UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended December 31, 2008

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934: For the transition period from ____________to ____________

Commission File No. 000-30805

WGNB CORP.

(Exact name of registrant as specified in its charter)

	Georgia	58-1640130
	(State of incorporation)	(I.R.S. Employer Identification No.)


	201 Maple Street
	P.O. Box 280	(770) 832-3557
	Carrollton, Georgia 30117	(Registrant’s telephone number,
	(Address of principal executive offices)	Including area code)

Securities registered pursuant to Section 12(b) of the Act:

	Title of Class	Name of Exchange on Which Listed
	Common Stock, no par value	The NASDAQ Stock Market, LLC
	Series A Convertible Preferred Stock, no par value	The NASDAQ Stock Market, LLC (pending)

Securities registered pursuant to Section 12(g) of the Act: N/A

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicated by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Form 10-K. x

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

Large Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer ¨

Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 2b-2 of the Exchange Act).

Yes ¨ No x

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant as of June 30, 2008 which is the last business day of its most recently completed second fiscal quarter, was approximately $ 37,303,335 based on a per share price of $8.90 (which is the average of the ask and bid price reported by the NASDAQ Stock Market) as of such date. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the registrant’s Common Stock have been excluded in that such persons may be deemed affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 10, 2009, there were 6,058,007 shares of the registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2009 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

WGNB CORP.

2008 Form 10-K Annual Report

TABLE OF CONTENTS

Item Number in Form 10-K		Description	Page or Location

PART I
	Item 1.	Business	1

	Item 1A.	Risk Factors	19

	Item 1B.	Unresolved Staff Comments	19

	Item 2.	Properties	20

	Item 3.	Legal Proceedings	21

	Item 4.	Submission of Matters to a Vote of Security Holders	21
PART II
	Item 5.	Market for the Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities	21

	Item 6.	Selected Financial Data	23

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48

	Item 8.	Financial Statements and Supplementary Data	48

	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	48

	Item 9A(T).	Controls and Procedures	48

	Item 9B.	Other Information	49
PART III
	Item 10.	Directors, Executive Officers and Corporate Governance	49

	Item 11.	Executive Compensation	49

	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	49

	Item 13.	Certain Relationships and Related Transactions, and Director Independence	50

	Item 14.	Principal Accountant Fees and Services	50
PART IV
	Item 15.	Exhibits and Financial Statement Schedules	50

		Signatures	54

PART I

Item 1. Business

General

WGNB Corp. (which is sometimes referred to herein as the “Company” or “WGNB”) is an $892 million asset bank holding company headquartered in Carrollton, Georgia. The Company was organized as a business corporation under the laws of the State of Georgia in 1984 and is a registered bank holding company under the Federal Bank Holding Company Act of 1956, as amended, and under the bank holding company laws of the State of Georgia. WGNB completed a merger transaction with First Haralson Corporation (which is sometimes referred to herein as “First Haralson”) effective July 1, 2007 whereby First Haralson was merged with and into WGNB. In addition, First National Bank of Georgia, a wholly owned subsidiary of First Haralson, was merged with and into West Georgia National Bank. After the closing of the merger, both First Haralson and First National Bank of Georgia ceased to exist. At the effective date of the merger West Georgia National Bank changed its name to First National Bank of Georgia.

WGNB continues to conduct operations in western Georgia through its wholly-owned subsidiary, First National Bank of Georgia (which is sometimes referred to herein as the “Bank” or “First National Bank”). The Bank was organized in 1946 as a national banking association under the federal banking laws of the United States. As of March 10, 2009, WGNB had (i) 6,058,007 issued and outstanding shares of common stock, no par value per share (which is sometimes referred to herein as the “Common Stock”), held by approximately 1,200 shareholders of record and (ii) 1,509,100 shares of Series A Convertible Preferred stock, no par value per share (which is sometimes referred to herein as the “Series A Preferred”), held by approximately 240 shareholders of record.

WGNB conducts all of its business through First National Bank. The executive offices of both WGNB and First National Bank are located at 201 Maple Street, Carrollton, Georgia 30117. Access to WGNB’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports is available at its website, www.fnbga.com under the investor relations tab.

The Bank

First National Bank is a full service commercial bank offering a variety of services customary for community banks of similar size which are designed to meet the banking needs of individuals and small to medium-sized businesses. It attracts most of its deposits from Carroll, Haralson, and Douglas Counties and conducts most of its lending transactions from an area encompassing Carroll, Haralson, Douglas, and Paulding Counties.

First National Bank’s main office is located in Carrollton, Georgia. It operates a total of fourteen branches and nine additional 24-hour ATM sites located in Carroll, Haralson and Douglas Counties in Georgia. In Carroll County, First National Bank operates, in addition to its main office, two branches in the City of Carrollton, one branch in Villa Rica, one branch in Bowdon and one branch in Temple. In Haralson County, it operates two branches in Bremen, one branch in Buchanan and two branches in Tallapoosa. In Douglas County, it operates two branches in the City of Douglasville and one branch in Villa Rica. In November of 2008, the Bank closed its Coweta County loan production office. In January of 2009, the Bank closed its Banco de Progreso locations in Carrollton and Newnan. However, it has retained eight of the Banco de Progreso operation employees and will continue to serve Spanish-speaking customers in our market.

As a convenience to its customers, First National Bank offers at all of its branch locations drive-thru teller windows and 24-hour automated teller machines. All of our locations except our Bremen Pacific Avenue and our Carrollton Motor Bank have Saturday banking hours. It is a member of Star, Cirrus and several other ATM networks of automated teller machines that permit customers to perform monetary transactions in most cities throughout the southeast and other regions. First National Bank also offers Internet banking services through its website located at www.fnbga.com. Information included on the Bank’s website is not a part of this Report.

Deposit Services. First National Bank offers a full range of deposit services including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from money market accounts to longer-term certificates of deposit. The accounts are all offered to its market area at rates competitive to those offered in the area. All deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum allowed by law. In addition, First National Bank has implemented service charge fee schedules competitive with other financial institutions in its market area covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and the like.

As of December 31, 2008, First National Bank had deposits of approximately $762 million, and approximately 52 thousand deposit accounts. No material portion of its deposits relates to one or a few persons or entities (including federal, state and local governments and agencies). The loss of any one or a few principal deposit customers would not have a material adverse effect on the operations or earnings of the Bank.

The following table sets forth the mix of depository accounts at the Bank as a percentage of total deposits as of December 31, 2008:

Deposit Mix
	At December 31, 2008

Non-interest bearing demand		9	%
NOW accounts and money market		26	%
Savings		2	%
Time Deposits
Under $100,000		29	%
$100,000 and over		34	%
		100	%

Lending Services. First National Bank’s lending business consists principally of making consumer loans to individuals and commercial loans to small and medium-sized businesses and professional concerns. First National Bank also makes secured real estate loans and first and second mortgage loans for the acquisition or improvement of personal residences. As of December 31, 2008, the Bank had approximately $632 million in total loans outstanding, representing 71% of its total assets of approximately $892 million. The loan portfolio is made up of both fixed and adjustable rate loans. As of December 31, 2008, approximately 58% of the total loan portfolio was fixed rate and 42% was adjustable rate. Some of our adjustable rate loans have interest rate floors. The Bank is not dependent to any material degree upon any single borrower or a few principal borrowers. The loss of any individual borrower or of a few principal borrowers would not have a material adverse effect on the operations or earnings of First National Bank.

Real Estate Loans. Loans secured by real estate make up the primary component of the Bank’s loan portfolio, constituting approximately $538 million, or 85%, of its total loans as of December 31, 2008. Approximately 55% of the real estate loans are fixed rate and 45% are adjustable rate. Approximately 36% of the fixed rate real estate loans mature in one year or less and approximately 92% of the fixed rate real estate loans mature in five years or less. Real estate loans consist of commercial real estate loans, construction and development loans, residential real estate loans and home equity loans. Real estate loans are collateralized by commercial and residential real estate primarily located in our primary and secondary market areas. The types of real estate that typically constitute collateral include primary and secondary residences for individuals, multi-family projects, places of business, real estate for agricultural uses and developed and undeveloped land.

Commercial Loans, Other Than Commercial Loans Secured by Real Estate. First National Bank makes loans for commercial purposes in various industries resident to its market area. As of December 31, 2008, commercial loans constituted approximately $64 million, or 10%, of its total loans. Approximately 63% of commercial loans are fixed rate while 27% are adjustable. The typical commercial loan has a maturity of three years or less. The typical commercial loan has collateral such as equipment for business use and inventory and may include unsecured working capital lines.

Consumer Loans. The Bank makes a variety of loans to individuals for personal and household purposes, including secured and unsecured installment and term loans and lines of credit. As of December 31, 2008, it held approximately $35 million of consumer loans, representing 5% of total loans. Consumer loans are primarily fixed rate in nature with 95% of this loan category carrying fixed rates. These loans are typically collateralized by personal automobiles, recreational vehicles or cash on deposit and may include unsecured loans to individuals.

Other Lending Activities. First National Bank also engages in secondary-market mortgage activities whereby it originates mortgage loans on behalf of investor correspondent banks that fund the loans. The investor correspondent banks underwrite and price the loans and the Bank receives a fee for originating and packaging the loans. Periodically, the Bank receives discount points depending on the pricing of the loan. No mortgage loans are held by the Bank for resale nor does it service third party loans.

Risks Associated with Lending Activities. Consumer and non-mortgage loans to individuals can entail greater risk, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Commercial loans and loans secured by commercial and multi-family real estate properties are generally larger and involve a greater degree of credit risk than one-to-four family residential mortgage loans. Because payments on these loans are often dependent on the successful operation of the business or management of the property, repayment of such loans may be subject to adverse conditions in the economy or real estate markets. It has been the Bank’s practice to underwrite such loans based on its analysis of the amount of cash flow generated by the business and the resulting ability of the borrower to meet its payment obligations. In addition, the Bank, in general, seeks to obtain a personal guarantee of the loan by the owner of the business and, under certain circumstances, seeks additional collateral.

Construction, acquisition and development loans (“CA&D loans”) are generally considered to involve a higher degree of credit risk than most other types of loans. Risk of loss on a CA&D loan is dependent largely upon the accuracy of the initial estimate of the security property’s value upon completion of construction as compared to the estimated costs of construction, including interest and fees. In addition, First National Bank assumes certain risks associated with the borrower’s ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or in a quality manner, the Bank may be confronted with a project which, when completed, has a value insufficient to assure full repayment or to advance funds beyond the amount originally committed to permit completion of the project. Additionally, the Bank limits draws on construction projects on a percentage of completion basis which is monitored by an independent inspection process. For the past 12 months, residential real estate values both nationally and in the Bank’s market have declined significantly from their peak in 2006 and 2007.

CA&D lending has been particularly difficult beginning in the last half of 2007 and continuing throughout 2008 with the downturn in the residential real estate market in the metropolitan Atlanta area which includes our primary and secondary market areas. As of December 31, 2008, First National Bank had $188 million of CA&D loans which constituted 30% of total loans. As of December 31, 2008, included in CA&D loans were approximately $84.4 million of impaired loans that are either restructured or for which the Bank is no longer accruing interest. Impaired loans represented 13% of total loans as of December 31, 2008 compared to 5% of total loans as of December 31, 2007.

Impaired loans are considered non-performing assets when the accrual of interest is discontinued. The level of non-performing assets including impaired non-accrual loans, real estate taken in foreclosure and loans which are 90 days past due totaled $122.0 million, or 18.0% of total loans plus foreclosed property, as of December 31, 2008, which are at a historical high and are primarily attributable to the CA&D portfolio.

Target Concentrations & Loan Portfolio Mix. The Bank has target concentration and portfolio mix limits written in its loan policy. The goal of the policy is to avoid concentrations that would result in a particular loan or collateral type, industry or geographic area comprising a large part of the whole portfolio. Because of the downturn in the Bank’s CA&D portfolio, management has decreased its desired exposure to that type of lending. The Bank’s loan portfolio should be varied enough to obtain a balance of maximum yield and acceptable credit risk. The loan portfolio mix is reported and reviewed quarterly by our Board of Directors. Concentration targets are also evaluated periodically to determine changes in risk profiles and market need. The following represents target concentrations of loans by category as a percentage of total capital:

Unsecured loans	30	%
Loans secured by:
Residential real estate	300	%
Total commercial real estate	300	%
Convenience stores	20	%
Hotels/motels	10	%
Apartments	50	%
Construction acquisition & development loans	100	%
Commercial and industrial purpose loans	150	%
Participations purchased	75	%
Single payment notes	300	%

While the loan policy includes a provision generally limiting all types of real estate loans to 700% of total capital, the executive loan committee can approve loans that exceed the policy limits on a case by case basis where warranted. At the end of the fourth quarter of 2008, we were within the overall real estate concentration target although we have approved concentrations above the target in the specific segments of single family construction and land development. With the benefit of our experienced lenders and specialized controls, we are actively reducing this concentration. However, during the last half of 2007 and continuing through 2008, the Bank experienced significant charge-offs and a high level of non-performing assets primarily because of market deterioration in residential real estate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Provision and Allowance for Possible Loan and Lease Losses” and “- Non-Performing Assets and Past Due Loans.” We will continue actively seeking to diversify our portfolio into other business lines such as commercial and industrial loans as well as one-to-four family residential mortgages.

Legal Lending Limit. First National Bank is subject to loans to one borrower limitations prescribed for national banks by the Office of the Comptroller of the Currency. See -- Supervision and Regulation. The legal lending limit to a single borrower by regulation is 15% of a bank’s total capital and reserves, plus an additional 10% of a bank’s capital and reserves if the amount exceeding the 15% general limit is secured by readily marketable securities. The Bank, however, has adopted an internal policy requiring all exposure above 15% of capital and reserves to be approved by the entire Board of Directors unless certain conditions are met including one or more of the following:

	●	the amounts exceeding the limit are sold on a non-recourse basis;

	●	the amounts exceeding the limit are secured by readily marketable securities, up to a limit of 25% of capital and reserves.

Loan Underwriting Standards. Management recognizes the importance of character and past performance as consideration in the lending decision process. In analyzing a credit relationship, primary emphasis is placed on adequacy of cash flow and the ability of the borrower to service the debt. Secondary emphasis is placed on the past performance of the borrower, the type or value of the collateral, the amount of net worth present or any performance of endorsers or guarantors.

Collateral is not considered a substitute for the borrower’s ability to repay. Collateral serves as a way to control the borrower and provide additional sources of repayment in the event of default. The quality and liquidity of the collateral are of paramount importance and must be confirmed before the loan is made. The Bank has loan-to-value and margin guidelines that are varied depending on the type of collateral offered. Loans secured by liquid assets and securities carry margins of 75% to 100% depending on the liquidity and price volatility of the asset. Loan-to-value ratios on various types of real estate credits generally do not exceed 85% with many below 80%. Installment loans, in general, allow for a maximum loan to collateral value of 85%. In addition, there are limits on terms of repayment of loans for automobiles and related collateral which are dependent on the age of the asset. There are certain exceptions to the loan-to-value guidelines that are dependent on the overall creditworthiness of the borrower.

Loan Approval. First National Bank’s loan approval policies provide for various levels of officer lending authority. When the aggregate outstanding loans to a single borrower exceeds an individual officer’s lending authority, the loan request must be considered and approved by an officer with a higher lending limit or an officers’ loan committee (the “OLC”). Individual officer’s secured and unsecured lending limits range from $5,000 to $150,000, depending on seniority. The OLC, which consists of the Bank’s Chief Executive Officer, President, and three Executive Vice Presidents, has a lending limit of $1 million for secured and $250,000 for unsecured loans. Loans between $1 million and the Bank’s legal lending limit must be approved by the Bank’s Executive Loan Committee (the “ELC”), which is made up of the Bank’s CEO, President, one Executive Vice President and nine outside directors.

Loan Review. During 2008, the Bank’s loan review process increased in quantity as well as quality. Our Chief Credit Officer and loan review staff reviewed and improved critical policies and procedures in order to adequately support the current portfolio risk. Particular focus was placed on the CA&D portfolio. A comprehensive credit administration process is imperative particularly as portfolio size, complexity and risk exposure increases.

The Bank has a comprehensive loan review process involving independent internal loan review and, as necessary, independent consulting firms. The loan review process is designed to promote early identification of credit quality problems at both the relationship level and portfolio level. The scope of loan review activity for the commercial and business portfolio includes a minimum of 100% of all loan relationships greater than $1 million and 75% of all loan relationships between $800 thousand and $1 million. All loan officers are charged with the responsibility of properly grading their loans. Loan review may modify grades as part of the loan review process, with the Chief Credit Officer’s approval, to ensure proper risk identification. Loan reviews are presented to the ELC for oversight and concurrence. The Bank’s risk identification process is reviewed by its regulators and its independent auditors giving further oversight and feedback.

