 221,741    $ 196,289
                    

The amounts of securities available for sale in each category as of December 31, 2005 are shown in the following table below according to the following contractual maturity classifications: (1) one year or less, (2) after one year through five years, (3) after five years through ten years, and (4) after ten years.

 

    

U. S. Treasury

and Other U. S.

Government Agencies

and Corporations

    State and
Political Subdivisions
 
     Amount    Yield
(1)
    Amount    Yield
(1) (2)
 
     (Dollars in Thousands)  

Maturity:

          

One year or less

   $ 13,185    4.09 %   $ 587    8.94 %

After one year through five years

     177,493    4.06       3,046    4.82  

After five years through ten years

     10,966    4.92       4,130    5.46  

After ten years

     25,533    5.52       205    5.52  
                          
   $ 227,177    4.23 %   $ 7,968    5.47 %
                          

(1) Yields were computed using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. The weighted average yield for each maturity range was computed using the acquisition price of each security in that range.
(2) Yields on securities of state and political subdivisions are stated on a taxable-equivalent basis, using a tax rate of 34%.

DEPOSITS

The average amount of deposits and average rate paid thereon, classified as non-interest-bearing demand deposits, interest-bearing demand and savings deposits and time deposits, for the periods indicated are presented below.

 

     Year Ended December 31,  
     2005     2004  
     Amount    Rate     Amount    Rate  
     (Dollars in Thousands)  

Non-interest-bearing demand deposits

   $ 154,326    —   %   $ 133,546    —   %

Interest-bearing demand and savings deposits

     393,594    1.02       357,893    0.73  

Time deposits

     498,036    3.02       406,467    2.14  
                  

Total deposits

   $ 1,045,956      $ 897,906   
                  

 

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Index to Financial Statements

We have a large, stable base of time deposits with little or no dependence on volatile deposits of $100,000 or more. The time deposits are principally certificates of deposit and individual retirement accounts obtained for individual customers.

The amounts of time certificates of deposit issued in amounts of $100,000 or more as of December 31, 2005, are shown below by category, which is based on time remaining until maturity of (1) three months or less, (2) over three through twelve months and (3) over twelve months.

 

     (Dollars in
Thousands)

Three months or less

   $ 74,828

Over three through twelve months

     202,827

Over twelve months

     78,345
      

Total

   $ 356,000
      

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

In the ordinary course of business, our Banks have granted commitments to extend credit to approved customers. Generally, these commitments to extend credit have been granted on a temporary basis for seasonal or inventory requirements and have been approved by the Banks’ Board of Directors. Our Banks have also granted commitments to approved customers for standby letters of credit. These commitments are recorded in the financial statements when funds are disbursed or the financial instruments become payable. The Banks use the same credit policies for these off-balance sheet commitments as they do for financial instruments that are recorded in the consolidated financial statements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitment amounts expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Following is a summary of the commitments outstanding at December 31, 2005 and 2004.

 

     December 31,
     2005    2004
     (Dollars in Thousands)

Commitments to extend credit

   $ 184,265    $ 114,942

Financial standby letters of credit

     5,741      3,172
             
   $ 190,006    $ 118,114
             

The following table summarizes short-term borrowings for the periods indicated:

 

     Years Ended December 31,  
     2005     2004     2003  
     Average
Balance
   Average
Rate
   

Average

Balance

   Average
Rate
    Average
Balance
   Average
Rate
 

Federal funds purchased and securities sold under agreement to repurchase

   $ 6,521    1.58 %   $ 5,235    1.28 %   $ 6,547    1.04 %
                                       
     Total
Balance
         Total
Balance
         Total
Balance
      

Total maximum short-term borrowings outstanding at any month-end during the year

   $ 15,545      $ 14,205      $ 13,978   
                           

 

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The following table sets forth certain information about contractual cash obligations as of December 31, 2005.

 

     Payments Due After December 31, 2005
     Total   

1 Year

Or Less

  

1 -3

Years

   4 -5
Years
   After 5
Years

Short-term borrowings

   $ 10,307    $ 10,307    $ —      $ —      $ —  

Time certificates of deposit

     680,876      537,857      124,369      18,298      352

Long-term debt

     5,000      —        5,000      —        —  

Federal Home Loan Bank advances

     101,022      3,522      5,500      2,000      90,000

Subordinated deferrable interest debentures

     40,722      35,567      —        —        5,155
                                  

Total contractual cash obligations

   $ 837,927    $ 587,253    $ 134,869    $ 20,298    $ 95,507
                                  

Our operating leases represent short-term obligations, normally with maturities of one year or less. Many of the operating leases have thirty-day cancellation provisions. The total contractual obligations for operating leases do not require a material amount of our cash funds.

At December 31, 2005, we had no material amounts in binding commitments for capital expenditures.

CAPITAL ADEQUACY

The capital resources of our Company are monitored on a periodic basis by state and federal regulatory authorities. During 2005, we increased our capital by retaining net earnings of $6.9 million after payment of dividends. In addition to earnings for 2005, the Company issued approximately 1,084,000 shares to effect the purchase of First National Banc, Inc. during the fourth quarter of 2005, resulting in approximately $22.2 million in new capital. We are aware of no events or trends likely to result in a material change in our liquidity.

In accordance with risk capital guidelines issued by the Federal Reserve, we are required to maintain a minimum standard of total capital to risk-weighted assets of 8%. Additionally, all member banks must maintain “core” or “Tier 1” capital of at least 4% of total assets (“leverage ratio”). Member banks operating at or near the 4% capital level are expected to have well-diversified risks, including no undue interest rate risk exposure, excellent control systems, good earnings, high asset quality and well managed on- and off-balance-sheet activities, and, in general, be considered strong banking organizations with a composite 1 rating under the CAMEL rating system of banks. For all but the most highly rated banks meeting the above conditions, the minimum leverage ratio is to be 4% plus an additional 100 to 200 basis points.

The following table summarizes the regulatory capital levels of Ameris at December 31, 2005.

 

     Actual     Required     Excess  
     Amount    Percent     Amount    Percent     Amount    Percent  
     (Dollars in Thousands)  

Leverage capital

   $ 132,899    9.71 %   $ 54,757    4.00 %   $ 78,142    5.71 %

Risk-based capital:

               

Core capital

     132,899    10.89       48,808    4.00       84,091    6.89  

Total capital

     154,513    12.66       97,616    8.00       56,897    4.66  

 

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INFLATION

The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.

QUARTERLY FINANCIAL INFORMATION (Unaudited)

The following table sets forth certain consolidated quarterly financial information of the Company. This information is derived from unaudited consolidated financial statements, which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods.

