One Bank,United. 2 0 0 5 A N N U A L R E P O R T One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Table of Contents Chairman’s and CEO’s Letter to Shareholders 2 United in Growth 4 United in Community 6 United in Heritage 8 Board of Directors 9 Bancorp Leadership Team 11 Bank Leadership 13 2005 Financials 21 2005 Financial Highlights (Dollars in thousands except per share data) 2005 2004 2003 Assets....................................................................................$1,697,209 Loans ......................................................................................1,186,601 Deposits .................................................................................1,375,232 Shareholders’ Equity ................................................................148,703 Net Income .................................................................................13,728 Per-share Data:* Earnings per share-basic............................................................. $1.15 Earnings per share-diluted..........................................................$1.14 $1,267,993 877,074 986,224 120,939 13,101 $1,169,111 840,539 906,524 113,613 12,010 $1.12 $1.11 $1.03 $1.02 *Restated for a six-for-five stock split effective 3.15.05. $1,697,209,000 2005 Total Assets Kenneth J. Hunnicutt Chairman of the Board Edwin W. Hortman, Jr. President & Chief Executive Officer One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T A Strong Legacy. A Bright Vision. Dear Fellow Shareholders: We are pleased to share our results for 2005. It was a transitional year as we took on new roles and closed an extraordinary chapter in our Company’s history. Now, as One Bank, United, we’d like to communicate how Ameris, building on a strong legacy, will continue last year’s progress for 2006 and beyond. A Bright Vision. Ameris ended the year focused on becoming one company, with opportunities as one team with one brand. The increased investment in key areas – our new and unified brand, charter consolidation, technology enhancements in major systems, including teller processing and banker workstations, and people – has strengthened our team and will position Ameris as one of the region’s most forward-thinking banks. As always, our success depends upon our ability to develop great business strategies, provide competitive financial products, improve core processes and excel at delivering outstanding customer service. We must execute well and pay attention to every customer, every bank market, every employee, and every detail. A strategy that builds over Edwin W. Hortman, Jr. time – taking into account our short-term goals as well as the long-term health of Ameris – has been charted and will continue President & to guide our efforts. Chief Executive Officer United in Growth. We must organically grow our current foundation, which will allow us to capitalize on merger opportunities such as St. Marys and Orange Park. Expansion is a priority for new and existing markets – Gainesville, Tallahassee, Jacksonville, Tifton and Valdosta. Profitable and quality sustained growth will result from calculated decisions, managing risk and an unrelenting focus on expenses. It is just as important as remaining well capitalized and well reserved while delivering good returns. United in Community. Our progress depends on community bankers who have a desire to be the best in class and who have a passion for winning; winning with the desire to improve service, by setting high expectations and standards of excellence. We understand the dynamics of banking, knowing that at times, our local decision makers must look at business with brutal honesty, not afraid to make changes when they are the right initiatives for our Company’s long-term success. It is vital for our team to have the right employees in the right positions. Our employees value quality customer service and believe in the value of our communities. They give their time, talents and monies to many worthy causes, such as the recent support of hurricane victims and many other hometown endeavors. Our Company culture fosters a spirit of stock ownership, including guidelines for Directors and the Leadership Team. Involvement by our local Boards of Directors provides strength in leadership, enhances business development opportunities and guides our direction. United in Heritage. Ameris is committed to community banking: a timeless style of banking – one that is founded on relationships. We eagerly face challenges and recognize the importance of reaching forthright decisions, while we work together as one team with one agenda. We know our purpose – steadfast community banking. It is the strategy we intend to uphold year in and year out. As always, we remain appreciative of our valued shareholders, customers and employees. Sincerely, Respectfully, Kenneth J. Hunnicutt Chairman of the Board Edwin W. Hortman, Jr. President and Chief Executive Officer $148,703,000 2005 Shareholders’ Equity 2 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T United In Growth. As a bank that’s built on the cooperation and support of the communities we serve, Ameris’s plans for future expansion are found in areas that are growing. There’s more to growth than building more banks in existing markets, and there’s more to growth than charts and numbers. As planned, our growth will have a lasting and positive impact on our shareholders, customers and employees. Through our steadfast commitment to service, we’ll contribute to the overall growth of each new market we enter. By supporting small businesses, individuals and families with local decision-making, we gain a deeper understanding of each community’s needs. 5-Year Total Return $200 $100 2000 2001 2002 2003 2004 2005 $299.90 Ameris Bancorp (ABCB) $159.40 Nasdaq Stock Market U.S. Companies $91.10 Nasdaq Bank Stocks 4 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T United In Community. If there’s one thing Ameris carries into each new market we enter, it’s an allegiance to community banking. Through local decision-making, one-to-one service, and a genuine interest in the financial well-being of the towns and cities we serve, we’ve grown into a bank known for its unique approach to banking. Every customer and every business owner is one of our neighbors. And we treat them as such – by taking the time to consider every factor that only a neighbor can genuinely understand. It is what has set us apart for many decades, and it continues to make Ameris a real community bank. $1,697,209 $1,177,953 2001 2002 2003 2004 2005 $429,216,000 2005 Asset Growth 6 Mary Downing (standing in red) with our bank in Headland, Alabama, with four generations of the Rushing Family. One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T United In Heritage. With a history born over a century ago, Ameris’s employees have had the honor of serving multiple generations. As families’ financial needs change, we’re able to meet each new challenge because we understand and value the history of our customers and our communities. Just as we’ve helped thousands of existing customers plan for day-to-day expenses, big purchases, and retirement, everyday we are helping their children, grandchildren – even great-grandchildren – handle the challenges and victories of a well-managed financial life. Harold Rushing (standing, right) GREAT-GRANDFATHER Owner of Rushing Enterprises founding customer, Headland, Alabama Barbara Rushing (seated, right) GREAT-GRANDMOTHER Co-owner of Rushing Enterprises founding customer, Headland, Alabama Robin Hancock (standing, left) GRANDMOTHER Customer since 1993 Brooke Patterson (seated, left) MOTHER Customer since 2003 Pierce Patterson (seated, left) GRANDCHILD Customer since 2004 Mia Patterson (seated, right) GRANDCHILD Customer since 2005 8 Pictured from left to right: Brooks Sheldon Glenn A. Kirbo Eugene M. Vereen, Jr. Chairman Emeritus Robert P. Lynch Occupation: Retired Banker Occupation: Attorney Kirbo & Kirbo, P.C. Occupation: Investments M.I.A., Co. Occupation: Auto Dealer Motor Finance Co. Kenneth J. Hunnicutt Chairman Occupation: Executive Consultant B O A R D O F D I R E C T O R S 9 Edwin W. Hortman, Jr. President & Chief Executive Officer Daniel B. Jeter Vice Chairman J. Raymond Fulp Johnny W. Floyd Henry C. Wortman Ameris Bancorp Occupation: Consumer Finance Standard Discount Occupation: Pharmacist CVS Pharmacy Occupation: Timber and Realty Floyd Timber Company & Cordele Realty, Inc. Occupation: Dairyman Jackson & Wortman 10 Through every new change and at every bank location, Ameris remains committed to a consistent community banking style. It shows in our structure – with resources accessible at every office to respond quickly to our customers’ needs. We’re dedicated to keeping our key decision-makers close to the customer. Ameris is all about the careful balance between big-bank services and community-bank sensibilities. $13,728,000 2005 Net Income One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Edwin W. Hortman, Jr. President & Chief Executive Officer Dennis J. Zember, Jr. Executive Vice President & Chief Financial Officer Jon S. Edwards Executive Vice President & Senior Credit Officer Thomas T. Dampier Executive Vice President & North Regional Executive Johnny R. Myers Executive Vice President & South Regional Executive Cindi H. Lewis Executive Vice President, Director of Human Resources & Corporate Secretary Marc E. DeMott Senior Vice President & Director of Automation and Operations Michael F. McDonald Senior Vice President & Director of Retail Banking Charles A. Robinson Senior Vice President & Director of Internal Audit B A N C O R P L E A D E R S H I P T E A M 12 Ameris Bank Leadership Albany, Georgia 2627 Dawson Road 229.888.5600 Leesburg - 229.434.4550 President Don Monk Directors Glenn A. Kirbo, Chairman Willie Adams, Jr., MD Robert V. Barkley, Sr. Thomas T. Dampier Waddell M. Hagins, Jr. Russell E. Martin Reid E. Mills W. Thomas Mitcham, MD Don Monk R. Douglas Oliver W. Paul Wallace, Jr. President Michael D. Hodges Directors Jimmy D. Veal, Chairman C. Ray Acosta Mark D. Hall Michael D. Hodges C. Vance Leavy Johnny R. Myers Director Emeritus J. Thomas Whelchel Brunswick, Georgia 3440 Cypress Mill Road 912.267.9500 North Glynn - 912.264.9699 St. Simons Island - 912.634.1270 Jekyll Island - 912.635.9014 President Edgar B. Smith, III Directors Jeffrey (Jet) F. Cox, Chairman Kevin S. Cauley Nancy C. Clark Cuy Harrell, III Johnny R. Myers G. Ashley Register, MD Edgar B. Smith, III Cairo, Georgia 201 South Broad Street 229.377.1110 Meigs - 229.683.3411 13 Ameris Bank Leadership City President Teresa D. Youmans Directors Lewis M. Carter, Jr., Chairman Thomas T. Dampier Joseph S. Hall Walter Hays David Glenn Heard Newton E. King, Jr. C. Willard Mims Dan E. Ponder, Jr. Directors Emeritus Charles R. Burke, Sr. H. Wayne Carr John B. Clarke, Sr. N. E. King, Sr. Jerry G. Mitchell President Robert L. Evans Directors Johnny W. Floyd, Chairman Robert E. Barr, MD Charles W. Clark Thomas T. Dampier Robert L. Evans William H. Griffin, III David N. Rainwater Director Emeritus: Henry M. Turton, Jr. City President Nancy S. Jernigan Directors Lewis M. Carter, Jr., Chairman Thomas T. Dampier Joseph S. Hall Walter Hays David Glenn Heard Newton E. King, Jr. C. Willard Mims Dan E. Ponder, Jr. Directors Emeritus Charles R. Burke, Sr. H. Wayne Carr John B. Clarke, Sr. N. E. King, Sr. Jerry G. Mitchell 14 