The Bank’s loan review staff has developed an annual loan review schedule to meet annual review penetration goals. This process has improved the loan review work product, making reviews an important part of our individual loan and portfolio management process. The loan review schedule is reviewed regularly for adherence to performance and production goals. As necessary, outside loan review consultants may be retained to increase review coverage.

The Bank has created a special assets management (“SAM”) department. SAM is a separate department of the Bank responsible for managing and disposing of non-accrual loans and foreclosed property. SAM is responsible for establishing policies and procedures which will allow the Bank and its lenders to focus on serving performing borrowers and provide independence in managing problem assets from the original loan relationship. SAM is currently developing management information systems to track staffing requirements and measure successful and sound workout activities.

Market Area

The following statistical data relating to our market area is based on information contained in a report published by the University of West Georgia Department of Economics dated October 28, 2008 and other information published by the FDIC on its website.

The five county West Georgia area that we serve has been significantly impacted by the slowdown of the residential real estate market which continued throughout 2008 and is likely to continue well into 2009. Institutions that are involved in various aspects of residential construction and development have also been affected by the slowdown. The primary effect of this downturn on our business has been a significant increase in First National Bank’s non-performing assets over the last eighteen months. The devaluation of property may migrate from residential to commercial real estate. As the rate of foreclosed property accelerated through 2008, the demand for property also decreased This phenomena has been exacerbated by the decrease in employment, not only in the Bank’s market area, but nationally as well. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Provision and Allowance for Possible Loan and Lease Losses” and “ Non-Performing Assets and Past Due Loans.”

The Bank’s primary market area includes all of Carroll, Douglas and Haralson Counties in Georgia. Approximately 70% of its deposit accounts are located in Carroll County, 26% are located in Haralson County and 4% are located in Douglas County. However, the Bank attracts loan business from neighboring Coweta and Paulding Counties as well. Our secondary market area includes the Georgia counties of Coweta, Heard, Cobb, Polk, Paulding, and the southern portion of Fulton, and the Alabama counties of Clebourne and Randolph.

Carroll County, located approximately 45 miles southwest of Atlanta and 90 miles east of Birmingham, Alabama, ranks 19th among Georgia’s 159 counties in terms of population and 23rd in terms of total personal income. Its major industries include manufacturing, wholesale and retail trade, food processing, accommodation and food services, construction and health services. Our main office is located in Carrollton, which is the county seat for Carroll County. The University of West Georgia, which serves more than 11,000 students, Southwire Inc. and Tanner Health System are also headquartered in Carrollton.

Carroll County continues to be the largest deposit base county in the Bank’s market area with Douglas County, to its east, and Paulding County, to its north, also emerging as deposit growth areas. The amount of total deposits in Carroll County was approximately $2.08 billion as of June 30, 2008, an increase of 4.5% from total deposits of approximately $1.99 billion as of June 30, 2007. As of June 30, 2008, First National Bank ranked number one in terms of market share for Carroll County, holding approximately 26% of the market’s deposits. The number two, three and four banks held, respectively, 14%, 12% and 10% of the market area’s deposits.

Carroll County has been severely impacted by a combination of employment declines, inflationary pressures, especially food and energy prices, and declines in the housing market. From the first quarter of 2007 to the first quarter of 2008, total employment in Carroll County declined 4.9% and declined further in the second through fourth quarters of 2008. On the housing front, single family housing permits peaked in Carroll County in 2004 at 1,838. By contrast, single family housing permits in 2008 numbered an annualized amount of 307, a 15 year low. Housing has been at the forefront of concerns about the local economy. Declining housing permits, slipping home values due to foreclosures and fading consumer confidence do not provide much hope for a positive outlook in the housing sector for Carroll County anytime in the near future.

Haralson County ranks 59th among Georgia’s 159 counties in terms of population. The amount of total deposits in Haralson County was approximately $452 million as of June 30, 2008, an increase of 4.4% over June 30 2007. We entered the Haralson County market through our acquisition of First Haralson. As of June 30, 2008, the Bank held a 36% market share of Haralson County deposits. A primary factor for the First Haralson acquisition was its effect on the resulting market share in WGNB’s and First Haralson’s respective counties. In Carroll and Haralson Counties alone, our combination gave us a number one market share position, holding 27% of the deposits in the combined county market. The second ranked institution held a 15% deposit market share.

Haralson County’s housing market, though affected by the economic downturn, has not seen the declines that other counties in the West Georgia region have faced. Haralson County’s housing permits peaked in 2005 with 185 permits, but declined in 2008 to an annualized amount of 51 permits. Haralson County’s unemployment rate has seen an increase from 4.6% to over 6.5% by the end of 2008. Not since 2004, when clothing manufacturing declined, has Haralson County experienced unemployment over 6%.

Douglas County (which has the largest population of our five county West Georgia market and ranks 16th among all 159 Georgia counties in terms of population) had the second largest deposit base in our market area with $1.54 billion in total deposits and a 2.0% deposit growth rate in 2008. The Bank held a 3.3% market share as of June 30, 2008, ranking ninth in terms of deposits for financial institutions located in Douglas County. With respect to Carroll, Haralson and Douglas Counties, on a combined basis, the Bank ranked number one in terms of market share of total deposits in the combined counties, with a 18.7% market share. The second ranked institution held a 9.7% market share in the combined counties.

Douglas County has been the hardest hit by the downturn of the national economy of all the counties in the West Georgia region. The county’s unemployment rate was over 7% at the end of 2008, well above the 4.5% unemployment rate Douglas County had at the end of 2007. As of August 2008, initial claims for unemployment had increased 80% from a year earlier. Housing permit activity decreased sharply as well. Based on housing permit data, single family construction in Douglas County had fallen over 70% in 2008 compared to 2007 levels and compared to a statewide level of 54%.

During November 2008, the Bank closed its loan production office in Coweta County. Additionally, the Bank closed its Coweta County and Carrollton locations of Banco de Progreso in January 2009. The Spanish-speaking population in our market area has been especially hard hit by the slowdown in residential real estate construction and loss of employment. Many people in that population have moved out of the area to find work. Consequently, the prospect for growth in this market niche has been significantly reduced. As part of our ongoing cost cutting efforts, we have consolidated those operations into closely located branches that have been staffed with Spanish speaking tellers, customer service representatives and lenders.

Competition

The Bank operates in a competitive environment, competing for deposits and/or loans with commercial banks, thrifts and other financial entities. Principal competitors include other small community commercial banks (such as McIntosh Commercial Bank, First Georgia Banking Company, Community Bank of West Georgia, Peoples Community National Bank, Douglas County Bank, First Commerce Community Bank and River City Bank) and larger institutions with branches in the Bank’s market area such as Bank of North Georgia (a division of Synovus), BB&T, Regions Bank, United Community Bank, Bank of America, SunTrust Bank and Wachovia Bank, a division of Wells Fargo. Numerous mergers and consolidations involving banks in the Bank’s market area have occurred, requiring the Bank to compete with banks with greater resources. During 2008, for example, Synovus announced the consolidation of several community banks that were formerly separately chartered into the Bank of North Georgia.

Despite its competition, First National Bank of Georgia enjoys the reputation of being the largest and oldest independent bank in Carroll County recently celebrating its 62nd year of service. At the time we acquired First National Bank in Haralson County, that institution enjoyed a 97 year history. With respect to our competitors, on the other hand, McIntosh Commercial Bank commenced operations in the fourth quarter of 2002, Community Bank of West Georgia commenced operations in the second quarter of 2003, First Georgia Banking Company commenced operations in the third quarter of 2003, Peoples Community National Bank commenced operations in the third quarter of 2004 and River City Bank commenced operations in the fourth quarter of 2007. Given the competition for deposits in Carroll County, deposit rates are increased as banks compete for funds in the market area.

The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, the financial strength of the institution, convenience of office locations and office hours. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market funds and other investment alternatives. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Many of the financial institutions operating in the Bank’s market area offer services such as trust and international banking, which the Bank does not offer, and have greater financial resources or have substantially higher lending limits than the Bank.

To compete with other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers’ needs. We believe that the Bank has an opportunity to establish business ties with customers who have been displaced by the consolidations of other banks, the financial weakening of competing banks and desire to forge banking relationships with locally owned and managed institutions. In addition, as commercial customers’ needs outgrow a de novo bank’s ability to fund their business, the Bank can serve those customers because it has a higher loan-to-one borrower limit which has increased as a result of our merger with First Haralson.

The Bank offers many personalized services and attracts customers by being responsive and sensitive to the needs of the community. The Bank relies not only on the goodwill and referrals of satisfied customers as well as traditional media advertising to attract new customers, but also on individuals who develop new relationships to build its customer base. To enhance the Bank’s image in the community, the Bank supports and participates in many events. Employees, officers and directors represent the Bank on many boards and local civic and charitable organizations.

Employees

As of December 31, 2008, the Bank had 248 full time equivalent employees compared to 268 full time equivalent employees as of December 31, 2007. None of our employees are a party to a collective bargaining agreement. Certain executive officers of the Bank also serve as the officers of WGNB (which does not have compensated employees). The Company believes that the Bank enjoys satisfactory relations with its employees.

Supervision and Regulation

The Company and the Bank are regulated under federal and state law. These laws and regulations generally are intended to protect depositors, not shareholders. The following is a summary description of certain provisions of certain laws which affect the regulation of bank holding companies and banks. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company and its bank subsidiary.

The Company

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHCA”). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. The Company’s and the Bank’s activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

Investments, Control and Activities. With certain limited exceptions, the BHCA requires every bank holding company to obtain prior approval of the Federal Reserve:

	●	to acquire the ownership or control of more than 5% of any class of voting stock of any bank not already controlled by it;

	●	for it or any subsidiary (other than a bank) to acquire all or substantially all of the assets of a bank; and

	●	to merge or consolidate with any other bank holding company.

In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring “control” of a bank holding company, such as the Company. Under current Federal Reserve policy guidelines, a person generally will not be viewed as having acquired control where the person holds up to 33% of the equity of the bank holding company, provided that the investment (i) does not include ownership of 15% or more of any class of voting securities of the target and (ii) does not represent more than 33% of a class of voting securities of the target (including for this purpose nonvoting equity that is convertible into equity).

The BHCA further provides that the Federal Reserve may not approve any transaction that would result in a monopoly, or the effect of which may be substantially to lessen competition in any section of the country, or that in any other manner would be in restraint of trade, unless the transaction’s anticompetitive effects are clearly outweighed by the public interest. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served.

Bank holding companies generally are also prohibited under the BHCA from engaging in non-banking activities or from acquiring direct or indirect control of any company engaged in non-banking activities. However, the Federal Reserve may permit bank holding companies to engage in certain types of non-banking activities determined by the Federal Reserve to be closely related to banking or managing or controlling banks. Activities determined by the Federal Reserve to fall under this category include:

	●	making or servicing loans and certain leases;

	●	providing certain data processing services;

	●	acting as a fiduciary or investment or financial advisor;

	●	providing discount brokerage services;

	●	underwriting bank eligible securities; and

	●	making investments designed to promote community welfare.

Subsidiary banks of a bank holding company are subject to certain restrictions on extensions of credit to the bank holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for the payment of dividends, interest and operating expenses. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or the furnishing of services. For example, the Bank may not generally require a customer to obtain other services from it or the Company, and may not require that a customer promise not to obtain other services from a competitor as a condition to an extension of credit to the customer.

Financial Services Modernization Act. Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related or incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999) relaxed the previous limitations and permitted bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed “financial in nature” include:

	●	lending, exchanging, transferring, investing for others or safeguarding money or securities;

	●	insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;

	●	providing financial, investment, or economic advisory services, including advising an investment company;

	●	issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and

	●	underwriting, dealing in or making a market in securities.

A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. A bank holding company that falls out of compliance with such requirement may be required to cease engaging in certain activities. Any bank holding company that does not elect to become a financial holding company remains subject to the bank holding company restrictions of the Act.

Under this legislation, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies with supervisory authority over each parent company and limited authority over its subsidiaries. The primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurance subsidiaries will be regulated largely by insurance authorities.

We have no current plans to register as a financial holding company.

Source of Strength; Cross-Guarantee. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support these subsidiaries. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. Under these provisions, a bank holding company may be required to loan money to its subsidiary banks in the form of capital notes or other instruments which qualify for capital under regulatory rules. Under the BHCA, the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC against losses it incurs with respect to any other bank controlled by the Company, which in effect makes the Company’s equity investments in healthy bank subsidiaries available to the FDIC to assist any failing or failed bank subsidiary of the Company.

State Regulation. Activities of the Company are subject to certain provisions of The Financial Institutions Code of Georgia and regulations issued pursuant to such code. These provisions are administered by The Georgia Department of Banking & Finance, which has concurrent jurisdiction with the Federal Reserve over the activities of the Company. The laws and regulations administered by The Georgia Department of Banking & Finance are generally consistent with, or supplemental to, those federal laws and regulations discussed herein.

The Bank

As a national bank, the Bank is subject to the supervision and examination by the Office of the Comptroller of the Currency (the “OCC”). Deposits in the Bank are insured by the FDIC up to a maximum amount allowable by law per depositor, subject to aggregation rules. The OCC and the FDIC regulate or monitor all areas of the Bank’s commercial banking operations, including security devices and procedures, adequacy of capitalization and loan loss reserves, loans, investments, borrowings, deposits, mergers, consolidations, reorganizations, issuance of securities, payment of dividends, interest rates, establishment of branches, and other aspects of its operations. The OCC requires the Bank to maintain certain capital ratios and imposes limitations on the Bank’s aggregate investment in real estate, bank premises and furniture and fixtures. The Bank is currently required by the OCC to prepare quarterly reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with minimum standards and procedures prescribed by the OCC.

Under FDICIA, all insured institutions must undergo periodic on-site examination by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC and the appropriate agency (and state supervisor when applicable). FDICIA also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset quality.

Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC or any other appropriate federal agency, shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could pose additional requirements and limitations on the bank. The Bank was examined for CRA compliance in December 2006 and received a CRA rating of “satisfactory.”

Other Regulations. Interest and certain other charges collected or contracted for by the Bank are subject to Georgia usury laws and certain federal laws concerning interest rates. The Bank’s loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit, the Fair Credit Reporting Act of 1978 governing the use and provision of information to credit reporting agencies, the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies, the Soldiers’ and Sailors’ Civil Relief Act of 1940 governing the repayment terms of, and property rights underlying, secured obligations of persons in military service, and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Bank also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services. The Bank’s commercial transactions are also subject to the provisions of the Uniform Commercial Code and other provisions of The Georgia Code Annotated.

Deposit Insurance

The deposits of the Bank are currently insured to the maximum allowable by law per depositor, subject to aggregation rules. The FDIC establishes rates for the payment of premiums by federally insured banks and thrifts for deposit insurance. Since 1993, insured depository institutions like the Bank have paid for deposit insurance under a risk-based premium system. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC. Due to its severe consequences, the FDIC historically uses insurance termination as an enforcement action of last resort and the termination process itself involves substantial notice, a formal adjudicative hearing and federal appellate review. In instances where insurance deposit is terminated, the financial institution is required to notify its depositors and insured funds on the date of termination that they will continue to be insured for at least six months and up to two years, at the discretion of the FDIC. After the date of termination, no new deposits accepted by the financial institution will be federally insured.

The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. On December 16, 2008, the FDIC adopted a final rule increasing risk-based assessment rates uniformly by 7 basis points, on an annual basis, for the first quarter of 2009. Currently, banks pay between 5 and 43 basis points of their domestic deposits for FDIC insurance. Under the final rule, risk-based rates would range between 12 and 50 basis points (annualized) for the first quarter 2009 assessment, depending on the insured institution’s risk category as described above. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The FDIC has published guidelines under the Reform Act on the adjustment of assessment rates for certain institutions. Under the current system, premiums are assessed quarterly. The Reform Act also provides for a one-time premium assessment credit for eligible insured depository institutions, including those institutions in existence and paying deposit insurance premiums on December 31, 1996, or certain successors to any such institution. The assessment credit is determined based on the eligible institution’s deposits at December 31, 1996 and is applied automatically to reduce the institution’s quarterly premium assessments to the maximum extent allowed, until the credit is exhausted. In addition, insured deposits have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”) to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.

On February 27, 2009, the FDIC adopted an interim rule, with request for comment, which would institute a one-time special assessment of 20 cents per $100 of domestic deposits on FDIC insured institutions. If approved, the Company estimates that the assessment would total approximately $1.525 million. The assessment would be payable on September 30, 2009.

Dividends

The Company is a legal entity separate and distinct from the Bank. The principal source of cash flow for the Company is dividends from the Bank. The amount of dividends that may be paid by the Bank to the Company depends on the Bank’s earnings and capital position and is subject to various statutory and regulatory limitations. In addition, the Federal Reserve has stated that bank holding companies should refrain from or limit dividend increases or reduce or eliminate dividends under circumstances in which the bank holding company fails to meet minimum capital requirements or in which its earnings are impaired.