 

     Quarters Ended December 31, 2005
     4    3    2    1
     (Dollars in Thousands, Except Per Share Data)

Selected Income Statement Data:

           

Interest income

   $ 22,892    $ 20,494    $ 18,595    $ 17,558

Net interest income

     14,601      13,312      12,569      12,123

Net income

     2,723      3,905      3,500      3,600

Per Share Data:

           

Net income – basic

     0.22      0.33      0.29      0.31

Net income – diluted

     0.22      0.33      0.29      0.30

Dividends

     0.14      0.14      0.14      0.14
     Quarters Ended December 31, 2004
     4    3    2    1
     (Dollars in Thousands, Except Per Share Data)

Selected Income Statement Data:

           

Interest income

   $ 17,060    $ 16,196    $ 15,446    $ 15,663

Net interest income

     11,945      11,296      10,788      10,961

Net income

     3,788      3,085      3,042      3,186

Per Share Data:

           

Net income – basic

     0.32      0.27      0.26      0.27

Net income – diluted

     0.32      0.26      0.26      0.27

Dividends

     0.12      0.12      0.12      0.12

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed only to U. S. Dollar interest rate changes and, accordingly, we manage exposure by considering the possible changes in the net interest margin. We do not have any trading instruments nor do we classify any portion of the investment portfolio as held for trading. We do not engage in any hedging activities or enter into any derivative instruments with a higher degree of risk than mortgage-backed securities, which are commonly, pass-through securities. Finally, we have no exposure to foreign currency exchange rate risk, commodity price risk and other market risks.

Interest rates play a major part in the net interest income of a financial institution. The sensitivity to rate changes is known as “interest rate risk.” The repricing of interest-earning assets and interest-bearing liabilities can influence the changes in net interest income. As part of our asset/liability management program, the timing of repriced assets and liabilities is referred to as gap management. Our policy is to maintain a gap ratio in the one-year time horizon of .80 to 1.20. As indicated by the gap analysis included in this Annual Report, we are somewhat asset sensitive in relation to changes in market interest rates. Being asset sensitive would result in net interest income increasing in a rising rate environment and decreasing in a declining rate environment.

We use simulation analysis to monitor changes in net interest income due to changes in market interest rates. The simulation of rising, declining and flat interest rate scenarios allow management to monitor and adjust interest rate sensitivity to minimize the impact of market interest rate swings. The analysis of the impact on net interest income over a twelve-month period is subjected to a gradual 200 basis points increase or 200 basis points decrease in market rates on net interest income and is monitored on a quarterly basis. Our most recent simulation model projects net interest income would increase 9.84% if rates rise 200 basis points gradually over the next year. On the other hand, the model projects net interest income to decrease 8.62% if rates decline 200 basis points over the next year.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets - December 31, 2005 and 2004

Consolidated Statements of Income - Years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Comprehensive Income - Years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Cash Flows - Years ended December 31, 2005, 2004 and 2003

Notes to Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

During 2005 and 2004, Ameris did not change its accountants and there was no disagreement on any matter of accounting principles or practices for financial statement disclosure.

 

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ITEM 9A. CONTROLS AND PROCEDURES

Ameris’s Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report, as required by paragraph (b) of Rules 13a-15 or 15d-15 of the Exchange Act. Based on such evaluation, such officers have concluded that, as of the end of the period covered by this Annual Report, the Company’s disclosure controls and procedures are effective.

During the quarter ended December 31, 2005, there was not any change in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 of the Exchange Act that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s Annual Report on Internal Control Over Financial Reporting

The management of Ameris Bancorp is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2005.

Mauldin & Jenkins, Certified Public Accountants, LLC (“Mauldin & Jenkins”), the Company’s independent auditors, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. That report is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.”

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors

Ameris Bancorp

Moultrie, Georgia

We have audited management’s assessment, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting”, that Ameris Bancorp and its subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Ameris Bancorp’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Ameris Bancorp and its subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Ameris Bancorp and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial position of Ameris Bancorp and its subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, and our report dated February 17, 2006 expressed an unqualified opinion.

/s/ Mauldin & Jenkins, LLC

Albany, Georgia

February 17, 2006

 

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ITEM 9B. OTHER INFORMATION

None.

 

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Index to Financial Statements

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Nominees for Director

Information with respect to the Company’s directors and nominees for director is set forth in Ameris’s Proxy Statement for the Annual Meeting of Shareholders (the “Proxy Statement”) under the caption “Proposal I: Election of Directors” and is incorporated herein by reference.

Executive Officers

The following table sets forth certain information with respect to the executive officers of Ameris as of March 10, 2006.

 

Name, Age and Term as Officer

  

Position with Ameris

  

Principal Occupation for the Last Five Years

and Other Directorships

Edwin W. Hortman, Jr.; 52

Officer since 2002

   President and Chief Executive Officer    President and Chief Executive Officer since January 1, 2005. Director since November 2003. President and Chief Operating Officer from November 2003 through December 2004. Executive Vice President and Regional Bank Executive for Northern Division from August 2002 through November 2003. President, Chief Executive Officer and director of Citizens Security Bank from April 1998 to November 2003. Director of each subsidiary bank in the Northern Division from September 2002 through March 2004.

Dennis J. Zember, Jr.; 36

Officer since 2005

   Executive Vice President and Chief Financial Officer    Executive Vice President and Chief Financial Officer of Ameris since February 14, 2005. Senior Vice President and Treasurer of Flag Financial Corporation and Senior Vice President and Chief Financial Officer of Flag Bank from January 2002 to February 2005. Vice President and Treasurer of Century South Banks, Inc. from August 1997 to May 2001.

Jon S. Edwards; 44

Officer since 1999

   Executive Vice President and Director of Credit Administration    Executive Vice President and Director of Credit Administration since May 2005. Executive Vice President and Regional Bank Executive for Southern Division from August 2002 through April 2005. Director of Credit Administration from March 1999 to July 2003. Senior Vice President from March 1999 to August 2002. Director of each subsidiary bank in the Southern Division from September 2002 through April 2005.

Thomas T. Dampier; 55

Officer since 2004

   Executive Vice President and North Regional Executive    Executive Vice President and North Regional Executive since April 2004. Director of each subsidiary bank in the Northern Division since April 2004. President and Chief Executive Officer of Colony Bank from 1994 to April 2004.

Johnny R. Myers; 56

Officer since 2005

   Executive Vice President and South Regional Executive    Executive Vice President and South Regional Executive since May 2005. Director of each subsidiary bank in the Southern Division since May 2005.

