item 14 principal accountant fees services information appearing caption “independent public accountants” 2009 proxy statement incorporated herein reference part iv item 15 item 14 exhibits reports form 8k financial statement schedules omitted applicable required information incorporated consolidated financial statements related notes 3 following exhibits filed report 31 amended restated articles incorporation incorporated reference exhibit 31 company’s registration statement form 10sb filed june 14 2000 “form 10sb” 32 amended restated bylaws incorporated reference exhibit 32 form 10sb 41 see exhibits 31 32 provisions company’s articles incorporation bylaws defining rights shareholders 42 specimen certificate representing shares common stock incorporated reference exhibit 42 form 10sb 43 rights agreement dated february 12 1997 company suntrust bank atlanta incorporated reference exhibit 43 form 10sb 101 employment agreement dated september 10 1996 company l leighton alston incorporated reference exhibit 101 form 10sb 102 incentive stock option plan incorporated reference exhibit 102 form 10sb 103 bonus stock option agreement dated may 11 1993 company l leighton alston incorporated reference exhibit 103 form 10sb 104 first amendment bonus stock option agreement dated june 14 1994 company l leighton alston incorporated reference exhibit 104 form 10sb 105 bonus stock option agreement dated june 14 1994 company richard duncan incorporated reference exhibit 105 form 10sb 106 bonus stock option agreement dated september 23 1998 company hb lipham iii incorporated reference exhibit 106 form 10sb 107 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 108 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 109 bonus stock option agreement dated november 29 1995 company h james crowe incorporated reference exhibit 109 form 10sb 1010 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 1011 employment agreement dated august 30 2000 company richard duncan incorporated reference exhibit 1011 company’s form 10ksb filed february 21 2001 “2000 form 10ksb” 1012 employment agreement dated august 30 2000 company h james crowe incorporated reference exhibit 1012 2000 form 10ksb 1013 employment agreement dated august 31 2000 company steven j haack incorporated reference exhibit 1013 2000 form 10ksb 1014 employment agreement dated august 31 2000 company hb lipham iii incorporated reference exhibit 1014 2000 form 10ksb 1015 employment agreement dated august 31 2000 company w galen hobbs jr incorporated reference exhibit 1015 2000 form 10ksb subsidiaries wgnb corp indicates management contract compensatory plan arrangement b reports form 8k reports form 8k filed quarter ended december 31 2001 signatures accordance section 13 15d exchange act registrant caused report signed behalf undersigned thereunto duly authorized power attorney know men presents person whose signature appears constitutes appoints l leighton alston steven j haack either attorneyinfact power substitution capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof accordance requirements exchange act report signed following persons behalf registrant capacities dates indicated l leighton alston l leighton alston president chief executive officer director principal executive officer date march 6 2002 steven j haack steven j haack secretary treasurer principal financial accounting officer date march 6 2002 joe whit walker joe whit walker chairman board date march 6 2002 grady w cole director date march 2002 richard duncan richard duncan director date march 6 2002 wt green jr wt green jr director date march 6 2002 lg joyner lg jack joyner director date march 6 2002 r david perry r david perry director date march 6 2002 l richard plunkett director date march 2002 thomas e reeve iii md thomas e reeve iii md director date march 6 2002 thomas richards thomas richards director date march 8 2002 oscar w roberts iii director date march 2002 frank thomasson iii frank thomasson iii director date march 8 2002 j thomas vance j thomas vance director date march 8 2002 charles willis sr charles willis sr director date march 6 2002 wgnb corp consolidated financial statements december 31 2001 2000 independent accountants’ report thereon report independent certified public accountants board directors stockholders wgnb corp subsidiaries audited accompanying consolidated balance sheets wgnb corp subsidiaries december 31 2001 2000 related consolidated statements earnings comprehensive income changes stockholders’ equity cash flows three years ended december 31 2001 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiaries december 31 2001 2000 results operations cash flows three years ended december 31 2001 conformity auditing standards generally accepted united states america porter keadle moore llp atlanta georgia january 11 2002 wgnb corp consolidated balance sheets december 31 2001 2000 see accompanying notes consolidated financial statements wgnb corp consolidated statements earnings years ended december 31 2001 2000 1999 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income years ended december 31 2001 2000 1999 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2001 2000 1999 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2001 2000 1999 wgnb corp consolidated statements cash flows continued years ended december 31 2001 2000 1999 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies following summary significant policies procedures basis presentation consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiaries west georgia national bank “bank” west georgia credit services inc “wgcs” significant intercompany accounts transactions eliminated consolidation bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll county georgia wgcs also operates name mortgage loan solutions commenced operations 1997 serving paulding douglas carroll counties company established wgcs order diversify revenue sources offering consumer financing traditionally offered banks accounting reporting policies company methods applying principles conform generally accepted accounting principles general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income cash equivalents purposes reporting cash flows cash equivalents include cash due banks federal funds sold investment securities company classifies securities one three categories trading available sale held maturity trading securities bought held principally purpose selling near term held maturity securities company ability intent hold security maturity securities included trading held maturity classified available sale trading available sale securities recorded fair value held maturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities available sale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value available sale investment cost deemed temporary charged earnings establishes new cost basis security premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified available sale included earnings derived using specific identification method determining cost securities sold wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued loans allowance loan losses loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan accrual interest discontinued loan management believes considering economic business conditions collection efforts borrower’s financial condition collection interest doubtful allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment adequate absorb probable losses existing loans may become uncollectible management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgments information available time examination premises equipment premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment real estate properties acquired foreclosure carried lower cost defined fair value foreclosure fair value less estimated costs dispose accounting literature defines fair value amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns provided charge income allowance losses real estate period need arises wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued income taxes company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements changes fair value derivative depends intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change december 31 2001 company held interest rate swap entered means managing interest rate risk accounts hedge instrument fair value hedges december 31 2001 company interest rate swap contract notional outstanding 20000000 interest swap contract company receives fixed rate 345 pays rate 90 day libor 189 december 31 2001 company derivatives instruments december 31 2000 net earnings per share earnings per common share based weighted average number common shares outstanding period effects potential common shares outstanding period included diluted earnings per share stock options described note 10 granted key management personnel 2000 company completed two one stock split earnings per share related average shares outstanding reporting period restated reflect effects stock split wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued net earnings per share continued new accounting standards transfers servicing financial assets extinguishments liabilities september 2000 fasb issued statement financial accounting standards 140 “accounting transfers servicing financial assets extinguishments liabilitiesa replacement fasb statement 125” “sfas 140” fas 140 revises criteria accounting securitizations transfers financial assets collateral addition sfas 140 requires certain additional disclosures except new disclosure provisions effective year ended december 31 2000 sfas 140 effective transfer financial assets occurring march 31 2001 provisions sfas 140 significant effect consolidated financial statements accounting business combinations july 2001 fasb issued statements financial accounting standards 141 “business combinations” “fas 141” 142 “goodwill intangible assets” “fas 142” standards change accounting business combinations among things prohibiting prospective use poolingofinterests accounting requiring companies stop amortizing goodwill certain intangible assets indefinite useful life created business combinations accounted using purchase method accounting instead goodwill intangible assets deemed indefinite useful life subject annual review impairment new standards generally effective first quarter 2002 provisions statements effect consolidated financial statements reclassifications certain reclassifications made prior years consolidated financial statements conform presentation used 2001 2 investment securities investment securities available sale held maturity december 31 2001 2000 summarized follows wgnb corp notes consolidated financial statements continued 2 investment securities continued amortized cost estimated fair value investment securities available sale held maturity december 31 2001 contractual maturity shown expected maturities differ contractual maturities borrowers right call prepay certain obligations without call prepayment penalties proceeds sales securities available sale 2001 2000 1999 1080000 560520 2608723 respectively following gains losses recognized wgnb corp notes consolidated financial statements continued 2 investment securities continued investment securities fair value approximately 52755000 38860000 december 31 2001 2000 respectively pledged secure public deposits required law purposes 3 loans major classifications loans december 31 2001 2000 summarized follows bank wgcs grant loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market changes allowance loan losses years ended december 31 2001 2000 1999 follows 4 premises equipment major classifications premises equipment december 31 2001 2000 summarized follows depreciation expense amounted 700825 655487 588456 2001 2000 1999 respectively wgnb corp notes consolidated financial statements continued 5 time deposits december 31 2001 scheduled maturities time deposits follows 6 lines credit bank lines credit overnight borrowings 11000000 10500000 december 31 2001 2000 respectively bank also line credit federal home loan bank atlanta fhlb totaling 43140000 42680000 december 31 2001 2000 respectively advances fhlb line credit subject available collateral bank december 31 2001 bank advances outstanding fhlb amounting 35000000 following advances require quarterly interest payments december 31 2000 bank advances outstanding fhlb amounting 25000000 following advances require quarterly interest payments early conversion option allows fhlb convert advances variable interest rate upon notification bank fhlb advances secured bank’s stock fhlb 14 family first mortgage loans qualified commercial loans wgnb corp notes consolidated financial statements continued 6 lines credit continued additionally 1999 company entered 1750000 line credit arrangement financial institution matures march 31 2002 december 31 2001 2000 company outstanding advances 1282000 1300000 respectively facility requires interest payments quarterly annual interest calculated prime rate minus 125 7 commitments company party financial instruments offbalancesheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations onbalancesheet instruments cases company requires collateral support financial instruments credit risk commitments extend credit agreements lend customer long violation condition established contract commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property standby letters credit conditional commitments issued company guarantee performance customer third party credit risk involved issuing letters credit essentially involved extending loan facilities customers 8 stock repurchase plan 1996 board directors approved stock repurchase plan 2000000 company’s common stock currently outstanding 2001 board directors approved additional 1000000 used stock repurchase plan company redeemed 2466 shares common stock 55365 dring 2001 december 31 2001 company 1543712 remaining reacquire shares stock repurchase plan 9 regulatory matters company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet specific capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors wgnb corp notes consolidated financial statements continued 9 regulatory matters continued quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets management believes december 31 2001 company bank meet capital adequacy requirements subject december 31 2001 recent notification federal deposit insurance corporation categorized bank well capitalized regulatory framework prompt corrective action categorized well capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table conditions events since notification management believes changed institution’s category presented bank’s actual capital amounts ratios detail disclosures related company excluded materially deviate disclosure herein dividends paid bank primary source funds available company banking regulations limit amount dividends may paid without prior approval regulatory authorities restrictions based level regulatory classified assets prior years’ net earnings ratio equity capital total assets december 31 2001 bank could pay approximately 4941000 dividends without obtaining prior regulatory approval 10 incentive stock option plan company incentive stock option plan accounted apb 25 related interpretations january 11 1994 incentive stock option plan company may grant options certain key officers acquire shares common stock company fair value number shares determined annually agreed upon formulas total 160000 shares common stock reserved possible issuance plan options granted commencing march 8 1994 continue year 2004 options may exercised prior five years date grant exercisable later ten years date additionally 4448 options issued officer bank covered aforementioned plan subject conditions compensation cost recognized stock options wgnb corp notes consolidated financial statements continued 10 incentive stock option plan continued compensation cost plan determined based upon fair value options grant dates company’s net earnings net earnings per share would reduced proforma amounts indicated fair value option estimated date grant using minimum value model following weighted average assumptions used grants 2001 2000 1999 respectively dividend yield 243 200 170 risk free interest rates 508 500 600 respectively expected life 10 years disclosure purposes company immediately recognized expense associated option grants assuming awards vest summary status company’s stock option plan december 31 2001 2000 1999 changes years ending dates presented following information applies options outstanding december 31 2001 11 defined contribution plan company began qualified retirement plan pursuant internal revenue code section 401k 1996 covering substantially employees subject certain minimum age service requirements contribution plan employees voluntary 2001 2000 1999 company matched 100 participants’ contributions 6 participants’ salaries company also made discretionary contributions plan 2001 2000 1999 5 participants’ salaries contributions plan charged expense 2001 2000 1999 365993 303996 261763 respectively wgnb corp notes consolidated financial statements continued 12 income taxes components provision income taxes consolidated statements earnings years ended december 31 2001 2000 1999 follows differences provision income taxes amount computed applying statutory federal income tax rate earnings income taxes follows following summarizes net deferred tax asset included component assets december 31 2001 2000 wgnb corp notes consolidated financial statements continued 13 related party transactions bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2001 december 31 2001 deposits directors executive officers related interests totaled approximately 6482000 14 operating expenses components operating expenses exceed 1 total interest income follows 15 fair value financial instruments company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiaries rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance cash equivalents cash due banks federal funds sold carrying amount reasonable estimate fair value investment securities fair values investment securities based quoted market prices loans fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value deposits fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal home loan bank advances fair value advances outstanding based quoted value provided fhlb borrowings based variable rates carrying value reasonable estimate fair value wgnb corp notes consolidated financial statements continued 15 fair value financial instruments continued commitments extend credit standby letters credit commitments extend credit standby letters credit made using variable rates short term contract value reasonable estimate fair value derivative instruments fair value estimated amount company would receive pay terminate contract reporting date december 31 2001 fair value contract outstanding 0 contracts outstanding december 31 2000 limitations fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgements estimates subjective nature involve uncertainties matters significant judgement therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing offbalancesheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates carrying amount estimated fair values company’s financial instruments december 31 2001 2000 follows wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information balance sheets december 31 2001 2000 statements earnings years ended december 31 2001 2000 1999 wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information continued statements cash flows years ended december 31 2001 2000 1999 item 14 principal accountant fees services information appearing caption “independent public accountants” 2006 proxy statement incorporated herein reference part iv item 15 item 14 principal accountant fees services information appearing caption “independent public accountants” 2007 proxy statement incorporated herein reference part iv item 15 item 14 principal accountant fees services information appearing caption “independent public accountants” 2005 proxy statement incorporated herein reference part iv item 15 item 14 principal accountant fees services information appearing caption “independent public accountants” 2008 proxy statement incorporated herein reference part iv item 15 item 14 principal accountant fees services information appearing caption “independent public accountants” 2004 proxy statement incorporated herein reference item 15 item 14 controls procedures evaluation disclosure controls procedures company maintains controls procedures designed ensure information required disclosed reports company files submits securities exchange act 1934 recorded processed summarized reported within time periods specified rules forms securities exchange commission based upon evaluation controls procedures performed within 90 days filing date report chief executive chief financial officers company concluded company’s disclosure controls procedures adequate changes internal controls company made significant changes internal controls factors could significantly affect controls subsequent date evaluation controls chief executive chief financial officers item 15 item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided wgnb’s consolidated financial statements accompanying footnotes use words like “we” “us” “our” like referring wgnb together subsidiary first national bank cautionary notice regarding forwardlooking statements certain statements made report documents incorporated reference herein including matters discussed caption “management’s discussion analysis financial condition results operations” well oral statements made company officers directors employees may constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended “exchange act” forwardlooking statements based management’s beliefs current expectations estimates projections financial