As a national bank, the Bank may not pay dividends from its paid-in-capital. All dividends must be paid out of retained earnings, after deducting expenses, including reserves for losses and bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank’s net profits of the preceding two consecutive half-year periods (in the case of an annual dividend). The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. Under FDICIA, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. See Capital Adequacy.

As discussed below, additional capital requirements imposed by the OCC may limit the Bank’s ability to pay dividends to the Company. The Bank declared dividends in the amount of $1,908,142 to the Company during 2008. Under the OCC guidelines, as of December 31, 2008, the Bank could not pay additional dividends to the Company without obtaining prior regulatory approval.

In addition to the availability of funds from the Bank, the future dividend policy of the Company is subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, cash needs and general business conditions. The terms of our Series A Preferred also prohibit us from paying dividends on our Common Stock unless dividends on our Series A Preferred are paid for the applicable quarterly period. If dividends should be declared in the future, the amount of such dividends presently cannot be estimated and it cannot be known whether such dividends would continue for future periods.

Capital Adequacy

Federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to:

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

	●	account for off-balance sheet exposure; and

	●	minimize disincentives for holding liquid assets.

The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums.

The current guidelines require all bank holding companies and federally regulated banks to maintain a minimum risk-based Total Capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Bank holding companies controlling financial institutions can be called upon to boost the institution’s capital and to partially guarantee the institution’s performance under their capital restoration plans. Tier 1 capital includes shareholders’ equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangible assets and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate-term preferred stock and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.

Under the guidelines, banks’ and bank holding companies’ assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans, both of which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating.

Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business.

The Federal Reserve also has implemented a leverage ratio, which is Tier 1 capital as a percentage of average total assets less intangible assets, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. The Federal Reserve has established a minimum 3% leverage ratio of Tier 1 capital to total assets for the most highly rated bank holding companies and insured banks. All other bank holding companies and insured banks will be required to maintain a leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The tangible Tier 1 Leverage ratio is the ratio of a banking organization’s Tier 1 capital, less all intangibles, to total assets, less all intangibles.

FDICIA established a capital-based regulatory plan designed to promote early intervention for troubled banks and requires the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. To qualify as a well capitalized institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%. The bank must also not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level.

Under FDICIA, regulators must take prompt corrective action against depository institutions that do not meet minimum capital requirements. FDICIA and the related regulations establish five capital categories as shown in the following table:

Classification	Total Risk- Based Capital	Tier I Risk-Based Capital	Tier I Leverage

Well Capitalized (1)	10%	6%	5%

Adequately Capitalized (1)	8%	4%	4% (2)

Undercapitalized (3)	<8%	<4%	<4%

Significantly Undercapitalized (3)	<6%	<3%	<3%

Critically Undercapitalized (3)	—	—	<2%


	(1)	An institution must meet all three minimums.
	(2)	3% for composite 1-rated institutions, subject to appropriate federal banking agency guidelines.
	(3)	An institution is classified as undercapitalized if it is below the specified capital level for any of the three capital measures.

A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of four categories. As a depository institution moves downward through the capitalization categories, the degree of regulatory scrutiny will increase and the permitted activities of the institution will decrease. Action may be taken by a depository institution’s primary federal regulator against an institution that falls into one of the three undercapitalized categories, including the requirement of filing a capital plan with the institution’s primary federal regulator, prohibition on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring. Other restrictions may be imposed on the institution either by its primary federal regulator or by the FDIC, including requirements to raise additional capital, sell assets, or sell the institution.

As of the date of this Report, the Company and the Bank are considered to be well capitalized according to their current regulatory capital requirements. The Bank received certain requests relating to capital from its primary regulator, the OCC, the terms of which are confidential. Management is in the process of complying with certain of these requests. If the regulatory capital requirements are not met and/or maintained, additional regulatory actions may be taken against the Bank. See Note 12 of the Notes to Consolidated Financial Statements for additional details.

Interstate Banking and Branching Restrictions

Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), an adequately capitalized and adequately managed bank holding company may acquire a bank across state lines, without regard to whether such acquisition is permissible under state law. A bank holding company is considered to be “adequately capitalized” if it meets all applicable federal regulatory capital standards.

While the Riegle-Neal Act precludes a state from entirely insulating its banks from acquisition by an out-of-state holding company, a state may still provide that a bank may not be acquired by an out-of-state company unless the bank has been in existence for a specified number of years, not to exceed five years. Additionally, the Federal Reserve may not approve an interstate acquisition which would result in the acquirer’s controlling more than 10% of the total amount of deposits of insured depository institutions in the United States with 30% or more of the deposits in the home state of the target bank. A state may waive the 30% limit based on criteria that does not discriminate against out-of-state institutions. The limitations do not apply to the initial entry into a state by a bank holding company unless the state has a deposit concentration cap that applies on a nondiscriminatory basis to in-state or out-of-state bank holding companies making an initial acquisition.

The Riegle-Neal Act permits banks with different home states to merge unless a particular state opts out of the statute. Georgia adopted legislation which has permitted interstate bank mergers since June 1, 1997.

The Riegle-Neal Act also permits national and state banks to establish de novo branches in another state if there is a law in that state which applies equally to all banks and expressly permits all out-of-state banks to establish de novo branches. However, in 1996, Georgia adopted legislation which opts out of this provision. The Georgia legislation provides that, with the prior approval of the Georgia Department of Banking and Finance, after July 1, 1996, a bank may establish three new or additional de novo branch banks anywhere in Georgia and, beginning July 1, 1998, a bank may establish new or additional branch banks anywhere in the state with prior regulatory approval.

Privacy

Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. It is the Bank’s policy not to disclose any personal information unless required by law.

Anti-Terrorism Legislation

In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and “know your customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps—

	●	to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

	●	to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

	●	to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and

	●	to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

Under the USA PATRIOT Act, financial institutions are required to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:

	●	the development of internal policies, procedures, and controls;

	●	the designation of a compliance officer;

	●	an ongoing employee training program; and

	●	an independent audit function to test the programs.

In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above. The Bank currently has policies and procedures in place designed to comply with the USA PATRIOT Act.

Regulation W

The Company and its banking affiliates are subject to Regulation W, which provides guidance on permissible activities and transactions between affiliated companies. In general, subject to certain specified exemptions, a bank or its subsidiaries are limited in their ability to engage in “covered transactions” with affiliates:

	●	to an amount equal to 10% of the bank’s capital and surplus, in the case of covered transactions with any one affiliate; and

	●	to an amount equal to 20% of the bank’s capital and surplus, in the case of covered transactions with all affiliates.

In addition, a bank and its subsidiaries may engage in covered transactions and other specified transactions only on terms and under circumstances that are substantially the same, or at least as favorable to the bank or its subsidiary, as those prevailing at the time for comparable transactions with nonaffiliated companies. A “covered transaction” includes:

	●	a loan or extension of credit to an affiliate;

	●	a purchase of, or an investment in, securities issued by an affiliate;

	●	a purchase of assets from an affiliate, with some exceptions;

	●	the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any party; and

	●	the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

In addition, under Regulation W:

	●	a bank and its subsidiaries may not purchase a low-quality asset from an affiliate;

	●	covered transactions and other specified transactions between a bank or its subsidiaries and an affiliate must be on terms and conditions that are consistent with safe and sound banking practices; and

	●	with some exceptions, each loan or extension of credit by a bank to an affiliate must be secured by collateral with a market value ranging from 100% to 130%, depending on the type of collateral, of the amount of the loan or extension of credit.

The Bank is also subject to certain restrictions imposed by the Federal Reserve on extensions of credit to executive officers, directors, principal shareholders, or any related interest of such persons. Extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, and following credit underwriting procedures that are at least as stringent as those prevailing at the time for comparable transactions with persons not covered above and who are not employees, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. The Bank is also subject to certain lending limits and restrictions on overdrafts to such persons.

Consumer Credit Reporting

On December 4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the FAIR Act), amending the federal Fair Credit Reporting Act (the FCRA). Amendments to the FCRA include, among other things:

	●	new requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud;

	●	new consumer notice requirements for lenders that use consumer report information in connection with risk-based credit pricing programs;

	●	for entities that furnish information to consumer reporting agencies(which would include the Bank), new requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information, and regarding the correction of previously furnished information that is later determined to be inaccurate; and

	●	a new requirement for mortgage lenders to disclose credit scores to consumers.

The amendments also prohibit a business that receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes, subject to certain exceptions. The Company and the Bank have implemented procedures to comply with those new rules.

Recent Legislation and Regulatory Action

Emergency Economic Stabilization Act of 2008

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. EESA enables the federal government, under terms and conditions to be developed by the Secretary of the Treasury, to insure troubled assets, including mortgage-backed securities, and collect premiums from participating financial institutions. EESA includes, among other provisions: (a) the $700 billion Troubled Assets Relief Program (“TARP”), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages originated or issued on or before March 14, 2008; and (b) an increase in the amount of deposit insurance provided by the FDIC. Both of these specific provisions are discussed in the below sections.

Troubled Assets Relief Program (TARP)

Under the TARP, the Department of Treasury authorized a voluntary capital purchase program (“CPP”) to purchase up to $250 billion of senior preferred shares of qualifying financial institutions that elected to participate by November 14, 2008. Participating companies must adopt certain standards for executive compensation, including (a) prohibiting “golden parachute” payments as defined in EESA to senior Executive Officers; (b) requiring recovery of any compensation paid to senior Executive Officers based on criteria that is later proven to be materially inaccurate; and (c) prohibiting incentive compensation that encourages unnecessary and excessive risks that threaten the value of the financial institution. The terms of the CPP also limit certain uses of capital by the issuer, including repurchases of company stock, and increases in dividends. The Company is currently evaluating its participation in the TARP and CPP. The Company has applied for CPP funding under the TARP program. Its application remains pending as of the date of this Report.

Temporary Liquidity Guarantee Program

Pursuant to the EESA, the maximum deposit insurance amount per depositor has been increased from $100,000 to $250,000 until December 31, 2009. Additionally, on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, the Secretary of the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to establish its Temporary Liquidity Guarantee Program (“TLGP”). Under the transaction account guarantee program of the TLGP, the FDIC will fully guarantee, until the end of 2009, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The TLGP also guarantees all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009 with a stated maturity greater than 30 days. All eligible institutions were permitted to participate in both of the components of the TLGP without cost for the first 30 days of the program. Following the initial 30 day grace period, institutions were assessed at the rate of ten basis points for transaction account balances in excess of $250,000 for the transaction account guarantee program and at the rate of either 50, 75, or 100 basis points of the amount of debt issued, depending on the maturity date of the guaranteed debt, for the debt guarantee program. Institutions were required to opt-out of the TLGP if they did not wish to participate. The Company did not choose to opt out of either the transaction account guarantee program or debt guarantee program components of the TGLP.

Financial Stability Plan

On February 10, 2009, the Financial Stability Plan (“FSP”) was announced by the U.S. Treasury Department. The FSP is a comprehensive set of measures intended to shore up the financial system. The core elements of the plan include making bank capital injections, creating a public-private investment fund to buy troubled assets, establishing guidelines for loan modification programs and expanding the Federal Reserve lending program. The U.S. Treasury Department has indicated more details regarding the FSP are to be announced on a newly created government website, FinancialStability.gov, in the next several weeks. We continue to monitor these developments and assess their potential impact on our business.

American Recovery and Reinvestment Act of 2009

On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. ARRA is intended to provide a stimulus to the U.S. economy in the wake of the economic downturn brought about by the subprime mortgage crisis and the resulting credit crunch. The bill includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, healthcare, and infrastructure, including the energy structure. The new law also includes numerous non-economic recovery related items, including a limitation on executive compensation in federally aided banks.

Under ARRA, an institution will be subject to the following restrictions and standards through out the period in which any obligation arising from financial assistance provided under TARP remains outstanding:

	●	Limits on compensation incentives for risk taking by senior executive officers.
	●	Requirement of recovery of any compensation paid based on inaccurate financial information.
	●	Prohibition on “Golden Parachute Payments”.
	●	Prohibition on compensation plans that would encourage manipulation of reported earnings to enhance the compensation of employees.

	●	Publicly registered TARP recipients must establish a board compensation committee comprised entirely of independent directors, for the purpose of reviewing employee compensation plans.
	●	Prohibition on bonus, retention award, or incentive compensation, except for payments of long term restricted stock.
	●	Limitation on luxury expenditures.
	●	TARP recipients are required to permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the SEC’s compensation disclosure rules.
	●	The chief executive officer and chief financial officer of each TARP recipient will be required to provide a written certification of compliance with these standards to the SEC.

The foregoing is a summary of requirements to be included in standards to be established by the Secretary of the U.S. Treasury Department.

Homeowner Affordability and Stability Plan

On February 18, 2009, the Homeowner Affordability and Stability Plan (“HASP”) was announced by the President of the United States. HASP is intended to support a recovery in the housing market and ensure that workers can continue to pay off their mortgages through the following elements:

	●	Provide access to low-cost refinancing for responsible homeowners suffering from falling home prices.
	●	A $75 billion homeowner stability initiative to prevent foreclosure and help responsible families stay in their homes.
	●	Support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

More details regarding HASP are expected. We continue to monitor these developments and assess their potential impact on our business

Other Regulatory Developments

The Basel Committee on Banking Supervision’s “Basel II” regulatory capital guidelines originally published in June 2004 and adopted in final form by U.S. regulatory agencies in November 2007 are designed to promote improved risk measurement and management processes and better align minimum capital requirements with risk. The Basel II guidelines became operational in April 2008, but are mandatory only for “core banks,” i.e., banks with consolidated total assets of $250 billion or more. They are thus not applicable to the Bank, which continues to operate under U.S. risk-based capital guidelines consistent with “Basel I” guidelines published in 1988.

Federal regulators issued for public comment in December 2006 proposed rules (designated as “Basel IA” rules) applicable to non-core banks that would have modified the existing U.S. Basel I-based capital framework. In July 2008, however, these regulators issued, instead of the Basel 1A proposals, a new rulemaking involving a “standardized approach” that would implement some of the simpler approaches for both credit risk and operational risk from the more advanced Basel II framework. Non-core U.S. depository institutions would be allowed to opt in to the standardized approach or elect to remain under the existing Basel 1-based regulatory capital framework. The new rulemaking remained pending at the end of 2008.

In January 2008, with the support of the Bank’s Board of Directors, the Bank began initiating a series of corrective actions to mitigate the impact of increasing non-performing assets while maintaining communications with the OCC examiners. Among the actions taken are the following:

	●	assigning of additional asset recovery staff including management whose sole responsibility is to manage and reduce non-performing assets as quickly as possible;

	●	continuing review and revision, as appropriate, of loan portfolio management procedures and processes including loan diversification, increased underwriting standards, intensified loan review and aggressive problem asset identification;

	●	maintaining a valuation process which we believe balances rapid collection of non-performing loans and reduction of foreclosed property with maximizing the net realizable value of these assets for the shareholders; and

	●	taking necessary steps, including raising capital through a public offering of our Series A Preferred stock, in order to be considered well capitalized as determined by regulatory standards applicable to the Bank and us.

All of these steps have been reported in prior SEC filings and other communications with our shareholders including through investor presentations and our annual shareholders meeting. These steps are designed to improve risk management, enhance internal controls over credit administration, focus on our market, and return the Bank to profitable community banking. During these presentations, management shared that we may formalize these actions with our regulators.

On November 12, 2008, the Bank, entered into a formal written agreement with the Office of the OCC. The Bank has agreed to undertake certain actions within designated timeframes and operate in compliance with the provisions of the agreement during its term. The agreement is based on the results of an examination of the Bank by the OCC commenced on April 28, 2008.

The provisions of the agreement include the following: (i) within 45 days, the Board of Directors of the Bank is required to adopt and implement a written action plan detailing the Board’s assessment of what needs to be done to improve the Bank, specifying how the Board will implement the plan and setting forth a timetable for the implementation of the plan, which must be submitted to the OCC for review and prior determination of no supervisory objection; (ii) within 45 days, the Board is required to update, review and implement its written asset diversification program which must be submitted to the OCC for review and prior determination of no supervisory objection; (iii) within 90 days, the Board is required to adopt and implement a written program to eliminate the basis for criticism of assets identified as problem assets; (iv) within 60 days, the Board is required to establish a Loan Workout Department for the purpose of restoring and reclaiming classified assets, including commercial real estate loans, and submit for supervisory review a capable loan workout specialist; (v) within 90 days, the Board is required to update and implement its three-year budget and capital plan, which must be submitted to the OCC for review and prior determination of no supervisory objection. Compliance with the agreement is to be monitored by a committee of at least seven directors, two of whom can be employees or controlling shareholders of the Bank or any of its affiliates or a family member of such person. The committee is required to submit written progress reports on a quarterly basis and the Agreement requires the Bank to make periodic reports and filings with the OCC. The Bank has submitted all plans within the timeframes outlined in the agreement.