Cindi Lewis; 52

Officer since 1987

   Executive Vice President, Director of Human Resources and Corporate Secretary    Executive Vice President since May 2002 and Director of Human Resources and Corporate Secretary since May 2000. Senior Vice President from May 2000 to May 2002 and Vice President of Operations, Client Services and Assistant Corporate Secretary from April 1993 to May 2000.

Officers serve at the discretion of the Board of Directors.

The information set forth in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” is incorporated herein by reference.

 

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Code of Ethics

Ameris has adopted a code of ethics that is applicable to its Chief Executive Officer and all senior financial officers, including its Chief Financial Officer and principal accounting officer. Ameris shall provide to any person without charge, upon request, a copy of its code of ethics. Such requests should be directed to the Corporate Secretary of Ameris Bancorp at 24 2nd Avenue, S.E., Moultrie, Georgia 31768.

ITEM 11. EXECUTIVE COMPENSATION

The information set forth under the caption “Executive Compensation” in the Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption “Executive Compensation – Compensation Committee Interlocks and Insider Participation” in the Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following is a summary of the fees billed to Ameris by Mauldin & Jenkins, Ameris’s independent accountants, for professional services rendered for the fiscal years ended December 31, 2005 and December 31, 2004:

 

Fee Category

   Fiscal 2005
Fees
   Fiscal 2004
Fees

Audit fees

   $ 275,700    $ 253,825

Audit-related fees

     62,500      65,650

Tax fees

     78,275      69,350

All other fees

     —        —  
             

Total fees

   $ 416,475    $ 388,825
             

Audit Fees

The amounts consist of fees billed for professional services rendered for the audit of Ameris’s annual consolidated financial statements, review of the interim consolidated financial statements included in quarterly reports, attestation services related to management’s assertions related to internal controls and services that are normally provided by Mauldin & Jenkins in connection with statutory and regulatory filings or engagements.

Audit-Related Fees

Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Ameris’s consolidated financial statements and are not reported under “Audit Fees.” These services include due diligence services related to contemplated mergers and acquisitions, employee benefit plan audits and consultations concerning financial accounting and reporting standards.

 

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Tax Fees

The amounts consist of fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and assistance with tax notices.

All Other Fees

Consists of fees for products and services other than the services reported above. There were no fees paid to Mauldin & Jenkins in fiscal 2005 or 2004 that are not included in the above classifications.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

All services provided by Mauldin & Jenkins are subject to pre-approval by the Audit Committee of Ameris’s Board of Directors. The Audit Committee may authorize any member of the Audit Committee to approve services by Mauldin & Jenkins in the event there is a need for such approval prior to the next full Audit Committee meeting. However, the Audit Committee must review the decisions made by such authorized member of the Audit Committee at its next schedule meeting. Before granting any approval, the Audit Committee gives due consideration to whether approval of the proposed service will have a detrimental impact on Mauldin & Jenkins’ independence.

 

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

 

  1. Financial statements:

 

  (a) Ameris Bancorp and Subsidiaries:

 

  (i) Consolidated Balance Sheets - December 31, 2005 and 2004;

 

  (ii) Consolidated Statements of Income - Years ended December 31, 2005, 2004 and 2003;

 

  (iii) Consolidated Statements of Comprehensive Income - Years ended December 31, 2005, 2004 and 2003;

 

  (iv) Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2005, 2004 and 2003;

 

  (v) Consolidated Statements of Cash Flows - Years ended December 31, 2005, 2004 and 2003; and

 

  (vi) Notes to Consolidated Financial Statements.

 

  (b) Ameris Bancorp (parent company only):

Parent company only financial information has been included in Note 20 of Notes to Consolidated Financial Statements.

 

  2. Financial statement schedules:

All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

 

  3. A list of the Exhibits required by Item 601 of Regulation S-K to be filed as a part of this report is shown on the “Exhibit Index” filed herewith.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  AMERIS BANCORP

Date: March 14, 2006

 

By:

 

/s/ Edwin W. Hortman, Jr.

   

Edwin W. Hortman, Jr., President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Edwin W. Hortman, Jr. as his attorney-in-fact, acting with full power of substitution for him in his name, place and stead, in any and all capacities, to sign any amendments to this Form 10-K and to file the same, with exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission and hereby ratifies and confirms all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue thereof.

Pursuant to the requirements of the Exchange Act, this Form 10-K has been signed by the following persons in the capacities and on the dates indicated.

 

Date: March 14, 2006  

/s/ Edwin W. Hortman, Jr.

  Edwin W. Hortman, Jr., President, Chief Executive Officer and Director
Date: March 14, 2006  

/s/ Kenneth J. Hunnicutt

  Kenneth J. Hunnicutt, Director and Chairman of the Board
Date: March 14, 2006  

/s/ Dennis J. Zember, Jr.

  Dennis J. Zember, Jr., Executive Vice President and Chief Financial Officer
Date: March 14, 2006  

/s/ Johnny W. Floyd

  Johnny W. Floyd, Director
Date: March 14, 2006  

/s/ J. Raymond Fulp

  J. Raymond Fulp, Director
Date: March 14, 2006  

/s/ Daniel B. Jeter

  Daniel B. Jeter, Director
Date: March 14, 2006  

/s/ Glenn A. Kirbo

  Glenn A. Kirbo, Director
Date: March 14, 2006  

/s/ Robert P. Lynch

  Robert P. Lynch, Director
Date: March 14, 2006  

/s/ Brooks Sheldon

  Brooks Sheldon, Director
Date: March 14, 2006  

/s/ Eugene M. Vereen, Jr.

  Eugene M. Vereen, Jr., Director
Date: March 14, 2006  

/s/ Henry C. Wortman

  Henry C. Wortman, Director

 

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Table of Contents
Index to Financial Statements

EXHIBIT INDEX

 

Exhibit No.  

