deteriorating economy and its impact on operations and credit quality; (ii) unique risks associated with our construction and land development loans;
(iii) the continued impact of a slowing economy on our commercial loan portfolio and its potential continued impact on our consumer portfolio; (iv) changes in real estate values and economic conditions in Atlanta, Georgia; (v) our ability to maintain and service relationships with automobile dealers and indirect automobile loan purchasers and our ability to profitably manage changes in our indirect automobile lending operations; (vi) changes in the interest rate environment and their impact on our net interest margin; (vii) difficulties in maintaining quality loan growth; (viii) less favorable than anticipated changes in the national and local business environment, particularly in regard to the housing market in general and residential construction and new home sales in particular; (ix) adverse changes in the regulatory requirements affecting us;
(x) impact on the Company from the implementation of the Emergency Economic Stabilization Act of 2008; (xi) greater competitive pressures among financial institutions in our market; (xii) changes in political, legislative and economic conditions; (xiii) inflation; (xiv) greater loan losses than historic levels and an insufficient allowance for loan losses; and (xv) failure to achieve the revenue increases expected to result from our investments in branch additions and in our transaction deposit and lending businesses. This list is intended to identify some of the principal factors that could cause actual results to differ materially from those described in the forward-looking statements included herein and are not intended to represent a complete list of all risks and uncertainties in our business. Investors are encouraged to read the related section in our 2007 Annual Report on Form 10-K, including the "Risk Factors" set forth therein. Additional information and other factors that could affect future financial results are included in our filings with the Securities and Exchange Commission. Critical Accounting Policies
Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles and conform to general practices within the financial services industry. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies, or conditions significantly different from certain assumptions, could result in material changes in our consolidated financial position or consolidated results of operations. Critical accounting and reporting policies include those related to the allowance for loan losses, the capitalization of servicing assets and liabilities and the related amortization, loan related revenue recognition, and income taxes. Our accounting policies are fundamental to understanding our consolidated financial position and consolidated results of operations. Significant accounting policies have been periodically discussed and reviewed with and approved by the Audit Committee of the Board of Directors and the Board of Directors.
Our critical accounting policies that are highly dependent on estimates, assumptions and judgment are substantially unchanged from the descriptions included in the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007.