services industry economy company bank general words “expect” “anticipate” “intend” “plan” “believe” “seek” “estimate” similar expressions intended identify forwardlooking statements forwardlooking statements guarantees future performance subject risks uncertainties factors may cause actual results performance achievements differ materially historical results expressed implied forwardlooking statements caution readers following important factors among others could cause actual results differ materially forwardlooking statements contained report ● effect changes laws regulations including federal state banking laws regulations must comply associated costs compliance laws regulations either currently future applicable ● effect changes accounting policies standards guidelines principles may adopted regulatory agencies well financial accounting standards board ● effect changes organization compensation benefit plans ● effect competitive position within market area increasing consolidation within banking financial services industries including increased competition larger regional outofstate banking organizations well nonbank providers various financial services ● effect changes interest rates ● effect compliance failure comply within stated deadlines provisions formal agreement primary regulators ● effect changes business cycle downturns local regional national economies ● effect continuing deterioration local economies conduct operations results among things deterioration credit quality reduced demand credit including resultant adverse effect loan portfolio allowance loan lease losses ● possibility allowance loan lease losses proves inappropriate federal state regulators periodically review loan portfolio require us increase provision loan losses recognize loan chargeoffs ● effect current anticipated deterioration housing market residential construction industry may lead increased loss severities worsening delinquencies nonperforming assets loan portfolios ● effect significant number construction loans loan portfolios may pose credit risk types mortgage loans typically made banking institutions due disruptions credit housing markets ● effect troubled institutions market area continuing dispose problem assets given already excess inventory residential homes lots continue negatively impact home values increase time takes us borrowers sell existing inventory ● effect public perception banking institutions risky institutions purposes regulatory compliance safeguarding deposits may cause depositors nonetheless move funds larger institutions ● possibility could held responsible environmental liabilities properties acquired foreclosure caution foregoing list important factors exclusive factors may impact operations critical accounting policies established various accounting policies govern application accounting principles generally accepted united states america preparation financial statements significant accounting policies described notes consolidated financial statements certain accounting policies involve significant judgments assumptions management material impact carrying value certain assets liabilities management considers accounting policies critical accounting policies judgments assumptions used management based historical experience factors believed reasonable circumstances nature judgments assumptions made management actual results could differ judgments estimates could material impact carrying value assets liabilities results operations accounting policies important policies described notes consolidated financial statements reviewed greater understanding financial performance recorded reported believe allowance loan losses critical accounting policy requires significant judgments estimates used preparation consolidated financial statements allowance loan losses represents management’s estimate probable loan losses inherent loan portfolio calculation allowance loan losses critical accounting estimate due significant judgment assumptions estimates related amount timing estimated losses consideration current historical trends amount timing cash flows related impaired loans please refer section report entitled “balance sheet review provision allowance possible loan lease losses” note 1 note 4 consolidated financial statements detailed description estimation processes methodology related allowance loan losses earnings overview years ended december 31 2008 2007 2006 net loss 2008 308 million includes noncash charge impairment goodwill amount 241 million net loss 66 million 114 per common share exclusive charge goodwill impairment net loss 2008 compares net earnings 30 million 055 per diluted common share 2007 83 million 166 per diluted common share 2006 excluding goodwill chargethe return average assets 2008 074 return average shareholders’ total equity 2008 852 return average tangible equity 2008 1363 compared 041 return average assets 437 return average equity 2007 151 return average assets 1654 return average equity 2006 past ten years return average assets averaged 116 return average equity averaged 920 excluding goodwill charge 2008 historically earnings driven primarily balance sheet growth particularly loans attaining greater overhead efficiency suburb atlanta along heavily traveled interstate 20 west market driven residential commercial real estate development 2007 completed merger first haralson also significant presence west georgia merger increased earnings number shares outstanding last half 2007 anticipated merger would neither materially accretive dilutive first eighteen months following merger analysis took account nonrecurring nonoperating merger costs estimated cost savings twelve eighteen month period expected average number shares outstanding based elections first haralson shareholders merger two entities actually proved beneficial company since increased core earnings base helped brace us significant decrease credit quality began last half 2007 continued throughout 2008 acquired loans first haralson impact level nonperforming assets except increase total loan portfolio thereby reducing percentage nonperforming assets total loans operations first haralson negative impact chargedown goodwill incurred fourth quarter 2008 statement financial accounting standards 142 “goodwill intangible assets” requires companies perform annual test goodwill impairment result general decline market valuations bank stocks deterioration economic conditions financial performance impacted loan quality deterioration 2008 concluded goodwill resulting company’s acquisition first haralson july 1 2007 impaired therefore chargedoff entire amount goodwill recorded balance sheet much said slowdown metroatlanta residential real estate market past eighteen months question subprime mortgage production subsequent default rate impact construction development borrowers actually produce subprime mortgages excess inventory residential homes lots produced foreclosure subprime loans overbuilding meet demand subprime lending negative impact home values increased time takes sell existing inventory economics significant impact borrower’s ability carry construction development project result reduced quality overall construction development loan portfolio began experience credit quality issues third quarter 2007 reduction asset quality continued throughout 2008 national local economies continued deteriorate since middle 2007 nonperforming assets increased 66 million june 30 2007 583 million december 31 2007 increase approximately 517 million 783 december 31 2008 nonperforming assets totaled 1220 million increase 110 end 2007 majority nonperforming asset increase attributable approximately twentysix residential real estate construction development loan relationships midst record credit deterioration residential real estate market recorded loan loss provision 149 million incurred net chargeoffs 161 million 246 average loans outstanding 2008 particularly hard hit metroatlanta area south west suburbs comprise much market area last eighteen months comprising last half 2007 2008 experienced net chargedoff loans 211 million resulted recording loan loss provisions amount 243 million addition elevated loan loss provision chargedoff loans recorded chargedoff interest impaired loans amount 29 million realized loss sale chargedown 12 million foreclosed property incurred 24 million expense collection impaired loans maintenance foreclosed property 2008 measure core earnings taxes adding back charge goodwill impairment credit related charges loan loss provision chargedoff interest impaired loans loss sale writedown foreclosed property expense collection impaired loans maintenance foreclosed property core earnings taxes 2008 72 million net interest margin compressed significantly 2008 compared 2007 2006 net interest margin significantly impacted increase nonperforming assets increased liquidity carried balance sheet throughout 2008 bank 1220 million nonperforming assets 754 million cash equivalents balance sheet december 31 2008 net interest margin 297 433 460 2008 2007 2006 respectively loans became impaired ceased accruing interest balance loan therefore loans became nonperforming assets classified impaired loans cured eventually became foreclosed property bank must maintain interestbearing deposits cover balance nonperforming assets excess liquidity results compressing net interest margin net interest margin also compressed amount interest income chargedoff impaired loans addition bank increased interestbearing deposits fund increased liquidity needs safety availability customer deposits became priority response increased headline risk 2008 banks across country including large banks georgia banks began fail addition compression net interest margin take place balance sheet protected impact changes market interest rates completely immune compression net interest margin due interest rate risk rapidly falling market interest rates negatively impacted net interest margin late 2008 interest rates approach zero certificates deposit require time reprice match falling loan cash equivalent yields rates fall rapidly certificate deposit rates remain high perceived risk banking system margin could continue negatively impacted management continually seeks increase revenues controlling costs 2008 overhead ratio excluding charge impairment goodwill noninterest expensenet interest income plus noninterest income 937 compared 636 2007 555 2006 increase overhead ratio primarily due impact increased collection carrying cost nonperforming assets nonperforming assets reduced expense reduction measures realized overhead ratio expected decrease historical levels net interest income operational results primarily depend earnings bank depend large degree ability generate net interest income net interest income represented 747 780 785 net interest income plus income 2008 2007 2006 respectively following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets loans investment securities federal funds sold average rate paid interest bearing liabilities deposits borrowings interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income decreased 61 million 215 2008 2007 increased 53 million 226 2007 2006 net interest income 2008 225 million compared 286 million 2007 234 million 2006 net interest margin interest earning assets 297 2008 433 2007 460 2006 tax equivalent basis market interest rates volatile past five six years mid 2004 first half 2007 short term interest rates increased 575 basis points 2003 levels beginning last half 2007 though 2008 short term interest rates declined 600 basis points likely remain historic lows foreseeable future broad fluctuations significant impact net interest margin net interest income without robust interest rate risk management seek manage interest rate risk fluctuations market rates significant negative impact earnings throughout period increasing decreasing rates margin compressed expanded although extreme volatility short term market interest rates fluctuated decline net interest margin experienced 2008 partly due rapidly declining interest rates however compression due increase nonperforming assets increased liquidity levels increase nonperforming assets writeoff accrued interest impaired loans primary component interest margin compression 2008 larger amount nonperforming assets percentage balance sheet compressed net interest margin becomes employ interestbearing deposits fund noninterest bearing assets thereby reducing net interest margin reduction exacerbated chargeoff previously accrued interest stated nonperforming assets increased 583 million december 31 2007 1220 million december 31 2008 annual average balance nonaccrual loans 2008 513 million chargedoff interest 2008 impaired loans amount 29 million include average balance nonaccrual loans denominator subtract chargedoff interest numerator calculation net interest margin additionally hampered interest rate risk management strategy necessity increase liquidity cash reserves 2008 uncertainty arose banking industry 2008 fear created local national media increased amount cash liquid assets cover potential withdrawals may taken place amount interest earned liquid assets currently less cost obtaining funds federal reserve reduced target federal funds rate earned liquid assets zero 025 fourth quarter 2008 average yield federal funds sold 147 2008 compares average cost funds amount 349 2008 negative spread plus interest carry nonperforming assets compresses net interest margin net interest income net interest margin decreased 136 basis points comparing 2008 2007 net interest margin 297 2008 compared 433 2007 net interest margin 2006 460 representative historical net interest margin past ten years including 2008 net interest margin averaged 457 average yield earning assets 2008 616 decrease 214 basis points compared 2007 decrease 202 basis points 2006 average cost funds 349 2008 decrease 108 basis points 2007 78 basis points 2006 yield total loans 2008 635 yield would approximately 738 29 million chargedoff interest reduced average balance total loans average nonaccrual loans 513 million consequently impact loan yield isolating effect chargedoff interest nonaccrual loans 2008 103 basis points impact nonperforming assets net interest spread 57 basis points 2008 impact nonperforming assets net interest margin could greater 2009 unless average balance nonperforming assets reduced management able minimize amount future chargedoff interest following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities tax equivalent basis assuming rate 34 nonaccrual loans interest income recorded andor chargedoff loans included yield calculation loans periods reported following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate us assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table changes interest income expense tax equivalent basis thousands income 2008 76 million decrease 451 thousand 56 compared 2007 increase service charges deposit accounts atm network fees 2008 attributable combination wgnb first haralson merger took place july 2007 consequently half year first haralson’s noninterest income included 2007 operations full year 2008 including half year first haralson’s operations 2007 versus full year operations 2008 merged entities greatest impact service charges deposit accounts atm network fees service charges deposit accounts increased 891 thousand 166 2008 compared 2007 much increase service charges deposit accounts attributable nonsufficient funds charges nonsufficient funds charges increased 835 thousand 170 2007 2008 service charges demand money market savings deposits increased 50 thousand 2007 2008 nonsufficient funds service charge revenue increased increase robust prior years deposit holders become fee sensitive economy worsened customers choosing free checking accounts taking greater care overdraft accounts frequently means conserve money increase service charges deposit accounts 2006 2007 13 million 321 prior combination first haralson averaged approximately 180 thousand per month service charges deposit accounts thus approximately 11 million increase service charges deposit accounts 2006 2007 attributable revenue derived first haralson’s customer base last six months 2007 remaining 200 thousand increase service charges deposit accounts attributable combined entity’s ability increase combined customer base much enhanced revenue attributable increased overdraft fee income 2007 compared 2006 atm network fees increased 422 thousand 403 comparing 2008 2007 atm network fees increased 270 thousand 347 2007 compared 2006 increase atm network fees volume driven revenues continues attributable increased foreign nonfirst national bank georgia customers usage expanding atm network well increased volume atm debit card revenue attributable addition first haralson’s atm operations wgnb mortgage origination fees decreased 116 thousand 297 2007 2008 flat 2006 2007 decline mortgage fee income attributable much publicized credit mortgage foreclosure crisis took place 2008 subprime losses 2007 2008 mortgage underwriting standards since increased credit extension also decreased due falling residential real estate values mortgage lenders reluctant lend housing inability determine low home values continue fall consumer confidence time low unemployment rates continue increase consumers feel confident enough immediate future make large purchases like homes automobiles despite decreasing prices wealth management business significant contributor fee income us 2008 2007 however due volatility sharp decrease equities market fee income attributable wealth management services decreased 194 thousand 304 comparing 2008 2007 wealth management division become cumulatively profitable 2007 startup 2006 despite 304 decline revenue 2008 however wealth management division missed breakeven point 24 thousand comparing 2007 2006 increase brokerage fees attributable twelve months operation 2007 compared four months 2006 2008 extending january 2009 closed three locations due deteriorating economic conditions cost saving measures discussed closed loan production office coweta county two locations banco de progreso division three locations leased consequently wrote book value leasehold improvements locations addition sold small amount surplus fixed assets 2008 resulted small loss chargeoffs sale fixed assets resulted net loss 303 thousand recognized fourth quarter 2008 august 2008 company repaid 200 million securities sold repurchase agreement paid fee 683 thousand company also sold securities availableforsale third quarter amount 215 million net gain 329 thousand addition company sold 73 million securities first second quarters 2008 net gain 106 thousand total net gain sale securities 2008 435 thousand compared gain loss sale securities 2007 2006 sale securities reduction debt 2008 resulted deleveraging approximately 20 million bank’s balance sheet giving company greater capital coverage available liquidity management continues actively manage nonperforming asset portfolio included management nonperforming asset portfolio valuation sales nonperforming loans foreclosed property 2008 sold 189 million nonperforming loans foreclosed property total loss sale writedown property 2008 12 million comprised loss writedowns nonperforming loans foreclosed property 11 million loss sales nonperforming loans foreclosed property approximately 100 thousand total received 91 original loan balance sales nonperforming loans foreclosed property loss sale writedown foreclosed property 2007 amount 729 thousand attributable cumulative recognition net gains disposal foreclosed property amount 75 thousand fourth quarter writedown foreclosed property 804 thousand writedown foreclosed property occurs receive updated appraisals certain foreclosed properties hold updated appraisal may result need writedown nonperforming loans foreclosed property net loss sale writedown foreclosed property fourth quarter 2007 compared 2006 gain sale foreclosed property amount 243 thousand past three years net loss sale subsequent writedown nonperforming loans foreclosed property totaled 17 million miscellaneous income decreased 447 thousand comparing 2008 2007 recognized 237 thousand gain market value fair value swap described note 11 consolidated financial statements “commitments derivative instruments hedging activities” compared gain 2008 2006 company terminated fair value interest rate swap position april 2008 gain amount 626 thousand company recognizing gain transaction original term swap company recognized 483 thousand gain 2008 however gain recognized reduction interest expense original instruments hedged addition received distribution 118 thousand business development partnership member first quarter 2007 nonrecurring nature therefore revenue recognized 2008 2006 included miscellaneous income 2008 2007 163 thousand 78 thousand respectively income insurance contracts owned first haralson connection supplemental employee retirement plan see note 15 consolidated financial statements “supplemental employee retirement plan” income recognized 2006 since prior merger company plan place late fees loans included miscellaneous income late fees loans 2008 372 thousand compared 365 thousand 2007 turn exceeded late fees loans 2006 72 thousand remainder difference miscellaneous income attributable addition first haralson’s miscellaneous revenue line items contributed growth volume fees 2006 half year 2007 full year 2008 expense management focused expense reduction 2008 became clear early 2008 credit collection cost loan loss provision writedown maintenance carrying costs nonperforming assets foreclosed property would increase dramatically anticipated significant increase expenses 2007 2008 resulting adding full year expenses merged entities compared half year 2007 however sought reduce staff facilities overhead contribute core revenue bank collection management nonperforming assets