Description

3.1   Articles of Incorporation of Ameris Bancorp, as amended (incorporated by reference to Exhibit 2.1 to Ameris Bancorp’s Regulation A Offering Statement on Form 1-A filed August 14, 1987).
3.2   Amendment to Amended Articles of Incorporation (incorporated by reference to Exhibit 3.1.1 to Ameris Bancorp’s Form 10-K filed March 28, 1996).
3.3   Amendment to Amended Articles of Incorporation (incorporated by reference to Exhibit 4.3 to Ameris Bancorp’s Registration Statement on Form S-4 filed with the Commission on July 17, 1996).
3.4   Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.5 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 25, 1998).
3.5   Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.7 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 26, 1999).
3.6   Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.9 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 31, 2003).
3.7   Articles of Amendment to the Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Ameris Bancorp’s Current Report on Form 8-K filed with the Commission on December 1, 2005).
3.8   Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to Ameris Bancorp’s Current Report on Form 8-K filed with the Commission on March 14, 2005).
4.1   Form of Indenture for Subordinated Debentures (incorporated by reference to Exhibit 4.1 to Ameris Bancorp’s Registration Statement on Form S-3/A filed with the Commission on November 2, 2001).
4.2   Form of Subordinated Debenture (incorporated by reference to Exhibit A to Exhibit 4.1 to Ameris Bancorp’s Registration Statement on Form S-3/A filed with the Commission on November 2, 2001).
4.3   Certificate of Trust of ABC Bancorp Capital Trust I (incorporated by reference to Exhibit 4.3 to Ameris Bancorp’s Registration Statement on Form S-3 filed with the Commission on September 7, 2001).
4.4   Trust Agreement of ABC Bancorp Capital Trust I (incorporated by reference to Exhibit 4.4 to Ameris Bancorp’s Registration Statement on Form S-3 filed with the Commission on September 7, 2001).

 

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Index to Financial Statements

EXHIBIT INDEX

 

Exhibit No.  

Description

4.5   Form of Amended and Restated Trust Agreement of ABC Bancorp Capital Trust I (incorporated by reference to Exhibit 4.5 to Ameris Bancorp’s Registration Statement on Form S-3/A filed with the Commission on November 2, 2001).
4.6   Form of ABC Bancorp Capital Trust I Preferred Securities Certificate (incorporated by reference to Exhibit D to Exhibit 4.5 to Ameris Bancorp’s Registration Statement on Form S-3/A filed with the Commission on November 2, 2001).
4.7   Form of Preferred Securities Guarantee Agreement (incorporated by reference to Exhibit 4.7 to Ameris Bancorp’s Registration Statement on Form S-3/A filed with the Commission on November 2, 2001).
4.8   Form of Agreement as to Expenses and Liabilities of ABC Bancorp Capital Trust I (incorporated by reference to Exhibit C to Exhibit 4.5 to Ameris Bancorp’s Registration Statement on Form S-3/A filed with the Commission on November 2, 2001).
10.1   Deferred Compensation Agreement for Kenneth J. Hunnicutt dated December 16, 1986 (incorporated by reference to Exhibit 5.3 to Ameris Bancorp’s Regulation A Offering Statement on Form 1-A filed with the Commission on August 14, 1987).
10.2   Executive Salary Continuation Agreement dated February 14, 1984 (incorporated by reference to Exhibit 10.6 to Ameris Bancorp’s Annual Report on Form 10-KSB filed with the Commission on March 27, 1989).
10.3   1992 Incentive Stock Option Plan and Option Agreement for Kenneth J. Hunnicutt (incorporated by reference to Ameris Bancorp’s Annual Report on Form 10-KSB filed with the Commission on March 30, 1993).
10.4   Form of Omnibus Stock Ownership and Long-Term Incentive Plan (incorporated by reference to Exhibit 10.17 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 25, 1998).
10.5   Form of Rights Agreement between ABC Bancorp and SunTrust Bank dated as of February 17, 1998 (incorporated by reference to Exhibit 10.18 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 25, 1998).
10.6   ABC Bancorp 2000 Officer/Director Stock Bonus Plan (incorporated by reference to Exhibit 10.19 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on Mach 29, 2000).
10.7   Commission Agreement by and between Ameris Bancorp and Jerry L. Keen dated as of September 12, 2002 (incorporated by reference to Exhibit 10.1 to Ameris Bancorp’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2002).

 

55


Table of Contents
Index to Financial Statements

EXHIBIT INDEX

 

Exhibit No.  

Description

10.8   Asset Purchase Agreement by and between Southland Bank and MBNA America Bank, N.A. dated as of December 19, 2002 (incorporated by reference to Exhibit 10.16 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 31, 2003).
10.9   Interim Servicing Agreement by and between Southland Bank and MBNA America Bank, N.A. dated as of December 19, 2002 (incorporated by reference to Exhibit 10.17 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 31, 2003).
10.10   Joint Marketing Agreement by and between Ameris Bancorp and MBNA America Bank, N.A. dated as of December 19, 2002 (incorporated by reference to Exhibit 10.18 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 31, 2003).
10.11   Executive Employment Agreement with Jon S. Edwards dated as of July 1, 2003 (incorporated by reference to Exhibit 10.1 to Ameris Bancorp’s Quarterly Report on Form 10-Q filed with the Commission on November 12, 2003).
10.12   Executive Employment Agreement with Edwin W. Hortman, Jr. dated as of December 31, 2003 (incorporated by reference to Exhibit 10.19 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 15, 2004).
10.13   Executive Employment Agreement with Cindi H. Lewis dated as of December 31, 2003 (incorporated by reference to Exhibit 10.20 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 15, 2004).
10.14   Executive Employment Agreement with Thomas T. Dampier dated as of May 18, 2004 (incorporated by reference to Exhibit 10.1 to Ameris Bancorp’s Quarterly Report on Form 10-Q filed with the Commission on August 9, 2004).
10.15   Executive Consulting Agreement with Kenneth J. Hunnicutt dated as of January 1, 2005 (incorporated by reference to Exhibit 10.16 to Ameris Bancorp’s Annual Report on Form 10-K filed with the Commission on March 16, 2005).
10.16   Amendment No. 1 to Executive Employment Agreement with Edwin W. Hortman, Jr. dated as of March 10, 2005 (incorporated by reference to Exhibit 10.1 to Ameris Bancorp’s Current Report on Form 8-K filed with the Commission on March 14, 2005).
10.17   Form of 2005 Omnibus Stock Ownership and Long-Term Incentive Plan (incorporated by reference to Appendix A to Ameris Bancorp’s Definitive Proxy Statement filed with the Commission on April 18, 2005).
10.18   Executive Employment Agreement with Dennis J. Zember, Jr. dated as of May 5, 2005 (incorporated by reference to Exhibit 10.1 to Ameris Bancorp’s Current Report on Form 8-K/A filed with the Commission on May 11, 2005).

 

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Table of Contents
Index to Financial Statements

EXHIBIT INDEX

 

Exhibit No.  