New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation’s financial institutions operating in the United States. The Company cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which its business may be affected by any new regulation or statute.

Effect of Governmental Monetary Policies

The earnings of the Company are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Item 1A. Risk Factors Not applicable.

Item 1B. Unresolved Staff Comments Not applicable.

Item 2. Properties

The following table sets forth information regarding our current offices and banking facilities:

Facility	Location	Ownership

WGNB and First National Bank Corporate Offices	201 Maple Street Carrollton, Carroll County, Georgia	Owned

First National Bank Main Branch Office	201 Maple Street Carrollton, Carroll County, Georgia	Owned

First National Bank First Tuesday Mall Office	1004 Bankhead Highway Carrollton, Carroll County, Georgia	Owned

First National Bank Motor Office	314 Newnan Street Carrollton, Carroll County, Georgia	Leased

First National Bank Villa Rica Office	725 Bankhead Highway Villa Rica, Carroll County, Georgia	Owned

First National Bank Bowdon Office	205 East College Street Bowdon, Carroll County, Georgia	Owned

First National Bank Temple Office	184 Carrollton Street Temple, Carroll County, Georgia	Owned

First National Bank Bremen Financial Center (former First Haralson headquarters)	900 Atlantic Avenue Bremen, Haralson County, Georgia	Owned

First National Bank Bremen Office	501 Pacific Avenue Bremen, Haralson County, Georgia	Owned

First National Bank Buchanan Office	3559 Business 27 Buchanan, Haralson County, Georgia	Owned

First National Bank Tallapoosa Office	3408 Georgia Hwy 100 Tallapoosa, Haralson County, Georgia	Owned

First National Bank Tallapoosa Office	39 Bowden Street Tallapoosa, Haralson County, Georgia	Owned

First National Bank Mirror Lake Office	Village at Mirror Lake Shopping Center Douglasville, Douglas County, Georgia	Owned

First National Bank Highway 5 Office	9557 Georgia Hwy 5 Douglasville, Douglas County, Georgia	Leased

First National Bank Chapel Hill Office	9360 The Landing Drive (adjacent to Arbor Place Mall) Douglasville, Douglas County, Georgia	Owned

All locations are typical of branch banking facilities located throughout the United States and all locations, except the Motor offices, are full service locations. Each branch location has an ATM that is either walk-up or drive-up. The Bank also operates nine additional ATMs on leased properties located throughout the Carrollton, Bremen and Villa Rica areas. The Motor offices provide primarily teller and ATM transactions and do not originate loans.

The Bank’s main office, operations center and related parking are located on approximately 2.5 acres. The main office is a two-story building with a total of approximately 19,100 square feet housing its lobby, retail offices, administrative and executive offices. The operations center is a two-story building with a total of approximately 12,200 square feet housing a computer room, administrative offices and storage facilities. The branch offices in Carroll County (with the exception of the Motor office which is approximately 700 square feet) are typical of other banking facilities and are approximately 3,000 to 5,000 square feet in size.

The Bremen Financial Center is a two-story building located on approximately 3 acres that contains approximately 20,000 square feet. The other Haralson County branches are typical of our other locations and are approximately 3,000 to 4,000 square feet in size (with the exception of the Tallapoosa motor branch which is approximately 700 square feet).

The Mirror Lake and Chapel Hill branches provided a new look for the Bank and contain customer-centric features such as concierge customer service areas with workstations and Internet connectivity. The Mirror Lake branch utilizes a remote teller system and is designed to be high-touch customer service and low-touch transactional service. The new Chapel Hill branch (formerly a Wachovia location) was built in 2001 and is a 3,400 square foot building on approximately one acre with brick and veneer exterior.

Item 3. Legal Proceedings

While the Company and its subsidiaries are from time to time party to various legal proceedings arising from the ordinary course of business, management believes that there are no proceedings of material risk threatened or pending.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholders of the Company during the fourth quarter of the fiscal year covered by this Report.

PART II

Item 5. Market for Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s Common Stock is traded on the NASDAQ Capital Market System under trading symbol “WGNB”. Approximately 1,200 shareholders (including holders having security positions held through a clearing agency or nominee) held our Common Stock as of March 10, 2009. Set forth below are the high and low sales prices for each full quarterly period during 2007 and 2008 and the dividends declared and paid per share of Common Stock for those periods.

		Price Range Per Share
		Low		High		Dividends Paid Per Share
2007:
	First Quarter	$	27.50	$	33.00	$	0.197
	Second Quarter		28.32		31.60		0.203
	Third Quarter		24.79		28.08		0.210
	Fourth Quarter		19.79		24.24		0.210

2008:
	First Quarter	$	15.00	$	21.55	$	0.210
	Second Quarter		8.16		16.89		0.105
	Third Quarter		4.28		9.37		0.000
	Fourth Quarter		2.27		6.99		0.000

Dividends

The declaration of future dividends is within the discretion of the Board of Directors and will depend, among other things, upon business conditions, earnings, the financial condition of the Bank and the Company, and regulatory requirements. The terms of our Series A Preferred also prohibit us from paying dividends on our Common Stock unless dividends on our Series A Preferred are paid for the applicable quarterly period. See “Business – Supervision and Regulation – Dividends.”

Recent Sales of Unregistered Securities

The Company did not issue any securities during the year ended December 31, 2008 that were not registered under the Securities Act.

Issuer Purchases of Equity Securities

The Company did not repurchase any of its securities during the fourth quarter of 2008.

Item 6. Selected Financial Data

The selected consolidated financial data of the Company for and as of the end of each of the periods indicated in the five-year period ended December 31, 2008 have been derived from the audited consolidated financial statements of the Company. The selected consolidated financial data should be read in conjunction with the consolidated financial statements of the Company, including the notes to those consolidated financial statements contained elsewhere in this Report.

	Year Ended December 31,
	2008			2007			2006			2005			2004
	(In thousands, except share and per share data)
For the Year:
Total interest income	$	48,113		$	55,828		$	42,093		$	32,546		$	25,268
Total interest expense		25,611			27,181			18,727			12,583			7,570
Net interest income		22,502			28,647			23,366			19,963			17,698
Provision for loan losses		14,900			10,206			1,465			1,550			925
Net interest income after provision for loan losses		7,602			18,441			21,901			18,413			16,773
Other income		7,617			8,068			6,404			6,008			5,637
Other expense		28,234			23,341			16,519			14,464			13,664
Goodwill impairment		24,128			—			—			—			—
Earnings (loss) before income taxes		(37,143	)		3,168			11,786			9,957			8,746
Income (benefit) taxes		(6,393	)		134			3,458			2,889			2,682
Net (loss) earnings		(30,750	)		3,034			8,327			7,067			6,064
Per Share Data:
Net (loss) earnings		(5.12	)		.55			1.67			1.42			1.22
Diluted (loss) earnings		(5.12	)		.55			1.66			1.41			1.21
Diluted (loss) exclusive of goodwill impairment		(1.14	)		—			—			—			—
Cash dividends declared		0.32			.82			.72			.61			.52
Book value		7.43			13.23			10.50			9.61			9.01
Tangible book value		6.62			8.37			10.50			9.61			9.01
At Year End:
Total loans		631,500			659,963			474,319			423,720			356,909
Earning assets		727,316			739,334			550,466			503,275			425,062
Assets		892,219			883,665			575,329			523,643			441,929
Total deposits		761,693			706,377			462,813			429,049			338,398
Shareholders’ equity		56,929			80,151			52,496			47,952			44,962
Tangible shareholders’ equity		52,052			50,718			52,496			47,952			44,962
Common shares outstanding		6,058,007			6,057,594			5,000,613			4,987,794			4,988,661
Average Balances:
Total loans		652,597			580,387			441,883			395,943			330,159
Earning assets		803,578			683,998			522,703			473,480			404,121
Assets		897,715			740,862			549,691			501,191			428,637
Deposits		729,451			594,564			440,560			393,851			325,991
Shareholders’ equity		77,745			69,412			50,358			46,857			43,742
Tangible shareholders’ equity		48,580			54,695			50,358			46,857			43,742
Weighted average shares outstanding		6,057,613			5,534,851			4,998,103			4,986,930			4,958,604
Weighted average diluted shares outstanding		6,057,613			5,560,038			5,024,668			5,024,429			5,034,495
Key Performance Ratios:
Return on average assets		(3.43	)%		0.41	%		1.51	%		1.41	%		1.41	%
ROAA exclusive of goodwill impairment		(0.74	)%		—			—			—			—
Return on average equity		(39.55	)%		4.37	%		16.54	%		15.08	%		13.86	%
ROAE exclusive of goodwill impairment		(8.52	)%		—			—			—			—
Return on average tangible equity		(63.30	)%		5.55	%		16.54	%		15.08	%		13.86	%
ROATE exclusive of goodwill impairment		(13.63	)%		—			—			—			—
Net interest margin, taxable equivalent		2.97	%		4.33	%		4.60	%		4.37	%		4.55	%
Dividend payout ratio	NM				149.09	%		43.11	%		43.19	%		42.62	%
Average equity to average assets		8.66	%		9.37	%		9.16	%		9.35	%		10.20	%
Average loans to average deposits		89.46	%		97.62	%		100.30	%		100.53	%		101.28	%
Overhead ratio exclusive of goodwill impairment		93.74	%		63.57	%		55.49	%		55.69	%		58.56	%

NM – Not meaningful

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of the following discussion is to address information relating to our financial condition and results of operations that may not be readily apparent from a review of the consolidated financial statements and notes thereto, which begin on page F-1 of this Report. This discussion should be read in conjunction with information provided in WGNB’s consolidated financial statements and accompanying footnotes. When we use words like “we,” “us,” “our” and the like, we are referring to WGNB together with its subsidiary, First National Bank.

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements made in this Report and in documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as oral statements made by the Company or its officers, directors or employees, may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based on management’s beliefs, current expectations, estimates and projections about the financial services industry, the economy and about the Company and the Bank in general. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements. Such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ materially from historical results or from any results expressed or implied by such forward-looking statements. We caution readers that the following important factors, among others, could cause our actual results to differ materially from the forward-looking statements contained in this Report:

	●	the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which we must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable;

	●	the effect of changes in accounting policies, standards, guidelines or principles, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board;

	●	the effect of changes in our organization, compensation and benefit plans;

	●	the effect on our competitive position within our market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services;

	●	the effect of changes in interest rates;

	●	the effect of compliance, or failure to comply within stated deadlines, of the provisions of our formal agreement with our primary regulators;

	●	the effect of changes in the business cycle and downturns in local, regional or national economies;

	●	the effect of the continuing deterioration of the local economies in which we conduct operations which results in, among other things, a deterioration in credit quality or a reduced demand for credit, including a resultant adverse effect on our loan portfolio and allowance for loan and lease losses;

	●	the possibility that our allowance for loan and lease losses proves to be inappropriate or that federal and state regulators who periodically review our loan portfolio require us to increase the provision for loan losses or recognize loan charge-offs;

	●	the effect of the current and anticipated deterioration in the housing market and the residential construction industry which may lead to increased loss severities and further worsening of delinquencies and non-performing assets in our loan portfolios;

	●	the effect of the significant number of construction loans we have in our loan portfolios, which may pose more credit risk than other types of mortgage loans typically made by banking institutions due to the disruptions in credit and housing markets.

	●	the effect of troubled institutions in our market area continuing to dispose of problem assets which, given the already excess inventory of residential homes and lots will continue to negatively impact home values and increase the time it takes us or our borrowers to sell existing inventory;

	●	the effect of public perception that banking institutions are risky institutions for purposes of regulatory compliance or safeguarding deposits which may cause depositors nonetheless to move their funds to larger institutions; and

	●	the possibility that we could be held responsible for environmental liabilities of properties acquired through foreclosure.

We caution that the foregoing list of important factors is not exclusive of other factors which may impact our operations.

CRITICAL ACCOUNTING POLICIES

We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. These significant accounting policies are described in the Notes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management which have 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 these judgments and estimates which could have a material impact on the carrying value of our assets and liabilities and results of operations. All accounting policies are important, and all policies described in Notes to the consolidated financial statements should be reviewed for a greater understanding of how our financial performance is recorded and reported.

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 is 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. Please refer to the section of this Report entitled “Balance Sheet Review – Provision and Allowance for Possible Loan and Lease Losses” and Note 1 and Note 4 to our consolidated financial statements for a detailed description of our estimation processes and methodology related to the allowance for loan losses.

EARNINGS OVERVIEW

For the Years Ended December 31, 2008, 2007 and 2006

Our net loss for 2008 was $30.8 million which includes a non-cash charge for impairment of goodwill in the amount of $24.1 million. The net loss was $6.6 million, or $1.14 per common share, exclusive of the charge for goodwill impairment. The net loss for 2008 compares to net earnings of $3.0 million, or $0.55 per diluted common share, in 2007 and $8.3 million, or $1.66 per diluted common share, in 2006. Excluding the goodwill charge,the return on average assets for 2008 was (0.74)%, the return on average shareholders’ total equity for 2008 was (8.52)%, and the return on average tangible equity for 2008 was (13.63)%. This compared to a 0.41% return on average assets and 4.37% return on average equity for 2007, and a 1.51% return on average assets and 16.54% return on average equity for 2006. Over the past ten years, our return on average assets has averaged 1.16% and our return on average equity has averaged 9.20% excluding the goodwill charge in 2008.

Historically, our earnings have been driven primarily by balance sheet growth, particularly in loans, and attaining greater overhead efficiency. Being a suburb of Atlanta along heavily traveled Interstate 20 West, our market has been driven by residential and commercial real estate development. During 2007, we completed our merger with First Haralson which also had a significant presence in west Georgia. The merger increased both earnings and the number of shares outstanding for the last half of 2007. We anticipated that the merger would be neither materially accretive nor dilutive in the first eighteen months following the merger. Our analysis took into account non-recurring, non-operating merger costs, estimated cost savings over a twelve to eighteen month period and the expected average number of shares outstanding based on the elections of First Haralson shareholders. The merger of the two entities actually proved to be very beneficial to the Company since it increased our core earnings base and helped brace us for a significant decrease in credit quality that began in the last half of 2007 and continued throughout 2008.

The acquired loans of First Haralson had no impact on the level of non-performing assets except to increase the total loan portfolio, thereby reducing the percentage of non-performing assets to total loans. Nor did the operations of First Haralson have a negative impact on the charge-down of goodwill incurred in the fourth quarter of 2008. Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, requires companies to perform an annual test for goodwill impairment. As a result of the general decline in market valuations for bank stocks, the deterioration of economic conditions and our financial performance as impacted by loan quality deterioration during 2008, we concluded that the goodwill resulting from the Company’s acquisition of First Haralson on July 1, 2007 was impaired. Therefore, we charged-off the entire amount of goodwill recorded on our balance sheet.

Much has been said about the slowdown in the metro-Atlanta residential real estate market over the past eighteen months. There is no question that the subprime mortgage production and subsequent default rate has had an impact on our construction and development borrowers. While we did not actually produce subprime mortgages, the excess inventory of residential homes and lots that has been produced by foreclosure on subprime loans and over-building to meet the demand of subprime lending has had a negative impact on home values and increased the time it takes to sell existing inventory. These economics have had a significant impact on our borrower’s ability to carry the construction or development project and, as a result, have reduced the quality of our overall construction and development loan portfolio.

We began to experience credit quality issues in the third quarter of 2007. The reduction in asset quality continued throughout 2008 as both the national and local economies continued to deteriorate. Since the middle of 2007, our non-performing assets increased from $6.6 million as of June 30, 2007 to $58.3 million as of December 31, 2007, an increase of approximately $51.7 million, or 783%. As of December 31, 2008, non-performing assets totaled $122.0 million, an increase of 110% from the end of 2007. The majority of the non-performing asset increase was attributable to approximately twenty-six residential real estate construction and development loan relationships. In the midst of record credit deterioration in the residential real estate market, we recorded a loan loss provision of $14.9 million and incurred net charge-offs of $16.1 million, or 2.46% of average loans outstanding in 2008. Particularly hard hit in the metro-Atlanta area were the south and west suburbs which comprise much of our market area. Over the last eighteen months comprising the last half of 2007 and all of 2008, we experienced net charged-off loans of $21.1 million which resulted in our recording loan loss provisions in the amount of $24.3 million.

In addition to the elevated loan loss provision and charged-off loans, we recorded charged-off interest on impaired loans in the amount of $2.9 million, realized a loss on sale or charge-down of $1.2 million of foreclosed property and incurred $2.4 million in expense on collection of impaired loans and maintenance of foreclosed property during 2008.