Colquitt, Georgia 162 E. Crawford St. 229.758.3461 Cordele, Georgia 502 South 2nd Street 229.273.7700 Donalsonville, Georgia 109 West Third Street 229.524.2112 Lake Seminole - 229.861.2213 Ameris Bank Leadership Douglas, Georgia 100 South Pearl Ave. 912.384.2701 Leesburg, Georgia U.S. Highway 19 S. 229.434.4550 City President David B. Batchelor Directors Donnie H. Smith, Chairman Lawton E. Bassett, III David B. Batchelor Thomas T. Dampier J. Anthony Deal William (Bill) H. Elliott Faye Hennesy Alfred Lott, Jr. Ronnie Spivey Oscar Street City President Ronnie L. Middlebrooks Directors Glenn A. Kirbo, Chairman Willie Adams, Jr., MD Robert V. Barkley, Sr. Thomas T. Dampier Waddell M. Hagins, Jr. Russell E. Martin Reid E. Mills W. Thomas Mitcham, MD Don Monk R. Douglas Oliver W. Paul Wallace, Jr. President Ronnie F. Marchant Directors Brooks Sheldon, Chairman Robert M. Brown, MD C. Wayne Cooper Thomas T. Dampier Thomas L. Estes, MD Robert A. Faircloth Plenn Hunnicutt Daniel B. Jeter Lynn Jones, Jr. Ronnie F. Marchant J. Mark Mobley, Jr. Thomas W. Rowell President Emeritus Eugene M. Vereen, Jr. Moultrie, Georgia 225 South Main Street 229.985.2222 Doerun - 229.782.5358 Quitman Hwy. - 229.985.1111 Sunset - 229.873.4444 Ag. Center - 229.985.2222 15 Ameris Bank Leadership Ocilla, Georgia 300 South Irwin Ave. 229.468.9411 St. Marys, Georgia 2509 Osborne Road 912.882.3400 Kingsland East - 912.729.8878 Kingsland West - 912.729.5611 City President C. Larry Young Directors Loran (Sonny) A. Pate, Chairman Lawton E. Bassett, III Thomas T. Dampier Howard C. McMahon, MD Daniel (Danny) M. Paulk Gary H. Paulk C. Larry Young Directors Emeritus Wycliffe Griffin W.C. Sams, M.D. President R. Edwin Haworth Directors Roscoe H. Mullis, Chairman Michael A. Akel Michael L. Davis William H. Gross Kenneth L. Harrison R. Edwin Haworth Joseph P. Helow J. Grover Henderson Johnny R. Myers Thomas I. Stafford, Jr. President Ronald K. Bell, Sr. Directors L. Maurice Chastain, Chairman Dale E. Aldridge S. Mark Brewer, MD Gene Hickey Zeke Johnson Johnny R. Myers Dr. Terrel M. Solana F. Keith Wortman Thomasville, Georgia 2484 East Pinetree Blvd. 229.226.5755 Coolidge - 229.346.3555 16 Ameris Bank Leadership President Lawton E. Bassett, III Directors J. Raymond Fulp, Chairman Lawton E. Bassett, III John R. Brownlee Austin L. Coarsey Thomas T. Dampier Stewart D. Gilbert, MD John Alan Lindsey Loran (Sonny) A. Pate Donnie H. Smith Clifford A.Walker, Sr., DMD President Tim S. Jones Directors Henry C. Wortman, Chairman John A. Baker William P. Cooper, Jr. Thomas T. Dampier Tim S. Jones Sue D. Mink Charles E. Smith Thomas Eddie York Director Emeritus Doyle Weltzbarker President David D. Buckridge Directors L.F. Young, Jr., Chairman Wade G. Brown David D. Buckridge William E. Mills Johnny R. Myers W. Mark Payne Jo Anne Strickland Tifton, Georgia 735 West Second Street 229.382.7311 Douglas - 912.384.2701 Ocilla - 229.468.9411 Valdosta, Georgia 3140 Inner Perimeter Rd. 229.241.2851 Troupeville - 229.247.5376 Quitman - 229.263.7525 Crawfordville, Florida 2628 Crawfordville Highway 850.926.5211 Panacea - 850.984.5050 Sopchoppy - 850.962.4050 17 Ameris Bank Leadership Orange Park, Florida 1775 Eagle Harbor Parkway 904.264.8840 Blanding Blvd - 904.213.0883 Trenton, Florida 530 East Wade Street 352.463.7171 Newberry - 352.472.2162 President Timothy M. O’Keefe Directors V. Wayne Williford, Chairman Vasant P. Bhide Benny L. Cleghorn Phillip H. Cury Michael L. Davis Roscoe H. Mullis Johnny R. Myers Timothy M. O’Keefe Kenneth W. Suggs President R. Edwin Haworth Directors John H. Ferguson, Chairman Michael Hayes Michael E. McElroy Johnny R. Myers Samuel Sanders Norman Scoggins President Harris O. Pittman, III Directors R. Dale Ezzell, Chairman Robert Crowder Gerald B. Crowley Thomas T. Dampier Ronald E. Dean John D. DeLoach Harris O. Pittman, III Dothan, Alabama 3299 Ross Clark Circle NW 334.671.4000 Dothan-Southside - 334.677.3063 Headland - 334.693.5411 Abbeville - 334.585.2265 Clayton - 334.775.3211 Eufaula - 334.687.3260 18 Ameris Bank Leadership Eufaula, Alabama 1140 South Eufaula Ave. 334.687.3260 Clayton - 334.775.3211 Kingsland, Georgia 1603 Highway 40 East 912.729.8878 City President Jerry L. Gulledge Directors R. Dale Ezzell, Chairman Robert Crowder Gerald B. Crowley Thomas T. Dampier Ronald E. Dean John D. DeLoach Harris O. Pittman, III President R. Edwin Haworth Directors George L. Hannaford, Chairman Michael L. Davis R. Edwin Haworth James R. McCollum John W. McDill Roscoe H. Mullis Johnny R. Myers Daniel W. Simpson Mary O. Smith Debbie L. Waldrep President Timothy M. O’Keefe Directors John A. Adams Barbara M. Coleman R. Scott Drawdy Barry J. Fuller Gregory A. Moorehead Johnny R. Myers Timothy M. O’Keefe Blanding - Orange Park, Florida 485 Blanding Boulevard 904.213.0883 19 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T AMERIS BANCORP 2005 FINANCIALS Selected Financial Data Management’s Discussion and Analysis of Financial Conditions and Results of Operations Management’s Annual Report on Internal Control Over Financial Reporting Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 21 25 47 48 50 51 52 53 55 57 20 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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 Note 3 – “Business Combinations” in the Notes to Consolidated Financial Statements. Selected Balance Sheet Data: Total assets Total loans Total deposits Investment securities Shareholders’ equity Selected Income Statement Data: Interest income Interest expense Net interest income Provision for loan losses Other income Other expenses Income before tax Income tax expense Net income Per Share Data: Net income - basic Net income - diluted Book value Tangible book value Dividends $ $ $ $ 2005 1,697,209 1,186,601 1,375,232 243,742 148,703 79,539 26,934 52,605 1,651 13,530 43,607 20,877 7,149 13,728 1.15 1.14 11.48 7.64 0.56 $ $ $ $ Year Ended December 31, 2002 2003 (Dollars in Thousands, Except Per Share Data) 2004 $ $ $ $ 1,267,993 877,074 986,224 221,741 120,939 64,365 19,375 44,990 1,786 13,023 36,505 19,722 6,621 13,101 1.12 1.11 10.28 7.90 0.47 $ $ $ $ 1,169,111 840,539 906,524 196,289 113,613 64,479 22,141 42,338 3,945 14,718 35,147 17,964 5,954 12,010 1.03 1.02 9.68 7.76 0.43 $ $ $ $ 1,193,406 833,447 916,047 184,081 107,484 71,347 28,240 43,107 5,574 15,706 37,807 15,432 5,077 10,355 0.87 0.87 9.17 7.16 0.40 2001 1,177,953 805,076 931,156 156,835 104,148 72,913 34,928 37,985 4,566 11,749 30,843 14,325 4,692 9,633 0.87 0.87 8.68 6.57 0.40 21 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 2005 Year Ended December 31, 2002 2003 (Dollars in Thousands, Except Per Share Data) 2004 2001 1.04 % 1.12 % 1.04 % 0.90 % 1.00 % 10.87 4.31 65.94 11.19 4.15 62.93 10.85 3.96 61.60 9.81 4.07 64.28 10.30 4.27 62.02 .03 % 0.22 % 0.46 % 0.68 % 0.54 % 1.88 0.90 232.57 207.68 1.77 0.70 274.70 253.32 1.78 0.95 231.20 187.58 1.78 1.11 196.64 160.74 1.85 1.67 124.97 111.00 86.28 % 97.33 88.93 % 80.91 92.72 % 78.63 90.98 % 78.76 86.46 % 90.56 Profitability Ratios: Net income to average total assets Net income to average stockholders’ equity Net interest margin Efficiency ratio Loan Quality Ratios: Net charge-offs to total loans Reserve for loan losses to total loans and OREO Nonperforming assets to total loans and OREO Reserve for loan losses to nonperforming loans Reserve for loan losses to total nonperforming assets Liquidity Ratios: Loans to total deposits Loans to average earnings assets 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 Dividend payout ratio 9.55 48.70 9.98 41.96 9.56 41.75 9.17 45.98 9.74 45.98 22 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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 1 (Dollars in Thousands, Except Per Share Data) 2 3 $ 22,892 14,601 2,723 $ 20,494 13,312 3,905 $ 18,595 12,569 3,500 $ 17,558 12,123 3,600 0.22 0.22 0.14 0.33 0.33 0.14 0.29 0.29 0.14 0.31 0.30 0.14 Quarters Ended December 31, 2005 1 4 (Dollars in Thousands, Except Per Share Data) 3 2 $ 17,060 11,945 3,788 $ 16,196 11,296 3,085 15,446 10,788 3,042 $ 15,663 10,961 3,186 0.32 0.32 0.12 0.27 0.26 0.12 0.26 0.26 0.12 0.27 0.27 0.12 Selected Income Statement Data: Interest income Net interest income Net income Per Share Data: Net income – basic Net income – diluted Dividends Selected Income Statement Data: Interest income Net interest income Net income Per Share Data: Net income – basic Net income – diluted Dividends 23 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T MARKET FOR OUR COMMON STOCK 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. Quarter Ended 2005 March 31 June 30 September 30 December 31 Quarter Ended 2004 March 31 June 30 September 30 December 31 High Low Close Dividend $20.00 19.20 20.32 20.99 $16.50 17.30 16.88 18.61 $15.22 16.42 17.60 17.57 $13.22 14.05 14.67 15.89 $16.89 18.08 19.19 19.84 $15.81 16.95 16.81 17.43 $.14 .14 .14 .14 $.12 .12 .12 .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. 24 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the banking industry; the extent and timing of the entry of additional competition in Ameris’s markets; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by Ameris, state and federal banking regulations; changes in or application of environmental and other laws and regulations to which Ameris is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather, natural disasters and other catastrophic events; and other factors discussed in Ameris’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K. Additional information with respect to factors that may cause results to differ materially from those contemplated by such forward-looking statements is included in Ameris’s current and subsequent filings with the Securities and Exchange Commission. 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. FINANCIAL 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. 25 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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 averge 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. 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 26 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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. 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 27 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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. 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. 28 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Net Income and Earnings Per Share RESULTS OF OPERATIONS 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 Liabilities 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. 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. 29 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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 in 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 30 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 3.97% in 2003. Increases in funding costs relate mostly to a trend toward higher rates that began during 2004. 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. 