foreclosed property time merger structured sufficient management staff continue grow institution fourth quarter 2008 reduced layer management flattening organizational chart 2009 loan demand volume dramatically decreased 2008 consumers business owners sought reduce outstanding debt lending residential real estate primary business west georgia area also decreased dramatically 2008 compared last five years management undertook staff reductions branch facilities closings fourth quarter 2008 much cost savings realized 2009 estimate noninterest expense reduced approximately 30 million compared 2008 bulk reduction anticipated take place salaries benefits occupancy expense continue strong desire support community 60 year history heritage serving customers depository borrowing needs feel core franchise value remain intact maintaining number one deposit market share community bank west georgia area focused consumer local business deposit lending needs 2008 placed much less emphasis generating larger loans residential real estate commercial properties therefore staff reduction facilities closings undertaken strategy mind additionally created special assets management division “sam” whose sole function maintain manage market dispose nonperforming assets foreclosed properties division duties allows remaining lending staff focus serving new customers maintaining performing loan portfolio sam staffed existing experienced commercial lenders support staff thereby avoiding need hire additional staff economy improves bank retained valuable lenders goal sam division realize maximum value impaired loans foreclosed property shareholders disposing loans property quickly possible reduce interest carrying cost conserve company’s capital cash reserves closed coweta county loan production office november 2008 office designed serve growing residential commercial development market coweta county dramatically suddenly impacted slowdown metroatlanta economic conditions west georgia including carroll haralson douglas coweta counties experienced increased unemployment decreased demand residential commercial real estate additionally banco de progreso division also impacted downturn economic conditions response consolidated banco de progreso operations traditional branches continue serve spanishspeaking community’s deposit loan needs nearby branches closed newnan banco de progreso branch carrollton banco de progreso locations january 2009 three locations leased negotiated satisfactory termination leases accrued impact closing facilities including writedown leasehold improvements severance benefits related staff reduction 2008 anticipate bank realize significant staff occupancy cost savings 2009 expenses increased 290 million 1243 2008 2007 68 million 413 2007 2006 mentioned overview chargedoff goodwill recorded connection merger first haralson amount 241 million fourth quarter 2008 chargeoff goodwill classified expenses noncash item impact bank’s regulatory capital liquidity position core deposit intangible amount 49 million remains intact determined impaired result impairment testing chargeoff goodwill represented 831 290 million increase expense statement financial accounting standards “sfas” 142 “goodwill intangible assets” requires companies perform annual test goodwill impairment result general decline market valuations bank stocks including market capitalization deterioration economic conditions 2008 connection preparation annual financial statements 2008 company concluded goodwill resulting company’s acquisition first haralson july 1 2007 impaired impairment condition exists carrying amount goodwill exceeds fair value sfas 142 requires twostep impairment test used test impairment measure amount impairment loss recognized first step goodwill impairment test compares fair value company carrying amount including goodwill fair value amount company could bought sold current transaction willing parties forced liquidation sale fair value company exceeds carrying amount goodwill considered impaired carrying amount company exceeds fair value second step required measure amount impairment second step goodwill impairment test requires performing purchase price allocation business combination consummated date impairment test fair value company serving proxy purchase price fair values assets liabilities determined measure implied value goodwill test date implied fair value goodwill lower carrying amount goodwill impairment indicated carrying amount goodwill written implied fair value valuation approaches implemented measuring fair value cost approach income approach market approach cost approach based amount currently would required replace service capacity asset often referred current replacement cost income approach uses valuation techniques convert future amounts cash flows earnings discounted amount market approach uses observable prices relevant information generated market transactions involving identical comparable assets liabilities case net interest income primary reason increased expenses 2008 2007 goodwill impairment charge twelve months operations include first haralson operations 2008 compared six months 2007 increased salaries employee benefits significant component increase noninterest expenses 2008 2007 2006 salaries employee benefits increased 743 thousand 53 2007 2008 40 million 401 2006 2007 occupancy expenses increased 661 thousand 200 2007 2008 898 thousand 374 2006 2007 operating expenses increased 15 million 267 comparing 2008 2007 17 million 422 comparing 2007 2006 operations 2007 included nonrecurring merger costs incurred either 2008 2006 level noninterest expense absorbed combination first haralson much line management expected based upon due diligence estimation merger costs attainable cost savings eighteen months following merger offered certain employees voluntary retirement packages accepted staff members including certain wgnb employees cost expensed period incurred primarily 2007 increase expenses percentage basis material relation year increase salary employee benefits expense increase 2006 2007 much greater 2007 2008 indicated previously experience cost savings 2008 salary employee benefits offset increases noninterest expense related nonperforming loans foreclosed property terms asset size first haralson approximately 211 million assets closing merger july 2007 asset size prior merger 623 million consequently first haralson one third size employed 85 people immediately preceding closing merger management expected revenue expenses would increase 30 40 depending category first haralson operated seven branches haralson carroll counties one closed merger carrollton location conversion two operating systems went smoothly time consuming required available human resources companies 2007 able reduce staff expenses 2008 operations absorbed stabilized single entity addition first haralson acquisition added 11 full time employees opened commercial loan production office second banco de progreso location coweta county 2007 also experienced entire year operations chapel hill location douglas county initial banco de progreso location carroll county placed service 2006 management expected significant increase expense related expansion efforts 2007 increase salaries benefits occupancy operating expense reflected fact downturn national local economy however significant impact expansion strategy rapidly reversed 2008 believed time formed business strategy investment expansion would ultimately provide enhanced return shareholders however expansion strategy suspended economic conditions improve increase salaries benefits comparing 2007 2008 broken follows salaries overtime increased 20 million 222 employee benefits including profitsharing bonus 401k deferred compensation payroll tax employee health life insurance expense decreased 13 million 274 decrease employee benefits 2007 2008 attributable profit sharing bonus expense decreased 19 million 100 bonuses profit sharing payments incurred 2008 management sought decrease expenses employee benefit category increased 2007 2008 employee health life insurance expense 317 thousand 237 deferred compensation expense 120 thousand 1212 attributable twelve months opposed six months operations merged entity two years comparison deferred compensation expense fully described note 15 consolidated financial statements “supplemental employee retirement plan” 186 full time equivalent employees june 30 2007 merger july 2 2007 added 81 full time equivalent employees increase 435 result first haralson merger december 31 2008 248 full time equivalent employees reduction 71 july 1 2007 2008 management allowed attrition reduce staff 15 positions fourth quarter 2008 reduced staff 11 positions reduction additional 11 positions took place january 2009 closing banco de progreso locations lending staff also reduced reassignment six staff members sam division described sam division employs six staff members much reduction staff took place specific departments residential mortgage origination greatly reduced 2008 addition realized reduction management team several management positions eliminated result flattening organization chart attempted maintain customer service teller positions fewer consumer lender commercial lender positions order continue serve core depositor borrower base several bilingual customer service representatives tellers lenders operational staff banco de progreso division retained order serve needs spanishspeaking customers past years merit cost living increases accounted 4 5 increased salary expense 2008 however approximately 1 increase salaries attributable merit cost living increases comparing 2007 2006 additional employee count last half 2007 resulting merger accounted nearly increase salaries benefits annual merit increases accounted less 4 increased salaries 2007 2006 required continue expense options despite low probability exercised near future comparing exercise price outstanding options market value company’s stock outstanding options intrinsic value employees december 31 2008 options expense 175 thousand 2008 compared 178 thousand 2007 anticipate options granted 2009 stockbased compensation expense methodology described fully note 1 consolidated financial statements “stock compensation plans” increase salaries benefits 2006 2007 described follows salaries overtime related payroll taxes increased 30 million 426 profit sharing 401k bonuses deferred compensation expense stock option expense increased 562 thousand 265 employee benefits primarily included employee health life insurance expense increased 467 thousand 536 prior merger negotiated certain first haralson executive officers buyout employment agreements expenditures included transaction costs merger thus expensed 2007 however offered voluntary retirement packages throughout combined organization post merger certain employees exercised offer resulted expensing approximately 271 thousand salary payroll tax expense related voluntary retirement connection merger subsequent conversion operating systems also incurred 62 thousand overtime expense directly related conversion management considered voluntary retirement offer overtime nonrecurring nature 2007 increase profit sharing 401k bonuses deferred compensation employee health life insurance expense similarly attributable merger location expansions completed 2006 2007 plan merit cost living salary increases 2009 reduced amount company matches employees’ contributions 401k retirement plan maximum 6 employee’s salary 2008 1 2009 2007 2006 company paid additional 5 employee’s salary 401k plan component profit sharing payment made 2008 intention make payment 2009 additionally intend increase staff anticipate experience normal attrition 2009 change compensation staffing strategy estimated reduce salary benefits expense approximately 20 million 2009 compared 2008 occupancy expense increased 661 thousand 200 2007 2008 increase attributable full year operations depreciation expense first haralson’s operations 2008 compared six months 2007 depreciation expense increased 185 thousand comparing year ended 2007 2008 increase depreciation expense 2007 2008 attributable additional fixed assets first haralson recorded market value july 2007 rather historical cost occupancy expense increased 476 thousand 257 increase projected based post merger analysis branch additions 2006 2007 anticipate experience cost savings lease utilities real estate taxes occupancy expense previously associated discontinued coweta county loan production office two banco de progreso locations longer incurred 2009 occupancy expense increased 898 thousand 374 2007 compared 2006 attributable merger branch expansion previously discussed occupancy expense branches including additional branches first haralson administrative operations offices comprise six major components depreciation utilities property tax operating leases repairs maintenance expense depreciation expense 2007 increased 315 thousand 277 compared 2006 likewise utilities expense increased 239 thousand 499 comparing 2007 2006 occupancy expense including property taxes maintenance repairs operating leases increased 344 thousand 434 comparing 2007 2006 expense loans foreclosed property increased dramatically 2007 2008 credit quality continued deteriorate included expense loans periods legal collection appraisal expenses impaired loans maintenance management improvement costs real estate taxes attributable foreclosed property expense loans foreclosed property increased 196 million five times amount realized 2007 turn almost two half times amount expended 2006 expense foreclosed property 193 million 2008 increase 176 million eleven times amount recorded 2007 expense impaired loans 458 thousand 2008 increase 203 thousand 799 compared 2007 approximately 75 foreclosed property either developed partially developed residential lots raw residential commercial land consequently much expense related foreclosed property 2008 current past due real estate taxes erosion control cleanup properties foreclosure paid current past due real estate taxes amount 10 million either foreclosure fourth quarter 2008 approximately 50 real estate taxes paid 2008 past due expense legal fees related foreclosure property 280 thousand incurred erosion water control costs property management maintenance property improvement costs approximately 650 thousand expense impaired loans includes appraisal fees legal costs expenses incurred collection loans yet foreclosed balance impaired loans 716 million december 31 2008 compared 464 million december 31 2007 increase collection costs function volume 2008 2007 company typically experiences loan related expense equivalent expensed 2006 appraisal environmental survey title exam fees 171 thousand legal costs collection loans 153 thousand loan administration expenses 134 thousand 2008 expenses 2008 last half 2007 concentrated collection costs rather loan production underwriting costs bulk similar expenses early 2007 2006 total expense loans increased 333 thousand 1506 comparing 2007 2006 expense related foreclosed property increased 158 thousand reflective increased amount foreclosed real estate 2007 2006 collection legal appraisal fees related collection efforts troubled loans increased 175 thousand 2006 2007 increase expense loans foreclosed property primary concern management represents another factor limiting desired holding period real estate taken foreclosure quantity impaired loans anticipate construction acquisition development loans decreased 2009 become reduced percentage loan portfolio expense loans foreclosed property decrease uncertainty related credit quality construction acquisition development loan portfolio potential credit weakness may migrate commercial consumer loan portfolios management limited knowledge whether cost savings achieved expense category much bank’s market area including commercial professional enterprises small businesses historically dependent residential real estate development construction sales related commercial development retail trade significant portion revenue operating expenses increased 15 million 267 2007 2008 increased 17 million 422 2006 2007 operating expense includes professional accounting regulatory fees atm network fees advertising charitable contributions fdic insurance also included operating expense costs supplies printing checks paper envelopes related postage attributable bank operations customer statements accounting professional fees increased 117 thousand 197 2007 2008 128 thousand 277 2006 2007 increase accounting professional fees less merger ongoing internal audit compliance costs related sarbanesoxley section 404 expenses related compliance burdens listed public company proven costly regard consulting accountants attorneys anticipated legal expenses increased 104 thousand 858 2007 2008 incurred increased attorneys fees related communicating complying increased banking scrutiny regulation legal fees related collection loans included line item period rather legal fees included expense loans foreclosed property premiums paid federal deposit insurance corporation “fdic” deposit insurance increased dramatically 2007 2008 deposit insurance premium expense 535 thousand 2008 compared 62 thousand 2007 almost ninefold increase somewhat attributable increase deposits due first haralson merger overwhelming reason increase deposit insurance premium expense banks increased risk exposure banking industry placed deposit insurance fund last eighteen months bank recognized credit awarded banking industry last half 2006 throughout 2007 credit exhausted prior 2008 2006 2007 deposit insurance expense trended downward estimated loss rate insurance fund historically low anticipate deposit insurance premiums increase 2009 since bank participating temporary liquidity guarantee program created fdic safety bank deposits utmost importance maintaining confidence national banking system changes regulation supervisory issues likely continue defined refined 2009 proposal require banks recapitalize fdic fund onetime assessment 2009 estimate rate 200 thousand per 100 million deposits onetime assessment along increase fdic insurance rates significant impact noninterest expense 2009 advertising expense 2008 decreased 82 thousand 241 2007 advertising expense increased 2007 91 thousand 362 compared 2006 however 48 thousand increase 2007 related promoting newly combined institution educating market regard name change advertising expense somewhat discretionary part cost cutting efforts purposely reduced amount advertising expense incurred like advertising charitable contributions expense discretionary contribution expense increased much less anticipated 2008 2007 management attempting visible communities bank serves best way community bank accomplish maintain contribution local charities contribution expense budgeted increase approximately 25 2007 2008 actual increase 135 atm network nonnetwork expense increase 226 thousand 513 atm expense like atm revenue volume sensitive impacted twelve months atm network first haralson 2008 compared six months 2007 atm network revenue increased 420 thousand comparing 2008 2007 consequently increase atm revenue outpaced increase atm expense another merger related expense amortization core deposit intangible amortization like goodwill impairment noncash charge twelve months 2008 recorded 573 thousand amortization core deposit intangible increase 286 thousand 100 compared 2007 core deposit intangible amortized straightline basis period benefit estimated ten years core deposit intangible reviewed impairment annually events changes circumstances indicate value underlying asset may given rise core deposit intangible becoming permanently impaired determined value core deposit intangible impaired 2008 2007 2008 recorded 557 thousand expenses supplies represented almost change 2007 however 2007 incurred onetime expenditures office supplies letterhead promotional items redesigned accommodate new name logo 2006 expensed 365 thousand supplies compared 558 thousand 2007 increase 193 thousand 528 merger related expenditures supplies 96 thousand 2007 expense primarily reprinting redesign statements promotional literature incurred 2008 number customer accounts increased 30 35 merger caused supply expenses increase 2008 2007 result increased volume supplies expense 2007 included six months combined companies compared twelve months 2008 therefore reduce supplies expense viewed annual basis expenditures directly related volume customer accounts resulting first haralson merger including twelve months operations 2008 opposed six months operations 2007 postage data processing expense postage expense increased 69 thousand 184 2007 2008 103 thousand 380 2006 2007 technology expense increased 72 thousand 204 2007 2008 276 thousand 387 comparing 2006 2007 included 2007 increase 20 thousand related conversion operating systems connection merger recur 2008 miscellaneous expense decreased 136 thousand 315 comparing 2007 2008 miscellaneous expense increased 182 thousand 725 2006 2007 items included miscellaneous expense customer employee appreciation gifts functions amortization investment tax credits portfolio management fees seasonal decorations facilities employee health community appreciation programs much increase 2006 2007 resulted amortization tax credits amount 129 thousand 32 thousand nonrecurring expense new employee apparel reflecting name change merger income tax benefitexpense expressed percentage earnings income taxes effective tax rate 172 2008 42 2007 293 2006 effective tax rate past three years varied significantly comparing 2008 2007 effective tax rate increased however two primary differences calculation income tax benefitexpense 2008 2007 first impairment goodwill tax implications therefore 241 million expense recorded 2008 deductible tax purposes second nontaxable interest income municipal securities loans changed 2007 