Description

10.19   Executive Employment Agreement with Johnny R. Myers dated as of May 11, 2005 (incorporated by reference to Exhibit 10.1 to Ameris Bancorp’s Current Report on Form 8-K filed with the Commission on May 16, 2005).
10.20   Revolving Credit Agreement with SunTrust Bank dated as of December 14, 2005 (incorporated by reference to Exhibit 10.1 to Ameris Bancorp’s Current Report on Form 8-K filed with the Commission on December 20, 2005).
10.21   Security Agreement with SunTrust Bank dated as of December 14, 2005 (incorporated by reference to Exhibit 10.2 to Ameris Bancorp’s Current Report on Form 8-K filed with the Commission on December 20, 2005).
10.22   Form of Incentive Stock Option Agreement (incorporated by reference to Exhibit 4.2 to Ameris Bancorp’s Registration Statement on Form S-8 filed with the Commission on January 24, 2006).
10.23   Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 4.3 to Ameris Bancorp’s Registration Statement on Form S-8 filed with the Commission on January 24, 2006).
10.24   Form of Restricted Stock Agreement (incorporated by reference to Exhibit 4.4 to Ameris Bancorp’s Registration Statement on Form S-8 filed with the Commission on January 24, 2006).
21.1   Schedule of subsidiaries of Ameris Bancorp.
23.1   Consent of Mauldin & Jenkins, LLC.
24.1   Power of Attorney relating to this Form 10-K is set forth on the signature pages of this Form 10-K.
31.1   Rule 13a-14(a)/15d-14(a) Certification by Ameris Bancorp’s Chief Executive Officer.
31.2   Rule 13a-14(a)/15d-14(a) Certification by Ameris Bancorp’s Chief Financial Officer.
32.1   Section 1350 Certification by Ameris Bancorp’s Chief Executive Officer.
32.2   Section 1350 Certification by Ameris Bancorp’s Chief Financial Officer.

 

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Index to Financial Statements

AMERIS BANCORP

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

Consolidated financial statements:

 

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets - December 31, 2005 and 2004

Consolidated Statements of Income - Years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Comprehensive Income - Years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Stockholders’ Equity - Years ended December 31, 2005, 2004 and 2003

Consolidated Statements of Cash Flows - Years ended December 31, 2005, 2004 and 2003

Notes to Consolidated Financial Statements

All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

 

F-1


Table of Contents
Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Ameris Bancorp

Moultrie, Georgia

We have audited the accompanying consolidated balance sheets of Ameris Bancorp and Subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ameris Bancorp and Subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

We have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Ameris Bancorp and Subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 17, 2006, expressed an unqualified opinion on management’s assessment of the effectiveness of Ameris Bancorp’s internal control over financial reporting.

/s/ Mauldin & Jenkins, LLC

Albany, Georgia

February 17, 2006

 

F-2


Table of Contents
Index to Financial Statements

AMERIS BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2005 AND 2004

(Dollars in Thousands)

 

     2005     2004  

Assets

    

Cash and due from banks

   $ 74,420     $ 40,339  

Interest-bearing deposits in banks

     70,854       57,331  

Federal funds sold

     28,927       12,285  

Securities available for sale, at fair value

     235,145       213,948  

Restricted equity securities, at cost

     8,597       7,793  

Loans, net of unearned income

     1,186,601       877,074  

Less allowance for loan losses

     22,294       15,493  
                

Loans, net

     1,164,307       861,581  
                

Premises and equipment, net

     39,606       27,772  

Intangible assets

     6,412       3,706  

Goodwill

     43,304       24,325  

Other assets

     25,637       18,913  
                
   $ 1,697,209     $ 1,267,993  
                

Liabilities and Stockholders’ Equity

    

Deposits

    

Noninterest-bearing

   $ 200,840     $ 150,090  

Interest-bearing

     1,174,392       836,134  
                

Total deposits

     1,375,232       986,224  

Federal funds purchased and securities sold under agreements to repurchase

     10,307       7,530  

Other borrowings

     106,022       110,366  

Other liabilities

     16,223       7,367  

Subordinated deferrable interest debentures

     40,722       35,567  
                

Total liabilities

     1,548,506       1,147,054  
                

Commitments and contingencies

    

Stockholders’ equity

    

Common stock, par value $1; 30,000,000 shares authorized; 14,270,783 and 13,070,578 shares issued

     14,271       13,071  

Capital surplus

     67,381       45,073  

Retained earnings

     80,683       73,768  

Accumulated other comprehensive loss

     (2,625 )     (230 )

Unearned compensation

     (526 )     (523 )
                
     159,184       131,159  

Less cost of 1,318,465 and 1,304,430 shares acquired for the treasury

     (10,481 )     (10,220 )
                

Total stockholders’ equity

     148,703       120,939  
                
   $ 1,697,209     $ 1,267,993  
                

See Notes to Consolidated Financial Statements.

 

F-3


Table of Contents
Index to Financial Statements

AMERIS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

 

     2005     2004    2003  

Interest income

       

Interest and fees on loans

   $ 69,238     $ 56,433    $ 57,707  

Interest on taxable securities

     8,547       7,216      6,079  

Interest on nontaxable securities

     163       169      156  

Interest on deposits in other banks

     1,502       542      537  

Interest on federal funds sold

     89       5      —    
                       
     79,539       64,365      64,479  
                       

Interest expense

       

Interest on deposits

     19,029       11,306      14,183  

Interest on other borrowings

     7,905       8,069      7,958  
                       
     26,934       19,375      22,141  
                       

Net interest income

     52,605       44,990      42,338  

Provision for loan losses

     1,651       1,786      3,945  
                       

Net interest income after provision for loan losses

     50,954       43,204      38,393  
                       

Other income

       

Service charges on deposit accounts

     10,428       10,210      10,638  

Other service charges, commissions and fees

     926       737      917  

Mortgage origination fees

     1,614       1,427      1,637  

Loss on sale of securities

     (391 )     —        (5 )

Other

     953       649      1,531  
                       
     13,530       13,023      14,718  
                       

Other expenses

       

Salaries and employee benefits

     22,483       20,893      19,599  

Equipment expense

     2,331       2,144      2,112  

Occupancy expense

     2,600       2,626      2,613  

Amortization of intangible assets

     819       789      1,023  

Data processing fees

     1,899       1,680      1,587  

Provision for restructuring of operations

     2,838       —        —    

Other operating expenses

     10,637       8,373      8,213  
                       
     43,607       36,505      35,147  
                       

Income before income taxes

     20,877       19,722      17,964  

Applicable income taxes

     7,149       6,621      5,954  
                       

Net income

   $ 13,728     $ 13,101    $ 12,010  
                       

Basic earnings per share

   $ 1.15     $ 1.12    $ 1.03  
                       

Diluted earnings per share

   $ 1.14     $ 1.11    $ 1.02  
                       

See Notes to Consolidated Financial Statements.