Results of Operations
Earnings
For the third quarter of 2008, the Company recorded a net loss of $4.9 million compared to net income of $1.7 million for the third quarter of 2007. Basic and diluted (loss) earnings per share for the third quarter of 2008 and 2007 were $(.52) and $.18, respectively. Net loss for the nine months ended September 30, 2008 was $4.7 million compared to net income of $6.3 million for the same period in 2007. Basic and diluted (loss) earnings per share for the first nine months of 2008 and 2007 were $(.50) and $.68, respectively. The decrease in net income for the third quarter and first nine months of 2008 when compared to the same periods in 2007 was primarily due to an $8.6 million and $16.9 million increase, respectively, in the provision for loan losses to $11.4 million and $21.9 million, respectively. The increases in the provision for loan losses were due to the continued weak economy and increased loan charge-offs.
The Company benefited in the first quarter of 2008 from a pretax gain of $1,252,000 on the mandatory redemption of 29,267 shares of Visa, Inc. common stock upon Visa's successful initial public offering. The Company reversed a pretax $567,000 litigation expense accrual recorded in the fourth quarter of 2007 to recognize the Company's proportional share of Visa litigation settlements and litigation reserves. In October 2008, Visa settled with Discovery Financial Services related to a case within the covered litigation. As a result, in the third quarter of 2008, the Company recorded a pretax charge of $360,000 related to its estimated proportional share of Visa litigation and the Company's associated guarantee liability. Net Interest Income
Net interest income decreased $81,000 or .7% in the third quarter of 2008 to $11.9 million compared to $12.0 million for the same period in 2007 resulting primarily from a decrease in loan interest income due to lower interest rates on loans and an increase in nonperforming assets.
The average balance of interest-earning assets increased by $118.1 million or 7.6% to $1.678 billion for the third quarter of 2008, when compared to the same period in 2007. The yield on interest-earning assets for the third quarter of 2008 was 6.21%, a decrease of 121 basis points when compared to the yield on interest-earning assets for the same period in 2007. The average balance of loans outstanding for the third quarter of 2008 increased $89.3 million or 6.3% to $1.502 billion when compared to the same period in 2007. The yield on average loans outstanding for the period decreased 127 basis points to 6.39% when compared to the same period in 2007 as a result of a net decrease in the prime lending rate and to a lesser extent, the effects of an increase in the level of nonperforming loans from $7.0 million at September 30, 2007 to $73.0 million at September 30, 2008
The average balance of interest-bearing liabilities increased $124.5 million or 8.9% to $1.528 billion for the third quarter of 2008 and the rate on this average balance decreased 114 basis points to 3.68% when compared to the same period in 2007. The 114 basis point decrease in the cost of interest-bearing liabilities was lower than the 121 basis point decrease in the yield on interest earning assets, resulting in a seven basis point decrease in net interest spread. Net interest margin decreased 23 basis points to 2.86% for the third quarter of 2008 compared to 3.09% for the same period in 2007. The Bank manages its net interest spread and net interest margin based primarily on its loan and deposit pricing. To maintain its deposit market share and to assist in liquidity management, during 2008 as compared to 2007, the Bank did not decrease its deposit pricing as much as it lowered its loan rates, which increase or decrease with the prime interest rate. Deposit pricing in our markets has remained fairly constant due to increased competition for deposits resulting from liquidity issues impacting the banking industry as a whole.

Net interest income increased $744,000 or 2.1% in the first nine months of 2008 to $35.7 million compared to $35.0 million for the same period in 2007 resulting primarily from a decrease in interest expense on deposits due to overall lower interest rates. The average balance of interest-earning assets increased by $108.9 million or 7.1% to $1.652 billion for the first nine months of 2008, when compared to the same period in 2007. The yield on interest-earning assets for the first nine months of 2008 was 6.47%, a decrease of 91 basis points when compared to the yield on interest-earning assets for the same period in 2007. The average balance of loans outstanding for the first nine months of 2008 increased $96.4 million or 6.9% to $1.488 billion when compared to the same period in 2007. The yield on average loans outstanding for the period decreased 97 basis points to 6.65% when compared to the same period in 2007 as a result of a net decrease in the prime lending rate and an increase in the level of nonperforming loans and assets.
The average balance of interest-bearing liabilities increased $116.8 million or 8.5% to $1.499 billion for the nine months ended September 30, 2008 and the rate on this average balance decreased 90 basis points to 3.92% when compared to the same period in 2007. The 90 basis point decrease in the cost of interest-bearing liabilities was lower than the 91 basis point decrease in the yield on interest-earning assets, resulting in a one basis point decrease in net interest spread. Net interest margin decreased 14 basis points to 2.92% for the first nine months of 2008 compared to 3.06% for the same period in 2007. Provision for Loan Losses
The allowance for loan losses is established and maintained through provisions charged to operations. Such provisions are based on management's evaluation of the loan portfolio including loan portfolio concentrations, economic conditions, past loan loss experience, adequacy of underlying collateral, and such other factors which, in management's judgment, require consideration in estimating loan losses. Loans are charged off or charged down when, in the opinion of management, such loans are deemed to be uncollectible or not fully collectible. Subsequent recoveries are added to the allowance.
For all loan categories, historical loan loss experience, adjusted for changes in the risk characteristics of each loan category, current trends, and other factors, is used to determine the level of allowance required. Additional amounts are allocated based on the probable losses of individual impaired loans and the effect of economic conditions on both individual loans and loan categories. Since the allocation is based on estimates and subjective judgment, it is not necessarily indicative of the specific amounts of losses that may ultimately occur.
In determining the allocated allowance, all portfolios are treated as homogenous pools. The allowance for loan losses for the homogenous pools is allocated to loan types based on historical net charge-off rates adjusted for any current changes in these trends. Within the commercial, commercial real estate, SBA, construction and business banking loan portfolios, every nonperforming loan and loans having greater than normal risk characteristics are not treated as homogenous pools and are individually reviewed for a specific allocation. The specific allowance for these individually reviewed loans is based on a specific loan impairment analysis.
In determining the appropriate level for the allowance, management ensures that the overall allowance appropriately reflects a margin for the imprecision inherent in most estimates. This additional allowance is reflected in the overall allowance. Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio at September 30, 2008 (see "Asset Quality").
The provision for loan losses for the third quarter and the first nine months of 2008 was $11.4 million and $21.9 million, respectively, compared to $2.8 million and $5.0 million for the same periods in 2007. The allowance for loan losses as a percentage of loans at September 30, 2008, was 1.83% compared to 1.19% at December 31, 2007, and to 1.10% at September 30, 2007. The increase in the provision in the third quarter and