2005 Interest Income/ Expense Average Balance ASSETS Interest-earning assets: Loans, net of unearned Year Ended December 31, 2004 Interest Income/ Expense (Dollars in Thousands, Except Per Share Data) Average Yield Rate Average Balance Average Yield Rate Average Balance 2003 Interest Income/ Expense Average Yield Rate interest $ 952,647 $ 69,238 7.27% $ 855,205 $ 56,433 6.60% $ 841,857 $ 57,707 6.85% Investment securities: Taxable Nontaxable Interest-bearing deposits in banks Federal funds sold Total interest- 219,640 3,993 40,173 2,711 8,547 247 1,502 89 3.89 6.19 3.74 3.28 186,989 3,654 31,471 ,311 7,216 256 542 5 3.86 7.01 1.72 1.61 179,925 3,133 6,079 236 42,482 - 537 - 3.38 7.53 1.26 - 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 Allowance for loan losses Unrealized gain on available for sale Securities Other assets Total non-interest- 44,506 (16,862) (2,139) 77,926 earning other assets 103,431 37,303 (15,394) ,257 73,416 95,582 37,387 (15,867) 1,524 67,261 90,305 Total assets $1,322,595 $1,173,212 $1,157,702 31 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 2005 Interest Income/ Expense Average Balance LIABILITIES AND STOCKHOLDERS’ EQUITY Year Ended December 31, 2004 Interest Income/ Expense (Dollars in Thousands, Except Per Share Data) Average Yield Rate Average Balance Average Yield Rate Average Balance 2003 Interest Income/ Expense Average Yield Rate Interest-bearing liabilities: Savings and interest-bearing demand deposits Time deposits Other short-term borrowings Other borrowings Trust preferred securities Total interest-bearing $ 393,592 $ 4,013 15,016 103 4,296 3,506 498,036 6,521 100,456 35,779 1.02% $ 357,893 $ 3.02 1.58 .28 9.80 406,467 5,235 110,977 35,567 2,604 8,702 67 4,496 3,506 0.73% $ 324,819 $ 2.14 1.28 4.05 9.86 439,873 6,547 106,809 35,567 2,691 11,492 68 4,392 3,498 0.83% 2.61 1.04 4.11 9.83 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 Other liabilities Stockholders’ equity Total non-interest-bearing liabilities and stockholders’ equity Total liabilities and 154,326 7,895 126,290 288,511 133,546 6,463 117,064 257,073 124,972 8,421 110,694 244,087 stockholders’ equity $1,322,595 $1,173,212 $1,157,702 Interest rate spread 3.93% 3.87% Net interest income $ 52,689 $ 45,077 $ 42,418 Net interest margin 4.32% 4.18% 3.63% 3.97% 32 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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 Rate Volume Increase (Decrease) Changes Due To Rate Volume (Dollars in Thousands, Except Per Share Data) 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 Tax exempt Interest-bearing deposits in banks Interest on federal funds Total interest income Expense from interest-bearing liabilities: Interest on savings and interest- bearing demand deposits Interest on time deposits Interest on short-term borrowings Interest on other borrowings Interest on trust preferred securities Total interest expense 1,331 (9) 960 84 15,171 1,409 6,314 36 (200) - 7,559 71 (33) 810 45 7,268 1,149 4,354 20 226 - 5,749 1,260 24 150 39 7,903 260 1,960 16 (426) - 1,810 1,137 20 5 5 (107) (87) (2,790) (1) 104 8 (2,766) 898 (19) 144 - (1,166) (361) (1,917) 13 (67) 8 (2,324) 239 39 (139) 5 1,059 274 (873) (14) 171 - (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 33 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T of loss inherent in the loan portfolio. Noninterest Income Following is a comparison of noninterest income for 2005, 2004 and 2003. Service charges on deposit accounts Mortgage origination fees Other service charges, commissions and fees Gain (loss) on sale of securities Other income 2005 Compared With 2004 2005 Years Ended December 31, 2004 (Dollars in Thousands) 2003 $ $ 10,428 1,614 926 (391) 953 13,530 $ $ 10,210 1,427 737 - 649 13,023 $ $ 10,638 1,637 917 (5) 1,531 14,718 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. Salaries and employee benefits Equipment and occupancy Amortization of intangible assets Data processing fees Business restructuring Other expense 2005 Years Ended December 31, 2004 (Dollars in Thousands) 2003 $ 22,483 4,931 819 1,899 2,838 10,637 $ 20,893 4,770 789 1,680 - 8,373 $ 19,599 4,725 1,032 1,587 - 8,204 34 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 2005 Compared With 2004 $ 43,607 $ 36,505 $ 35,147 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. 35 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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. Commercial and financial Agricultural Real estate - construction Real estate - mortgage, farmland Real estate - mortgage, commercial Real estate - mortgage, residential Consumer installment loans Other Less reserve for possible loan losses Loans, net 2005 2004 December 31, 2003 (Dollars in Thousands) 2002 2001 $ 152,715 30,437 224,230 74,023 321,443 317,593 62,508 3,652 1,186,601 22,294 $1,164,307 $ $ 136,229 28,198 94,043 64,245 253,001 235,431 60,884 5,043 877,074 15,493 861,581 $ $ 157,594 22,051 60,978 65,433 250,247 209,172 68,230 6,834 840,539 14,963 825,576 $ 172,429 34,007 23,020 63,093 243,037 209,485 78,535 9,841 833,447 14,868 $ 818,579 $ 152,097 39,878 24,650 63,533 225,470 202,447 91,557 5,444 805,076 14,944 $ 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. Maturity or Repricing Within: One year or less After one year through five years After five years (Dollars in Thousands) $ 745,840 393,955 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. Predetermined interest rates Floating or adjustable interest rates (Dollars in Thousands) $ 427,972 12,789 $ 440,761 Records were not available to present the above information in each category listed in the first paragraph above 36 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. and could not be reconstructed without undue burden. 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. 2005 2004 % of Total Loans Amount % of Total Loans Amount At December 31, 2003 % of Total Loans Amount (Dollars in Thousands) 2002 2001 % of Total Loans Amount % of Total Loans Amount Commercial, financial, industrial and agricultural Real estate Consumer Unallocated $ 9,926 2,953 5,402 4,013 15% $ 79 6 - 6,876 2,036 3,792 2,789 19% $ 74 7 - 6,289 2,431 3,550 2,693 21% $ 70 9 - 5,892 2,651 3,649 2,676 25% $ 65 10 - 6,009 2,825 3,420 2,690 24% 64 12 - 37 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T The following table presents an analysis of our loan loss experience for the periods indicated: $ 22,294 100% $ 15,493 100% $ 14,963 100% $ 14,868 100% $ 14,944 100% Average amount of loans outstanding $ 952,647 $ 855,205 $ 841,857 $ 827,939 $ 698,292 2005 2004 December 31, 2003 (Dollars in Thousands) 2002 2001 Balance of reserve for possible loan losses at beginning of period Charge-offs: Commercial, financial and agricultural Real estate Consumer Recoveries: Commercial, financial and agricultural Real estate Consumer Net charge-offs Additions to reserve charged to operating expenses Allowance for loan losses of acquired subsidiary Balance of reserve for possible loan losses at end of period Ratio of net loan charge-offs to average loans $ 15,493 $ 14,963 $ 14,868 $ 14,944 $ 9,832 (649) (543) (963) 601 644 532 (378) (1,639) (382) (1,555) 464 483 718 (1,911) (3,114) (781) (1,443) 963 46 479 (3,850) (2,576) (2,491) (2,092) 502 492 515 (5,650) (3,534) (626) (1,328) 203 546 361 (4,378) 1,651 1,786 3,945 5,574 4,566 5,528 655 - - 4,924 $ 22,294 $ 15,493 $ 14,963 $ 14,868 $ 14,944 0.04% 0.22% 0.46% 0.68% 0.63% 38 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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. Loans accounted for on a nonaccrual basis $ 9,586 $ 5,640 $ 6,472 $ 7,561 $ 11,958 2005 2004 December 31, 2003 (Dollars in Thousands) 2002 2001 Installment loans and term loans contractually past due ninety days or more as to interest or principal payments and still accruing 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 - - - 44 25 171 691 - - - - - - - - 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. 39 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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. 40 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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. Three Months to One Year At December 31, 2005 One to Five Years (Dollars in Thousands) Over Five Years Total Zero to Three Months 70,854 28,927 8,597 3,343 607,575 719,296 493,516 144,751 10,307 5,000 5,155 658,729 Earning assets: Interest-bearing deposits in banks Federal funds sold Restricted stock Investment securities Loans Interest-bearing liabilities: Interest-bearing deposits (1) Certificates of deposit Other short-term borrowings Other borrowings Trust preferred securities Interest rate sensitivity gap Cumulative interest rate sensitivity gap Interest rate sensitivity gap ratio Cumulative interest rate sensitivity gap ratio $ $ $ $ - - - 10,429 138,265 148,694 - 393,106 - 3,522 35,567 432,195 $ - - - 180,539 393,955 574,494 - 142,667 - 7,500 - 150,167 60,567 $ (283,501) $ 424,327 60,567 $ (222,934) $ 201,393 1.09 1.09 0.34 0.80 3.83 1.16 $ $ $ - - - 40,834 46,806 87,640 - 352 - 90,000 - 90,352 $ 70,854 28,927 8,597 235,145 1,186,601 1,530,124 493,516 680,876 10,307 106,022 40,722 1,331,443 (2,712) $ 198,681 198,681 0.97 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. 41 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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. Following is a summary of the carrying value of investments, including restricted equity securities, as of the end of each reported period: U. S. Government and agency securities State and municipal securities Corporate debt securities Mortgage-backed securities Marketable equity securities Restricted equity securities 2005 December 31, 2004 (Dollars in Thousands) 2003 $ 92,461 7,968 7,113 126,870 733 8,597 $ 243,742 $ 78,227 4,212 18,131 112,640 738 7,793 $ 221,741 $ 79,545 3,733 23,468 83,108 741 5,694 $ 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 Yield (1) Amount State and Political Subdivisions Yield (1) (2) Amount (Dollars in Thousands) Maturity: One year or less After one year through five years After five years through ten years After ten years $ $ 13,185 177,493 10,966 25,533 227,177 4.09 % 4.06 4.92 5.52 4.23 % $ $ 587 3,046 4,130 205 7,968 8.94 % 4.82 5.46 5.52 5.47 % (1) (2) 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. Yields on securities of state and political subdivisions are stated on a taxable-equivalent basis, using a tax rate of 34%. 42 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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. Non-interest-bearing demand deposits Interest-bearing demand and savings deposits Time deposits Total deposits Year Ended December 31, 2005 Amount $ 154,326 393,594 498,036 $1,045,956 Rate Amount (Dollars in Thousands) - % $ 1.02 3.02 $ 133,546 357,893 406,467 897,906 2004 Rate - % 0.73 2.14 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. Three months or less Over three through twelve months Over twelve months Total (Dollars in Thousands) $ 74,828 202,827 78,345 $ 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. Commitments to extend credit Financial standby letters of credit 43 December 31, 2005 2004 (Dollars in Thousands) $ 184,265 5,741 $ 114,942 3,172 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T The following table summarizes short-term borrowings for the periods indicated: $ 190,006 $ 118,114 2005 Average Balance Average Rate Years Ended December 31, 2004 Average Balance (Dollars in Thousands) Average Rate 2003 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 The following table sets forth certain information about contractual cash obligations as of December 31, 2005. Total Payments Due After December 31, 2005 1 - 3 Years (Dollars in Thousands) 1 Year or Less 4 - 5 Years After 5 Years Short-term borrowings Time certificates of deposit Long-term debt Federal Home Loan Bank advances Subordinated deferrable interest debentures Total contractual cash obligations $ 10,307 680,876 5,000 101,022 40,722 $ 837,927 $ 10,307 537,857 - 3,522 35,567 $ 587,253 $ - 124,369 5,000 5,500 - $ 134,869 $ $ - 18,298 - 2,000 - 20,298 $ $ - 352 - 90,000 5,155 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. 