We measure our core earnings before taxes by adding back the charge on goodwill impairment and credit related charges such as loan loss provision, charged-off interest on impaired loans, loss on sale or write-down of foreclosed property and expense on collection of impaired loans and maintenance of foreclosed property. Core earnings before taxes for 2008 were $7.2 million.

Our net interest margin compressed significantly in 2008 when compared to 2007 and 2006. Our net interest margin was significantly impacted by the increase in non-performing assets and increased liquidity that have been carried on the balance sheet throughout 2008. The Bank had $122.0 million of non-performing assets and $75.4 million of cash and cash equivalents on the balance sheet as of December 31, 2008. The net interest margin was 2.97%, 4.33% and 4.60% in 2008, 2007 and 2006, respectively. As loans became impaired, we ceased accruing interest on the balance of the loan. Therefore, the loans became non-performing assets classified as impaired loans and, if not cured, eventually became foreclosed property. The Bank must maintain interest-bearing deposits to cover the balance in non-performing assets and excess liquidity which results in compressing the net interest margin. The net interest margin was also compressed by the amount of interest income that was charged-off on impaired loans. In addition, the Bank increased its interest-bearing deposits to fund increased liquidity needs. The safety and availability of our customer deposits became a priority in response to increased headline risk in 2008 as banks across the country (including very large banks and Georgia banks) began to fail.

In addition, compression of the net interest margin can take place if our balance sheet is not protected from the impact of changes in market interest rates. While not completely immune to compression of the net interest margin due to interest rate risk, rapidly falling market interest rates negatively impacted the net interest margin in late 2008. As interest rates approach zero, our certificates of deposit require time to reprice to match falling loan and cash and cash equivalent yields. If rates fall rapidly and certificate of deposit rates remain high because of perceived risk in the banking system, our margin could continue to be negatively impacted.

Management continually seeks to increase revenues while controlling costs. In 2008, our overhead ratio excluding the charge for the impairment of goodwill (non-interest expense/net interest income plus non-interest income) was 93.7%, compared to 63.6% in 2007 and 55.5% in 2006. The increase in the overhead ratio is primarily due to the impact of increased collection and carrying cost of non-performing assets. Once non-performing assets are reduced and expense reduction measures are realized, the overhead ratio is expected to decrease to historical levels.

Net Interest Income

Our operational results primarily depend on the earnings of the Bank which depend, to a large degree, on its ability to generate net interest income. Net interest income represented 74.7%, 78.0% and 78.5% of net interest income plus other income in 2008, 2007 and 2006, respectively. The following discussion and analysis of net interest margin assumes and is stated on a tax equivalent basis. That is, non-taxable interest is restated at its taxable equivalent rate.

The banking industry uses two key ratios to measure the relative profitability of net interest income. The net interest rate spread measures the difference between the average yield on interest earning assets (loans, investment securities and federal funds sold) and the average rate paid on interest bearing liabilities (deposits and other borrowings). The interest rate spread eliminates the impact of non-interest bearing deposits and gives a direct perspective on the effect of market interest rate movements. The other commonly used measure is net interest margin which is defined as net interest income as a percent of average total interest earning assets and takes into account the positive impact of investing non-interest-bearing deposits.

Our net interest income decreased by $6.1 million, or 21.5%, in 2008 from 2007, and increased by $5.3 million, or 22.6%, in 2007 from 2006. Net interest income for 2008 was $22.5 million compared to $28.6 million for 2007 and $23.4 million for 2006. The net interest margin on interest earning assets was 2.97% in 2008, 4.33% in 2007 and 4.60% in 2006 on a tax equivalent basis.

Market interest rates have been very volatile during the past five to six years. From mid 2004 through the first half of 2007, short term interest rates increased 575 basis points from 2003 levels. Beginning in the last half of 2007 though 2008, short term interest rates declined over 600 basis points and are likely to remain at historic lows for the foreseeable future. These broad fluctuations can have a significant impact on our net interest margin and net interest income without robust interest rate risk management. We seek to manage our interest rate risk such that fluctuations in market rates do not have a significant negative impact on earnings. Throughout the period of increasing and decreasing rates our margin compressed and expanded although not with the extreme volatility that short term market interest rates have fluctuated. The decline in net interest margin that we experienced in 2008 was partly due to rapidly declining interest rates. However, most of the compression was due to the increase in non-performing assets and increased liquidity levels.

The increase in non-performing assets and the write-off of accrued interest on impaired loans was a primary component of our interest margin compression in 2008. The larger the amount of non-performing assets as a percentage on our balance sheet, the more compressed the net interest margin becomes. We employ interest-bearing deposits to fund non-interest bearing assets thereby reducing the net interest margin. Margin reduction is further exacerbated when we charge-off previously accrued interest. As stated above, non-performing assets increased from $58.3 million as of December 31, 2007 to $122.0 million as of December 31, 2008. The annual average balance of non-accrual loans for 2008 was $51.3 million. Further, we charged-off interest in 2008 on impaired loans in the amount of $2.9 million. We include the average balance of nonaccrual loans in the denominator and we subtract charged-off interest from the numerator in the calculation of the net interest margin.

Additionally, we were hampered in our interest rate risk management strategy because of the necessity to increase our liquidity (cash reserves) in 2008. Because of the uncertainty that arose in the banking industry in 2008 and the fear created by the local and national media, we increased our amount of cash and liquid assets to cover any potential withdrawals that may have taken place. The amount of interest earned on liquid assets is currently less than the cost of obtaining funds. The Federal Reserve reduced the target federal funds rate (the rate earned on liquid assets) to between zero and 0.25% in the fourth quarter of 2008. Our average yield on federal funds sold was 1.47% for 2008. This compares to our average cost of funds in the amount of 3.49% for 2008. The negative spread plus the interest carry on non-performing assets compresses both our net interest margin and net interest income. Our net interest margin decreased by 136 basis points, comparing 2008 to 2007. Our net interest margin was 2.97% in 2008 compared to 4.33% in 2007. The net interest margin in 2006 was 4.60% which is more representative of our historical net interest margin. Over the past ten years including 2008, our net interest margin has averaged 4.57%.

Our average yield on earning assets in 2008 was 6.16%, a decrease of 214 basis points compared to 2007 and a decrease of 202 basis points from 2006. Our average cost of funds was 3.49% in 2008, a decrease of 108 basis points from 2007 and 78 basis points from 2006. The yield on total loans in 2008 was 6.35%, but the yield would have been approximately 7.38% had we not had the $2.9 million of charged–off interest and reduced the average balance of total loans by the average non-accrual loans of $51.3 million. Consequently, the impact to the loan yield isolating the effect of charged-off interest and non-accrual loans in 2008 was 103 basis points. The impact of non-performing assets on the net interest spread was 57 basis points in 2008. The impact of non-performing assets on the net interest margin could be greater in 2009 unless the average balance of non-performing assets is reduced and management is able to minimize the amount of future charged-off interest.

The following table shows, for the past three years, the relationship between interest income and interest expense and the average daily balances of interest-earning assets and interest-bearing liabilities on a tax equivalent basis assuming a rate of 34%:

Table 1
Average Consolidated Balance Sheets and Net Interest Analysis
(in thousands)
	For the Years Ended December 31,
	2008									2007									2006
	Average Balance			Interest			Yield/ Rate			Average Balance			Interest			Yield/ Rate			Average Balance			Interest			Yield/ Rate
Assets:
Interest earnings assets:
Federal funds sold	$	24,877			366			1.47	%	$	11,691			614			5.25	%	$	12,133			641			5.28	%
Investments:
Taxable		62,565			3,671			5.87	%		49,907			3,295			6.60	%		40,528			2,491			6.15	%
Tax exempt		63,539			3,996			6.29	%		42,013			2,699			6.42	%		28,159			1,825			6.48	%
Total Investments and Federal Funds Sold		150,981			8,033			5.32	%		103,611			6,608			6.38	%		80,820			4,957			6.13	%
Loans (including loan fees):
Taxable		650,850			41,307			6.35	%		579,126			50,057			8.64	%		440,939			37,695			8.55	%
Tax Exempt		1,747			147			8.41	%		1,261			123			9.74	%		944			94			9.96	%
Total Loans		652,597			41,454			6.35	%		580,387			50,180			8.65	%		441,883			37,789			8.55	%
Total interest earning assets		803,578			49,487			6.16	%		683,998			56,788			8.30	%		522,703			42,746			8.18	%
Other non-interest earnings assets		94,137									56,864									26,988
Total assets	$	897,715								$	740,862								$	549,691

Liabilities and shareholders’ equity:
Interest-bearing liabilities:
Deposits:
Demand	$	207,231			3,530			1.70	%	$	172,706			6,259			3.62	%	$	137,747			4,995			3.63	%
Savings		25,329			96			0.38	%		20,631			242			1.17	%		16,908			185			1.09	%
Time		424,315			19,088			4.50	%		337,058			17,373			5.15	%		232,143			10,776			4.64	%
FHLB advances & other borrowings		76,972			2,897			3.76	%		63,966			3,307			5.16	%		51,985			2,771			5.33	%
Total interest-bearing liabilities		733,847			25,611			3.49	%		594,361			27,181			4.57	%		438,783			18,727			4.27	%

Non-interest bearing deposits		72,576									64,170									53,762
Other liabilities		13,547									12,919									6,787
Shareholders’ equity		77,745									69,412									50,359
Total liabilities and Shareholders’ equity	$	897,715								$	740,862								$	549,691
Excess of interest-earning assets over interest-bearing liabilities	$	89,637								$	89,637								$	83,920
Ratio of interest-earning assets to interest-bearing liabilities		109.50	%								115.08	%								119.13	%

Net interest income tax equivalent					23,876									29,607									24,019
Net interest spread								2.67	%								3.73	%								3.91	%
Net interest margin on interest earning assets								2.97	%								4.33	%								4.60	%

Tax Equivalent Adjustments:
Investments					(1,325	)								(919	)								(621	)
Loans					(49	)								(42	)								(32	)
Net interest income				$	22,502								$	28,647								$	23,366

Non-accrual loans and the interest income that was recorded and/or charged-off on these loans are included in the yield calculation for loans in all periods reported.

The following table shows the relative impact on net interest income of changes in the annual average daily outstanding balances (volume) of interest-earning assets and interest-bearing liabilities and the rates earned (rate) by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.

Table 2

Changes in Interest Income and Expense on a Tax Equivalent Basis

(in thousands)

	Increase (decrease) due to changes in:
	2008 over 2007								2007 over 2006
	Volume		Rate			Total			Volume			Rate			Total
Interest income on:
Federal funds sold	$	194		(442	)		(248	)	$	(23	)		(4	)		(27	)
Taxable investments		743		(367	)		376			619			186			805
Non-taxable investments		1,354		(56	)		1,298			890			(16	)		874
Taxable loans		4,552		(13,303	)		(8,751	)		11,983			379			12,362
Non-taxable loans		40		(17	)		23			31			(2	)		29
Total Interest Income		6,883		(14,185	)		(7,302	)		13,500			543			14,043

Interest expense on:
Deposits:
Demand		588		(3,318	)		(2,730	)		1,267			(2	)		1,265
Savings		18		(164	)		(146	)		44			13			57
Time		3,925		(2,210	)		1,715			5,408			1,189			6,597
FHLB advances & other borrowings		581		(990	)		(409	)		704			(168	)		536
Total Interest Expense		5,112		(6,682	)		(1,570	)		7,423			1,032			8,455
Increase (decrease) in net interest income	$	1,771		(7,503	)		(5,732	)	$	6,077			(489	)		5,588

Other Income

Other income in 2008 was $7.6 million, a decrease of $451 thousand, or 5.6%, when compared to 2007. Most of the increase in service charges on deposit accounts and ATM network fees for 2008 was attributable to the combination of WGNB and First Haralson. The merger took place in July of 2007. Consequently, there is a half year of First Haralson’s other non-interest income included in our 2007 operations and a full year in 2008.

Including a half year of First Haralson’s operations in 2007 versus the full year of operations in 2008 for the merged entities had the greatest impact on service charges on deposit accounts and ATM network fees. Service charges on deposit accounts increased by $891 thousand, or 16.6% in 2008 compared to 2007. Much of the increase in service charges on deposit accounts was attributable to non-sufficient funds charges. Non-sufficient funds charges increased by $835 thousand, or 17.0%, from 2007 to 2008. Service charges on demand, money market and savings deposits increased by $50 thousand from 2007 to 2008. While both non-sufficient funds and service charge revenue increased, the increase was not as robust as it had been in prior years. Deposit holders have become more fee sensitive as the economy has worsened. Customers are choosing free checking accounts and taking greater care not to overdraft their accounts as frequently as a means to conserve money.

The increase in service charges on deposit accounts from 2006 to 2007 was $1.3 million, or 32.1%. Prior to the combination, First Haralson averaged approximately $180 thousand per month in service charges on deposit accounts. Thus, approximately $1.1 million of the increase in service charges on deposit accounts from 2006 to 2007 was attributable to revenue derived from First Haralson’s customer base for the last six months of 2007. The remaining $200 thousand increase in service charges on deposit accounts is attributable to our combined entity’s ability to increase the combined customer base with much of the enhanced revenue being attributable to increased overdraft fee income in 2007 compared to 2006.

ATM network fees increased by $422 thousand, or 40.3%, comparing 2008 to 2007. ATM network fees increased by $270 thousand, or 34.7%, in 2007 compared to 2006. The increase in ATM network fees, which are volume driven revenues, continues to be attributable to increased foreign (non-First National Bank of Georgia customers) usage of our expanding ATM network as well as the increased volume of ATM and debit card revenue attributable to the addition of First Haralson’s ATM operations to the operations of WGNB.

Mortgage origination fees decreased by $116 thousand, or 29.7%, from 2007 to 2008 and were flat between 2006 and 2007. The decline in mortgage fee income was attributable to the much publicized credit and mortgage foreclosure crisis that took place in 2008. After the subprime losses of 2007 and 2008, mortgage underwriting standards have since increased. Credit extension has also decreased due to falling residential real estate values. Mortgage lenders are reluctant to lend on housing because of an inability to determine how low home values will continue to fall. Consumer confidence, too, is at an all time low while unemployment rates continue to increase. Consumers do not feel confident enough about the immediate future to make large purchases like homes or automobiles, despite decreasing prices.

Our wealth management business was a significant contributor to fee income for us in 2008 and 2007. However, due to the volatility and sharp decrease in the equities market, fee income attributable to wealth management services decreased by $194 thousand, or 30.4%, comparing 2008 to 2007. The wealth management division had become cumulatively profitable through 2007 after its start-up in 2006. Despite the 30.4% decline in revenue in 2008, however, the wealth management division missed the breakeven point by only $24 thousand. Comparing 2007 to 2006, most of the increase in brokerage fees was attributable to twelve months of operation in 2007 compared to four months in 2006.

During 2008, and extending into January 2009, we closed three locations. Due to deteriorating economic conditions and the cost saving measures discussed below, we closed our loan production office in Coweta County and the two locations of our Banco de Progreso division. All three locations were leased. Consequently, we wrote down the book value of the leasehold improvements for all locations. In addition, we sold a small amount of surplus fixed assets during 2008 that resulted in a small loss. The charge-offs and sale of fixed assets resulted in a net loss of $303 thousand, most of which was recognized in the fourth quarter of 2008.

In August of 2008, the Company repaid its $20.0 million securities sold under a repurchase agreement and paid a fee of $683 thousand. The Company also sold securities available-for-sale during the third quarter in the amount of $21.5 million for a net gain of $329 thousand. In addition, the Company sold $7.3 million of securities in the first and second quarters of 2008 for a net gain of $106 thousand. The total net gain on the sale of securities for 2008 was $435 thousand compared to no gain or loss on the sale of securities in 2007 and 2006. The sale of securities and the reduction of debt during 2008 resulted in deleveraging of approximately $20 million of the Bank’s balance sheet giving the Company greater capital coverage and more available liquidity.

Management continues to actively manage our non-performing asset portfolio. Included in the management of the non-performing asset portfolio is the valuation and sales of the non-performing loans and foreclosed property. During 2008, we sold $18.9 million of non-performing loans and foreclosed property. The total loss on sale or write-down of property for 2008 was $1.2 million comprised of a loss on write-downs of non-performing loans and foreclosed property of $1.1 million and a loss on sales of non-performing loans and foreclosed property of approximately $100 thousand. In total, we received 91% of the original loan balance on the sales of these non-performing loans and foreclosed property.

The loss on the sale and write-down of foreclosed property during 2007 in the amount of $729 thousand was attributable to a cumulative recognition of net gains on disposal of foreclosed property in the amount of $75 thousand and a fourth quarter write-down of foreclosed property of $804 thousand. The write-down of foreclosed property occurs after we receive updated appraisals on certain foreclosed properties we hold. The updated appraisal may result in the need for further write-down of non-performing loans or foreclosed property. The net loss on the sale and write-down of foreclosed property in the fourth quarter of 2007 compared to a 2006 gain on the sale of foreclosed property in the amount of $243 thousand. Over the past three years, the net loss on sale or subsequent write-down of non-performing loans and foreclosed property totaled $1.7 million.