2008 ignoring goodwill impairment charge effective tax rate 2008 491 compared 42 2007 amount nontaxable interest income increased 906 thousand 2007 2008 impacts increase effective tax rate 2007 2008 effective tax rate 2007 appears low impact nontaxable interest income pretax income book purposes ratio taxable income company effective tax rate 2006 reflective company’s historical income tax impact realized either 2008 2007 balance sheet overview years ended december 31 2008 2007 general 2008 average total assets increased 1569 million 212 average deposits increased 1349 million 227 average loans increased 722 million 124 average balances recorded 2007 average total assets increased 1912 million 348 average deposits increased 1540 million 350 average loans increased 1385 million 313 amounts recorded 2006 10 year average growth rates assets loans deposits 156 151 155 respectively average asset growth past two years primarily attributable merger first haralson effort maximize capital coverage slowing economic environment significantly slowed balance sheet growth 2008 instead management focused maintaining sufficient liquidity meet deposit needs customers total assets december 31 2008 8922 million representing 86 million 10 increase december 31 2007 2008 cash equivalents increased 495 million 1915 total loans decreased 285 million 43 securities availableforsale decreased 283 million 231 comparing year ended december 31 2008 2007 increased total deposits 553 million 78 paidoff securities sold repurchase agreement amount 20 million reduced federal home loan bank advances 25 million additionally raised 12 million series preferred stock offering third quarter 2008 offering increased total riskbased capital ratio 107 december 31 2008 compared 102 december 31 2007 increased deposits sold securities available sale effort increase liquidity 2008 december 31 2008 held cash equivalents liquidity exceeded uninsured deposits 600 period economic uncertainty concern safety deposits intend continue maintain higher historical amounts available liquidity notable development balance sheet 2008 apart increase capital liquidity continued increase level nonperforming assets nonperforming assets include loans nonaccrual status loans ninety days past due impaired loans foreclosed property june 30 2007 nonperforming assets 66 million less 1 total assets december 31 2007 nonperforming assets 579 million 65 total assets december 31 2008 nonperforming assets 1220 137 total assets thus eighteen month period nonperforming assets grew 1154 million increase nonperforming assets indicative rapid steep decline residential real estate market entire metroatlanta market area residential construction development loans affected slowdown management views condition greatest priority sees reduction nonperforming assets imperative return profitability management intends reduce level nonperforming assets dependent great extent improvement residential real estate market residential real estate market last half 2008 proved difficult values homes residential lots decreased alarming rate sales volume reached historic lows market flooded foreclosed homes economic conditions continue deteriorate employment decreased causing prime subprime mortgage default rates accelerate therefore values homes decreased inventory residential lots remains historically high levels compared forecasted absorption rate investments availableforsale investment portfolio 944 million december 31 2008 consisted primarily debt securities provide us source liquidity stable source income vehicle implement asset liability management strategies amount availableforsale securities portfolio decreased significantly compared december 31 2007 investment portfolio decreased 283 million 231 2007 2008 2007 acquired 423 million securities first haralson merger additionally increased availableforsale investment portfolio 161 million 250 2007 significant growth compared historical growth portfolio 2008 however banking environment deteriorated subprime mortgage crisis impacted largest banks nationally internationally bank capital rapidly diminished several large banks failed understandably caused certain amount concern among depositors response order address concerns depositors began increase amount liquidity balance sheet implemented contingency funding committee 2008 began strategy selling securities reducing loans increasing liquidity sold 290 million availableforsale securities 2008 total gain 435 thousand compared total sales availableforsale securities 60 million 2007 sales 2006 typically sell securities however strategically repositioned acquired portfolio first haralson conjunction merger additionally falling rate environment 2008 offered us opportunity increase liquidity recognize gain sale availableforsale securities believe investment portfolio provides balance interest rate credit risk categories balance sheet portfolio also provides vehicle investment available funds supplying securities pledge required collateral certain public deposits securities reported availableforsale stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 76 million december 31 2008 decrease 279 thousand 35 compared year ended 2007 portfolio consists banking industry issued trust preferred securities various issuers across united states particularly southeast 2008 estimated fair value heldtomaturity securities decreased significantly perceived risk holding securities increased response difficulties faced banking industry increased default rate securities intent ability hold securities maturity consider decrease estimated fair value temporary following table shows carrying value securities security type december 31 2008 2007 2006 table securities following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2008 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table expected maturity securities thousands mortgagebacked securities included maturities categories anticipated repaid based average maturities actual cash flow mortgagebacked securities differs assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions routine basis evaluate concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions industry trends primary types loans portfolio residential mortgages home equity construction development commercial real estate commercial consumer installment loans generally underwrite loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan general policy employ relatively conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans limiting gross debt ratios consumer loans loantovalue ratios types real estate loans exceptions given localized nature lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal shareholders wgnb directors officers first national bank subject limitations federal reserve principal effect require extensions credit us executive officers directors ten percent shareholders satisfy certain standards routinely make loans ordinary course business certain directors executive officers wgnb first national bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2008 loans outstanding directors executive officers wgnb first national bank associates members immediate families totaled 99 million represented approximately 156 total loans date december 31 2008 none loans outstanding related parties nonaccrual past due restructured following table presents loans type dates indicated following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction loans includes nonperforming loans mortgage loans consumer loans december 31 2008 table loan portfolio maturity thousands variablefixed rate mix provision allowance possible loan lease losses provision loan losses 2008 149 million compared 102 million 2007 15 million 2006 increase provision loan losses reflects higher level nonperforming assets criticized classified loans recognized last half 2007 continued 2008 allowance loan losses represented 178 188 121 total loans outstanding december 31 2008 2007 2006 respectively management taken aggressive approach identification recognition potential problem loans impairment process addition management recognizing impairment loan continuously analyzing evaluating current market values collateral impaired loans independent loan review function loan officer responsible initially placing loans loan grade categories consistent used regulators target loans scheduled review loan review personnel credit quality consistency grading accuracy grading process seek assure timely recognition credit risks general credit risk increases level allowance loan loss also increase however 2008 management chargedoff loans recognition decreased market values collateral dependent properties reduced overall allowance balance uncertainty rapid change prevailing assessing loan quality allowance loan loss appropriateness test performed quarter end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations additionally monthly analysis performed determine provision appropriate management’s judgment determining appropriateness allowance based evaluations collectibility loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining appropriateness allowance loan losses management uses loan grading system rates loans nine different categories grades six nine represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one five stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses loans deemed impaired certain types classified loans evaluated individually measure probable loss credit management uses internal credit personnel independent lending function challenge corroborate loan grading results provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate management uses available information recognize current risk loss portfolio based changes economic conditions change borrowers’ ability repay addition regulators integral part examination process periodically review allowance loan losses regulators may require us recognize additions allowance based judgments information available time examination addition engaged independent review allowance loan loss process third party management realizes importance maintaining appropriate allowance loan losses professional loan review function effective loan officer identification program management believes able recognize weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance position minimize potential loss regular problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list management elected meet lenders credit staff often greater detail may stable credit quality period special attention given construction development loans order accurately evaluate exposure loan loss portfolio migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio specific reserve may assigned loan result fair value analysis also evaluate risks associated concentrations credit following table presents summary changes allowance loan losses years indicated table allowance loan losses thousands nonperforming assets past due loans nonperforming assets december 31 2008 1220 million 1932 total loans compared 583 million 893 total loans december 31 2007 43 million 091 total loans december 31 2006 levels nonperforming loans historic high us primary cause increase nonperforming asset levels decline residential real estate market metroatlanta area past five years market area become connected growth metroatlanta residential real estate growth became leading industry market area five years residential construction development loans averaged 33 loan portfolio recognition potential impact downturn 2004 management began raise credit standards borrowers management however surprised suddenness severity downturn came many market realize impact subprime mortgage lending absorption rate home sales market area subprime lenders began experience credit quality problems related increased rates adjustable subprime market type lending ceased homes built meet subprime conforming mortgage demand came market subprime demand decreased sharply homes subject subprime lending began emerging back market foreclosure trend continued increasing rate 2008 resulted estimates 48 60 month supply homes sale market ten fifteen year supply developed lots based recent absorption rates excess supply homes developed residential lots negative impact residential construction development borrowers continue experience much longer expected sales time therefore holding period expense homes residential lots much higher expected time passes borrowers paying interest ownership carry properties diminished financial capacity continue hold property thus experiencing increased number past due loans lead impairment loan increasing rate foreclosure borrowers addition borrowers may file protection bankruptcy laws lengthen collection period loan approximately 80 total amount nonperforming assets december 31 2008 made twentysix loan relationships balances 2 million 7 million per relationship management performed impairment analyses troubled loan relationship continues focus credit quality residential construction development loan portfolio impairment analysis entails evaluating fair value properties held collateral loans properties reappraised appropriate updated appraisals evaluated management generally greater uncertainty real estate values times market downturn expected updated values often less earlier appraisals therefore fair value analysis recorded loan amount management generally suspends accrual interest certain instances chargesdown balance impaired loans dictated collateral values fair value assessment part ongoing evaluation collectibility impaired asset management must continue make value judgments properties loans updated appraisals knowledge market assurance residential real estate values continue decline loans become impaired thereby causing potential suspension accrued interest chargedown loans management’s critical priority disposing maximizing net realizable value nonperforming assets management considers multiple avenues reduce nonperforming assets holding period nonperforming assets must minimized assets bear cost carry us interest carry maintenance real estate taxes believe ultimate outcome cycle economic downturn largest uncertainty management faces next twelve months market high historical projected population income growth potential current downturn significant impact asset quality therefore earnings believe long term growth earnings outlook company remains positive following table summarizes loans 90 days greater past due nonaccrual loans real estate taken settlement foreclosure years indicated may additional loans portfolio may become nonperforming conditions dictate management aware nonperforming loans disclosed table result management’s ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest due loan exceptions may allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal loan review function also monitors selected performing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect liquidity capital resources operations factors discussed throughout report deposits time deposits 100 thousand greater totaled 2600 million december 31 2008 compared 2294 million yearend 2007 growth time deposits 100 thousand greater 307 million 134 december 31 2007 december 31 2008 growth category deposits attributable increase brokered time deposits 100 thousand greater 465 million decrease resulting time deposits within market area 161 million following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2008 table maturity time deposits 100000 greater thousands liquidity must maintain manage daily basis sufficient funds cover withdrawals depositors’ accounts supply potential borrowers funds meet obligations keep cash hand maintain account balances correspondent banks purchase sell federal funds shortterm investments certificates deposit banks asset liability maturities monitored attempt match variables meet liquidity needs response concerns regard safety bank deposits surfaced 2008 increased focus management liquidity formalized contingency funding committee met frequently 2008 respond liquidity management needs committee makes judgments “headline risk” banking industry locally headline risk results media reports decreased earnings increased nonperforming assets decreased capital banks creates concern among depositors safety funds therefore may cause depositors make larger normal withdrawals date relatively unaffected headline risk however policy monitor liquidity meet regulatory requirements safe sound banking practices local funding needs management believes current level liquidity adequate meet needs maintain collateralized short long term borrowing relationships correspondent banks including federal home loan bank fhlb federal reserve bank atlanta “frb” provide funds us short notice needed line credit fhlb 20 total assets dependent available collateral financial performance bank arrangements correspondent commercial banks short term secured advances 158 million december 31 2008 drawn available facilities addition subject collateral availability line credit fhlb drawn 520 million december 31 2008 additional details lines credit fhlb frb correspondent bank see note 8 “lines credit” consolidated financial statements cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents amounted 754 million december 31 2008 represented increase 495 million december 31 2007 reflective desire maintain increased liquidity times uncertainty net cash provided operating activities 70 million 2008 net cash provided operating activities impacted impairment goodwill amount 241 million provision loan loss amount 149 million items noncash nature therefore addedback net loss 2008 compute cash provided operating activities recognized addbacks attributable noncash items depreciation amortization accretion stock based employee compensation expense totaling 21 million net cash provided investing activities 12 million consisted primarily net increase loans 293 million net decrease securities availableforsale 260 million net cash provided financing activities totaled 413 million primarily attributable net increase deposits 553 million decrease borrowings fhlb advances securities sold repurchase agreement net amount 225 million proceeds net stock issuance cost series preferred offering amount 119 million capital resources total shareholders’ equity december 31 2008 569 million decrease 232 million 2007 change equity due net loss 2008 amount 308 million discussed elsewhere report 241 million net loss attributable impairment goodwill impacted total shareholders’ equity impact amount tangible shareholders’ equity regulatory capital ignoring impact goodwill impairment net loss 2008 66 million june 2008 company filed form s1 securities exchange commission register 3750000 shares series preferred sale company’s shareholders rights offering completed september 22 2008 total 1153508 shares series preferred sold shareholders rights offering remaining registered shares subject ongoing public offering expected completed april 2009 december 31 2008 total 1509100 shares series preferred sold including sold rights offering total proceeds offering net stock issuance cost 119 million december 31 2008 addition may 2008 company filed form s3 securities exchange commission register 500000 shares common stock direct stock purchase dividend reinvestment plan offers holders company’s common stock new investors opportunity reinvest dividends company’s common stock purchase common stock optional cash payments 250 10000 per month without payment brokerage commissions service charges plan amended company’s board directors october 2008 order permit holders series preferred reinvest dividends paid series preferred shares company’s common stock december 31 2008 413 shares purchased plan company paid dividends common stock amount 19 million first half 2008 253 thousand series preferred fourth quarter 2008 board directors suspended dividends common stock changes shareholders’ equity 2007 2008 included decrease comprehensive income amount 24 million increase common equity amount 175 thousand attributable stock option expense occ established certain minimum riskbased capital standards apply national banks subject certain capital requirements imposed federal reserve december 31 2008 first national bank exceeded applicable regulatory capital requirements classification “well capitalized” bank wgnb satisfied applicable regulatory requirements imposed federal reserve following tables present consolidated regulatory capital position december 31 2008 complete discussion actual required ratios us subsidiary including requests received occ see note 13 consolidated financial statements contractual obligations ordinary course operations enter certain contractual obligations following table summarizes significant fixed determinable contractual obligations payment date december 31 2008 dollars thousands regard fhlb advances obligations contain call dates option issuer therefore advances may called prior maturity date see note 8 financial statements “lines credit” balance sheet risk operations first national bank made contractual commitments extend credit ordinary course business activities commitments legally binding agreements lend money customers predetermined interest rates specified period time december 31 2008 issued commitments extend credit 643 million various types commercial lending arrangements additional commitments standby letters credit 74 million evaluate customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary us upon extension credit based credit evaluation borrower collateral varies may include accounts receivable inventory property plant equipment commercial residential real estate manage credit risk commitments subjecting normal underwriting risk management processes commitments generally fixed expiration dates many expire without drawn upon total commitment level necessarily represent future cash requirements needed fund outstanding commitments ability