44 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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 Percent Amount (Dollars in Thousands) Amount Percent $ 132,899 9.71 % $ 54,757 4.00 % $ 78,142 5.71 % 132,899 154,513 10.89 12.66 48,808 97,616 4.00 8.00 84,091 56,897 6.89 4.66 Leverage capital Risk-based capital: Core capital Total capital 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. 45 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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. 46 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of Ameris 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”), Ameris’s independent auditors, has issued an attestation report on management’s assessment of Ameris’s internal control over financial reporting. That report is included in this Item under the heading “Report of Independent Registered Public Accounting Firm.” 47 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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 and 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’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 and 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 and 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). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial position of Ameris 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, and our report dated February 17, 2006 expressed an unqualified opinion. Albany, Georgia 48 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. February 17, 2006 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 inter- nal control over financial reporting. Albany, Georgia 49 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T CONSOLIDATED BALANCE SHEETS December 31, 2005 and 2004 (Dollars in Thousands) February 17, 2006 Assets Cash and due from banks Interest-bearing deposits in banks Federal funds sold Securities available for sale, at fair value Restricted equity securities, at cost Loans, net of unearned income Less allowance for loan losses Loans, net Premises and equipment, net Intangible assets Goodwill Other assets Liabilities and Stockholders’ Equity Deposits Noninterest-bearing Interest-bearing Total deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings Other liabilities Subordinated deferrable interest debentures Total liabilities Commitments and contingencies Stockholders’ equity Common stock, par value $1; 30,000,000 shares authorized; 14,270,783 and 13,070,578 shares issued Capital surplus Retained earnings Accumulated other comprehensive loss Unearned compensation Less cost of 1,318,465 and 1,304,430 shares acquired for the treasury Total stockholders’ equity 2005 2004 $ 74,420 $ 70,854 28,927 235,145 8,597 1,186,601 22,294 1,164,307 39,606 6,412 43,304 25,637 40,339 57,331 12,285 213,948 7,793 877,074 15,493 861,581 27,772 3,706 24,325 18,913 $ 1,697,209 $ 1,267,993 $ 200,840 $ 1,174,392 1,375,232 10,307 106,022 16,223 40,722 1,548,506 14,271 67,381 80,683 (2,625) (526) 159,184 (10,481) 148,703 150,090 836,134 986,224 7,530 110,366 7,367 35,567 1,147,054 13,071 45,073 73,768 (230) (523) 131,159 (10,220) 120,939 $ 1,697,209 $ 1,267,993 50 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2005, 2004 and 2003 (Dollars in Thousands) Interest income Interest and fees on loans Interest on taxable securities Interest on nontaxable securities Interest on deposits in other banks Interest on federal funds sold Interest expense Interest on deposits Interest on other borrowings Net interest income Provision for loan losses Net interest income after provision for loan losses Other income Service charges on deposit accounts Other service charges, commissions and fees Mortgage origination fees Loss on sale of securities Other Other expenses Salaries and employee benefits Equipment expense Occupancy expense Amortization of intangible assets Data processing fees Provision for restructuring of operations Other operating expenses $ 2005 2004 2003 $ 69,238 8,547 163 1,502 89 79,539 19,029 7,905 26,934 52,605 1,651 50,954 10,428 926 1,614 (391) 953 13,530 22,483 2,331 2,600 819 1,899 2,838 10,637 43,607 $ 56,433 7,216 169 542 5 64,365 11,306 8,069 19,375 44,990 1,786 43,204 10,210 737 1,427 - 649 13,023 20,893 2,144 2,626 789 1,680 - 8,373 36,505 57,707 6,079 156 537 - 64,479 14,183 7,958 22,141 42,338 3,945 38,393 10,638 917 1,637 (5) 1,531 14,718 19,599 2,112 2,613 1,023 1,587 - 8,213 35,147 Income before income taxes 20,877 19,722 17,964 7,149 6,621 5,954 $ $ $ 13,728 1.15 1.14 $ $ $ 13,101 1.12 1.11 $ $ $ 12,010 1.03 1.02 Applicable income taxes Net income Basic earnings per share Diluted earnings per share 51 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, 2005, 2004 and 2003 (Dollars in Thousands) Net income Other comprehensive income (loss): Net unrealized holding losses arising during period, net of tax benefits of $1,366, $387 and $575 Reclassification adjustment for losses included in net income, net of tax benefits of $133 and $2 Total other comprehensive loss 2005 2004 2003 $ 13,728 $ 13,101 $ 12,010 (2,653) (752) (1,117) 258 (2,395) - (752) 3 (1,114) Comprehensive income $ 11,333 $ 12,349 $ 10,896 52 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. See Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Years Ended December 31, 2005, 2004 and 2003 (Dollars in Thousands) Common Stock Shares Par Value Capital Surplus Balance, December 31, 2002 10,824,257 $ 10,824 $ - - 24,800 - 865 - - - 10,849,922 - - 14,900 - 27,326 - - 2,178,430 - 13,070,578 - - - - 25 - 1 - - - 10,850 - - 15 - 27 - - 2,179 - 13,071 - - 45,946 - - 386 - 8 106 - - 46,446 - - 279 - 293 234 - (2,179) - 45,073 - - 1,083,718 1,084 21,103 17,300 - 100,129 (942) - - - 17 - 100 (1) - - - 14,270,783 $ 14,271 $ 307 - 845 - 53 - - 67,381 Net income Cash dividends declared, $.43 per share Issuance of restricted shares of common stock under employee incentive plan Amortization of unearned compensation, net of forfeitures Proceeds from exercise of stock options Reduction in income taxes payable resulting from vesting of restricted shares Repurchase of shares for treasury Other comprehensive loss Balance, December 31, 2003 Net income Cash dividends declared, $.47 per share Issuance of restricted shares of common stock under employee incentive plan Amortization of unearned compensation, net of forfeitures Proceeds from exercise of stock options Reduction in income taxes payable resulting from vesting of restricted shares Repurchase of shares for treasury Six-for-five common stock split Other comprehensive loss Balance, December 31, 2004 Net income Cash dividends declared, $.56 per share Adjustments to record acquisition of purchased subsidiaries, net of direct costs Issuance of restricted shares of common stock under employee incentive plan Amortization of unearned compensation, net of forfeitures Proceeds from exercise of stock options Payment for fractional shares Reduction in income taxes payable resulting from vesting of restricted shares Repurchase of shares for treasury Other comprehensive loss Balance, December 31, 2005 53 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T See Notes to Consolidated Financial Statements. Accumulated Other Comprehensive Income (Loss) Retained Earnings Unearned Compensation Treasury Stock Shares Cost Total $ $ 59,210 12,010 (5,075) $ 1,636 - - - - - - - - 66,145 13,101 (5,478) - - - - - - - 73,768 13,728 (6,795) - - - - (18) - - - - - - - - (1,114) 522 - - - - - - - - (752) (230) - - - - - - - - - (2,395) (443) - - (411) 363 - - - - (491) - - (294) 262 - - - - - (523) - - - (324) 321 - - - - - $ 1,053,321 - - (9,689) - - $ 107,484 12,010 (5,075) - - - - 12,747 - 1,066,068 - - - - - - 20,957 217,405 - 1,304,430 - - - - - - - - 14,035 - - - - - (170) - (9,859) - - - - - - (361) - - (10,220) - - - - - - - - (261) - - 363 9 106 (170) (1,114) 113,613 13,101 (5,478) - 262 320 234 (361) - (752) 120,939 13,728 (6,795) 22,187 - 321 945 (19) 53 (261) (2,395) 54 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. $ 80,683 $ (2,625) $ (526) 1,318,465 $ (10,481) $ 148,703 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004 and 2003 (Dollars in Thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of intangible assets Amortization of unearned compensation Net losses on sale of securities available for sale Net (gains) losses on sale or disposal of premises and equipment Provision for loan losses Provision for deferred taxes (Increase) decrease in interest receivable Increase (decrease) in interest payable Decrease in taxes payable Reduction in income taxes payable resulting from vesting of restricted shares Net other operating activities Total adjustments Net cash provided by operating activities INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks Purchases of securities available for sale Proceeds from maturities of securities available for sale Proceeds from sale of securities available for sale (Increase) decrease in restricted equity securities, net (Increase) decrease in federal funds sold Increase in loans, net Purchase of premises and equipment Proceeds from sale of premises and equipment Net cash received (paid) for acquisitions Net cash provided by (used in) investing activities FINANCING ACTIVITIES Increase (decrease) in deposits Increase (decrease) in federal funds purchased and securities sold under agreements to repurchase Proceeds from other borrowings Repayment of other borrowings Dividends paid Proceeds from exercise of stock options Payment for fractional shares Purchase of treasury shares 2005 2004 2003 $ 13,728 $ 13,101 $ 12,010 2,153 819 321 391 36 1,651 (35) (2,290) 911 (400) 53 4,361 7,971 21,699 (10,888) (80,495) 49,066 20,451 647 13,413 (116,295) (2,954) - 5,125 (121,930) 1,880 789 262 - (50) 1,786 243 438 81 (284) 234 2,419 7,798 20,899 (21,705) (67,681) 68,130 - (1,957) (10,430) (17,302) (2,816) 583 (9,416) (62,594) 1,858 1,023 363 5 3 3,945 (157) 944 (667) (284) 106 (524) 6,615 18,625 42,353 (129,998) 89,533 26,479 84 - (10,942) (2,071) - - 15,438 147,569 31,056 (9,523) 2,777 5,000 (15,344) (6,355) 945 (19) (261) (681) 32,000 (19,679) (5,475) 320 - (361) 7 15,000 (34,745) (4,885) 9 - (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 55 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Cash and due from banks at end of year 74,420 $ CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004 and 2003 (Dollars in Thousands) $ 40,339 $ 44,854 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest Income taxes NONCASH TRANSACTION Principal balances of loans transferred to other real estate owned 2005 2004 2003 $ $ $ 25,821 $ 19,184 $ 22,706 7,584 $ 6,662 $ 6,395 1,153 $ 2,239 $ 2,096 56 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. See Notes to Consolidated Financial Statements. 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. 57 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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 orig- inated 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. 