first nine months of 2008 as compared to the same periods in 2007 and the increase in the allowance as a percentage of loans at September 30, 2008, was due to management's assessment of the continued slowing economy and housing market, as well as increased charge-offs in both the residential construction and consumer loan portfolios. The ratio of net charge-offs to average loans on an annualized basis for the first nine months of 2008 increased to 1.16% compared to .39% for the same period in 2007. The ratio of net charge-offs to average loans for the year ended December 31, 2007 was .45%. The following schedule summarizes changes in the allowance for loan losses for the periods indicated (dollars in thousands):

                                                            Nine Months Ended             Year Ended
                                                              September 30,              December 31,
                                                          2008             2007              2007
Balance at beginning of period                          $  16,557        $ 14,213        $      14,213
Charge-offs:
Commercial, financial and agricultural                         99               -                  200
SBA                                                           244               -                    -
Real estate-construction                                    5,363           1,412                1,934
Real estate-mortgage                                          261              63                   82
Consumer installment                                        7,349           3,555                5,301

Total charge-offs                                          13,316           5,030                7,517


Recoveries:
Commercial, financial and agricultural                          5             255                  257
SBA                                                           215               -                    -
Real estate-construction                                       30              40                  190
Real estate-mortgage                                           13              78                   78
Consumer installment                                          669             649                  836

Total recoveries                                              932           1,022                1,361


Net charge-offs                                            12,384           4,008                6,156
Provision for loan losses                                  21,850           4,950                8,500

Balance at end of period                                $  26,023        $ 15,155        $      16,557


Annualized ratio of net charge-offs to average
loans                                                        1.16 %           .39 %                .45 %

Allowance for loan losses as a percentage of loans
at end of period                                             1.83 %          1.10 %               1.19 %

Substantially all of the consumer installment loan net charge-offs in the first nine months of 2008 and 2007 were from the indirect automobile loan portfolio. Consumer installment loan net charge-offs increased $3.8 million to $6.7 million for the nine months ended September 30, 2008, compared to the same period in 2007. The national and Atlanta economies continued to decline in the first nine months of 2008, as what began as a real estate slowdown impacted other areas of the economy, including our consumer lending portfolio. The annualized ratio of net charge-offs to average consumer loans outstanding was 1.18% and .56% during the first nine months of 2008 and 2007, respectively. Consumer loan net charge-offs represented 53.9% of total net charge-offs for the first nine months of 2008.
Construction loan net charge-offs were $5.3 million in the first nine months of 2008 compared to $1.4 million in the same period of 2007. Management will continue to monitor closely and aggressively address credit quality and trends in the residential construction loan portfolio. The residential construction loan portfolio will require close scrutiny through the next several quarters.
Based on the continuing poor economic conditions and increasing adverse trends in the both the consumer loan and construction loan portfolios, management believes that loan losses will continue to increase.