liquidate federal funds sold securities availableforsale short term basis borrow purchase federal funds financial institutions permanent funding obtained assetliability management objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure bank’s interest rate exposure repricing gap calculated taking assets reprice mature within given time frame subtracting liabilities reprice mature within time frame difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates bank’s net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates bank’s net interest income decrease rates fall increase rates rise due inherent limitations traditional gap analysis also employ sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk loan investment portfolios significantly impact profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2008 estimated impact immediate increase interest rates 100 basis points would resulted decrease net interest income 12month period 035 comparable decrease interest rates resulting increase net interest income 247 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition volume following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2008 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year subject management’s control table interest rate gap sensitivity thousands december 31 2008 difference assets liabilities repricing maturing within one year 1098 million chart indicates excess liabilities repricing maturing within one year thus rise interest rates would theoretically cause net interest income decrease however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing demand money market savings accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustable rate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies us operations predictable item 7a item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations company may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided company’s consolidated financial statements accompanying footnotes earnings overview years ended december 31 2001 2000 1999 company reported earnings 48 million 2001 44 million 2000 36 million 1999 representing increase 87 fiscal years 2000 2001 increase 238 fiscal years 1999 2000 increases three fiscal years primarily attributable bank’s continued loan growth higher noninterest income minimal increases noninterest expense net earnings per share fully diluted basis 152 2001 141 2000 113 1999 representing increase 78 fiscal years 2000 2001 248 fiscal years 1999 2000 return average assets return average shareholders’ equity 2001 147 1711 respectively compared 159 1858 respectively 2000 148 1627 respectively 1999 net interest income company’s operational results primarily depend earnings bank’s earnings depend large degree net interest income net interest income defined difference interest income received investments loans investment securities federal funds sold etc interest expense deposits borrowings following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets average rate paid interest bearing liabilities interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income increased 787 thousand 57 2001 2000 18 million 149 2000 1999 net interest income december 31 2001 145 million compared 137 million 2000 119 million 1999 net interest margin interest earning assets 484 2001 544 2000 549 1999 decrease margin 2000 2001 primarily due rapid decline prime discount rates 2001 assets repriced quickly funding sources benchmark rates declined 475 basis points ten months bank’s balance sheet traditionally slightly liability sensitive liabilities reprice faster assets high percentage transaction accounts therefore rising rate environment bank’s interest margin tends narrow whereas falling rate environment bank’s interest margin tends widen however rates fall rapidly drastically bank’s cost funds hit floor instance bank paying 25 checking account 30 savings account 35 money market account rates decrease 475 basis points savings money market rate fall fraction amount additionally large percentage time deposits unable decline quickly greatest share mature one year longer net result bank’s interest margin narrows since yield earning assets fall cost funds bank’s management asset liability management process attempts manage interest sensitivity position however balance sheet management technique completely shield bank’s margin precipitous interest rate move cost interestbearing liabilities 459 2001 480 2000 429 1999 representing decrease 21 basis points fiscal 2000 2001 increase 51 basis points fiscal 1999 2000 one considers yield interestbearing assets 874 2001 942 2000 907 1999 impact decreasing rates asset yields pronounced costs yields 2000 2001 decreased 68 basis points opposed increase 35 basis points 1999 2000 comparing net interest margins 484 2001 544 2000 549 one clearly identify impact net interest margin rates declined 475 basis points last ten months 2001 following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities table 1 average consolidated balance sheets net interest analysis nonaccrual loans interest income recorded loans included yield calculation loans periods reported taxexempt interest income calculated tax equivalent basis following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate company assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table 2 changes interest income expense tax equivalent basis income expense income 2001 46 million compared 30 million 2000 19 million 1999 represents increase 16 million 522 fiscal 2000 fiscal 2001 increase 11 million 549 fiscal 1999 fiscal 2000 continuing increases comparative years primarily due increase volume service charges deposit accounts specifically attributable insufficient funds charges deposit accounts additionally increase 2000 2001 attributable increase mortgage origination fees due resulting low mortgage rates 2001 expenses increased 16 million 170 2001 2000 principally due employee costs increasing 109 million 200 increase attributable following factors increased number employees due additional branches ii increased commissions mortgage loan originators due increase refinance activity iii increased costs health insurance iv annual raises increased profit sharing bonuses company five full time equivalent employees end 2001 end 2000 employed entire year bank opened staffed douglasville office accounted nearly new hires 2001 expenses related occupancy operating expenses increased 492 thousand 127 2000 2001 increase due increased occupancy operating costs associated mirror lake douglasville offices increased costs associated insufficient funds program expenses increased 13 million 161 2000 1999 principally due increase employee costs approximately 870 thousand related increase number pay rate employees company added personnel opened mirror lake office expanding lending finance collection departments operating expense also increased fiscal 2000 1999 358 thousand increase result increased professional fees expense attributable becoming exchange act filer 2000 expenses related company’s insufficient funds program income taxes expressed percentage earnings income taxes declined 34 2001 36 2000 36 1999 decline marginal rate primarily attributable tax credits purchased bank 2001 balance sheet overview years ended december 31 2001 2000 general 2001 average total assets increased 499 million 180 average deposits increased 394 million 176 average loans increased 387 million 184 recorded 2000 average total assets increased 366 million 152 average deposits increased 177 million 88 average loans increased 375 million 217 recorded 1999 growth figures discussed attributable expansion metro atlanta westward towards company’s market area past several years resulting development bank’s market area including carroll douglas paulding counties georgia total assets december 31 2001 350 million representing 61 million 211 increase december 31 2000 total deposits increased 467 million 200 2000 2001 total loans increased 253 million 111 2001 little less half increase deposits came result increase 210 million 238 interestbearing demand accounts 2000 2001 time deposits accounts increased 229 million 214 2001 local regional economy softened loan demand fell last half 2001 june 30 2001 bank grown 283 million loans however actual growth year 253 million deposit growth hand remained strong throughout 2001 customers sought move funds stock market back bank flight safety approximately fifty percent loan growth experienced company funded fhlb advances remainder funded principally increases deposit accounts total assets december 31 2000 289 million representing 351 million 138 increase december 31 1999 total deposits increased 190 million 88 1999 2000 total loans increased 436 million 236 2000 approximately one half increase deposits came result increase 99 million interestbearing demand accounts 1999 2000 time deposits accounts increased 87 million 2000 local economy remained strong loan demand remained good 2000 consequently bank showed increases loan classification yearend particular increases residential construction commercial real estate loans loan growth experienced company funded principally increases deposit accounts use existing funds advances federal home loan bank increased 10 million investments company’s availableforsale investment portfolio 549 million carrying value december 31 2001 consisted primarily debt securities provide company source liquidity relatively stable source income represented increase 150 million 374 40 million held december 31 2000 company believes investment portfolio provides balance interest rate credit risk categories balance sheet providing vehicle investment available funds supplying securities pledge required collateral certain public deposits investment securities availableforsale stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part company’s overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 20 million december 31 2001 increase 10 million compared prior year company intent ability hold securities maturity also available pledged collateral liquidity borrowing needs may occur following table shows carrying value company’s securities security type december 31 2001 2000 table 3 investment portfolio following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2001 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table 4 expected maturity securities mortgage backed securities included maturities categories anticipated repaid based scheduled maturities actual cash flow mortgage backed securities differs assumption additionally agency securities portfolio call features analysis assumes callable agencies mature final maturity date actual cash flow agency securities may differ assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions bank routine basis evaluates concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions loan deposit ratios industry trends primary types loans bank’s portfolio residential mortgages home equity loans commercial real estate loans commercial loans consumer installment loans generally bank underwrites loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan exceptions bank’s general policy require conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans emphasizing lower gross debt ratios consumer loans lower loantovalue ratios types real estate loans given localized nature bank’s lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal stockholders company directors officers bank subject limitations federal reserve principal effect require extensions credit bank executive officers directors ten percent shareholders satisfy certain standards bank routinely makes loans ordinary course business certain directors executive officers company bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2001 loans commitments outstanding directors executive officers company bank associates members immediate families totaled 54 million net participations sold banks nonrecourse basis represented approximately 21 total loans date december 31 2001 none loans outstanding bank related parties nonaccrual past due restructured considered management potential problem loan following table presents loans type dates indicated table 5 loan portfolio following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction mortgage loans consumer loans december 31 2001 table 6 loan portfolio maturity variablefixed rate mix provision allowance possible loan lease losses provision loan losses company 2001 911 thousand compared 509 thousand 2000 303 thousand 1999 increase provision loan losses primarily attributable growth portfolio well company’s uncertainty effect slowing economy borrowers’ ability repay company’s methodology measuring adequacy allowance loan loss indicates sufficient reserve expected losses portfolio provision loan losses continues reflect management’s estimate potential loan losses inherent portfolio creation allowance loan losses adequate absorb losses allowance loan losses represented 147 128 123 total loans outstanding december 31 2001 2000 1999 respectively total chargeoffs 200 thousand 77 thousand 130 thousand compared recoveries 89 thousand 207 thousand 89 thousand 2001 2000 1999 respectively company independent loan review function loans placed loan grade categories consistent used bank’s regulators loans constantly monitored loan officer loan review function consistency accuracy grading process bank assures timely recognition credit risks general credit risk increases level allowance loan lease loss also increase formal allowance loss adequacy test performed month end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications additionally evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations management’s judgment determining adequacy allowance based evaluations collectability loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades five though six represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one four stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses management uses internal loan reviewer independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions addition regulators integral part examination process periodically review company’s allowance loan losses regulators may require company recognize additions allowance based judgments information available time examination management company realizes importance maintaining adequate allowance loan losses professional loan review function effective loan officer identification program management recognizing weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance company’s position minimize potential loss problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list company’s migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio cases significant weaknesses exist specific loan specific reserve assigned loans addition general allowance company also evaluates risks associated concentrations credit necessary assign allowance related concentrations credit company adds specific reserve related risks following table presents summary changes allowance loan losses years indicated table 7 allowance loan losses nonperforming assets past due loans nonperforming assets december 31 2001 39 million 155 total loans real estate owned compared 14 million 62 total loans real estate owned december 31 2000 418 thousand 23 total loans real estate owned december 31 1999 levels nonperforming loans remain relatively low percentage nonperforming assets total loans increased increase nonperforming loans 2000 2001 attributable increase loan portfolio size foreclosure construction related loans increase nonaccrual loans following table summarizes past due nonaccrual loans real estate repossessions income would reported nonaccrual loans december 31 2001 2000 1999 table 8 nonperforming assets may additional loans portfolio may become classified conditions indicate management aware potential problem loans disclosed table result management’s ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest original terms exceptions allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal company adopted principals statement financial accounting standards sfas 114 118 relating accounting impaired loans bank’s loan review function continually monitors selected accruing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function also identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect company’s liquidity capital resources operations deposits time deposits 100 thousand greater totaled 415 million december 31 2001 compared 312 million yearend 2000 312 million yearend 1999 following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2001 table 9 deposits liquidity bank must maintain daily basis sufficient funds cover withdrawals depositors’ accounts supply new borrowers funds meet obligations bank keeps cash hand maintains account balances correspondent banks purchases sells federal funds shortterm investments asset liability maturities monitored attempt match meet liquidity needs policy bank monitor liquidity meet regulatory requirements local funding requirements management believes bank’s current level liquidity adequate meet needs bank maintains relationships correspondent banks including federal home loan bank “fhlb” provide funds short notice needed bank arrangements correspondent commercial banks short term unsecured advances 110 million december 31 2001 bank drawn available facilities addition bank line credit fhlb amount 431 million bank drawn 35 million december 31 2001 company line credit arrangement financial institution amount 175 million 13 million outstanding december 31 2001 used company lend finance company fund loan volume lines credit varying terms maturities discussed notes financial statements company’s cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents increased 191 million total 310 million december 31 2001 compared 119 million december 31 2000 increase primarily attributable net cash provided financing activities 544 million made 467 million increased deposits 100 million borrowing proceeds cash inflows operations totaled 64 million 2001 outflows investing activities totaled 418 million net loan increases 2001 255 million net cash flows invested securities 144 million cash inflows operations totaled 49 million 2000 inflows financing activities totaled 289 million net deposit increases 2000 190 million fhlb advances 15 million included financing activities line credit repayments 53 million 14 million dividends paid shareholders investing activities used 419 million cash equivalents principally composed net advances loans customers 442 million 2000 bank purchased property equipment operations future expansion amounting 788 thousand capital resources total shareholders’ equity december 31 2001 292 million increase 35 million 2001 compared shareholders’ equity 257 million 220 million december 31 2000 1999 increase 37 million occ established certain minimum riskbased capital standards apply national banks company subject certain capital requirements imposed federal reserve december 31 2001 bank exceeded applicable regulatory capital requirements classification “well capitalized” bank company satisfied applicable regulatory requirements imposed federal reserve following tables present company’s regulatory capital position december 31 2001 table 10 capital ratios leverage ratio complete discussion actual required ratios company subsidiaries see note 9 consolidated financial statements average equity average assets 857 2001 856 2000 ratio dividends declared net earnings 355 2001 compared 338 2000 assetliability management company’s objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize company’s exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure bank’s interest rate exposure repricing gap calculated taking assets reprice mature within given timeframe subtracting liabilities reprice mature within timeframe difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates bank’s net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates bank’s net interest income decrease rates fall increase rates rise company adopted objective achieving maintaining oneyear cumulative gap percent total assets plus 20 minus 20 consolidated basis company’s oneyear cumulative gap negative 1192 total assets december 31 2001 position indicated company exposed potential decreased earnings interest rates continue decline next twelve months due inherent limitations traditional gap analysis company also employs sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk company’s loan investment portfolios significantly impact company’s profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2001 estimated impact immediate increase interest rates 200 basis points would resulted decrease net interest income 12month period 22 comparable decrease interest rates resulting increase net interest income 21 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2001 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities company’s savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year table 11 interest rate gap sensitivity december 31 2001 difference company’s liabilities assets repricing maturing within one year 41 million chart indicates excess liabilities repricing maturing within one year thus rise interest rates would cause company’s net interest income decline however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustablerate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation company’s operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control company including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies company results operations predictable item 7a item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations company may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided company’s consolidated financial statements accompanying footnotes cautionary notice regarding forwardlooking statements