 

F-4


Table of Contents
Index to Financial Statements

AMERIS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

 

     2005     2004     2003  

Net income

   $ 13,728     $ 13,101     $ 12,010  
                        

Other comprehensive income (loss):

      

Net unrealized holding losses arising during period, net of tax benefits of $1,366, $387 and $575

     (2,653 )     (752 )     (1,117 )

Reclassification adjustment for losses included in net income, net of tax benefits of $133 and $2

     258       —         3  
                        

Total other comprehensive loss

     (2,395 )     (752 )     (1,114 )
                        

Comprehensive income

   $ 11,333     $ 12,349     $ 10,896  
                        

See Notes to Consolidated Financial Statements.

 

F-5


Table of Contents
Index to Financial Statements

AMERIS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

 

     Common Stock    

Capital

Surplus

 
     Shares     Par Value    

Balance, December 31, 2002

   10,824,257     $ 10,824     $ 45,946  

Net income

   —         —         —    

Cash dividends declared, $.43 per share

   —         —         —    

Issuance of restricted shares of common stock under employee incentive plan

   24,800       25       386  

Amortization of unearned compensation, net of forfeitures

   —         —         —    

Proceeds from exercise of stock options

   865       1       8  

Reduction in income taxes payable resulting from vesting of restricted shares

   —         —         106  

Repurchase of shares for treasury

   —         —         —    

Other comprehensive loss

   —         —         —    
                      

Balance, December 31, 2003

   10,849,922       10,850       46,446  

Net income

   —         —         —    

Cash dividends declared, $.47 per share

   —         —         —    

Issuance of restricted shares of common stock under employee incentive plan

   14,900       15       279  

Amortization of unearned compensation, net of forfeitures

   —         —         —    

Proceeds from exercise of stock options

   27,326       27       293  

Reduction in income taxes payable resulting from vesting of restricted shares

   —         —         234  

Repurchase of shares for treasury

   —         —         —    

Six-for-five common stock split

   2,178,430       2,179       (2,179 )

Other comprehensive loss

   —         —         —    
                      

Balance, December 31, 2004

   13,070,578       13,071       45,073  

Net income

   —         —         —    

Cash dividends declared, $.56 per share

   —         —         —    

Adjustments to record acquisition of purchased subsidiaries, net of direct costs

   1,083,718       1,084       21,103  

Issuance of restricted shares of common stock under employee incentive plan

   17,300       17       307  

Amortization of unearned compensation, net of forfeitures

   —         —         —    

Proceeds from exercise of stock options

   100,129       100       845  

Payment for fractional shares

   (942 )     (1 )     —    

Reduction in income taxes payable resulting from vesting of restricted shares

   —         —         53  

Repurchase of shares for treasury

   —         —         —    

Other comprehensive loss

   —         —         —    
                      

Balance, December 31, 2005

   14,270,783     $ 14,271     $ 67,381  
                      

 

F-6(a)


Table of Contents
Index to Financial Statements
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Unearned
Compensation
    Treasury Stock     Total  
         Shares    Cost    

Balance, December 31, 2002

   $ 59,210     $ 1,636     $ (443 )   1,053,321    $ (9,689 )   $ 107,484  

Net income

     12,010       —         —       —        —         12,010  

Cash dividends declared, $.43 per share

     (5,075 )     —         —       —        —         (5,075 )

Issuance of restricted shares of common stock under employee incentive plan

     —         —         (411 )   —        —         —    

Amortization of unearned compensation, net of forfeitures

     —         —         363     —        —         363  

Proceeds from exercise of stock options

     —         —         —       —        —         9  

Reduction in income taxes payable resulting from vesting of restricted shares

     —         —         —       —        —         106  

Repurchase of shares for treasury

     —         —         —       12,747      (170 )     (170 )

Other comprehensive loss

     —         (1,114 )     —       —        —         (1,114 )
                                             

Balance, December 31, 2003

     66,145       522       (491 )   1,066,068      (9,859 )     113,613  

Net income

     13,101       —         —       —        —         13,101  

Cash dividends declared, $.47 per share

     (5,478 )     —         —       —        —         (5,478 )

Issuance of restricted shares of common stock under employee incentive plan

     —         —         (294 )   —        —         —    

Amortization of unearned compensation, net of forfeitures

     —         —         262     —        —         262  

Proceeds from exercise of stock options

     —         —         —       —        —         320  

Reduction in income taxes payable resulting from vesting of restricted shares

     —         —         —       —        —         234  

Repurchase of shares for treasury

     —         —         —       20,957      (361 )     (361 )

Six-for-five common stock split

     —         —         —       217,405      —         —    

Other comprehensive loss

     —         (752 )     —       —        —         (752 )
                                             

Balance, December 31, 2004

     73,768       (230 )     (523 )   1,304,430      (10,220 )     120,939  

Net income

     13,728       —         —       —        —         13,728  

Cash dividends declared, $.56 per share

     (6,795 )     —         —       —        —         (6,795 )

Adjustments to record acquisition of purchased subsidiaries, net of direct costs

     —         —         —       —        —         22,187  

Issuance of restricted shares of common stock under employee incentive plan

     —         —         (324 )   —        —         —    

Amortization of unearned compensation, net of forfeitures

     —         —         321     —        —         321  

Proceeds from exercise of stock options

     —         —         —       —        —         945  

Payment for fractional shares

     (18 )     —         —       —        —         (19 )

Reduction in income taxes payable resulting from vesting of restricted shares

     —         —         —       —        —         53  

Repurchase of shares for treasury

     —         —         —       14,035      (261 )     (261 )

Other comprehensive loss

     —         (2,395 )     —       —        —         (2,395 )
                                             

Balance, December 31, 2005

   $ 80,683     $ (2,625 )   $ (526 )   1,318,465    $ (10,481 )   $ 148,703  
                                             

See Notes to Consolidated Financial Statements.