Miscellaneous income decreased by $447 thousand comparing 2008 to 2007. During 2007, we recognized $237 thousand in gain in the market value of a fair value swap described in Note 11 to the consolidated financial statements “Commitments – Derivative Instruments and Hedging Activities” compared to no gain during 2008 or 2006. The Company terminated its fair value interest rate swap position in April 2008 for a gain in the amount of $626 thousand. The Company is recognizing the gain on the transaction over the original term of the swap. The Company recognized $483 thousand of the gain during 2008. However, the gain is recognized as a reduction in interest expense on the original instruments hedged. In addition, we received a distribution of $118 thousand from a business development partnership in which we are a member in the first quarter of 2007 which was non-recurring in nature and therefore no such revenue was recognized in 2008 or 2006.

Included in miscellaneous income in 2008 and 2007 was $163 thousand and $78 thousand, respectively, of income on insurance contracts that were owned by First Haralson in connection with its supplemental employee retirement plan. See Note 15 to the consolidated financial statements – “Supplemental Employee Retirement Plan”. No income was recognized in 2006 since prior to the merger, the Company had no such plan in place.

Late fees on loans are included in miscellaneous income. Late fees on loans in 2008 were $372 thousand compared to $365 thousand in 2007 which, in turn, exceeded late fees on loans in 2006 by $72 thousand. The remainder of the difference in miscellaneous income is attributable to the addition of First Haralson’s miscellaneous revenue and other line items which contributed to our growth in the volume of fees from 2006 for a half year in 2007 and a full year in 2008.

Other Expense

Management focused on expense reduction in 2008. It became clear in early 2008 that credit collection cost, loan loss provision, write-down of and maintenance and carrying costs of non-performing assets and foreclosed property would increase dramatically. We anticipated a significant increase in expenses from 2007 to 2008 resulting from adding a full year of the expenses of the merged entities compared to a half year in 2007. However, we sought to reduce staff and facilities overhead that did not contribute to the core revenue of the Bank or collection and management of non-performing assets and foreclosed property. At the time of the merger, we structured sufficient management and staff to continue to grow the institution. In the fourth quarter of 2008, we reduced a layer of management flattening the organizational chart for 2009. Loan demand and volume dramatically decreased in 2008 as consumers and business owners sought to reduce outstanding debt. Lending on residential real estate, the primary business of the West Georgia area, also decreased dramatically in 2008 compared to the last five years. Management undertook staff reductions and branch and facilities closings in the fourth quarter of 2008. Much of these cost savings will be realized in 2009 and we estimate that other non-interest expense will be reduced by approximately $3.0 million compared to 2008. The bulk of that reduction is anticipated to take place in salaries and benefits and occupancy expense.

We continue to have a strong desire to support our community with our over 60 year history and heritage of serving our customers with their depository and borrowing needs. We feel that our core franchise value will remain intact through maintaining the number one deposit market share community bank in the West Georgia area. We focused on consumer and local business deposit and lending needs in 2008 and placed much less emphasis on generating larger loans on residential real estate or commercial properties. Therefore, our staff reduction and facilities closings were undertaken with that strategy in mind. Additionally, we created a Special Assets Management division (“SAM”) whose sole function is to maintain, manage, market and dispose of non-performing assets and foreclosed properties. This division of duties allows our remaining lending staff to focus on serving new customers and maintaining the performing loan portfolio. The SAM was staffed with existing experienced commercial lenders and support staff thereby avoiding the need to hire additional staff. As the economy improves, the Bank will have retained our most valuable lenders. The goal of our SAM division is to realize the maximum value on impaired loans and foreclosed property for our shareholders while disposing of the loans and property as quickly as possible to reduce the interest and carrying cost to conserve the Company’s capital and cash reserves.

We closed the Coweta County loan production office in November of 2008. That office was designed to serve the growing residential and commercial development market in Coweta County which was dramatically and suddenly impacted by the slowdown in the metro-Atlanta economic conditions. West Georgia, including Carroll, Haralson, Douglas and Coweta Counties, experienced increased unemployment and decreased demand for both residential and commercial real estate. Additionally, our Banco de Progreso division was also impacted by the downturn in economic conditions. In response, we have consolidated our Banco de Progreso operations into our traditional branches. We will continue to serve the Spanish-speaking community’s deposit and loan needs in our nearby branches. We closed the Newnan Banco de Progreso branch and the Carrollton Banco de Progreso locations in January 2009. All three locations were leased and we have negotiated a satisfactory termination of leases. We accrued the impact of the closing of the facilities, including write-down of leasehold improvements and severance benefits related to staff reduction, in 2008. We anticipate that the Bank will realize significant staff and occupancy cost savings in 2009.

Other expenses increased by $29.0 million, or 124.3%, in 2008 over 2007 and by $6.8 million, or 41.3%, in 2007 over 2006. As mentioned in the overview, we charged-off all of our goodwill recorded in connection with the merger with First Haralson in the amount of $24.1 million in the fourth quarter of 2008. The charge-off of goodwill is classified as other expenses and is a non-cash item which has no impact on the Bank’s regulatory capital or liquidity position. A core deposit intangible in the amount of $4.9 million remains intact and was determined to not be impaired as a result of the impairment testing.

The charge-off of goodwill represented 83.1% of the $29.0 million increase in other expense. Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” requires companies to perform an annual test for goodwill impairment. As a result of the general decline in market valuations for bank stocks including our own market capitalization and the deterioration of economic conditions during 2008, and in connection with the preparation of our annual financial statements for 2008, the Company concluded that the goodwill resulting from the Company’s acquisition of First Haralson on July 1, 2007 was impaired.

Impairment is a condition that exists when the carrying amount of goodwill exceeds its fair value. SFAS No. 142 requires a two-step impairment test that should be used to test the impairment and measure the amount of impairment loss to be recognized. The first step of the goodwill impairment test compares the fair value of the Company with its carrying amount including goodwill. Fair value is the amount at which the Company could be bought or sold in a current transaction between willing parties in an other than forced or liquidation sale. If the fair value of the Company exceeds its carrying amount, the goodwill is not considered impaired. If the carrying amount of the Company exceeds its fair value, then a second step is required to measure the amount of impairment.

The second step of the goodwill impairment test requires performing a purchase price allocation as if a business combination were consummated on the date of the impairment test, with the fair value of the Company serving as a proxy for the purchase price. Fair values of the assets and liabilities are determined to measure the implied value of goodwill at the test date. If the implied fair value of the goodwill is lower than its carrying amount, goodwill impairment is indicated, and the carrying amount of goodwill is written down to its implied fair value. The valuation approaches that were implemented in measuring fair value were the cost approach, the income approach and the market approach. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset often referred to as current replacement cost. The income approach uses valuation techniques to convert future amounts of cash flows or earnings to a discounted amount. The market approach uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities.

As was the case in net interest income and other income, the primary reason for increased expenses for 2008 from 2007, other than the goodwill impairment charge, is twelve months of operations which include the First Haralson operations in 2008 compared to only six months in 2007. Increased salaries and employee benefits were a significant component of the increase in other non-interest expenses in 2008 from 2007 and 2006. Salaries and employee benefits increased $743 thousand, or 5.3%, from 2007 to 2008 and $4.0 million, or 40.1%, from 2006 to 2007. Occupancy expenses increased by $661 thousand, or 20.0%, from 2007 to 2008, and $898 thousand, or 37.4%, from 2006 to 2007. Other operating expenses increased $1.5 million, or 26.7%, comparing 2008 to 2007 and $1.7 million, or 42.2%, comparing 2007 to 2006. Operations in 2007 included non-recurring merger costs which were not incurred in either 2008 or 2006.

The level of other non-interest expense that we absorbed in the combination with First Haralson is very much in line with what management expected based upon our due diligence and the estimation of merger costs and attainable cost savings in the eighteen months following the merger. We offered certain employees voluntary retirement packages which were accepted by some of the staff members, including certain WGNB employees. That cost was expensed in the period in which it was incurred, but primarily in 2007. While the increase in expenses on a percentage basis was material in relation to our year over year increase in salary and employee benefits expense, the increase from 2006 to 2007 was much greater than from 2007 to 2008. As indicated previously, we did experience cost savings in 2008 salary and employee benefits that were offset by increases in non-interest expense related to non-performing loans and foreclosed property.

In terms of asset size, First Haralson had approximately $211 million in assets as of the closing of the merger in July 2007. Our asset size prior to the merger was $623 million. Consequently, First Haralson was one third our size and employed 85 people immediately preceding the closing of the merger. Management expected that both revenue and expenses would increase by 30% to 40% depending on the category. First Haralson operated seven branches in Haralson and Carroll Counties, one of which closed after the merger (the Carrollton location). While the conversion of the two operating systems went very smoothly, it was very time consuming and required all available human resources from both companies during 2007. We were able to reduce staff and expenses in 2008 once the operations were absorbed and stabilized as a single entity

In addition to the First Haralson acquisition, we added 11 full time employees when we opened a commercial loan production office and a second Banco De Progreso location in Coweta County during 2007. We also experienced an entire year of operations from our Chapel Hill location in Douglas County and our initial Banco De Progreso location in Carroll County, both of which were placed in service in 2006. Management expected a significant increase in expense related to our expansion efforts and the 2007 increase in salaries and benefits, occupancy and other operating expense reflected that fact. The downturn in the national and local economy, however, had a significant impact on our expansion strategy which we rapidly reversed in 2008. We believed at the time we formed our business strategy, that the investment in expansion would ultimately provide an enhanced return to our shareholders. However, our expansion strategy has been suspended until economic conditions improve.

The increase in salaries and benefits comparing 2007 to 2008 is broken down as follows: Salaries and overtime increased by $2.0 million, or 22.2%; and employee benefits including profit-sharing, bonus, 401k, deferred compensation, payroll tax and employee health and life insurance expense decreased $1.3 million, or 27.4%. Most of the decrease in employee benefits from 2007 to 2008 was attributable to profit sharing and bonus expense which decreased by $1.9 million, or 100%. No bonuses or profit sharing payments were incurred in 2008 as management sought to decrease expenses. The only employee benefit category that increased from 2007 to 2008 was employee health and life insurance expense (by $317 thousand, or 23.7%) and deferred compensation expense (by $120 thousand, or 121.2%) both of which were attributable to twelve months as opposed to six months of operations as a merged entity for those two years of comparison. Our deferred compensation expense is more fully described in Note 15 to the consolidated financial statements “Supplemental Employee Retirement Plan”.

We had 186 full time equivalent employees as of June 30, 2007, just before the merger. On July 2, 2007, we added 81 full time equivalent employees (for an increase of 43.5%) as a result of the First Haralson merger. As of December 31, 2008, we had 248 full time equivalent employees, a reduction of 7.1% from July 1, 2007. During 2008, management allowed attrition to reduce staff (by 15 positions) until the fourth quarter of 2008 when we reduced staff further by 11 positions. The reduction of an additional 11 positions took place in January 2009 with the closing of the Banco de Progreso locations. Our lending staff was also reduced through the reassignment of six staff members to the SAM division as described above. The SAM division employs six staff members. Much of the reduction in staff took place in specific departments such as residential mortgage origination which was greatly reduced in 2008. In addition, we realized a reduction of the management team. Several management positions were eliminated as a result of a flattening of the organization chart. We attempted to maintain customer service, teller positions and fewer consumer lender and commercial lender positions in order to continue to serve our core depositor and borrower base. Several bilingual customer service representatives, tellers, lenders and operational staff that were in the Banco de Progreso division were retained in order to serve the needs of our Spanish-speaking customers. In past years, merit and cost of living increases accounted for 4% to 5% of increased salary expense. In 2008, however, approximately 1% of the increase in salaries was attributable to merit and cost of living increases. Comparing 2007 to 2006, the additional employee count in the last half of 2007 resulting from the merger accounted for nearly all of the increase in salaries and benefits. Annual merit increases accounted for less than 4% of the increased salaries in 2007 from 2006.

We are required to continue to expense options despite the low probability that they will be exercised in the near future. Comparing the exercise price of outstanding options to the market value of the Company’s stock, the outstanding options had no intrinsic value to employees as of December 31, 2008. Options expense was $175 thousand in 2008 compared to $178 thousand in 2007. We do not anticipate that options will be granted in 2009. Our stock-based compensation expense methodology is described more fully in Note 1 to the consolidated financial statements “Stock Compensation Plans”.

The increase in salaries and benefits from 2006 to 2007 are described as follows: Salaries, overtime and related payroll taxes increased $3.0 million, or 42.6%; profit sharing, 401k, bonuses, deferred compensation expense and stock option expense increased $562 thousand, or 26.5%; and employee benefits which primarily included employee health and life insurance expense increased $467 thousand, or 53.6%.

Prior to the merger, we negotiated with certain First Haralson executive officers to buyout their employment agreements. Those expenditures were included in transaction costs of the merger and, thus, were not expensed in 2007. However, we offered voluntary retirement packages throughout the combined organization post merger. Certain employees exercised this offer which resulted in our expensing approximately $271 thousand in salary and payroll tax expense related to voluntary retirement. In connection with the merger and subsequent conversion of operating systems, we also incurred $62 thousand in overtime expense that was directly related to the conversion. Management considered both the voluntary retirement offer and the overtime to be non-recurring in nature in 2007. The increase in profit sharing, 401k, bonuses, deferred compensation and employee health and life insurance expense is similarly attributable to the merger and location expansions completed in 2006 and 2007.

We plan no merit or cost of living salary increases in 2009 and have reduced the amount by which the Company matches employees’ contributions to the 401k retirement plan from a maximum 6% of an employee’s salary in 2008 to 1% in 2009. In 2007 and 2006, the Company paid an additional 5% of an employee’s salary into the 401k plan as a component of the profit sharing. No such payment was made in 2008 nor is there intention to make such payment in 2009. Additionally, we do not intend to increase staff and anticipate that we will experience normal attrition in 2009. This change in compensation and staffing strategy is estimated to reduce salary and benefits expense by approximately $2.0 million in 2009, when compared to 2008.

Occupancy expense increased by $661 thousand, or 20.0%, from 2007 to 2008. Most of the increase is attributable to a full year of operations and depreciation expense of First Haralson’s operations in 2008 compared to only six months in 2007. Depreciation expense increased by $185 thousand, comparing the year ended 2007 with 2008. The increase in depreciation expense from 2007 to 2008 was attributable to the additional fixed assets of First Haralson which were recorded at their market value as of July 2007, rather than at their historical cost. All other occupancy expense increased by $476 thousand, or 25.7%. This increase was projected based on post merger analysis and branch additions in 2006 and 2007. We anticipate that we will experience cost savings in lease, utilities, real estate taxes and other occupancy expense that was previously associated with the discontinued Coweta County loan production office and the two Banco de Progreso locations, which will no longer be incurred in 2009.

Occupancy expense increased by $898 thousand, or 37.4%, in 2007 when compared to 2006, which is attributable to the merger and branch expansion previously discussed. Occupancy expense of the branches including the additional branches of First Haralson and administrative and operations offices comprise six major components: depreciation, utilities, property tax, operating leases, repairs and maintenance expense. Depreciation expense in 2007 increased by $315 thousand, or 27.7%, compared to 2006. Likewise, utilities expense increased $239 thousand, or 49.9%, comparing 2007 to 2006. All other occupancy expense including property taxes, maintenance and repairs, and operating leases, increased by $344 thousand, or 43.4%, comparing 2007 to 2006.

Expense on loans and foreclosed property increased dramatically from 2007 to 2008 as credit quality continued to deteriorate. Included in expense on loans for all periods are legal, collection and appraisal expenses on impaired loans and maintenance, management, improvement costs and real estate taxes attributable to foreclosed property. Expense on loans and foreclosed property increased by $1.96 million, or over five times the amount realized in 2007 which, in turn, was almost two and a half times the amount expended in 2006. Expense on foreclosed property was $1.93 million in 2008, an increase of $1.76 million, or eleven times the amount recorded in 2007. Expense on impaired loans was $458 thousand in 2008, an increase of $203 thousand, or 79.9%, compared to 2007.

Approximately 75% of our foreclosed property is either developed or partially developed residential lots or raw residential and commercial land. Consequently, much of the expense related to foreclosed property in 2008 was current and past due real estate taxes, erosion control and cleanup of the properties after foreclosure. We paid current and past due real estate taxes in the amount of $1.0 million either at foreclosure or in the fourth quarter of 2008. Approximately 50% of the real estate taxes paid in 2008 were past due. Expense for legal fees related to foreclosure of property was $280 thousand. We incurred erosion and water control costs, property management, maintenance and property improvement costs of approximately $650 thousand.