certain statements made report documents incorporated reference herein including matters discussed caption “management’s discussion analysis financial condition results operations” well oral statements made company officers directors employees may constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended “exchange act” forwardlooking statements based management’s beliefs current expectations estimates projections financial services industry economy company bank general words “expect” “anticipate” “intend” “plan” “believe” “seek” “estimate” similar expressions intended identify forwardlooking statements forwardlooking statements guarantees future performance subject risks uncertainties factors may cause actual results performance achievements company differ materially historical results expressed implied forwardlooking statements company cautions readers following important factors among others could cause company’s actual results differ materially forwardlooking statements contained report · effect changes laws regulations including federal state banking laws regulations company bank must comply associated costs compliance laws regulations either currently future applicable · effect changes accounting policies standards guidelines principles may adopted regulatory agencies well financial accounting standards board · effect changes company’s organization compensation benefit plans · effect company’s competitive position within market area increasing consolidation within banking financial services industries including increased competition larger regional outofstate banking organizations well nonbank providers various financial services · effect changes interest rates · effect changes business cycle downturns local regional national economies · matters described part item 1a risk factors company cautions foregoing list important factors exclusive factors may impact operations company critical accounting policies company established various accounting policies govern application accounting principles generally accepted united states america preparation financial statements significant accounting policies described notes consolidated financial statements certain accounting policies involve significant judgments assumptions management material impact carrying value certain assets liabilities management considers accounting policies critical accounting policies judgments assumptions used management based historical experience factors believed reasonable circumstances nature judgments assumptions made management actual results could differ judgments estimates could material impact carrying value assets liabilities results operations company accounting policies important policies described notes consolidated financial statements reviewed greater understanding company’s financial performance recorded reported company believes allowance loan losses critical accounting policy requires significant judgments estimates used preparation company’s consolidated financial statements allowance loan losses represents management’s estimate probable loan losses inherent loan portfolio calculation allowance loan losses critical accounting estimate due significant judgment assumptions estimates related amount timing estimated losses consideration current historical trends amount timing cash flows related impaired loans please refer section report entitled “balance sheet review provision allowance possible loan lease losses” note 1 note 3 company’s consolidated financial statements detailed description company’s estimation processes methodology related allowance loan losses earnings overview years ended december 31 2005 2004 2003 net earnings company 71 million 2005 61 million 2004 58 million 2003 representing increase 165 fiscal years 2004 2005 increase 48 fiscal years 2003 2004 net earnings per share fully diluted basis 211 2005 181 2004 172 2003 representing increase 166 fiscal years 2004 2005 52 fiscal years 2003 2004 return average assets return average shareholders’ equity 2005 141 1508 respectively compared 141 1386 respectively 2004 151 1422 respectively 2003 past ten years company’s return average assets averaged 155 return average equity 161 2005 company experienced largest annual loan growth terms dollars 60 year history loans increased 668 million 187 2005 compared 604 million 204 2004 230 million 84 2003 average loan growth rate past ten years 153 company’s ability grow loans quality quantity important ability grow earnings company’s core business lending management maintains underwriting pricing policies procedures grow revenues significantly increase credit interest rate risk exposure additionally management seeks increase revenues controlling costs 2005 overhead ratio noninterest expensenet interest income plus noninterest income 557 compared 586 2004 591 2003 improved overhead ratio essence evidence improved efficiency use company’s resources described details major components company’s improved earnings performance net interest income company’s operational results primarily depend earnings bank’s earnings depend large degree ability generate net interest income net interest income represented 769 758 743 net interest income 2005 2004 2003 respectively following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets loans investment securities federal funds sold average rate paid interest bearing liabilities deposits borrowings interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income company increased 23 million 128 2005 2004 17 million 105 2004 2003 net interest income december 31 2005 200 million compared 177 million december 31 2004 160 million december 31 2003 net interest margin interest earning assets 437 2005 455 2004 465 2003 tax equivalent basis beginning early 2001 end 2003 short term interest rates dropped 550 basis points 2005 however short term interest rates recovered 500 basis points comparing interest margin 2005 2004 bank’s interest margin declined 18 basis points measuring last three years bank’s interest margin decreased 28 basis points believe management’s interest rate risk strategies helped mitigate effects rapidly declining rapidly increasing interest rates banks able easily maintain steady interest margin flat rate environments without diligent interest rate risk management banks susceptible declining interest margins earnings rapidly changing interest rate environments bank’s average yield earning assets 2005 tax equivalent basis 703 increase 61 basis points 2004 average cost funds 318 2005 increase 91 basis points 2004 net interest income increased nonetheless last three years despite declining net interest margin result increase bank’s volume earning assets average balance interest earning assets increased 694 million 172 2005 compared 467 million 131 2004 199 million 59 2003 bank’s balance sheet traditionally slightly liability sensitive 2003 2004 2005 progressed management sought become evenly matched perhaps slightly asset sensitive management sought shift scenario assets reprice faster liabilities therefore rising rate environment bank’s interest margin tend increase market interest rates fall rapidly 2003 2004 subsequently increase rapidly 2005 interest margin needs time respond rate changes rates increasing believe bank’s interest margin increase well ability management accomplish objective managing interest rate risk largely dependent ability manage cost funds competitive deposit gathering market believe impact fixed rates borrowings falling rate environment would significant 2004 2005 management chosen hedge fixed rates 30 million notional amount swap contract described note 1 note 7 financial statements contained elsewhere report swap contract reduced interest expense 2004 323 thousand 2005 benefit reduced 31 thousand since short term rates risen 340 fixed rate swap contract approximately 16 months remaining contractual term swap course short term rates continue increase cost swap increase much expected yield interest bearing assets following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities tax equivalent basis assuming rate 34 nonaccrual loans interest income recorded loans included yield calculation loans periods reported following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate bank assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table changes interest income expense tax equivalent basis thousands income expense income 2005 60 million increase 371 thousand 66 2004 increase income 2003 2004 84 thousand 15 increase income 2005 primarily due gain investment securities available sale amount 228 thousand management rarely elects sell investment securities however particular sale strategy allowed bank reposition portfolio rising rates recognize gain associated sale investment securities accomplish selling 38 million bonds approximately 5 portfolio service charges deposit accounts stabilized 2004 2005 increased 10 per year previous three years atm network fees increased 68 thousand 156 increase attributable increased usage bank’s atm network increase foreign atm fees took place later part 2004 effect 2005 mortgage origination fees declined 112 thousand 217 comparing 2005 2004 mortgage origination fees also declined 419 thousand 449 comparing 2003 throughout 2002 part 2003 bank experienced heavy refinancing activity mortgage department refinancing activity slowed significantly volume mortgage origination fees bank presently experiencing attributable new resale home financing activity bank’s market area miscellaneous income 2004 2005 increased 106 thousand 154 increased 62 thousand 100 2003 2004 increase miscellaneous income 2004 2005 2003 2004 attributable number income line items none particularly notable increases generally attributable volume increases miscellaneous fees due loan deposit growth bank expenses increased 800 thousand 59 2005 2004 912 thousand 72 2004 2003 salaries employee benefits increased 577 thousand 71 2004 2005 499 thousand 65 2004 year increase expense attributable salaries employee benefits common growing financial institution occupancy expense increased 190 thousand 97 2004 2005 comparing 2003 2004 occupancy expense increased 135 thousand 75 operating expenses include professional fees increased 33 thousand 09 2004 2005 increased 278 thousand 84 2003 2004 following narrative explains detail attributes changes expenses comparing 2005 2004 bank experienced increased salary costs amount 395 thousand 75 increase attributable annual raises officers staff averaged 45 additionally full time equivalent number employees increased 144 december 31 2004 154 december 31 2005 primary reason increase full time equivalent employees personnel added mirror lake office opened increased support staff lending compliance departments necessitated need manage rapid loan growth bank increased staffing two new branches scheduled open spring 2006 profit sharing bonus costs increased 182 thousand 109 profit sharing officer employee bonuses largely performance based increased result bank’s increased profitability increase salaries employee benefits year ended 2004 compared 2003 attributable number factors salary costs increased 212 thousand 42 primarily attributable annual raises since full time equivalent number employees significantly change 2003 2004 profit sharing bonus costs increased 201 thousand 137 attributable bonus program introduced 2004 lending staff effort increase loan production profit sharing bonuses also increased slightly increased profitability increases bonus percentages improved asset quality health insurance costs increased 55 thousand 81 increase attributable premium increase company’s health insurance carrier increase occupancy expense 2005 compared 2004 primarily attributable increase depreciation expense 130 thousand 141 increase depreciation expense due mirror lake branch facility placed service february 2005 remainder increase attributable addition utilities telephone occupancy costs mirror lake branch increase occupancy expense 2004 2003 primarily attributable increase depreciation expense 56 thousand 65 management company’s board directors elected continue update bank’s technology particularly outdated personal computers additionally company refurbished main office branch locations 2003 capital investment full year depreciation 2004 management made concerted effort minimize operating costs 2005 evidence effort culminated little increase operating expense 2004 2005 total operating expense increased 33 thousand 09 largest line item expense category legal professional accounting fees remained steady 2004 2005 compliance costs public company largely realized operations company expected increase significantly foreseeable future operating expenses increased 278 thousand 84 2004 2003 legal accounting professional fees totaled 623 thousand 408 thousand 520 thousand 2004 2003 2002 respectively increase legal accounting professional fees 2003 2004 215 thousand 527 bank incurred consulting costs associated executive management change resulting retirement bank’s president first quarter 2004 cost resulted successful transition duties among existing executive management team additionally 2004 company’s cost complying provisions sarbanesoxley act 2002 increased approximately 80 thousand income taxes expressed percentage earnings income taxes effective tax rate declined 290 2005 307 2004 317 2003 decline effective tax rate past three years primarily attributable impact purchase tax credits tax advantaged instruments municipal securities bank additionally october 2002 bank formed wgnb investments inc nevada corporation manage hold trade securities bank effect reducing state income tax liability 2003 2004 2005 balance sheet overview years ended december 31 2005 2004 general 2005 average total assets increased 726 million 169 average deposits increased 679 million 208 average loans increased 658 million 199 average balances recorded 2004 average total assets increased 442 million 115 average deposits increased 293 million 99 average loans increased 423 million 147 amounts recorded 2003 2005 2004 percentage growth representative bank’s historical growth rate 10 year average growth rate bank’s assets loans deposits 128 153 120 respectively earnings asset growth past two years attributable robust commercial residential growth bank’s market area company experienced significant loan growth low historical credit loss average net chargeoff loans less 25 percent average loans past 10 years total assets december 31 2005 524 million representing 817 million 185 increase december 31 2004 total loans increased 668 million 187 2005 management attempted take advantage continued loan demand total deposits increased 907 million 268 2004 2005 allowed bank pay federal home loan bank borrowings amount 13 million loan demand rebounded last half 2003 decline early part year remained robust 2005 much growth concentrated second half 2004 first half 2005 increase deposits 2005 attributable increase noninterest bearing demand accounts 34 million 77 increase interest bearing demand 232 million 174 increase time deposit accounts 637 million 430 much deposit growth 563 million came growth time deposit accounts excess 100000 much growth 360 million attributable brokered time deposits priced lower local market time deposits 2005 bank funded loan growth deposit growth fact flatness yield curve bank able gather time deposits early 2005 three four five year maturities cost short term time deposits latter part 2005 2003 2004 five de novo banks began operations continguous primary service area competition funding increased significantly 2004 2005 loan growth outpaced deposit growth carroll douglas counties funding landscape changed along bank’s deposit strategy since beginning 2004 almost 60 year history bank relied “in market” deposits fund balance sheet growth continued development metropolitan atlanta movement westward however loan demand preceded actual movement deposits management expects dynamic continue intends expand deposit gathering strategy towards greater use wholesale market funding sources loan demand remains high investments company’s availableforsale investment portfolio 644 million december 31 2005 consisted primarily debt securities provide company source liquidity stable source income vehicle implement asset liability management strategies availableforsale securities portfolio increased 35 million 57 december 31 2004 company believes investment portfolio provides balance interest rate credit risk categories balance sheet portfolio also provides vehicle investment available funds supplying securities pledge required collateral certain public deposits securities reported availableforsale stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part company’s overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 67 million december 31 2005 increase 19 million 393 compared year ended 2004 increase attributable purchase banking industry issued trust preferred securities various issuers across united states particularly southeast company intent ability hold securities maturity following table shows carrying value company’s securities security type december 31 2005 2004 2003 table securities following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2005 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table expected maturity securities thousands mortgagebacked securities included maturities categories anticipated repaid based average maturities actual cash flow mortgage backed securities differs assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions bank routine basis evaluates concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions loantodeposit ratios industry trends primary types loans bank’s portfolio residential mortgages home equity loans commercial real estate loans commercial loans consumer installment loans generally bank underwrites loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan exceptions bank’s general policy employ relatively conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans emphasizing lower gross debt ratios consumer loans lower loantovalue ratios types real estate loans given localized nature bank’s lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal shareholders company directors officers bank subject limitations federal reserve principal effect require extensions credit bank executive officers directors ten percent shareholders satisfy certain standards bank routinely makes loans ordinary course business certain directors executive officers company bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2005 loans outstanding directors executive officers company bank associates members immediate families totaled 35 million represented approximately 08 total loans date december 31 2005 none loans outstanding bank related parties nonaccrual past due restructured considered management potential problem loan following table presents loans type dates indicated following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction mortgage loans consumer loans december 31 2005 table loan portfolio maturity variablefixed rate mix provision allowance possible loan lease losses provision loan losses company 2005 155 million compared 925 thousand 2004 350 thousand 2003 increase provision loan losses reflects higher level loan growth 2005 reflects weakness one credit relationship allowance loan losses represented 126 114 117 total loans outstanding december 31 2005 2004 2003 respectively percentage allowance loan losses expressed percentage total loans increased 2004 2005 taking account slight increase nonperforming adversely rated loans 2005 net chargeoffs 303 thousand 324 thousand 643 thousand 2005 2004 2003 respectively company independent loan review function loans placed loan grade categories consistent used bank’s regulators loans constantly monitored loan officer loan review function credit quality consistency accuracy grading process bank assures timely recognition credit risks general credit risk increases level allowance loan loss also increase formal allowance loan loss adequacy test performed month end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications additionally evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations management’s judgment determining adequacy allowance based evaluations collectability loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades five eight represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one four stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses loans deemed impaired evaluated individually measure probable loss credit management uses internal loan reviewer times supplemented third party service providers independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate however management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions change borrowers’ ability repay addition regulators integral part examination process periodically review company’s allowance loan losses regulators may require company recognize additions allowance based judgments information available time examination management company realizes importance maintaining adequate allowance loan losses professional loan review function effective loan officer identification program management believes able recognize weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance company’s position minimize potential loss problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list company’s migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio cases significant weaknesses exist specific loan specific reserve assigned loan addition general allowance company also evaluates risks associated concentrations credit necessary assign allowance related concentrations credit company adds specific reserve related risks following table presents summary changes allowance loan losses years indicated table allowance loan losses nonperforming assets past due loans nonperforming assets