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 58 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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: Buildings Furniture and equipment Goodwill and Intangible Assets Years 39 3-7 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 59 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T and laws. 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. Net income, as reported Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects Pro forma net income Earnings per share: Basic - as reported Basic - pro forma Diluted - as reported Diluted – pro forma 2005 Years Ended December 31, 2004 (Dollars in Thousands) 2003 $ 13,728 $ 13,101 $ 12,010 (268) 13,460 1.15 1.13 1.14 1.12 $ $ $ $ $ (59) 13,042 1.12 1.11 1.11 1.10 $ $ $ $ $ (70) 11,940 1.03 1.02 1.02 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. 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. 60 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Presented below is a summary of the components used to calculate basic and diluted earnings per share: Net income Weighted average number of common shares outstanding Effect of dilutive options Weighted average number of common shares outstanding used to calculate dilutive earnings per share 2005 Years Ended December 31, 2004 (Dollars in Thousands) 2003 $ 13,728 11,933 113 $ 13,101 11,736 125 $ 12,010 11,727 80 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. 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. 61 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T 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. 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. 62 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 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) Cash and due from banks Interest-bearing deposits in banks Investments Federal funds sold Loans, net Premises and equipment Intangible asset Goodwill Other assets Total assets acquired Deposits Other borrowings Subordinated deferrable interest debentures Other liabilities Total liabilities assumed As of December 16, 2005 $ 18,210 2,635 15,688 30,055 189,235 11,069 3,525 18,251 3,456 292,124 241,439 6,000 5,155 4,197 256,791 Net assets acquired $ 35,333 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: Net interest income Net income Basic earnings per share Diluted earnings per share $ 2005 2004 62,254 $ 9,267 0.71 0.71 55,125 10,600 0.83 0.82 63 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T NOTE 4. SECURITIES The amortized cost and fair value of securities available for sale with gross unrealized gains and losses are summarized as follows: December 31, 2005: U. S. Government and federal agencies State and municipal securities Corporate debt securities Mortgage-backed securities Total debt securities Equity securities Total securities December 31, 2004: U. S. Government and federal agencies State and municipal securities Corporate debt securities Mortgage-backed securities Total debt securities Equity securities Total securities Amortized Cost $ 94,110 7,952 7,122 129,149 238,333 788 $ 239,121 $ 78,143 4,113 18,032 113,221 213,509 788 $ 214,297 Gross Unrealized Gains Gross Unrealized Losses (Dollars in Thousands) Fair Value $ - $ 29 59 58 146 - 146 235 99 112 173 619 - 619 $ $ $ (1,649) (13) (68) (2,337) (4,067) (55) (4,122) $ 92,461 7,968 7,113 126,870 234,412 733 $ 235,145 $ $ (151) - 13) (754) (918) (50) (968) $ 78,227 4,212 18,131 112,640 213,210 738 $ 213,948 The amortized cost and fair value of debt securities available for sale as of December 31, 2005 by contractual maturity are shown below. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not included in the maturity categories in the following maturity summary. Due in one year or less Due from one year to five years Due from five to ten years Due after ten years Mortgage-backed securities Fair Amortized Value Cost (Dollars in Thousands) $ 19,650 75,956 12,612 966 129,149 $ 238,333 $ 19,571 74,454 12,528 989 126,870 $ 234,412 64 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Securities with a carrying value of approximately $176,128,000 and $144,574,000 at December 31, 2005 and 2004, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Gains and losses on sales of securities available for sale consist of the following: Gross gains on sales of securities Gross losses on sales of securities Net realized gains (losses) on sales of securities available for sale 2005 December 31, 2004 (Dollars in Thousands) 2003 $ $ 61 (452) (391) $ $ - - - $ $ 87 (92) (5) The following table shows the gross unrealized losses and fair value of securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2005 and 2004. Less Than 12 Months Fair Value Unrealized Losses 12 Months or More Unrealized Fair Losses Value (Dollars in Thousands) Total Fair Value Unrealized Losses Description of Securities December 31, 2005: $ U. S. Government and federal agencies State and municipal securities Corporate debt securities Mortgage-backed securities Subtotal, debt securities Equity securities Total temporarily impaired securities $ December 31, 2004: U. S. Government and federal agencies Corporate debt securities Mortgage-backed securities Subtotal, debt securities Equity securities Total temporarily impaired securities $ $ 41,332 - 971 40,688 82,991 - 82,991 33,929 - 44,349 78,278 - 78,278 $ $ $ $ (446) - (20) (100) (566) - (566) $ 55,094 808 3,543 79,105 138,549 213 $ 138,762 (118) - (386) (504) - (504) $ $ 6,178 1,001 39,427 46,606 216 46,822 $ $ $ $ (1,203) (13) (48) (2,237) (3,501) (55) (3,556) $ 96,426 808 4,514 119,793 221,540 213 $ 221,753 (33) (13) (368) (414) (50) (464) $ 40,107 1,001 83,776 124,884 216 $ 125,100 $ $ $ $ (1,649) (13) (68) (2,337) (4,067) (55) (4,122) (151) (13) (754) (918) (50) (968) Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. The majority of debt securities containing unrealized losses at December 31, 2005 represent mortgage-backed securities. Eighteen (18) debt securities contained unrealized losses greater than four percent (4%) of their costs. None of the debt securities contained an unrealized loss greater than 5.0% of its cost. The unrealized losses on debt securities are related to changes in interest rates and do not affect the expected cash flows of the issuer or underlying collateral. One equity security representing an investment in a mutual fund reflected an unrealized loss of 20% of its cost. The unrealized loss in this security represented 1.3% of the total unrealized losses in the Company’s investment portfolio. The unrealized losses are considered temporary because each security carries an acceptable investment grade and the Company has the intent and ability to hold to maturity. 65 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of loans is summarized as follows: Commercial and financial Agricultural Real estate - construction Real estate - mortgage, farmland Real estate - mortgage, commercial Real estate - mortgage, residential Consumer installment loans Other Allowance for loan losses The following is a summary of information pertaining to impaired loans: December 31, 2005 2004 (Dollars in Thousands) $ 152,715 30,437 224,230 74,023 321,443 317,593 62,508 3,652 1,186,601 22,294 $1,164,307 $ 136,229 28,198 94,043 64,245 253,001 235,431 60,884 5,043 877,074 15,493 $ 861,581 As of and For the Years Ended December 31, 2004 (Dollars in Thousands) 2003 2005 Impaired loans without a valuation allowance Impaired loans with a valuation allowance Total impaired loans Valuation allowance related to impaired loans Average investment in impaired loans Interest income recognized on impaired loans Forgone interest income on impaired loans $ $ $ $ $ $ - 9,586 9,586 1,749 5,236 26 527 $ $ $ $ $ $ - 5,640 5,640 1,001 6,229 2 557 $ $ $ $ $ $ - 6,472 6,472 1,105 8,619 27 842 Loans on nonaccrual status amounted to approximately $9,586,000, $5,640,000 and $6,472,000 at December 31, 2005, 2004 and 2003, respectively. There were no loans past due ninety days or more and still accruing interest at December 31, 2005. There were $44,000 and $25,000 of loans past due ninety days or more and still accruing interest at December 31, 2004 and 2003, respectively. Changes in the allowance for loan losses for the years ended December 31, 2005, 2004 and 2003 are as follows: Balance, beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off 2005 December 31, 2004 (Dollars in Thousands) 2003 $ 15,493 1,651 (2,155) 1,777 $ 14,963 1,786 (3,576) 1,665 $ 14,868 3,945 (5,226) 1,376 66 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Acquired loan loss reserve - 14,963 Balance, end of year In the ordinary course of business, the Company has granted loans to certain directors, executive officers and their affiliates. The interest rates on these loans were substantially the same as rates prevailing at the time of the transaction and repayment terms are customary for the type of loan. Changes in related party loans are summarized as follows: 655 15,493 5,528 22,294 $ $ $ Balance, beginning of year Advances Repayments Transactions due to changes in related parties Balance, end of year NOTE 6. PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: Land Buildings Furniture and equipment Construction in progress; estimated cost to complete, $2,273,000 Accumulated depreciation Leases December 31, 2005 2004 (Dollars in Thousands) $ $ 38,313 62,392 (66,254) 5,898 40,349 $ $ 35,242 63,109 (60,297) 259 38,313 December 31, 2005 2004 (Dollars in Thousands) $ $ 13,070 31,088 19,991 1,225 65,374 (25,768) 39,606 $ $ 7,168 24,898 19,193 1,004 52,263 (24,491) 27,772 The Company has a noncancelable operating lease on its operations center with its Chairman of the Board and a subsidiary Bank Director. The lease has an initial term of five years with one five year renewal option. The Company also has four other operating leases on branch locations with outside parties. The Jekyll Island branch has a two year noncancelable lease term. The southside branch in Dothan, Alabama has a three year noncancelable lease term with two five year renewal options. The St. Mary’s branch has a three year noncancelable lease term with one five year renewal option and the Kings Bay Village branch has a one year noncancelable lease term. Rental expense amounted to approximately $140,000, $145,000 and $136,000 for the years ended December 31, 2005, 2004 and 2003. Future minimum lease commitments under these operating leases, excluding any renewal options, are summarized as follows: 2006 2007 2008 2009 67 $ 175,000 130,000 70,000 16,000 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Thereafter NOTE 7. INTANGIBLE ASSETS - 391,000 $ Following is a summary of information related to acquired intangible assets: Amortized intangible assets Core deposit premiums As of December 31, 2005 Accumulated Gross Amortization Amount As of December 31, 2004 Accumulated Gross Amortization Amount (Dollars in Thousands) $ 13,630 $ 7,218 $ 10,105 $ 6,399 The aggregate amortization expense for intangible assets was $819,000, $789,000 and $1,023,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The estimated amortization expense for each of the next five years is as follows: 2006 2007 2008 2009 2010 Changes in the carrying amount of goodwill are as follows: Beginning balance Adjustment of previously acquired goodwill based on final