The expense on impaired loans includes appraisal fees, legal costs and other expenses incurred in the collection of loans that have not yet been foreclosed. The balance of impaired loans was $71.6 million as of December 31, 2008 compared to $46.4 million as of December 31, 2007. The increase in collection costs has been a function of more volume in 2008 than 2007. The Company typically experiences loan related expense that is equivalent to what we expensed in 2006. Appraisal, environmental, survey and title exam fees were $171 thousand, legal costs for collection of loans were $153 thousand and other loan administration expenses were $134 thousand in 2008. The expenses in 2008 and the last half of 2007 were more concentrated in collection costs rather than in loan production and underwriting costs which were the bulk of similar expenses in early 2007 and 2006. Total expense on loans increased by $333 thousand, or 150.6%, comparing 2007 to 2006. Expense related to foreclosed property increased by $158 thousand which is reflective of the increased amount of foreclosed real estate in 2007 from 2006. Collection, legal and appraisal fees related to collection efforts on troubled loans increased by $175 thousand from 2006 to 2007.

The increase in expense on loans and foreclosed property is of primary concern to management and represents another factor in limiting the desired holding period of real estate taken in foreclosure and the quantity of impaired loans. We anticipate that as construction, acquisition and development loans are decreased in 2009 and become a reduced percentage of the loan portfolio, the expense on loans and foreclosed property will decrease. Because of the uncertainty related to the credit quality of our construction, acquisition and development loan portfolio and the potential credit weakness that may migrate to our commercial and consumer loan portfolios, management has only limited knowledge as to whether cost savings can be achieved in this expense category. Much of the Bank’s market area, including commercial and professional enterprises and small businesses, has historically been dependent on residential real estate development, construction and sales and related commercial development retail trade for a significant portion of their revenue.

Other operating expenses increased by $1.5 million, or 26.7%, from 2007 to 2008, and increased by $1.7 million, or 42.2%, from 2006 to 2007. Other operating expense includes professional, accounting and regulatory fees, ATM network fees, advertising, charitable contributions and FDIC insurance. Also included in other operating expense are costs for supplies such as printing, checks, paper and envelopes related and postage attributable to Bank operations and customer statements.

Accounting and other professional fees increased by $117 thousand, or 19.7%, from 2007 to 2008, and by $128 thousand, or 27.7%, from 2006 to 2007. The increase in accounting and other professional fees had less to do with the merger and more to do with ongoing internal audit and compliance costs related to Sarbanes-Oxley Section 404. The expenses related to the compliance burdens of being a listed public company have proven to be more costly with regard to consulting with accountants and attorneys than anticipated. Legal expenses increased by $104 thousand, or 85.8%, from 2007 to 2008. We incurred increased attorneys fees related to communicating and complying with increased banking scrutiny and regulation. Legal fees related to collection of loans are not included in this line item for any period. Rather, those legal fees are included in expense on loans and foreclosed property.

Premiums paid to the Federal Deposit Insurance Corporation (“FDIC”) for deposit insurance increased dramatically from 2007 to 2008. Deposit insurance premium expense was $535 thousand in 2008 compared to $62 thousand in 2007, almost a nine-fold increase. The increase is somewhat attributable to the increase in deposits due to the First Haralson merger, but the overwhelming reason for the increase in deposit insurance premium expense for all banks is the increased risk and exposure the banking industry has placed on the deposit insurance fund in the last eighteen months. The Bank recognized a credit awarded to the banking industry in the last half of 2006 and throughout 2007. This credit was exhausted prior to 2008. During 2006 and 2007, deposit insurance expense had trended downward because the estimated loss rate on the insurance fund had historically been very low. We anticipate that deposit insurance premiums will increase further in 2009 since the Bank is participating in the Temporary Liquidity Guarantee Program created by the FDIC. The safety of bank deposits is of utmost importance in maintaining confidence in the national banking system. Changes in regulation and supervisory issues are likely to continue and be more defined and refined in 2009. There is a proposal that will require banks to recapitalize the FDIC fund with a one-time assessment in 2009. The estimate of the rate is $200 thousand per $100 million of deposits. This one-time assessment along with the increase in FDIC insurance rates will have a significant impact on other non-interest expense in 2009.

Advertising expense in 2008 decreased by $82 thousand, or 24.1%, from 2007. Advertising expense increased in 2007 by $91 thousand, or 36.2%, compared to 2006. However, $48 thousand of the increase in 2007 was related to promoting the newly combined institution and educating the market with regard to our name change. Advertising expense is somewhat discretionary. As part of our cost cutting efforts, we purposely reduced the amount of advertising expense we incurred. Like advertising, charitable contributions expense is discretionary. Contribution expense increased much less than anticipated in 2008 over 2007. Management is attempting to be very visible in the communities in which the Bank serves. The best way for a community bank to accomplish this is to maintain its contribution to local charities. Contribution expense was budgeted to increase by approximately 25% from 2007 to 2008. The actual increase was 13.5%.

ATM network and non-network expense increase by $226 thousand, or 51.3%. ATM expense, like ATM revenue, is volume sensitive and was impacted by twelve months of the ATM network of First Haralson in 2008 compared to six months in 2007. ATM network revenue increased by $420 thousand, comparing 2008 to 2007. Consequently, the increase in ATM revenue outpaced the increase in ATM expense.

Another merger related expense is the amortization of the core deposit intangible. Again, this amortization, like the goodwill impairment, is a non-cash charge. During the twelve months of 2008, we recorded $573 thousand of amortization of the core deposit intangible, an increase of $286 thousand, or 100%, compared to that in 2007. The core deposit intangible is amortized on a straight-line basis over the period of benefit, which is estimated to be ten years. The core deposit intangible is reviewed for impairment annually as events or changes in circumstances indicate that the value in the underlying asset may have given rise to the core deposit intangible becoming permanently impaired. We have determined that the value of our core deposit intangible was not impaired in 2008 or 2007.

During 2008, we recorded $557 thousand of expenses for supplies which represented almost no change from 2007. However, during 2007, we incurred one-time expenditures for office supplies, letterhead and promotional items that were redesigned to accommodate our new name and logo. In 2006, we expensed $365 thousand for supplies compared to $558 thousand in 2007, an increase of $193 thousand, or 52.8%. The merger related expenditures for supplies was $96 thousand in 2007. This expense was primarily for reprinting and redesign of statements and promotional literature and was not incurred in 2008. The number of customer accounts increased by 30% to 35% in the merger which caused supply expenses to increase in 2008 and 2007 as a result of increased volume. Supplies expense for 2007 included six months of the combined companies compared to twelve months in 2008. Therefore, we did reduce supplies expense when viewed on an annual basis.

Other expenditures directly related to the volume of customer accounts resulting from the First Haralson merger and including them for twelve months of operations in 2008 as opposed to six months of operations in 2007, are postage and data processing expense. Postage expense increased by $69 thousand, or 18.4 %, from 2007 to 2008 and $103 thousand, or 38.0%, from 2006 to 2007. Technology expense increased by $72 thousand, or 20.4%, from 2007 to 2008 and $276 thousand, or 38.7%, comparing 2006 to 2007. Included in the 2007 increase is $20 thousand related to the conversion of operating systems in connection with the merger which did not recur in 2008.

Miscellaneous expense decreased by $136 thousand, or 31.5%, comparing 2007 to 2008. Miscellaneous expense increased by $182 thousand, or 72.5%, from 2006 to 2007. Items included in miscellaneous expense are customer and employee appreciation gifts and functions, amortization of investment in tax credits, portfolio management fees, seasonal decorations for facilities, employee health and community appreciation programs. Much of the increase from 2006 to 2007 resulted from amortization of tax credits in the amount of $129 thousand and $32 thousand in non-recurring expense for new employee apparel reflecting the name change in the merger.

Income tax benefit/expense, expressed as a percentage of earnings before income taxes (the effective tax rate), was 17.2% in 2008, 4.2% in 2007 and 29.3% in 2006. The effective tax rate over the past three years has varied significantly. Comparing 2008 to 2007, the effective tax rate increased. However, there are two primary differences in the calculation of income tax benefit/expense from 2008 to 2007. First, the impairment of goodwill has no tax implications. Therefore, $24.1 million of expense recorded in 2008 is not deductible for tax purposes. Second, non-taxable interest income on municipal securities and loans changed from 2007 to 2008. Ignoring the goodwill impairment charge, the effective tax rate for 2008 was 49.1% compared to 4.2% in 2007. The amount of non-taxable interest income increased by $906 thousand between 2007 and 2008 which further impacts the increase in the effective tax rate from 2007 to 2008. The effective tax rate in 2007 appears low because of the impact of non-taxable interest income on pretax income for book purposes as a ratio to the taxable income of the Company. The effective tax rate for 2006 is more reflective of the Company’s historical income tax impact than that realized in either 2008 or 2007.

BALANCE SHEET OVERVIEW

For the Years Ended December 31, 2008 and 2007

General

During 2008, average total assets increased $156.9 million, or 21.2%, average deposits increased $134.9 million, or 22.7%, and average loans increased $72.2 million, or 12.4%, from average balances recorded in 2007. During 2007, average total assets increased $191.2 million, or 34.8%, average deposits increased $154.0 million, or 35.0%, and average loans increased $138.5 million, or 31.3%, from amounts recorded in 2006. The 10 year average growth rates for our assets, loans and deposits are 15.6%, 15.1% and 15.5%, respectively. The average asset growth over the past two years is primarily attributable to the merger with First Haralson. In an effort to maximize capital coverage in a slowing economic environment, we significantly slowed balance sheet growth in 2008. Instead, management focused on maintaining sufficient liquidity to meet the deposit needs of our customers.

Total assets at December 31, 2008 were $892.2 million, representing a $8.6 million, or 1.0%, increase from December 31, 2007. During 2008, cash and cash equivalents increased by $49.5 million, or 191.5%. Total loans decreased by $28.5 million, or 4.3%, and securities available-for-sale decreased by $28.3 million, or 23.1%, comparing the year ended December 31, 2008 to 2007. We increased total deposits by $55.3 million, or 7.8%, paid-off securities sold under a repurchase agreement in the amount of $20 million and reduced Federal Home Loan Bank advances by $2.5 million. Additionally, we raised over $12 million in our Series A Preferred stock offering in the third quarter of 2008. The offering increased our total risk-based capital ratio to 10.7% as of December 31, 2008, compared to 10.2% as of December 31, 2007.

We increased deposits and sold securities available for sale in an effort to increase liquidity in 2008. As of December 31, 2008, we held cash and cash equivalents (liquidity) that exceeded uninsured deposits by 600%. During this period of economic uncertainty and concern over the safety of deposits, we intend to continue to maintain higher than historical amounts of available liquidity.

The most notable development in the balance sheet in 2008 apart from the increase in capital and liquidity was the continued increase in the level of non-performing assets. Non-performing assets include loans on non-accrual status, loans ninety days past due (impaired loans) and foreclosed property. On June 30, 2007, non-performing assets were $6.6 million, or less than 1% of total assets. As of December 31, 2007, non-performing assets were $57.9 million, or 6.5% of total assets and as of December 31, 2008, non-performing assets were $122.0, or 13.7% of total assets Thus, in an eighteen month period, non-performing assets grew by $115.4 million. This increase in non-performing assets was indicative of the rapid and steep decline in the residential real estate market for the entire metro-Atlanta market area. Residential construction and development loans were most affected by the slowdown. Management views this condition as its greatest priority and sees the reduction of non-performing assets as imperative to our return to profitability.

While management intends to do all it can to reduce the level of non-performing assets, we are dependent to a great extent on the improvement of the residential real estate market. The residential real estate market in the last half of 2008 proved to be very difficult as values of homes and residential lots decreased at an alarming rate and sales volume reached historic lows. The market has been flooded with foreclosed homes as economic conditions continue to deteriorate. Employment has decreased causing prime and subprime mortgage default rates to accelerate. Therefore, values of homes have decreased and the inventory of residential lots remains at historically high levels compared to our forecasted absorption rate.

Investments

Our available-for-sale investment portfolio of $94.4 million as of December 31, 2008 consisted primarily of debt securities, which provide us with a source of liquidity, a stable source of income, and a vehicle to implement asset and liability management strategies. The amount in the available-for-sale securities portfolio decreased significantly when compared to December 31, 2007. The investment portfolio decreased by $28.3 million, or 23.1%, from 2007 to 2008. During 2007, we acquired $42.3 million of securities in the First Haralson merger. Additionally, we increased the available-for-sale investment portfolio by $16.1 million, or 25.0% in 2007. This was significant growth compared to historical growth of the portfolio. In 2008, however, the banking environment deteriorated as the subprime mortgage crisis impacted the largest banks nationally and internationally. Bank capital rapidly diminished and several large banks failed. This, understandably, caused a certain amount of concern among some depositors. In response and in order to address concerns of our depositors, we began to increase the amount of liquidity on our balance sheet.

We implemented our Contingency Funding Committee in 2008 and began a strategy of selling securities, reducing loans and increasing liquidity. We sold $29.0 million of available-for-sale securities in 2008 for a total gain of $435 thousand. This compared to total sales of available-for-sale securities of $6.0 million in 2007 and no sales in 2006. We typically do not sell securities. However, we strategically repositioned some of the acquired portfolio of First Haralson in conjunction with the merger. Additionally, the falling rate environment in 2008 offered us an opportunity to increase liquidity and recognize a gain on the sale of available-for-sale securities.

We believe our investment portfolio provides a balance to interest rate and credit risk in other categories of the balance sheet. The portfolio also provides a vehicle for the investment of available funds and supplying securities to pledge as required collateral for certain public deposits. Securities reported as available-for-sale are stated at fair value. These securities may be sold, retained until maturity, or pledged as collateral for liquidity and borrowing in response to changing interest rates, changes in prepayment risk and other factors as part of our overall asset liability management strategy.

Investment securities held-to-maturity are stated at amortized cost and totaled $7.6 million at December 31, 2008, an decrease of $279 thousand, or 3.5%, when compared to the year ended 2007. This portfolio consists of banking industry issued trust preferred securities from various issuers across the United States and, particularly, the Southeast. During 2008, the estimated fair value of the held-to-maturity securities decreased significantly as the perceived risk of holding the securities increased in response to the difficulties faced in the banking industry and the increased default rate in the securities. We have the intent and ability to hold these securities until maturity and consider this decrease in estimated fair value to be temporary.

The following table shows the carrying value of our securities, by security type, as of December 31, 2008, 2007 and 2006:

Table 3

Securities

(in thousands)

Available for Sale	2008		2007		2006
US Government sponsored enterprises	$	—	$	2,030	$	9,937
State, county and municipal		57,279		70,466		33,459
Mortgage-backed securities		33,175		45,573		15,818
Corporate bonds		3,916		4,624		5,037
Total available for sale	$	94,370	$	122,693	$	64,251

Held to Maturity
Trust Preferred Securities	$	7,622	$	7,902	$	7,837

The following table presents the expected maturity of the amortized cost of securities by maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis, assuming a 34% marginal tax rate) at December 31, 2008. The composition and maturity/re-pricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.

Table 4

Expected Maturity of Securities

(in thousands)

Maturities at December 31, 2008	State, County & Municipals		Wtd. Avg. Yld.			Mortgage Backed Securities		Wtd. Avg. Yld.			Corporate Bonds		Wtd. Avg. Yld.			Trust Preferred		Wtd. Avg. Yld.
Within 1 year	$	350		4.15	%	$	2,924		4.68	%	$	—		—	%	$	—		—	%
After 1 through 5 years		2,599		6.01	%		11,603		4.90	%		3,786		5.54	%		—		—	%
After 5 through 10 years		12,040		6.64	%		13,993		5.82	%		—		—	%		—		—	%
After 10 years		44,342		6.40	%		4,068		5.58	%		557		—	%		7,622		5.42	%
Total	$	59,331		6.42	%	$	32,588		5.36	%	$	4,343		4.83	%	$	7,622		5.42	%
Fair Value	$	57,279				$	33,175				$	3,916				$	2,853

Mortgage-backed securities are included in the maturities categories in which they are anticipated to be repaid based on average maturities. The actual cash flow of mortgage-backed securities differs with this assumption. Yields on tax-exempt securities are calculated on a tax equivalent basis.

Loans

Loan concentrations are defined as aggregate credits extended to a number of borrowers engaged in similar activities or resident in the same geographic region, which would cause them to be similarly affected by economic or other conditions. On a routine basis we evaluate these concentrations for purposes of policing our concentrations and making necessary adjustments in our lending practices to reflect current economic conditions and industry trends.

The primary types of loans in our portfolio are residential mortgages and home equity, construction and development, commercial real estate, commercial and consumer installment loans. Generally, we underwrite loans based upon the borrower’s debt service capacity or cash flow, a consideration of past performance on loans from other creditors as well as an evaluation of the collateral securing the loan. Our general policy is to employ relatively conservative underwriting policies, primarily in the analysis of borrowers’ debt service coverage capabilities for commercial and commercial real estate loans, while limiting gross debt ratios for consumer loans and loan-to-value ratios for all types of real estate loans with some exceptions, Given the localized nature of our lending activities, the primary risk factor affecting the portfolio as a whole is the health of the local economy in the West Georgia area and its effects on the value of local real estate and the incomes of local professionals and business firms.