Noninterest Income
Noninterest income for the third quarter and first nine months of 2008 was $3.9 million and $13.9 million, respectively, compared to $4.8 million and $13.6 million for the same periods in 2007, a decrease of $944,000 for the quarter and an increase of $287,000 for the nine month period. The decrease for the quarter was due to decreased income from SBA and indirect lending activities. The increase for the nine month period was due to a gain of $1.3 million on the mandatory redemption of 29,267 shares of Visa, Inc. common stock upon Visa's successful initial public offering.
For the third quarter of 2008 compared to the same period in 2007, income from SBA lending activities decreased $351,000 or 47.6%, due to a reduction in the gain on loans sold and a reduction in the volume of loans sold. SBA loans sold totaled $5.7 million for the third quarter of 2008 compared to $9.8 million sold in the third quarter of 2007. With the continuing volatility in credit markets, the market price and thus the profit on loan sales have been less than they have been for us historically. Income from indirect lending activities, which includes both net gains from the sale of indirect automobile loans and servicing and ancillary loan fees on loans sold, decreased $281,000 or 20.5% in the third quarter of 2008 compared to 2007. The decrease was a result of a reduction in gain on sales due to lower sales and lower indirect automobile loans serviced for others. For the third quarter of 2008, there were servicing retained sales of $8.9 million compared to $36.2 million in service retained sales for the same period in 2007. The average amount of loans serviced for others decreased from $293 million for the third quarter of 2007 to $253 million for the same period in 2008, a decrease of $40 million or 13.7% due to monthly principal payments which exceeded the additional loans serviced for others added because of fewer servicing retained loan sales. Other operating income decreased $351,000 for the third quarter of 2008 compared to 2007 because of lower brokerage fee income, lower insurance sales commissions and lower gains on sale of other real estate.
For the nine months ended September 30, 2008 compared to the same period in 2007, noninterest income from SBA lending activities decreased $788,000 or 40.4%, due to a reduction in the gain on loans sold and a reduction in the volume of loans sold. Total SBA loans sold were $18.1 million for the nine month period ended September 2008 compared to $30.3 million sold during the same period in 2007. There were no SBA 504 loans sold in 2008 compared to $9.8 million sold during 2007. As discussed above, the continuing volatility in credit markets has negatively impacted the gains generated by the sale of SBA loans. The market for SBA 504 loans, because of their relative size and underwriting complexity, has particularly contracted. Other operating income decreased $472,000 or 31.6% for the nine months ended September 2008 compared to 2007 because of lower brokerage fee income, and lower insurance sales commissions.
Noninterest Expense
Noninterest expense was $12.6 million for the third quarter of 2008, compared to $11.8 million for the same period in 2007, an increase of $743,000 or 6.3%. The increase was primarily a result of higher ORE related expenses, which were $806,000 in the third quarter of 2008 compared to zero for the same period in 2007. The increase is a result of higher foreclosed assets held by the Bank during the third quarter. The average ORE balance increased 266.2% to $12.8 million for the third quarter of 2008 compared to $3.5 million for the same period in 2007. The ORE expense is made up of $559,000 in provision for other real estate losses and $247,000 in maintenance, real estate taxes, and other related expenses. Other significant variances include the accrual for the $360,000 reserve for Fidelity's estimated proportional share of a settlement of the Visa litigation with Discovery Financial Services, an increase of $240,000 related to a higher FDIC assessment, a decrease in salaries and employee benefits of $209,000, a decrease in fraud losses of $199,000, and a decrease in advertising expense of $137,000. Because of the announcement of increased FDIC insurance assessments for 2009, management expects this expense to increase nearly 150% in 2009.