allocations Goodwill acquired through business combinations Ending balance NOTE 8. DEPOSITS $ 1,038,000 944,000 755,000 675,000 653,000 For the Years Ended December 31, 2005 2004 (Dollars in Thousands) $ $ 24,325 $ 19,231 728 18,251 43,304 $ - 5,094 24,325 The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2005 and 2004 was $356,000,000 and $180,787,000, respectively. The scheduled maturities of time deposits at December 31, 2005 are as follows: 2006 2007 2008 2009 2010 $ Dollars in Thousands 537,857 106,166 18,203 8,627 9,671 68 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Later years 352 680,876 $ At December 31, 2005 and 2004, overdraft demand deposits reclassified to loans totaled $860,000 and $972,000, respectively. The Company had brokered deposits of $78,087,000 at December 31, 2005. The Company had no brokered deposits at December 31, 2004. NOTE 9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements, which are secured borrowings, generally mature within one to four days from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities. The Company monitors the fair value of the underlying securities on a daily basis. Securities sold under repurchase agreements at December 31, 2005 and 2004 were $10,307,000 and $7,530,000, respectively. NOTE 10. EMPLOYEE BENEFIT PLANS The Company has established a retirement plan for eligible employees. The Ameris Bancorp 401(k) Profit Sharing Plan allows a participant to defer a portion of his compensation and provides that the Company will match a portion of the deferred compensation. The plan also provides for nonelective and discretionary contributions. All full-time and part-time employees are eligible to participate in the 401(k) Profit Sharing Plan provided they have met the eligibility requirements. Generally, a participant must have completed twelve months of employment with a minimum of 1,000 hours and have attained an age of 21. Aggregate expense under the plan charged to operations during 2005, 2004 and 2003 amounted to $1,190,000, $1,099,000 and $1,149,000, respectively. NOTE 11. DEFERRED COMPENSATION PLANS The Company and three subsidiary banks have entered into separate deferred compensation arrangements with certain executive officers and directors. The plans call for certain amounts payable at retirement, death or disability. The estimated present value of the deferred compensation is being accrued over the expected service period. The Company and Banks have purchased life insurance policies which they intend to use to finance this liability. Cash surrender value of life insurance of $2,094,000 and $2,119,000 at December 31, 2005 and 2004, respectively, is included in other assets. Accrued deferred compensation of $1,285,000 and $1,349,000 at December 31, 2005 and 2004, respectively, is included in other liabilities. Aggregate compensation expense under the plans were 69 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T $60,000, $92,000 and $94,000 for 2005, 2004 and 2003, respectively, and is included in other operating expenses. NOTE 12. OTHER BORROWINGS Other borrowings consist of the following: Advances under revolving credit agreement with SunTrust Bank with interest at LIBOR plus 1.15% (3.32% at December 31, 2004) due on June 30, 2005, secured by subsidiary bank stock. Advances from SunTrust Bank with 5 quarterly principal payments at sixty-day LIBOR rate plus .9% (3.57% at December 31, 2004), maturing March 31, 2005. December 31, 2005 2004 (Dollars in Thousands) $ - $ 100 - 119 Advances under revolving credit agreement with SunTrust Bank with 5,000 - interest at thirty day LIBOR plus .95% ( 5.34% at December 31, 2005), maturing December 14, 2007, secured by subsidiary bank stock. Advances from Federal Home Loan Bank with interest at adjustable rate (3.28% at December 31, 2004), due February 10, 2005. Advances from Federal Home Loan Bank with interest at a fixed rate of 6.72%, due in annual installments due November 1, 2006. Advances from Federal Home Loan Bank with interest at fixed rates (ranging from 2.96% to 6.12%) convertible to a variable rate at option of Federal Home Loan Bank, due at various dates from November 16, 2006 through June 18, 2014. - 22 15,000 44 101,000 95,103 $ 106,022 $ 110,366 The advances from Federal Home Loan Bank are collateralized by the pledging of a blanket lien on all first mortgage loans and other specific loans, as well as FLHB stock. Other borrowings at December 31, 2005 have maturities in future years as follows: 2006 2007 2008 2009 2010 Later years Dollars in Thousands $ $ 3,522 5,000 5,500 - 2,000 90,000 106,022 70 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. The Company and subsidiaries have available unused lines of credit with various financial institutions totaling approximately $175,508,000 at December 31, 2005. NOTE 13. INCOME TAXES The income tax expense in the consolidated statements of income consists of the following: Current Deferred 2005 Years Ended December 31, 2004 (Dollars in Thousands) 2003 $ $ 7,184 (35) 7,149 $ $ 6,378 243 6,621 $ $ 6,111 (157) 5,954 The Company’s income tax expense differs from the amounts computed by applying the federal income tax statutory rates to income before income taxes. A reconciliation of the differences is as follows: Tax at federal income tax rate Increase (decrease) resulting from: Tax-exempt interest Amortization of intangible assets Other Provision for income taxes 2005 Years Ended December 31, 2004 (Dollars in Thousands) 2003 $ 7,098 $ 6,705 $ 6,108 (182) 2 231 7,149 $ (209) 79 46 6,621 $ (201) 13 34 5,954 $ Net deferred income tax assets of $4,816,000 and $4,657,000 at December 31, 2005 and 2004, respectively, are included in other assets. The components of deferred income taxes are as follows: Deferred tax assets: Loan loss reserves Deferred compensation Debt issue costs Unearned compensation related to restricted stock Nonaccrual interest Net operating loss tax carryforward Unrealized loss on securities available for sale Other Deferred tax liabilities: Depreciation and amortization Intangible assets December 31, 2005 2004 (Dollars in Thousands) $ $ 6,492 417 331 187 118 43 1,352 260 9,200 994 3,390 4,384 5,217 459 246 147 131 67 119 56 6,442 860 925 1,785 Net deferred tax assets $ 4,816 $ 4,657 71 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Net deferred tax assets at December 31, 2005 and 2004 includes net deferred tax assets (liabilities) of $(1,109,000) and $150,000, respectively, acquired in connection with business combinations. NOTE 14. SUBORDINATED DEFERRABLE INTEREST DEBENTURES In 2001, the Company formed a wholly-owned grantor trust to issue cumulative trust preferred securities to the public. The grantor trust invested the proceeds of the trust preferred securities in junior subordinated debentures of the Company. The trust preferred securities can be redeemed prior to maturity at the option of the Company on or after September 30, 2006. The sole assets of the guarantor trust are the Junior Subordinated Deferrable Interest Debentures of the Company (the Debentures) held by the grantor trust. The Debentures have the same interest rate (9%) as the trust preferred securities. The Company has the right to defer interest payments on the Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters provided that no extension period may extend beyond the stated maturity of the related Debentures. During any such extension period, distributions on the trust preferred certificates would also be deferred. The trust preferred securities are subject to mandatory redemption upon repayment of the related Debentures at their stated maturity date or their earlier redemption at a redemption price equal to their stated maturity date or their earlier redemption at a redemption price equal to their liquidation amount plus accrued distributions to the date fixed for the redemption upon concurrent repayment of the related Debentures. The trust preferred securities may be redeemed in whole or part at any time on or after September 30, 2006. Payment of periodic cash distributions and payment upon liquidation or redemption with respect to the trust preferred securities are guaranteed by the Company to the extent of funds held by the grantor trust (the Preferred Securities Guarantee). The Preferred Securities Guarantee, when taken together with the Company’s other obligations under the Debentures, constitute a full and unconditional guarantee, on a subordinated basis, by the Company of payments due on the trust preferred securities. The Company is required by the Federal Reserve Board to maintain certain levels of capital for bank regulatory purposes. The Federal Reserve Board has determined that certain cumulative preferred securities having the characteristics of trust preferred securities qualify as minority interest, which is included in Tier 1 capital for bank and financial holding companies. In calculating the amount of Tier l qualifying capital, the trust preferred securities can only be included up to the amount constituting 25% of total Tier 1 capital elements (including trust preferred securities). Such Tier 1 capital treatment provides the Company with a more cost-effective means of obtaining capital for bank regulatory purposes than if the Company were to issue preferred stock. The trust preferred securities and the related Debentures were issued on November 8, 2001. Both financial instruments bear an identical annual rate of interest of 9%. Distributions on the trust preferred securities are paid quarterly on March 31, June 30, September 30 and December 31 of each year. Interest on the Debentures is paid on the corresponding dates. The aggregate principal amount of trust preferred certificates outstanding at December 31, 2005 was $34,500,000. The aggregate principal amount of Debentures outstanding was $35,567,000. During 2005, the Company acquired First National Banc Statutory Trust I (the “Trust”), a subsidiary of First National Banc, Inc., 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. The 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) in which the securities may be redeemed within the first five years at the Company’s option. The aggregate principal amount of trust preferred certificates outstanding at December 31, 2005 was $5,000,000. The aggregate principal amount of Debentures outstanding was $5,155,000. 