 

F-6(b)


Table of Contents
Index to Financial Statements

AMERIS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

 

     2005     2004     2003  

OPERATING ACTIVITIES

      

Net income

   $ 13,728     $ 13,101     $ 12,010  
                        

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     2,153       1,880       1,858  

Amortization of intangible assets

     819       789       1,023  

Amortization of unearned compensation

     321       262       363  

Net losses on sale of securities available for sale

     391       —         5  

Net (gains) losses on sale or disposal of premises and equipment

     36       (50 )     3  

Provision for loan losses

     1,651       1,786       3,945  

Provision for deferred taxes

     (35 )     243       (157 )

(Increase) decrease in interest receivable

     (2,290 )     438       944  

Increase (decrease) in interest payable

     911       81       (667 )

Decrease in taxes payable

     (400 )     (284 )     (284 )

Reduction in income taxes payable resulting from vesting of restricted shares

     53       234       106  

Net other operating activities

     4,361       2,419       (524 )
                        

Total adjustments

     7,971       7,798       6,615  
                        

Net cash provided by operating activities

     21,699       20,899       18,625  
                        

INVESTING ACTIVITIES

      

(Increase) decrease in interest-bearing deposits in banks

     (10,888 )     (21,705 )     42,353  

Purchases of securities available for sale

     (80,495 )     (67,681 )     (129,998 )

Proceeds from maturities of securities available for sale

     49,066       68,130       89,533  

Proceeds from sale of securities available for sale

     20,451       —         26,479  

(Increase) decrease in restricted equity securities, net

     647       (1,957 )     84  

(Increase) decrease in federal funds sold

     13,413       (10,430 )     —    

Increase in loans, net

     (116,295 )     (17,302 )     (10,942 )

Purchase of premises and equipment

     (2,954 )     (2,816 )     (2,071 )

Proceeds from sale of premises and equipment

     —         583       —    

Net cash received (paid) for acquisitions

     5,125       (9,416 )     —    
                        

Net cash provided by (used in) investing activities

     (121,930 )     (62,594 )     15,438  
                        

FINANCING ACTIVITIES

      

Increase (decrease) in deposits

     147,569       31,056       (9,523 )

Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase

     2,777       (681 )     7  

Proceeds from other borrowings

     5,000       32,000       15,000  

Repayment of other borrowings

     (15,344 )     (19,679 )     (34,745 )

Dividends paid

     (6,355 )     (5,475 )     (4,885 )

Proceeds from exercise of stock options

     945       320       9  

Payment for fractional shares

     (19 )     —         —    

Purchase of treasury shares

     (261 )     (361 )     (170 )
                        

Net cash provided by (used in) financing activities

     134,312       37,180       (34,307 )
                        

Net increase (decrease) in cash and due from banks

     34,081       (4,515 )     (244 )

Cash and due from banks at beginning of year

     40,339       44,854       45,098  
                        

Cash and due from banks at end of year

   $ 74,420     $ 40,339     $ 44,854  
                        

 

F-7


Table of Contents
Index to Financial Statements

AMERIS BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003

(Dollars in Thousands)

 

     2005    2004    2003

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

        

Cash paid during the year for:

        

Interest

   $ 25,821    $ 19,184    $ 22,706

Income taxes

   $ 7,584    $ 6,662    $ 6,395

NONCASH TRANSACTION

        

Principal balances of loans transferred to other real estate owned

   $ 1,153    $ 2,239    $ 2,096
        

See Notes to Consolidated Financial Statements.

 

F-8


Table of Contents
Index to Financial Statements

AMERIS BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Ameris Bancorp (the “Company”) is a multi-bank holding company whose business is presently conducted by its subsidiary banks (the “Banks”). Through the Banks, the Company operates a full service banking business and offers a broad range of retail and commercial banking services to its customers located in a market area which includes South and Southeast Georgia, North Florida and Southeast Alabama. The Company and the Banks are subject to the regulations of certain federal and state agencies and are periodically examined by those regulatory agencies.

In 2005, the Company changed its corporate name from ABC Bancorp to Ameris Bancorp.

Basis of Presentation and Accounting Estimates

The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany transactions and balances have been eliminated in consolidation.

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of foreclosed assets, contingent assets and liabilities, intangible assets, goodwill, deferred compensation and deferred tax assets. The determination of the adequacy of the allowance for loan losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans and the valuation of foreclosed assets, management obtains independent appraisals for significant collateral. Management also tests intangible assets and goodwill for impairment on an annual basis.

Cash, Due from Banks and Cash Flows

For purposes of reporting cash flows, cash and due from banks includes cash on hand, cash items in process of collection and amounts due from banks. Cash flows from loans, federal funds sold, deposits, interest-bearing deposits in banks, federal funds purchased, restricted equity securities and securities sold under agreements to repurchase are reported net.

The Banks are required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank. The total of those reserve balances was approximately $8,115,000 and $9,602,000 at December 31, 2005 and 2004, respectively.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Management has not classified any of its debt securities as held to maturity. Securities, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income, net of the related deferred tax effect. Equity securities, including restricted equity securities, without a readily determinable fair value are classified as available for sale and recorded at cost.

 

F-9


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Securities (Continued)

The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the life of the securities. Realized gains and losses, determined on the basis of the cost of specific securities sold, are included in earnings on the settlement date. Declines in the fair value of securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.

In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans

Loans are reported at their outstanding principal balances less unearned income, net deferred fees and costs on originated loans and the allowance for loan losses. Interest income is accrued on the outstanding principal balance.

The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due, unless the loan is well-secured. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on nonaccrual or charged off, is reversed against interest income, unless management believes that the accrued interest is recoverable through the liquidation of collateral. Interest income on nonaccrual loans is subsequently recognized only to the extent cash payments are received until the loans are returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Impaired loans are measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses. Interest on accruing impaired loans is recognized as long as such loans do not meet the criteria for nonaccrual status.

 

F-10


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to expense. Loan losses are charged against the allowance when management believes the collectibility of the principal is unlikely. Subsequent recoveries are credited to the allowance.

The allowance is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of loans in light of historical experience, the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, current economic conditions that may affect the borrower’s ability to pay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks’ allowance for loan losses and may require the Banks to make additions to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Premises and Equipment

Land is carried at cost. Premises and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives:

 

     Years

Buildings

   39

Furniture and equipment

   3-7

 

F-11


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 any of its subsidiary banks as of October 1, 2005.

Intangible assets consist of core deposit premiums acquired in connection with the business combinations. The core deposit premium is initially recognized based on a valuation performed as of the consummation date. The core deposit premium is amortized over the average remaining life of the acquired customer deposits, or five to eight years. Amortization periods are reviewed annually in connection with the annual impairment testing of goodwill.

Foreclosed Assets

Foreclosed assets acquired through or in lieu of loan foreclosure are held for sale and are initially recorded at fair value. Any write-down to fair value at the time of transfer to foreclosed assets is charged to the allowance for loan losses. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs of improvements are capitalized, whereas costs relating to holding foreclosed assets and subsequent adjustments to the value are expensed. The carrying amount of foreclosed assets at December 31, 2005 and 2004 was $1,148,968 and $476,140, respectively.