Noninterest expense was $36.4 million for the first nine months of 2008, compared to $34.8 million for the same period in 2007, an increase of $1.7 million or 4.8%. ORE related expense for the nine months increased to $2.0 million compared to $18,000 in 2007 because of an increase in the number of foreclosures and the associated increase in ORE. The average balance in ORE increased from $1.7 million for the nine months ended September 2007 to $11.2 million for the same period in 2008. The $2.0 million in ORE expense is made up of $1.4 million in provision for other real estate losses and $569,000 in maintenance, real estate taxes, and other related expenses. Other operating expenses increased $427,000 or 15.7% primarily due to the $360,000 expense accrual for Fidelity's estimated proportional share of a settlement of the Visa litigation with Discovery Financial Services. In the fourth quarter of 2007, the Company recorded a $567,000 expense to recognize its proportional share of Visa litigation settlements, litigation reserves and certain other litigation. Because a portion of the proceeds from the Visa initial public offering funded a $3 billion litigation liability reserve for the American Express settlement, the Discover litigation, and other specific litigation matters, on which our $567,000 litigation accrual was based, management reversed the accrual during the first quarter of 2008. Salaries and employee benefits expense increased 1.7% or $324,000 to $19.6 million in the first nine months of 2008 compared to the same period in 2007. The increase was primarily attributable to the addition in the second half of 2007 of seasoned loan production staff, including SBA, indirect automobile, and commercial lenders to increase lending volume. Provision for Income Taxes
The provision for income taxes for the third quarter and first nine months of 2008 was a benefit of $3.3 million and $4.0 million, respectively, compared to expense of $497,000 and $2.6 million for the same periods in 2007. The income tax benefit recorded in the third quarter and first nine months of 2008 was primarily the result of a pretax loss and the amount of state income tax credits relative to the pretax income. In addition, the average balance of tax exempt investment securities increased during the third quarter and first nine months of 2008 compared to the same periods in 2007. Financial Condition
Assets
Total assets were $1.760 billion at September 30, 2008, compared to $1.686 billion at December 31, 2007, an increase of $73.6 million, or 4.4%. This increase was due to a $35.4 million increase in loans, a $24.3 million increase in investments available for sale, and a $22.6 million increase in cash and cash equivalents.
Loans increased $35.4 million or 2.5% to $1.424 billion at September 30, 2008 compared to $1.388 billion at December 31, 2007. The increase in loans was primarily the result of an increase in total commercial loans, including SBA loans of $28.9 million or 9.4% to $335.4 million, growth in consumer installment loans of $19.9 million or 2.8% to $726.1 million and growth in real estate mortgage loans of $13.2 million or 14.1% to $106.9 million. As the liquidity and credit crisis continued during the nine months of 2008, demand for these loan types continued and management was able to conservatively grow these portfolios while tightening our underwriting standards. Partially offsetting these increases was a decrease in real estate construction loans of $26.7 million or 9.5% to $255.4 million due to a decline in real estate construction activity and a transfer of approximately $15.3 million to other real estate.
Investment securities available for sale increased $24.3 million or 23.5% to $127.4 million at September 30, 2008 compared to $103.1 million at December 31, 2007. The increase was a result of management's decision to enter into a series of transactions in March and April of 2008 to take advantage of the steepness of the yield curve. In March, the Bank purchased $19.6 million in agency (U.S. government sponsored entity) mortgage backed securities and funded the transaction with $20.0 million in laddered maturity advances from the Federal Home Loan Bank. In April, the Bank purchased $10.0 million in agency (U.S. government

sponsored entity) mortgage backed securities and funded the transaction with $10 million in laddered maturity advances from the Federal Home Loan Bank. In addition, the Bank added six general obligation municipal bonds to the portfolio for a total of $5.0 million and purchased a $10 million Federal Home Loan Bank discount bond. Decreasing the size of the investment portfolio in the first nine months of 2008 were principal paydowns on mortgage backed securities, a $5.0 million agency note which was called at par, the sale of a $792,000 general obligation municipal security for a gain of $12,000, and the sale of five agency . . .