72 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. The total aggregate principal amount of trust preferred certificates outstanding at December 31, 2005 was $39,500,000. The total aggregate principal amount of Debentures outstanding at those dates was $40,722,000. NOTE 15. STOCK OPTION PLANS The Company had a fixed stock option plan under which it had granted options to its former Chief Executive Officer to purchase common stock at the fair market price on the date of grant. All of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Under the 1997 Plan, options to purchase 81,000 shares were granted. Options under the 1997 Plan are fully vested and are exercisable over a period of ten years subject to certain limitations as to aggregate fair market value (determined as of the date of the grant) of all options exercisable for the first time by the optionee during any calendar year (the “$100,000 Per-Year Limitation”). Under the 1997 Plan, options to purchase 81,000 shares were all exercised during 2005. At the annual meeting on April 15, 1997, the shareholders approved the 1997 Ameris Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan (the “1997 Omnibus Plan”). At the annual meeting on May 18, 2005, the shareholders approved the 2005 Ameris Bancorp Omnibus Stock Ownership and Long-Term Incentive Plan (the “2005 Omnibus Plan”). Awards granted under the Omnibus Plans may be in the form of Qualified or Nonqualified Stock Options, Restricted Stock, Stock Appreciation Rights (“SARS”), Long-Term Incentive Compensation Units consisting of a combination of cash and Common Stock, or any combination thereof within the limitations set forth in the Omnibus Plans. The Omnibus Plans provide that the aggregate number of shares of the Company’s Common Stock which may be subject to award may not exceed 1,785,000 subject to adjustment in certain circumstances to prevent dilution. As of December 31, 2005, the Company has issued a total of 289,095 restricted shares under the Omnibus Plans as compensation for certain employees. These shares carry dividend and voting rights. Sale of these shares is restricted prior to the date of vesting, which is three to five years from the date of the grant. Shares issued under this plan were recorded at their fair market value on the date of their grant with a corresponding charge to equity. The unearned portion is being amortized as compensation expense on a straight-line basis over the related vesting period. Compensation expense related to these grants was $321,000, $262,000 and $363,000 for 2005, 2004 and 2003, respectively. In addition to the granting of restricted shares, options to purchase 459,235 shares of the Company’s common stock have been granted under the Omnibus Plans as of December 31, 2005. Other pertinent information related to the options is as follows: 2005 Weighted- Average Exercise Price Number December 31, 2004 Weighted- Average Exercise Number Losses (Dollars in Thousands) 2003 Weighted- Average Exercise Losses Number Under option, beginning of the year Granted Exercised Forfeited Under option, end of year $ 390,042 177,000 (100,129) (7,678) 459,235 10.87 17.98 9.43 13.53 13.89 $ 412,247 36,000 (32,791) (25,414) 390,042 10.38 15.67 9.75 11.02 10.87 $ 376,786 48,300 (1,038) (11,801) 412,247 9.96 13.75 8.25 10.97 10.38 Exercisable at end of year 238,351 $ 11.46 252,366 $ 9.92 219,308 $ 9.79 Weighted-average fair value per option of options granted during year $ 4.90 $ 3.28 $ 2.61 73 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Information pertaining to options outstanding at December 31, 2005 is as follows: Range of Exercise Prices Number Outstanding Options Outstanding Weighted- Average Contractual Life In Years Weighted- Average Exercise Price Options Exercisable Number Outstanding Weighted- Average Exercise Price $ 13.28 11.81 8.25 8.43 8.65 8.28 8.75 9.33 11.04 12.13 13.75 15.16 15.73 16.71 18.16 18.00 18.00 19.43 18.24 20.12 22,222 7,200 19,293 7,200 42,600 3,600 36,660 12,000 9,600 49,860 39,000 3,000 30,000 12,000 2,000 134,000 18,500 3,000 5,000 2,500 459,235 2.0 2.3 3.1 3.3 4.1 4.5 5.1 5.5 6.2 6.7 7.3 8.3 8.4 9.2 9.4 9.5 9.5 9.6 9.8 9.9 7.02 $ 13.28 11.81 8.25 8.43 8.65 8.28 8.75 9.33 11.04 12.13 13.75 15.16 15.73 16.71 18.16 18.00 18.00 19.43 18.24 20.12 13.89 22,222 7,200 19,293 7,200 42,600 3,600 36,660 9,600 5,760 29,916 15,600 600 6,000 - - 26,800 3,700 600 1,000 - 238,351 $ 13.28 11.81 8.25 8.43 8.65 8.28 8.75 9.33 11.04 12.13 13.75 15.16 15.73 - - 18.00 18.00 19.43 18.24 - 11.46 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Dividend yield Expected life 2005 Years Ended December 31, 2004 (Dollars in Thousands) 2003 3.11% 8 years 3.40% 7 years 3.60% 7 years 74 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Expected volatility Risk-free interest rate NOTE 16. COMMITMENTS AND CONTINGENT LIABILITIES 30.05% 3.94% 22.57% 4.52% 22.30% 4.03% Loan Commitments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. They involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheets. The Company’s exposure to credit loss is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the Company’s commitments is as follows: Commitments to extend credit Financial standby letters of credit December 31, 2004 2005 (Dollars in Thousands) $ 184,265 5,741 $ 190,006 $ 114,942 3,172 $ 118,114 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which the Company deems necessary. At December 31, 2005 and 2004, the carrying amount of liabilities related to the Company’s obligation to perform under financial standby letters of credit was insignificant. The Company has not been required to perform on any financial standby letters of credit and the Company has not incurred any losses on financial standby letters of credit for the years ended December 31, 2005 and 2004. At December 31, 2005, the Company had guaranteed the debt of certain officers’ liabilities at another financial institution totaling $3,550,000. These guarantees represent the available credit line of those certain officers for the purchase of Company stock. Any stock purchased under this program will be assigned to the Company and held in safekeeping. The Company has not been required to perform on any of these guarantees for the year ended December 31, 2005. There were no guarantees outstanding at December 31, 2004. Contingencies 75 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material effect on the Company’s financial statements. NOTE 17. CONCENTRATIONS OF CREDIT The Banks make commercial, residential, construction, agricultural, agribusiness and consumer loans to customers primarily in counties in South and Southeast Georgia, North Florida and Southeast Alabama. A substantial portion of the Company's customers' abilities to honor their contracts is dependent on the business economy in the geo- graphical area served by the Banks. A substantial portion of the Company's loans are secured by real estate in the Company's primary market area. In addition, a substantial portion of the other real estate owned is located in those same markets. Accordingly, the ulti- mate collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned are susceptible to changes in real estate conditions in the Company's primary market area. Although the Company's loan portfolio is diversified, there is a relationship in this region between the agricultural economy and the economic performance of loans made to nonagricultural customers. The Company's lending poli- cies for agricultural and nonagricultural customers require loans to be well-collateralized and supported by cash flows. Collateral for agricultural loans include equipment, crops, livestock and land. Credit losses from loans relat- ed to the agricultural economy is taken into consideration by management in determining the allowance for loan losses. The Company has a concentration of funds on deposit at its three primary correspondent banks at December 31, 2005 as follows: Noninterest-bearing accounts Interest-bearing accounts NOTE 18. REGULATORY MATTERS $ 87,713,000 $ 64,337,000 The Banks are subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. At December 31, 2005, approximately $10,525,000 of retained earnings were available for dividend declaration without regulatory approval. The Company and the Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Banks to maintain minimum amounts and ratios of total and Tier I capital, as defined by the regulations, to risk-weighted assets, as defined, and of Tier I capital to average assets, as defined. Management believes, as of December 31, 2005 and 2004, the Company and the Banks met all capital adequacy requirements to which they are subject. As of December 31, 2005, the most recent notification from the regulatory authorities categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the 76 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Banks’ category. Prompt corrective action provisions are not applicable to bank holding companies. The Company and Banks’ actual capital amounts and ratios are presented in the following table. Actual Amount Ratio For Capital Adequacy Purposes Amount (Dollars in Thousands) Ratio To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 154,513 17,082 $ 9,571 $ 5,471 $ 16,508 $ 8,174 $ 21,215 $ 6,720 $ 8,845 $ 8,816 $ 7,576 $ 26,922 $ 5,669 $ 9,571 $ $ 132,899 15,332 $ 8,517 $ 5,046 $ 14,774 $ 7,545 $ 19,006 $ 6,189 $ 7,825 $ 8,096 $ 6,954 $ 23,634 $ 5,066 $ 8,404 $ $ 132,899 15,332 $ 8,517 $ 5,046 $ 14,774 $ 7,545 $ 19,006 $ 6,189 $ 7,825 $ 8,096 $ 6,954 $ 23,634 $ 12.66% 12.26% 11.35% 16.24% 11.93% 16.35% 12.07% 5.93% 10.88% 15.36% 15.23% 10.35% 11.80% 10.28% 10.89% 11.00% 10.10% 14.98% 10.68% 5.09% 10.81% 14.67% 9.62% 14.11% 13.98% 9.09% 10.54% 9.03% 9.71% 8.21% 7.75% 11.02% 8.21% 8.34% 7.31% 10.71% 7.49% 9.14% 9.90% 16.80% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 97,616 11,149 6,744 2,695 11,069 3,999 14,065 3,374 6,506 4,590 3,978 20,803 3,843 7,446 48,808 5,574 3,372 1,347 5,534 2,000 7,032 1,687 3,253 2,295 1,989 10,402 1,922 3,723 54,757 7,471 4,399 1,831 7,202 3,618 10,406 2,311 4,180 3,543 2,808 5,628 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% .00% 8.00% .00% 8.00% 8.00% 8.00% 8.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% N/A 13,936 8,430 3,369 13,836 4,999 17,581 4,218 8,132 5,738 4,973 26,004 4,804 9,308 N/A 8,362 5,058 2,021 8,301 3,000 10,549 2,531 4,879 3,443 2,984 15,603 2,883 5,585 N/A 9,339 5,498 2,289 9,002 4,523 13,007 2,889 5,225 4,429 3,511 7,035 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ N/A 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% N/A 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% N/A 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% As of December 31, 2005 Total Capital to Risk Weighted Assets Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Citizens Bank of Wakulla First National Bank Tier I Capital to Risk Weighted Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Citizens Bank of Wakulla First National Bank Tier I Capital to Average Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick 77 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Citizens Bank of Wakulla First National Bank $ $ 5,066 8,404 7.76% 8.38% $ $ 2,611 4,010 4.00% 4.00% For Capital Adequacy Purposes $ $ 3,264 5,012 5.00% 5.00% To Be Well Capitalized Under Prompt Corrective Action Provisions Amount (Dollars in Thousands) Ratio Amount Ratio Actual Amount Ratio As of December 31, 2004 Total Capital to Risk Weighted Assets Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Citizens Bank of Wakulla Tier I Capital to Risk Weighted Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Citizens Bank of Wakulla Tier I Capital to Average Assets: Consolidated American Banking Company Heritage Community Bank Bank of Thomas County Citizens Security Bank Cairo Banking Company Southland Bank Central Bank and Trust First National Bank of South Georgia Merchants and Farmers Bank Tri-County Bank First Bank of Brunswick Citizens Bank of Wakulla $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 138,603 16,709 8,801 4,779 15,930 7,255 19,598 5,657 7,271 8,573 7,426 16,589 4,483 123,293 14,979 7,883 4,386 14,301 6,613 17,677 5,163 6,407 7,857 6,907 15,120 4,076 123,293 14,979 7,883 4,386 14,301 6,613 17,677 5,163 6,407 7,857 6,907 15,120 4,076 14.95% 12.11% 11.99% 15.44% 12.27% 14.21% 12.83% 14.45% 10.55% 14.98% 17.92% 14.13% 13.92% 13.30% 10.85% 10.74% 14.17% 11.02% 12.95% 11.57% 13.19% 9.30% 13.73% 16.67% 12.88% 12.66% 10.43% 8.46% 8.25% 10.88% 8.61% 7.86% .42% 9.07% 7.69% 8.76% 10.43% 11.37% 8.18% $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 74,148 11,041 5,871 2,476 10,386 4,084 12,218 3,132 5,511 4,579 3,314 9,392 2,577 37,074 5,521 2,935 1,238 5,193 2,042 6,109 1,566 2,756 2,289 1,657 4,696 1,288 47,284 7,082 3,822 1,613 6,644 3,365 9,529 2,277 3,333 3,588 2,649 5,319 1,993 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% N/A 13,802 7,339 3,095 12,983 5,105 15,273 3,915 6,889 5,724 4,143 11,740 3,221 N/A 8,281 4,403 1,857 7,790 3,063 9,164 2,349 4,134 3,434 2,486 7,044 1,933 N/A 8,853 4,778 2,016 8,305 4,207 11,912 2,846 4,166 4,485 3,311 6,649 2,491 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ N/A 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% N/A 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% N/A 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 78 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Each banking subsidiary listed above conducts business under the trade name “Ameris”. NOTE 19. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair value is based on discounted cash flows or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107, Disclosures about Fair Value of Financial Instruments, excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments. Cash, Due From Banks, Interest-Bearing Deposits in Banks and Federal Funds Sold: The carrying amount of cash, due from banks and interest-bearing deposits in banks and federal funds sold approximates fair value. Securities: Fair value of securities is based on available quoted market prices. The carrying amount of equity securities with no readily determinable fair value approximates fair value. Loans: The carrying amount of variable-rate loans that reprice frequently and have no significant change in credit risk approximates fair value. The fair value of fixed-rate loans is estimated based on discounted contractual cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of impaired loans is estimated based on discounted contractual cash flows or underlying collateral values, where applicable. Deposits: The carrying amount of demand deposits, savings deposits and variable-rate certificates of deposit approximates fair value. The fair value of fixed-rate certificates of deposit is estimated based on discounted contractual cash flows using interest rates currently being offered for certificates of similar maturities. Federal Funds Purchased, Repurchase Agreements and Other Borrowings: The carrying amount of variable rate borrowings, federal funds purchased and securities sold under repurchase agreements approximate fair value. The fair value of fixed rate other borrowings are estimated based on discounted contractual cash flows using the current incre- mental borrowing rates for similar type borrowing arrangements. Subordinated Deferrable Interest Debentures: The carrying amount of the Company’s variable rate trust preferred securities approximate fair value. The fair value of the Company’s fixed rate trust preferred securities are based on available quoted market prices. Accrued Interest: The carrying amount of accrued interest approximates their fair value. Off-Balance-Sheet Instruments: The carrying amount of commitments to extend credit and standby letters of credit approximates fair value. The carrying amount of the off-balance-sheet financial instruments is based on fees charged 79 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T to enter into such agreements. The carrying amount and estimated fair value of the Company's financial instruments were as follows: December 31, 2004 December 31, 2005 Fair Carrying Value Amount Carrying Amount (Dollars in Thousands) Fair Value Financial assets: Cash, due from banks and interest-bearing deposits in banks Federal funds sold Securities available for sale Restricted equity securities Loans, net Accrued interest receivable Financial liabilities: Deposits Federal funds purchased and securities sold under agreements to repurchase Other borrowings $ 145,274 28,927 235,145 8,597 1,164,307 11,926 $ 145,274 28,927 235,145 8,597 1,162,124 11,926 $ 97,670 12,285 213,948 7,793 861,581 8,590 $ 97,670 12,285 213,948 7,793 859,652 8,590 1,375,232 1,374,613 986,224 985,717 10,307 106,022 10,307 106,043 7,530 110,366 7,530 111,818 80 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. 1,863 35,567 1,863 37,701 2005 2004 $ 4,865 - 185,545 11,310 $ 6,203 4,546 139,838 9,070 $ 201,720 $ 159,657 $ 5,000 7,295 40,722 $ 219 2,932 35,567 53,017 38,718 148,703 120,939 Accrued interest payable Subordinated deferrable interest debentures 3,989 43,745 NOTE 20. CONDENSED FINANCIAL INFORMATION OF AMERIS BANCORP (PARENT COMPANY ONLY) 3,989 40,722 CONDENSED BALANCE SHEETS December 31, 2005 and 2004 (Dollars in Thousands) Assets Cash and due from banks Interest-bearing deposits in banks Investment in subsidiaries Other assets Total assets Liabilities Other borrowings Other liabilities Subordinated deferrable interest debentures Total liabilities Stockholders’ equity 81 One Bank,United. A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T Total liabilities and stockholders’ equity $ 201,720 $ 159,657 CONDENSED STATEMENTS OF INCOME Years Ended December 31, 2005, 2004 and 2003 (Dollars in Thousands) Income Dividends from subsidiaries Interest on deposits in other banks Fee income from subsidiaries Other income Total income Expense Interest Amortization and depreciation Business restructuring expense Other expense Total expense Income before income tax benefits and equity in undistributed earnings of subsidiaries (distributions in excess of earnings) Income tax benefits Income before equity in undistributed earnings of subsidiaries (distributions in excess of earnings) Equity in undistributed earnings of subsidiaries (distributions in excess of earnings) 2005 2004 2003 $ 11,952 $ 254 11,244 1,936 25,386 $ 12,100 204 10,599 1,707 24,610 3,530 736 2,838 15,362 22,466 2,920 3,258 3,547 876 - 12,819 17,242 7,368 1,647 17,464 165 10,440 2,145 30,214 3,632 839 - 12,221 16,692 13,522 1,232 6,178 9,015 14,754 7,550 4,086 (2,744) 82 A M E R I S B A N C O R P 2 0 0 5 A N N U A L R E P O R T One Bank,United. Net income $ 13,728 $ 13,101 $ 12,010 CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 2005, 2004 and 2003 (Dollars in Thousands) OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of unearned compensation (Undistributed earnings of subsidiaries) distributions in excess of earnings Decrease in interest receivable Increase in interest payable Decrease in taxes payable Provision for deferred taxes (Increase) decrease in due from subsidiaries Other operating activities Total adjustments 2005 2004 2003 $ 13,728 $ 13,101 $ 12,010 736 321 (7,550) 3 10 (1,190) (180) (90) 3,169 (4,771) 614 262 (4,086) 4 - (370) 318 234 113 (2,911) 476 363 2,744 5 - (564) 80 (178) (709) 2,217 Net cash provided by operating activities 8,957 10,190 14,227 INVESTING ACTIVITIES (Increase) decrease in interest-bearing deposits in banks Purchases of premises and equipment Contribution of capital to subsidiary bank Net cash paid for acquisitions 4,546 (587) (325) (13,073) 13,029 (725) - (11,094) (2,642) (1,121) (1,050) - Net cash provided by (used in) investing activities (9,439) 1,210 (4,813) FINANCING ACTIVITIES Repayment of other borrowings Proceeds from other borrowings Purchase of treasury shares Dividends paid Reduction in income taxes payable resulting from vesting of restricted shares Payment for fractional shares Proceeds from exercise of stock options (219) 5,000 (261) (6,355) 53 (19) 945 (1,462) (6,462) - (361) (5,475) 234 - 320 - (170) (4,885) 106 - 9 Net cash used in financing activities (856) (6,744) (11,402) Net increase (decrease) in cash and due from banks (1,338) 4,656 (1,988) Cash at beginning of year Cash at end of year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest 83 6,203 1,547 3,535 4,865 $ 6,203 $ 1,547 3,215 $ 3,242 $ 3,335 $ $ A M E R I S B A N C O R P M A R K E T F O R T H E C O M P A N Y ’ S C O M M O N S T O C K A N D D I V I D E N D I N F O R M A T I O N Ameris Bancorp Common Stock is quoted through the National Market System of the National Association of Securities Dealers (NASDAQ) under the symbol “ABCB.” The following table sets forth the low and high sales prices for the common stock as quoted on the NASDAQ during 2005. CALENDAR PERIOD SALES PRICE 2005 First Quarter Second Quarter Third Quarter Fourth Quarter Low High $15.22 $20.00 $16.42 $19.20 $17.60 $20.32 $17.57 $20.99 Quarterly dividends of $0.14 per share were declared for first, second, third and fourth quarters of 2005. AVAILABILITY OF INFORMATION Upon written request, Ameris Bancorp will provide, without charge, a copy of the Annual Report on Form 10-K, including the financial statements and the financial statement schedules, required to be filed with the Securities and Exchange Commission for the fiscal year 2005. Please direct requests to: Ameris Bancorp, Attention: Dennis J. Zember, Jr., CPA, P.O. Box 3668, Moultrie, GA 31776-3668. ANNUAL MEETING OF SHAREHOLDERS The 2006 Annual Meeting of Shareholders of Ameris Bancorp will be held at 4:15 p.m. E.S.T., Tuesday, May 16, 2006, at the Ameris Bancorp Corporate Office located at 24 Second Avenue, S.E., Moultrie, Georgia. A M E R I S B A N K L O C A T I O N S ALABAMA Abbeville Colquitt Meigs 162 East Crawford Street - 229.758.3461 2023 East Depot Street - 229.683.3411 FLORIDA Crawfordville 204 Kirkland Street - 334.585.2265 Coolidge Moultrie 2628 Crawfordville Hwy - 850.926.5211 Clayton 1011 South Pine Street - 229.346.3555 305 South Main Street - 229.985.2222 Newberry 33 Eufaula Ave - 334.775.3211 Cordele 225 South Main Street - 229.985.2222 Dothan 502 South 2nd Street - 229.273.7700 2513 South Main Street - 229.873.4444 3299 Ross Clark Circle NW - 334.671.4000 1302 13th Ave East - 229.273.7700 1707 First Avenue SE - 229.985.1111 1817 South Oates Street - 334.677.3063 Doerun Ocilla 25365 West Newberry Road - 352.472.2162 Orange Park 1775 Eagle Harbor Parkway - 904.264.8840 Eufaula 137 West Broad Ave - 229.782.5358 300 South Irwin Ave. - 229.468.9411 485 Blanding Blvd - 904.213.0883 1140 South Eufaula Ave - 334.687.3260 Donalsonville Quitman Panacea Headland 109 West Third Street - 229.524.2112 1000 West Screven Street - 229.263.7525 208 Main Street - 334.693.5411 Douglas St. Marys GEORGIA Albany 100 South Pearl Ave. - 912.384.2701 2509 Osborne Road - 912.882.3400 Jekyll Island St Simons Island 18-B Beachview Drive - 912.635.9014 3811 Frederica Road - 912.634.1270 1445 Coastal Hwy - 850.984.5050 Sopchoppy 2117 Sopchoppy Hwy - 850.962.4050 Trenton 2627 Dawson Road - 229.888.5600 Kingsland Thomasville 530 East Wade Street - 352.463.7171 Brunswick 1603 Hwy 40 East - 912.729.8878 2484 East Pinetree Blvd. - 229.226.5755 3440 Cypress Mill Road - 912.267.9500 120 South Lee Street - 912.729.5611 Tifton 5340 New Jesup Hwy - 912.264.9699 Lake Seminole 735 West Second Street - 229.382.7311 Cairo Hwy 253 & 374 - 229.861.2213 Troupeville 201 South Broad Street - 229.377.1110 Leesburg 19540 Valdosta Hwy - 229.247.5376 40 Hwy 84 East - 229.377.1110 1607 US Hwy 19 S. - 229.434.4550 Valdosta 3140 Inner Perimeter Road - 229.241.2851 24 Second Avenue, S.E., Moultrie, GA 31768 P.O. Box 3668, Moultrie, GA 31776 Phone: 229.890.1111 • Fax: 229.890.2235 www.amerisbank.com Ameris Bancorp Corporate Headquarters