Income Taxes

Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

 

F-12


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-Based Compensation

Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans whereby compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. The Company has elected to continue with the accounting methodology of Opinion No. 25. No stock-based employee compensation cost is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying stock on the date of grant.

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

 

     Years Ended December 31,  
     2005     2004     2003  
     (Dollars in Thousands)  

Net income, as reported

   $ 13,728     $ 13,101     $ 12,010  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

     (268 )     (59 )     (70 )
                        

Pro forma net income

   $ 13,460     $ 13,042     $ 11,940  
                        

Earnings per share:

      

Basic - as reported

   $ 1.15     $ 1.12     $ 1.03  
                        

Basic - pro forma

   $ 1.13     $ 1.11     $ 1.02  
                        

Diluted - as reported

   $ 1.14     $ 1.11     $ 1.02  
                        

Diluted – pro forma

   $ 1.12     $ 1.10     $ 1.01  
                        

In December 2005, the Company decided to accelerate the vesting of 7,332 options to purchase its common stock to avoid the income statement impact of adopting FASB Statement 123R in future years.

Treasury Stock

The Company’s repurchases of shares of its common stock are recorded at cost as treasury stock and result in a reduction of stockholders’ equity. When treasury shares are reissued, the Company uses a first-in, first-out method and any difference in repurchase cost and reissuance price is recorded as an increase or reduction in capital surplus.

 

F-13


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted-average number of shares of common stock outstanding during the year. Diluted earnings per common share are computed by dividing net income, by the effect of the issuance of potential common shares that are dilutive, by the sum of the weighted-average number of shares of common stock outstanding and dilutive potential common shares. Potential common shares consist of only stock options for the years ended December 31, 2005, 2004 and 2003, and are determined using the treasury stock method.

Presented below is a summary of the components used to calculate basic and diluted earnings per share:

 

     Years Ended December 31,
     2005    2004    2003

Net income

   $ 13,728    $ 13,101    $ 12,010
                    

Weighted average number of common shares outstanding

     11,933      11,736      11,727

Effect of dilutive options

     113      125      80
                    

Weighted average number of common shares outstanding used to calculate dilutive earnings per share

     12,047      11,861      11,807
                    

At December 31, 2005 and 2003, potential common shares of 5,500 and 75,092, respectively, were not included in the calculation of diluted earnings per share because the exercise of such shares would be anti-dilutive. There were no anti-dilutive potential common shares at December 31, 2004.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available for sale, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

 

F-14


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Standards

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based Payment, a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions such as the issuance of stock options in exchange for employee services. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). This Statement is effective for public entities as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. This Statement applies to all awards granted or vesting after the required effective date and to awards modified, repurchased, or cancelled after that date. The Company has elected to continue with the accounting methodology of Opinion 25 until adoption of this standard is required. The adoption is expected to increase expense approximately $250,000 for the year ended December 31, 2006.

Reclassification of Certain Items

Certain items in the consolidated statements of income as of and for the years ended December 31, 2004 and 2003 have been reclassified, with no effect on net income, to be consistent with the classifications adopted for the year ended December 31, 2005.

NOTE 2. CORPORATE RESTRUCTURE

During 2005, the Company initiated a corporate restructuring plan to create a single brand name for the Company and each of its thirteen bank subsidiaries. In addition to the single brand name, the Company announced its intentions to consolidate its bank subsidiaries into a single bank subsidiary. Management believes that the new structure will afford the Company expanded opportunities for improved efficiency that otherwise would not be available and will enhance the Company’s opportunities for growth.

To effect this corporate restructuring, management identified several costs that would be incurred. These restructuring costs include $838,000 for the branding initiative and $2,000,000 to standardize and streamline the data processing functions of each subsidiary. These activities were substantially completed prior to year end with the costs included in operating expenses. As the Company completes standardizing and streamlining operational and managerial functions during 2006 and 2007, costs may be incurred for severance benefits for a small portion of the Company’s personnel. Management has not estimated the costs that may be incurred related to these severance benefits.

Although the Company had substantially completed work on the strategic initiatives, invoices for only $488,000 had been received and paid as of December 31, 2005. The Company anticipates receiving invoices for the expensed, but unpaid portion of these costs totaling $2,350,000 during the first quarter of 2006.

 

F-15


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. BUSINESS COMBINATION

On December 16, 2005, Ameris acquired all the issued and outstanding common shares of First National Banc, Inc., the parent company of First National Bank, in St. Mary’s, Georgia and First National Bank, in Orange Park, Florida. The acquisition was accounted for using the purchase method of accounting and accordingly, the results from First National Banc, Inc.’s operations have been included in the consolidated financial statements beginning December 17, 2005.

The aggregate purchase price was $35,333,000, including cash of $13,085,000 and the Company’s common stock valued at $22,248,000. The value of the 1,083,718 common shares was determined based on the closing price of the Company’s common stock on December 14, 2005, the first date on which the number of shares became fixed.

Ameris has not completed the purchase price allocation relating to the acquisition. The preliminary purchase price allocation has been determined as shown in the table below.

 

First National Banc, Inc.

(In Thousands)

   As of
December 16,
2005

Cash and due from banks

   $ 18,210

Interest-bearing deposits in banks

     2,635

Investments

     15,688

Federal funds sold

     30,055

Loans, net

     189,235

Premises and equipment

     11,069

Intangible asset

     3,525

Goodwill

     18,251

Other assets

     3,456
      

Total assets acquired

     292,124
      

Deposits

     241,439

Other borrowings

     6,000

Subordinated deferrable interest debentures

     5,155

Other liabilities

     4,197
      

Total liabilities assumed

     256,791
      

Net assets acquired

   $ 35,333
      

 

F-16


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3. BUSINESS COMBINATION (Continued)

Of the $21,776 thousand of acquired intangible assets, $18,251 thousand has been temporarily allocated to goodwill. The goodwill will not be deductible for tax purposes. The remaining $3,525 has been allocated to core deposit premiums which will be amortized over a period of 10 years. Amortization of the core deposit premiums will not be deductible for tax purposes. Ameris is in the process of obtaining third-party valuations of the core deposit intangibles; thus, the allocation of the purchase price is subject to refinement.

Unaudited proforma consolidated results of operations for the years ended December 31, 2005 and 2004 as though First National Banc, Inc. had been acquired as of January 1, 2004 follows:

 

     2005    2004

Net interest income

   $ 62,254    $ 55,125

Net income

     9,267      10,600

Basic earnings per share

     0.71 &nb