december 31 2005 36 million 85 total loans real estate owned compared 18 million 50 total loans real estate owned december 31 2004 22 million 75 total loans real estate owned december 31 2003 levels nonperforming loans remain relatively low compared bank’s peer group percentage nonperforming assets total loans steadily decreased peak 2001 increase nonperforming loans 2004 2005 attributable one credit relationship management created proper specific reserve following table summarizes loans 90 days greater past due nonaccrual loans real estate taken settlement foreclosure years indicated table nonperforming assets may additional loans bank’s portfolio may become classified conditions indicate management aware potential problem loans disclosed table result managements ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest original terms exceptions allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal bank’s loan review function monitors selected accruing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function also identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect company’s liquidity capital resources operations deposits time deposits 100 thousand greater totaled 1118 million december 31 2005 compared 555 million yearend 2004 310 million yearend 2003 following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2005 table maturity time deposits 100000 greater thousands liquidity bank must maintain daily basis sufficient funds cover withdrawals depositors accounts supply potential borrowers funds meet obligations bank keeps cash hand maintains account balances correspondent banks purchases sells federal funds shortterm investments asset liability maturities monitored attempt match variables meet liquidity needs policy bank monitor liquidity meet regulatory requirements local funding requirements management believes bank’s current level liquidity adequate meet needs bank maintains relationships correspondent banks including federal home loan bank fhlb provide funds short notice needed bank arrangements correspondent commercial banks short term unsecured advances 208 million december 31 2005 bank drawn available facilities addition subject collateral availability bank line credit fhlb bank drawn 42 million december 31 2005 additional details line credit fhlb see note 6 consolidated financial statements company’s cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents amounted 162 million december 31 2005 represented increase 82 million december 31 2004 increase primarily attributable net cash provided operating activities 95 million since net cash provided financing activities 747 million essentially net cash used investing activities 761 million major cash flows investing activities attributable net change loans 674 million net change investment securities availableforsale heldtomaturity investment securitise 67 million notable cash flows financing activities attributable net change deposits 907 million repayment federal home loan bank advances 130 million 100 million redrawn january 2006 2004 management concentrated investing excess liquidity bank’s balance sheet 2003 cash equivalents decreased 192 million 2004 cash flows attributable 75 million cash generated operating activities 690 million cash used investing activities 614 million loans 68 million investment securities 422 million cash generated financing activities 351 million deposit growth 150 million advances fhlb capital resources total shareholders’ equity december 31 2005 480 million increase 30 million 2004 change equity due 71 million net income less 31 million dividends decrease unrealized holding gain securities available sale 998 thousand net tax occ established certain minimum riskbased capital standards apply national banks company subject certain capital requirements imposed federal reserve december 31 2005 bank exceeded applicable regulatory capital requirements classification “well capitalized” bank company satisfied applicable regulatory requirements imposed federal reserve following tables present companys regulatory capital position december 31 2005 table complete discussion actual required ratios company subsidiaries see note 9 consolidated financial statements average equity average assets 935 2005 1020 2004 ratio dividends declared net earnings 433 2005 compared 423 2004 contractual obligations ordinary course operations company enters certain contractual obligations following table summarizes company’s significant fixed determinable contractual obligations payment date december 31 2005 dollars thousands balance sheet risk operations bank company made contractual commitments extend credit ordinary course business activities commitments legally binding agreements lend money bank’s customers predetermined interest rates specified period time december 31 2005 bank issued commitments extend credit 987 million various types commercial lending arrangements additional commitments standby letters credit 132 million company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based credit evaluation borrower collateral varies may include accounts receivable inventory property plant equipment commercial residential real estate company manages credit risk commitments subjecting normal underwriting risk management processes commitments generally fixed expiration dates many expire without drawn upon total commitment level necessarily represent future cash requirements needed fund outstanding commitments company ability liquidate federal funds sold securities availableforsale shortterm basis borrow purchase federal funds financial institutions assetliability management companys objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize company’s exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure banks interest rate exposure repricing gap calculated taking assets reprice mature within given time frame subtracting liabilities reprice mature within time frame difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates banks net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates banks net interest income decrease rates fall increase rates rise due inherent limitations traditional gap analysis company also employs sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk company’s loan investment portfolios significantly impact company’s profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2005 estimated impact immediate increase interest rates 100 basis points would resulted increase net interest income 12month period 13 comparable decrease interest rates resulting decrease net interest income 01 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition volume following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2005 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities companys savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year subject management’s control table interest rate gap sensitivity thousands december 31 2005 difference companys assets liabilities repricing maturing within one year 745 million chart indicates excess assets repricing maturing within one year thus rise interest rates would theoretically cause companys net interest income increase however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing demand money market savings accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustablerate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation company’s operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control company including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies company results operations predictable item 7a item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations company may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided company’s consolidated financial statements accompanying footnotes cautionary notice regarding forwardlooking statements certain statements made report documents incorporated reference herein including matters discussed caption “management’s discussion analysis financial condition results operations” well oral statements made company officers directors employees may constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended “exchange act” forwardlooking statements based management’s beliefs current expectations estimates projections financial services industry economy company bank general words “expect” “anticipate” “intend” “plan” “believe” “seek” “estimate” similar expressions intended identify forwardlooking statements forwardlooking statements guarantees future performance subject risks uncertainties factors may cause actual results performance achievements company differ materially historical results expressed implied forwardlooking statements company cautions readers following important factors among others could cause company’s actual results differ materially forwardlooking statements contained report · effect changes laws regulations including federal state banking laws regulations company bank must comply associated costs compliance laws regulations either currently future applicable · effect changes accounting policies standards guidelines principles may adopted regulatory agencies well financial accounting standards board · effect changes company’s organization compensation benefit plans · effect company’s competitive position within market area increasing consolidation within banking financial services industries including increased competition larger regional outofstate banking organizations well nonbank providers various financial services · effect changes interest rates · effect changes business cycle downturns local regional national economies · matters described part item 1a risk factors company cautions foregoing list important factors exclusive factors may impact operations company critical accounting policies company established various accounting policies govern application accounting principles generally accepted united states america preparation financial statements significant accounting policies described notes consolidated financial statements certain accounting policies involve significant judgments assumptions management material impact carrying value certain assets liabilities management considers accounting policies critical accounting policies judgments assumptions used management based historical experience factors believed reasonable circumstances nature judgments assumptions made management actual results could differ judgments estimates could material impact carrying value assets liabilities results operations company accounting policies important policies described notes consolidated financial statements reviewed greater understanding company’s financial performance recorded reported company believes allowance loan losses critical accounting policy requires significant judgments estimates used preparation company’s consolidated financial statements allowance loan losses represents management’s estimate probable loan losses inherent loan portfolio calculation allowance loan losses critical accounting estimate due significant judgment assumptions estimates related amount timing estimated losses consideration current historical trends amount timing cash flows related impaired loans please refer section report entitled “balance sheet review provision allowance possible loan lease losses” note 1 note 3 company’s consolidated financial statements detailed description company’s estimation processes methodology related allowance loan losses earnings overview years ended december 31 2006 2005 2004 net earnings company 83 million 2006 71 million 2005 61 million 2004 representing increase 178 fiscal years 2005 2006 increase 165 fiscal years 2004 2005 net earnings per share fully diluted basis 166 2006 141 2005 120 2004 representing increase 177 fiscal years 2005 2006 175 fiscal years 2004 2005 return average assets return average shareholders’ equity 2006 151 1654 respectively compared 141 1508 respectively 2005 141 1386 respectively 2004 past ten years company’s return average assets averaged 152 return average equity 160 2006 company experienced loan growth 506 million 119 compared 668 million 187 2005 604 million 204 2004 average loan growth rate past ten years 140 company’s ability grow loans quality quantity important ability grow earnings company’s core business lending management maintains underwriting pricing policies procedures grow revenues significantly increase credit interest rate risk exposure much loan growth company experienced 2006 took place fourth quarter total loans grew 259 million 58 232 annualized fourth quarter 2006 net interest margin increased substantially 2006 since company recorded less average loan growth increase net interest margin crucial earnings growth 2006 market interest rates measured discount rate increased 100 basis points since december 31 2005 company slightly asset sensitive increased market interest rates impact increasing net interest margin net interest margin 2006 460 compared 437 2005 455 2004 rates stabilize expected impact company’s net interest margin stabilize well two significant financial occurrences fourth quarter 2006 impacted net earnings positive manner company realized gain real estate owned amount 232 thousand fourth quarter 2006 company negotiated almost six years release property foreclosure 2005 company successfully foreclosed property 2006 completed sale property gain nonrecurring nature secondly fourth quarter 2006 company earned federal tax credits approximate amount 144000 recognized low moderate income housing project partner tax credits recurring nature benefit company next ten years finally management continually seeks increase revenues controlling costs 2006 overhead ratio noninterest expensenet interest income plus noninterest income 555 compared 557 2005 586 2004 company managed decrease overhead ratio despite opening three new branches last 24 months improved overhead ratio essence evidence improved efficiency use company’s resources described details major components company’s improved earnings performance net interest income company’s operational results primarily depend earnings bank’s earnings depend large degree ability generate net interest income net interest income represented 785 769 758 net interest income plus income 2006 2005 2004 respectively following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets loans investment securities federal funds sold average rate paid interest bearing liabilities deposits borrowings interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income company increased 34 million 170 2006 2005 23 million 128 2005 2004 net interest income december 31 2006 234 million compared 200 million december 31 2005 177 million december 31 2004 net interest margin interest earning assets 460 2006 437 2005 455 2004 tax equivalent basis beginning early 2001 end 2003 short term interest rates dropped 550 basis points 2006 however short term interest rates rebounded 575 basis points broad fluctuation significant impact company without robust interest rate risk management company seeks manage interest rate risk fluctuations market rates significant negative impact earnings bank’s net interest margin increased 23 basis points comparing 2006 2005 measuring last three years bank’s interest margin increased 5 basis points 2004 believe management’s interest rate risk strategies helped mitigate effects rapidly declining rapidly increasing interest rates banks able easily maintain steady interest margin flat rate environments without diligent interest rate risk management banks susceptible declining interest margins earnings rapidly changing interest rate environments bank’s average yield earning assets 2006 tax equivalent basis 818 increase 115 basis points 2005 average cost funds 427 2006 increase 109 basis points 2005 net interest income increased steadily last three years particularly 2006 interest rates continued rise stabilized last half 2006 result two things 1 increase bank’s volume earning assets 2 bank’s slight asset sensitivity average balance interest earning assets increased 492 million 104 2006 compared 694 million 172 2005 467 million 131 2004 bank’s balance sheet traditionally slightly liability sensitive 2004 2005 2006 progressed management sought become evenly matched perhaps slightly asset sensitive management sought shift scenario assets reprice faster liabilities therefore rising rate environment bank’s interest margin tend increase market interest rates fall rapidly 2002 2003 subsequently increase rapidly 2005 2006 interest margin needs time respond rate changes rates stabilized believe bank’s interest margin may compress slightly slower repricing deposits cause bank’s cost funds increase ability management accomplish objective managing interest rate risk largely dependent ability manage cost funds competitive deposit gathering market since bank slightly asset sensitive impact falling rate environment could negative impact net interest margin however management chosen hedge fixed rate borrowings 30 million notional amount swap contract addition swap matures five months management hedged portion fixed rate brokered certificates deposit series fifteen interest rate swaps september 2006 swap hedges specific cd maturity total 41 million notional amount hedge swap described note 1 note 7 consolidated financial statements contained elsewhere report 30 million swap contract decreased interest expense 2005 31 thousand however 2006 combined swap contracts increased interest expense 489 thousand since short term rates risen 340 451 weighted average fixed rates 30 million 41 million swap contracts respectively course short term rates continue increase cost swaps increase much expected yield interest bearing assets conversely rates decrease bank immediate protection swaps place following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities tax equivalent basis assuming rate 34 nonaccrual loans interest income recorded loans included yield calculation loans periods reported following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate bank assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table changes interest income expense tax equivalent basis thousands income expense income 2006 64 million increase 396 thousand 66 2005 increase income 2004 2005 371 thousand 66 2006 2005 company realized nonrecurring gains fourth quarter 2006 mentioned previously report company recognized gain sale real estate owned amount 232 thousand company expect realize gains frequently however sale foreclosed real estate normal coarse collecting impaired loans 2005 company recognized gain investment securities available sale amount 228 thousand management rarely elects sell investment securities however particular sale strategy allowed bank reposition portfolio rising rates recognize gain associated sale investment securities accomplish selling 38 million bonds approximately 5 portfolio service charges deposit accounts stabilized actually declined 2005 2006 increased previous three years bank instituted free checking program reduced service charges deposit accounts increased balance noninterest bearing checking accounts customers changed interest bearing accounts service charge free accounts mortgage origination fees declined 9 thousand 23 comparing 2006 2005 mortgage origination fees declined 112 thousand 217 comparing 2005 2004 419 thousand 449 comparing 2004 2003 throughout 2002 part 2003 2004 bank experienced refinancing activity mortgage department refinancing activity slowed significantly volume mortgage origination fees bank presently experiencing attributable new resale home financing activity bank’s market area 2006 2005 represent normal mortgage origination volume company atm network fees increased 275 thousand 548 increase attributable increased foreign customers usage bank’s expanding atm network miscellaneous income 2005 2006 increased 129 thousand 162 increase miscellaneous income 2005 2006 attributable fee income generated two sources august 23 2006 company entered triparty agreement registered principal raymond james financial services inc provide investment advisory brokerage services customer base past company relationship brokerage firm whereby provided rental space premises investment advisor employee brokerage firm recognizing brokerage services would beneficial company’s overall customer base management implemented business plan well known registered principal west georgia area ultimately culminated company purchasing individual’s book business hiring serve company’s registered principal broker company also hired additional financial advisor two sales assistants gross fees earned brokerage services 2006 130 thousand company significant fee income brokerage services 2005 past year management developed emphasis producing small business administration “sba” loans west georgia market loans made primarily small startup business owners company core competency serving small business owners however difficult company bear credit risk associated start businesses sba provides company credit stability providing guarantee portion loan loans meet credit standards company allows hold sba loan portfolio reduced risk guaranteed portion sba loan also market value packaged loans sold secondary market company intends originate underwrite sell hold sba loans attempt spread credit risk primarily real estate lending lines enhance noninterest income gain sale sba loans generated guaranteed portion loan sold company sold guaranteed portion two sba loans 2006 resulting gains totaling 84 thousand miscellaneous income increased 106 thousand 154 2004 2005 increase miscellaneous income 2004 2005 attributable number income line items none particularly notable increases generally attributable volume increases miscellaneous fees due loan deposit growth bank expenses increased 21 million 142 2006 2005 800 thousand 59 2005 2004 increased salaries employee benefits made half increase expenses 2006 2005 