Loans to directors, executive officers and principal shareholders of WGNB and to directors and officers of First National Bank are subject to limitations of the Federal Reserve, the principal effect of which is to require that extensions of credit by us to executive officers, directors, and ten percent shareholders satisfy certain standards. We routinely make loans in the ordinary course of business to certain directors and executive officers of WGNB and First National Bank, their associates, and members of their immediate families. In accordance with Federal Reserve guidelines, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with others and do not involve more than normal risk of collectibility or present other unfavorable features. As of December 31, 2008, loans outstanding to directors and executive officers of WGNB and First National Bank, their associates and members of their immediate families totaled $9.9 million, which represented approximately 1.56% of total loans as of that date. As of December 31, 2008, none of these loans outstanding to related parties were non-accrual, past due or restructured.

The following table presents loans by type on the dates indicated:

Table 5
Loan Portfolio
(in thousands)	December 31,

	2008			2007			2006			2005			2004

Commercial, financial & agricultural	$	64,434		$	61,540		$	52,334		$	51,555		$	50,528
Real estate – construction		182,878			242,216			175,024			153,511			114,657
Real estate – mortgage		349,612			315,335			219,563			196,383			173,110
Consumer		34,576			40,873			27,398			22,271			18,614
		631,500			659,964			474,319			423,720			356,909
Less: Unearned interest and fees		(1,338	)		(1,803	)		(818	)		(841	)		(581	)
Allowance for loan losses		(11,240	)		(12,422	)		(5,748	)		(5,327	)		(4,080	)
Loans, net	$	618,922		$	645,739		$	467,753		$	417,552		$	352,248

The following table sets forth the maturity distribution (based upon contractual dates) and interest rate sensitivity of commercial, financial and agricultural loans, real estate construction loans (which includes non-performing loans), mortgage loans and consumer loans as of December 31, 2008:

Table 6

Loan Portfolio Maturity

(in thousands)

	One Year Or Less		Wtd. Avg. Yld.			Over One to Five Years		Wtd. Avg. Yld.			Over Five Years		Wtd. Avg. Yld.			Total		Wtd. Avg. Yld.
Commercial, financial & agricultural	$	44,448		5.20	%	$	16,215		5.69	%	$	3,771		6.41	%	$	64,434		5.39	%
Real estate – construction		169,165		2.54	%		12,988		5.90	%		725		7.32	%		182,878		2.80	%
Real estate – mortgage		81,237		5.77	%		215,188		6.66	%		53,187		6.10	%		349,612		6.37	%
Consumer		16,943		8.97	%		17,412		8.63	%		221		6.88	%		34,576		8.79	%

Total	$	311,793		4.11	%	$	261,803		6.69	%	$	57,904		6.14	%	$	631,500		5.37	%

Variable/Fixed Rate Mix

	Variable Interest Rates		Wtd Avg Yld			Fixed Interest Rates		Wtd Avg Yld
Commercial, financial and agricultural	$	23,747		3.65	%	$	40,686		6.41	%
Real estate – construction		109,518		2.26	%		73,360		3.59	%
Real estate – mortgage		132,506		4.75	%		217,107		7.35	%
Consumer		1,558		6.29	%		33,018		8.90	%

Total	$	267,329		3.64	%	$	364,171		7.83	%

Provision and Allowance for Possible Loan and Lease Losses

Our provision for loan losses in 2008 was $14.9 million, compared to $10.2 million in 2007 and $1.5 million in 2006. The increase in the provision for loan losses reflects a higher level of non-performing assets and criticized and classified loans recognized in the last half of 2007 which continued through 2008. The allowance for loan losses represented 1.78%, 1.88% and 1.21% of total loans outstanding at December 31, 2008, 2007 and 2006, respectively. Management has taken an aggressive approach to identification and recognition of potential problem loans in its impairment process. In addition, management is recognizing impairment of a loan and continuously analyzing and evaluating current market values for collateral on impaired loans.

We have an independent loan review function. The loan officer is responsible for initially placing loans in loan grade categories which are consistent with those used by our regulators. Target loans are scheduled for review by the loan review personnel for credit quality, consistency and grading accuracy. Through the grading process, we seek to assure the timely recognition of credit risks. In general, as credit risk increases, the level of the allowance for loan loss will also increase. However in 2008, management charged-off loans in recognition of decreased market values from collateral dependent properties, which reduced the overall allowance balance.

While uncertainty and rapid change is prevailing in assessing loan quality, an allowance for loan loss appropriateness test is performed at each quarter end. Specific amounts of loss are estimated on problem loans and historical loss percentages are applied to the balance of the portfolio using certain portfolio stratifications. The evaluation takes into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions, regulatory examination results, and the existence of loan concentrations. Additionally, a monthly analysis is performed to determine if further provision is appropriate.

Management’s judgment in determining the appropriateness of the allowance is based on evaluations of the collectibility of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overall portfolio quality, and review of specific problem loans. In determining the appropriateness of the allowance for loan losses, management uses a loan grading system that rates loans in nine different categories. Grades six through nine, which represent criticized or classified loans, are assigned allocations of loss based on management’s estimate of potential loss that is generally based on historical losses and/or collateral deficiencies. Loans graded one through five are stratified by type and allocated loss ranges based on historical loss experience for the strata. The combination of these results is compared monthly to the recorded allowance for loan losses and material differences are adjusted by increasing or decreasing the provision for loan losses. Loans deemed to be impaired and certain types of classified loans are evaluated individually to measure the probable loss, if any, in the credit. Management uses internal credit personnel who are independent of the lending function to challenge and corroborate the loan grading results and provide additional analysis in determining the adequacy of the allowance for loan losses and the future provisions for estimated loan losses.

Management believes that the allowance for loan losses is adequate. Management uses available information to recognize current risk of loss in the portfolio based on changes in economic conditions and a change in the borrowers’ ability to repay. In addition, regulators, as an integral part of their examination process, periodically review our allowance for loan losses. Such regulators may require us to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. In addition, we engaged an independent review of the allowance for loan loss process by a third party. Management realizes the importance of maintaining an appropriate allowance for loan losses. Through a professional loan review function and effective loan officer identification program, management believes that we are able to recognize weaknesses in the loan portfolio in a timely manner. Early identification of deteriorating credit attributes allows management to take a proactive role in documenting an established plan to enhance our position and minimize the potential for loss.

Through a regular problem loan identification program outlined above, management is able to identify those loans that exhibit weakness and classify them on a classified and criticized loan list. Management has elected to meet with lenders and credit staff more often and in greater detail than it may have in a more stable credit quality period. Special attention is given to construction and development loans in order to accurately evaluate the exposure to loan loss of this portfolio. The migration analysis assigns historical loss amounts to pools of loans according to classifications of risk ratings to calculate a general allowance to the overall portfolio. A specific reserve may be assigned to a loan as a result of fair value analysis. We also evaluate the risks associated with concentrations in credit.

The following table presents a summary of changes in the allowance for loan losses for the years indicated:

Table 7

Allowance for Loan Losses

(in thousands)

	December 31,
	2008			2007			2006			2005			2004
Balance at beginning of year	$	12,422		$	5,748		$	5,327		$	4,080		$	3,479
Charge-offs:
Commercial, financial and agricultural		440			146			47			24			59
Real estate – construction		14,453			3,930			—			—			—
Real estate – mortgage		1,035			772			910			235			215
Consumer loans		502			395			155			129			123
Total charge-offs		16,430			5,243			1,112			388			397
Recoveries:
Commercial, financial and agricultural		3			7			11			16			16
Real estate – construction		203			25			—			—			—
Real estate – mortgage		12			74			—			18			13
Consumer loans		130			78			57			51			44
Total recoveries		348			184			68			85			73
Net (charge-offs) recoveries		(16,082	)		(5,059	)		(1,044	)		(303	)		(324	)
Allowance attributable to First Haralson loans		—			1,527			—			—			—
Provision for loan losses		14,900			10,206			1,465			1,550			925

Balance at end of year	$	11,240		$	12,422		$	5,748		$	5,327		$	4,080

Ratio of net charge-offs during the
Period to average loans outstanding		2.46	%		.87	%		.24	%		.08	%		.10	%

Ratio of allowance to total loans		1.78	%		1.88	%		1.21	%		1.26	%		1.14	%

Non-Performing Assets and Past Due Loans

Non-performing assets at December 31, 2008 were $122.0 million, or 19.32%, of total loans compared to $58.3 million, or 8.93%, of total loans at December 31, 2007 and $4.3 million, or 0.91%, of total loans at December 31, 2006. The levels of non-performing loans are at a historic high for us. The primary cause of the increase in non-performing asset levels is the decline in the residential real estate market in the metro-Atlanta area. Over the past five years, our market area has become more connected with the growth of metro-Atlanta. Residential real estate growth became a leading industry in our market area and over those five years, residential construction and development loans averaged 33% of our loan portfolio.

In recognition of the potential impact of a downturn, in 2004 management began to raise the credit standards for those borrowers. Management was, however, surprised by both the suddenness and the severity with which the downturn came. Many in the market did not realize the impact that subprime mortgage lending had on the absorption rate of home sales in the market area. When subprime lenders began to experience credit quality problems related to increased rates in the adjustable subprime market, that type of lending ceased. Further, as homes that were built to meet the subprime and conforming mortgage demand came to market, not only had the subprime demand decreased sharply, but homes which were subject to subprime lending began emerging back on the market in foreclosure. This trend continued at an increasing rate in 2008 and resulted in a (by some estimates) 48 to 60 month supply of homes for sale in the market and a ten to fifteen year supply of developed lots based on recent absorption rates.

The excess supply of homes and developed residential lots has had a negative impact on our residential construction and development borrowers. The borrowers continue to experience much longer than expected sales time and, therefore, the holding period and expense of the homes or residential lots was much higher than expected. As time passes, the borrowers have been paying the interest and ownership carry on the properties, but have diminished their financial capacity to continue to hold the property. Thus, we have been experiencing an increased number of past due loans which has lead to impairment of the loan and, at an increasing rate, foreclosure for some borrowers. In addition, some borrowers may file for protection under bankruptcy laws which can further lengthen the collection period of the loan. Approximately 80% of the total amount of non-performing assets as of December 31, 2008 is made up of twenty-six loan relationships with balances of $2 million to $7 million per relationship.

Management has performed impairment analyses on each troubled loan relationship and continues to focus on the credit quality of its residential construction and development loan portfolio. The impairment analysis entails evaluating the fair value of the properties which were held as collateral for the loans. The properties are re-appraised when appropriate and those updated appraisals are evaluated by management. Generally, there is greater uncertainty in real estate values in times of a market downturn. As expected, updated values are often less than the earlier appraisals. Therefore, if fair value analysis is below the recorded loan amount, management generally suspends the accrual of interest and, in certain instances, charges-down the balance of the impaired loans as dictated by collateral values in our fair value assessment. As part of our ongoing evaluation of the collectibility of the impaired asset, management must continue to make value judgments on the properties or loans through updated appraisals and our knowledge of the market. There can be no assurance that residential real estate values will not continue to decline or that more loans will become impaired, thereby causing more potential suspension of accrued interest or further charge-down of loans.

Management’s most critical priority is disposing of and maximizing the net realizable value of the non-performing assets. Management considers multiple avenues to reduce non-performing assets. The holding period of non-performing assets must be minimized as these assets bear a cost to carry for us in both interest carry and maintenance and real estate taxes. We believe that the ultimate outcome of this cycle of economic downturn is the largest uncertainty management faces over the next twelve months. We are in a market that has high historical and projected population and income growth potential. While the current downturn has had a significant impact on asset quality and, therefore, earnings, we believe our long term growth and earnings outlook for the Company remains positive.

The following table summarizes loans 90 days or greater past due, non-accrual loans and real estate taken in settlement of foreclosure for the years indicated.

Table 8 Non-Performing Assets (in thousands)
	December 31,
	2008			2007			2006			2005			2004
Foreclosed property	$	45,798		$	10,313		$	1,318		$	567		$	686
Non-accrual loans		71,600			46,352			1,212			2,382			536
Loans 90 days past due still accruing		4,597			1,204			1,781			673			567
Total	$	121,995		$	57,869		$	4,311		$	3,622		$	1,789

Non-performing assets as % of total loans		19.32	%		8.77	%		.91	%		.85	%		.50	%

While there may be additional loans in our portfolio that may become non-performing as conditions dictate, management is not aware of any non-performing loans that are not disclosed in the table above. As a result of management’s ongoing review of the loan portfolio, loans are classified as non-accrual generally when they are past due in principal or interest payments for more than 90 days or it is otherwise not reasonable to expect collection of principal and interest due on the loan. Exceptions may be allowed for 90 day past due loans when such loans are well secured and in process of collection. Generally, payments received on non-accrual loans are applied directly to principal.

Our loan review function also monitors selected performing loans for which general economic conditions or changes within a particular industry could cause the borrowers financial difficulties. The loan review function identifies loans with high degrees of credit or other risks. The focus of loan review and management is to maintain a low level of non-performing assets and return current non-performing assets to earning status. Management is unaware of any known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on our liquidity, capital resources or operations other than the factors discussed throughout this Report.

Deposits

Time deposits of $100 thousand and greater totaled $260.0 million at December 31, 2008, compared with $229.4 million at year-end 2007. The growth in time deposits of $100 thousand and greater was $30.7 million, or 13.4%, from December 31, 2007 to December 31, 2008. The growth in this category of deposits was attributable to an increase in brokered time deposits of $100 thousand and greater of $46.5 million and a decrease resulting from time deposits within our market area of $16.1 million.

The following table sets forth the scheduled maturities of time deposits of $100 thousand and greater at December 31, 2008.

Table 9

Maturity of Time Deposits of $100,000 and Greater

(in thousands)


Within 3 months	$	30,347
After 3 through 6 months		52,180
After 6 through 12 months		48,273
After 12 months		129,244
Total	$	260,044

Liquidity

We must maintain and manage, on a daily basis, sufficient funds to cover the withdrawals from depositors’ accounts and to supply potential borrowers with funds. To meet these obligations, we keep cash on hand, maintain account balances with correspondent banks, and purchase and sell federal funds and other short-term investments such as certificates of deposit in other banks. Asset and liability maturities are monitored in an attempt to match these variables to meet liquidity needs. In response to concerns with regard to the safety of bank deposits which surfaced in 2008, we have increased our focus on the management of liquidity.

We formalized our Contingency Funding Committee, which met frequently in 2008, to respond to liquidity management needs. The Committee makes judgments on “headline risk” in the banking industry and locally. Headline risk results when the media reports on the decreased earnings, increased non-performing assets and decreased capital of banks. This creates concern among depositors as to the safety of their funds and, therefore, may cause depositors to make larger than normal withdrawals. We have, to date, been relatively unaffected by headline risk. However, it is our policy to monitor liquidity to meet regulatory requirements, safe and sound banking practices and local funding needs. Management believes that our current level of liquidity is adequate to meet these needs.

We maintain collateralized short and long term borrowing relationships with correspondent banks including the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank of Atlanta (“FRB”) that can provide funds to us on short notice, if needed. Our line of credit with the FHLB is up to 20% to total assets, but is dependent on available collateral and the financial performance of the Bank. We have arrangements with correspondent and commercial banks for short term secured advances up to $15.8 million. As of December 31, 2008, we had not drawn on the available facilities. In addition, subject to collateral availability, we have a line of credit with the FHLB from which we had drawn $52.0 million as of December 31, 2008. For additional details on the lines of credit with the FHLB, FRB and a correspondent bank see Note 8, “Lines of Credit”, to the consolidated financial statements.

Our cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash and cash equivalents amounted to $75.4 million at December 31, 2008, which represented an increase of $49.5 million from December 31, 2007 and reflective of our desire to maintain increased liquidity during times of uncertainty. Net cash provided by operating activities was $7.0 million for 2008. Net cash provided by operating activities was not impacted by the impairment of goodwill in the amount of $24.1 million or the provision for loan loss in the amount of $14.9 million. Both items are non-cash in nature and, therefore, are added-back to our net loss for 2008 to compute cash provided by operating activities. We recognized other add-backs attributable to non-cash items such as depreciation, amortization and accretion and stock -based employee compensation expense totaling $2.1 million.

Net cash provided by investing activities of $1.2 million consisted primarily of a net increase in loans of $29.3 million and net decrease in securities available-for-sale of $26.0 million. Net cash provided by financing activities totaled $41.3 million which was primarily attributable to a net increase in deposits of $55.3 million, a decrease in borrowings such as FHLB advances and securities sold under a repurchase agre

WGNB CORP 10-K