2004 salaries employee benefits increased 12 million 140 2006 577 thousand 71 2004 2005 increase salaries benefits 2005 2006 broken follows salaries related payroll taxes increased 805 thousand 131 profit sharing 401k officer bonuses increased 146 thousand 79 employee benefits primarily include employee health life insurance expense increased 144 thousand 200 stockbased compensation expense recognized 2006 128 thousand company recognized stockbased compensation expense 2005 stockbased compensation expense methodology described detail note 1 consolidated financial statements “stock compensation plans” 2006 bank opened two new branches described elsewhere document impact adding staff new branches additions lending credit administration departments caused bank significantly increase fulltime equivalent employee count salary benefits expense anytime employee count increases significant manner salaries benefits increase greater percentage caused normal increases officer staff annual raises fulltime equivalent employee count december 31 2006 182 compared 154 december 31 2005 increase 182 salaries related payroll taxes increased 131 2006 compared 2005 182 full time equivalent employee count additionally new employees participate 401k plan bonus plans thus increase 401k bonus plans also less 182 2006 company experienced increase medical insurance premiums approximately 13 per employee well increase number employees covered plan therefore increase benefits expense related employee health life insurance increased 200 comparing 2005 2004 bank experienced increased salary costs amount 395 thousand 75 increase attributable annual raises officers staff averaged 45 additionally full time equivalent number employees increased 144 december 31 2004 154 december 31 2005 primary reason increase full time equivalent employees personnel added mirror lake office opened increased support staff lending compliance departments necessitated need manage rapid loan growth bank increased staffing two new branches scheduled open spring 2006 profit sharing bonus costs increased 182 thousand 109 profit sharing officer employee bonuses largely performance based increased result bank’s increased profitability occupancy expense increased 268 thousand 126 2006 compared 2005 primarily related branch expansion included addition chapel hill branch douglasville banco de progreso branch carrollton 2006 addition company seeks maintain operating technology high level includes capital purchases personal computers operating equipment software many capital items shorter depreciable lives therefore impact depreciation expense dramatically longerlived assets occupancy expense branches administrative operations offices include six major components depreciation utilities property tax operating leases repairs maintenance expense depreciation expense 2006 increased 86 thousand 82 compared 2005 likewise utilities expense including telephone increased 87 thousand 222 comparing 2006 2005 occupancy expense including property taxes repairs maintenance increased 95 thousand 132 occupancy expense increased 190 thousand 97 2004 2005 comparing 2003 2004 occupancy expense increased 135 thousand 75 increase occupancy expense 2005 compared 2004 primarily attributable increase depreciation expense 130 thousand 141 increase depreciation expense due mirror lake branch facility placed service february 2005 remainder increase attributable addition utilities telephone occupancy costs mirror lake branch operating expenses increased 565 thousand 156 2005 2006 operating expense includes professional accounting regulatory fees atm network fees advertising chartable contributions number expenses analyzing operating expense single expense stands increasing significant amount however mostly volume related increased enough amount 565 thousand increase indicated volume deposit loan statements increased costs supplies postage 2006 total postage cost increased 20 thousand 2006 250 thousand 2005 270 thousand 2006 supplies expense increased 62 thousand 303 thousand 2005 365 thousand 2006 another example volume related expense atm network fees atm network fees 295 thousand 2006 increased 34 thousand 132 2005 software maintenance consulting also volume related 238 thousand 2006 increase 34 thousand 142 compared 2005 charitable contributions increased 38 thousand 343 comparing 2005 2006 single largest expense classification legal accounting fees total legal accounting fees 2006 663 thousand 29 18 thousand compared 2005 compliance costs public company increasing year expected increase rapid pace 2007 company anticipated become accelerated filer securities exchange commission measurement date june 30 2007 finally miscellaneous expense includes annual report proxy printing annual meeting costs employee functions employment fees increase 51 thousand 256 2005 due increased volume annual reports increased employee count total operating expense increased 33 thousand 09 2004 2005 single line item stood 2005 income taxes expressed percentage earnings income taxes effective tax rate 293 2006 290 2005 307 2004 effective tax rate past three years remained steady however purchase tax credits tax advantaged instruments municipal securities bank less impact effective tax rate future earnings company grow rapid pace continued investment instruments balance sheet overview years ended december 31 2006 2005 general 2006 average total assets increased 485 million 97 average deposits increased 467 million 119 average loans increased 459 million 116 average balances recorded 2005 average total assets increased 726 million 169 average deposits increased 679 million 208 average loans increased 658 million 199 amounts recorded 2004 2006 2005 percentage growth representative bank’s historical growth rate 10 year average growth rate bank’s assets loans deposits 127 140 117 respectively earnings asset growth past two years attributable robust commercial residential growth bank’s market area company experienced significant loan growth recent history provided ability expand new markets total assets december 31 2006 575 million representing 517 million 99 increase december 31 2005 total loans increased 506 million 119 2006 less 2005 line average growth rates total deposits increased 338 million 79 2005 2006 growing loans rapid pace deposits management used excess liquidity balance sheet 2006 loan demand rebounded last half 2006 loan payoffs hampered loan growth early part year fact total loans grew 268 million fourth quarter alone increase deposits 2006 attributable increase noninterest bearing demand accounts 45 million 93 decrease interest bearing demand 70 million 45 increase time deposit accounts 375 million 177 much deposit growth 195 million came growth time deposit accounts excess 100000 growth 71 million attributable brokered time deposits priced lower local market time deposits 2006 bank funded loan growth deposit growth use liquidity balance sheet bank able gather time deposits 2005 2006 two three four year maturities match maturities loans lower cost traditional one year time deposits 2003 2004 five de novo banks began operations contiguous primary service area since time competition funding increased significantly loan growth outpaced deposit growth carroll douglas counties funding landscape changed along bank’s deposit strategy almost 60 year history bank relied “in market” deposits fund balance sheet growth continued development metropolitan atlanta movement westward loan demand preceded actual movement deposits management expects dynamic continue intends expand deposit gathering strategy towards greater use wholesale market funding sources loan demand remains high maintaining “in market” deposits customers relationship loyalty investments company’s availableforsale investment portfolio 643 million december 31 2006 consisted primarily debt securities provide company source liquidity stable source income vehicle implement asset liability management strategies amount availableforsale securities portfolio remained flat compared december 31 2005 company believes investment portfolio provides balance interest rate credit risk categories balance sheet portfolio also provides vehicle investment available funds supplying securities pledge required collateral certain public deposits securities reported availableforsale stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part company’s overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 78 million december 31 2006 increase 11 million 163 compared year ended 2005 increase attributable purchase banking industry issued trust preferred securities various issuers across united states particularly southeast company intent ability hold securities maturity following table shows carrying value company’s securities security type december 31 2006 2005 2004 table securities thousands following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2006 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table expected maturity securities thousands mortgagebacked securities included maturities categories anticipated repaid based average maturities actual cash flow mortgage backed securities differs assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions bank routine basis evaluates concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions loantodeposit ratios industry trends primary types loans bank’s portfolio residential mortgages home equity construction commercial real estate commercial consumer installment loans generally bank underwrites loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan exceptions bank’s general policy employ relatively conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans emphasizing lower gross debt ratios consumer loans lower loantovalue ratios types real estate loans given localized nature bank’s lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal shareholders company directors officers bank subject limitations federal reserve principal effect require extensions credit bank executive officers directors ten percent shareholders satisfy certain standards bank routinely makes loans ordinary course business certain directors executive officers company bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2006 loans outstanding directors executive officers company bank associates members immediate families totaled 34 million represented approximately 07 total loans date december 31 2006 none loans outstanding bank related parties nonaccrual past due restructured considered management potential problem loan following table presents loans type dates indicated following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction mortgage loans consumer loans december 31 2006 table loan portfolio maturity thousands variablefixed rate mix provision allowance possible loan lease losses provision loan losses company 2006 147 million compared 155 million 2005 925 thousand 2004 decrease provision loan losses reflects lower level loan growth 2006 allowance loan losses represented 121 126 114 total loans outstanding december 31 2006 2005 2004 respectively percentage allowance loan losses expressed percentage total loans decreased 2005 2006 taking account recognition chargeoff one credit relationship amount measurable loss portfolio 2006 net chargeoffs 10 million 303 thousand 324 thousand 2006 2004 respectively company independent loan review function loans placed loan grade categories consistent used bank’s regulators loans constantly monitored loan officer loan review function credit quality consistency accuracy grading process bank seeks assure timely recognition credit risks general credit risk increases level allowance loan loss also increase formal allowance loan loss adequacy test performed quarter end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications additionally evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations management’s judgment determining adequacy allowance based evaluations collectability loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades five eight represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one four stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses loans deemed impaired evaluated individually measure probable loss credit management uses internal loan reviewer times supplemented third party service providers independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate however management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions change borrowers’ ability repay addition regulators integral part examination process periodically review company’s allowance loan losses regulators may require company recognize additions allowance based judgments information available time examination management company realizes importance maintaining adequate allowance loan losses professional loan review function effective loan officer identification program management believes able recognize weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance company’s position minimize potential loss problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list company’s migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio cases significant weaknesses exist specific loan specific reserve assigned loan addition general allowance company also evaluates risks associated concentrations credit necessary assign allowance related concentrations credit company adds specific reserve related risks following table presents summary changes allowance loan losses years indicated nonperforming assets past due loans nonperforming assets december 31 2006 43 million 91 total loans real estate owned compared 36 million 85 total loans real estate owned december 31 2005 18 million 50 total loans real estate owned december 31 2004 levels nonperforming loans remain relatively low compared bank’s peer group percentage nonperforming assets total loans steadily decreased peak 2001 increase nonperforming loans 2005 2006 attributable credit relationships management created proper specific reserve following table summarizes loans 90 days greater past due nonaccrual loans real estate taken settlement foreclosure years indicated may additional loans bank’s portfolio may become classified conditions indicate management aware potential problem loans disclosed table result managements ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest original terms exceptions allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal bank’s loan review function monitors selected accruing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function also identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect company’s liquidity capital resources operations deposits time deposits 100 thousand greater totaled 1454 million december 31 2006 compared 1208 million yearend 2005 following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2006 table maturity time deposits 100000 greater thousands liquidity bank must maintain daily basis sufficient funds cover withdrawals depositors accounts supply potential borrowers funds meet obligations bank keeps cash hand maintains account balances correspondent banks purchases sells federal funds shortterm investments asset liability maturities monitored attempt match variables meet liquidity needs policy bank monitor liquidity meet regulatory requirements local funding requirements management believes bank’s current level liquidity adequate meet needs bank maintains relationships correspondent banks including federal home loan bank fhlb provide funds short notice needed bank arrangements correspondent commercial banks short term unsecured advances 208 million december 31 2006 bank drawn available facilities amount 25 million addition subject collateral availability bank line credit fhlb bank drawn 52 million december 31 2006 additional details line credit fhlb see note 6 consolidated financial statements company’s cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents amounted 132 million december 31 2006 represented decrease 30 million december 31 2005 net cash provided operating activities 101 million net cash provided operating activities attributable primarily net earnings 83 million addbacks attributable noncash items depreciation amortization accretion provision loan losses totaling 26 million net cash used investing activities 556 million consisted primarily net increase loans 528 million net increase securities available sale securities available sale securities 26 million net cash provided financing activities totaled 425 million primarily attributable net increase deposits 338 million increase federal home loan bank advances amount 100 million advance company’s federal funds line credit amount 25 million 2006 management concentrated investing liquidity bank’s balance sheet cash equivalents liquidity balance sheet high 2006 average balance federal funds sold year 121 million exceeds managements target balance approximately 70 million however liquidity used fourth quarter fund loans previously mentioned total loans grew 268 million fourth quarter caused bank federal funds purchased year end permanent funding obtained capital resources total shareholders’ equity december 31 2006 525 million increase 45 million 2005 change equity due 83 million net income less 36 million dividends decrease unrealized holding gain securities available sale 56 thousand net tax exercise stock options increased equity 711 thousand retirement shares repurchase plan swapping stock exercise options decreased equity 965 thousand occ established certain minimum riskbased capital standards apply national banks company subject certain capital requirements imposed federal reserve december 31 2006 bank exceeded applicable regulatory capital requirements classification “well capitalized” bank company satisfied applicable regulatory requirements imposed federal reserve following tables present companys regulatory capital position december 31 2006 table capital ratio leverage ratio complete discussion actual required ratios company subsidiaries see note 9 consolidated financial statements average equity average assets 916 2006 935 2005 ratio dividends declared net earnings 433 2006 compared 433 2005 contractual obligations ordinary course operations company enters certain contractual obligations following table summarizes company’s significant fixed determinable contractual obligations payment date december 31 2006 dollars thousands regard federal home loan bank advances obligations contain call dates option issuer therefore advances may called prior maturity date see note 6 financial statements “lines credit” balance sheet risk operations bank company made contractual commitments extend credit ordinary course business activities commitments legally binding agreements lend money bank’s customers predetermined interest rates specified period time december 31 2006 bank issued commitments extend credit 972 million various types commercial lending arrangements additional commitments standby letters credit 59 million company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based credit evaluation borrower collateral varies may include accounts receivable inventory property plant equipment commercial residential real estate company manages credit risk commitments subjecting normal underwriting risk management processes commitments generally fixed expiration dates many expire without drawn upon total commitment level necessarily represent future cash requirements needed fund outstanding commitments company ability liquidate federal funds sold securities availableforsale shortterm basis borrow purchase federal funds financial institutions permanent funding obtained assetliability management companys objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize company’s exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure banks interest rate exposure repricing gap calculated taking assets reprice mature within given time frame subtracting liabilities reprice mature within time frame difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates banks net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates banks net interest income decrease rates fall increase rates rise due inherent limitations traditional gap analysis company also employs sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk company’s loan investment portfolios significantly impact company’s profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2006 estimated impact immediate increase interest rates 100 basis points would resulted increase net interest income 12month period 005 comparable decrease interest rates resulting increase net interest income 036 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition volume following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2006 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities companys savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year subject management’s control table interest rate gap sensitivity thousands december 31 2006 difference companys assets liabilities repricing maturing within one year 674 million chart indicates excess assets repricing maturing within one year thus rise interest rates would theoretically cause companys net interest income increase however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing demand money market savings accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustablerate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation company’s operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control company including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies company results operations predictable item 7a item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations company may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided company’s consolidated financial statements accompanying footnotes cautionary notice regarding forwardlooking statements certain statements made report documents incorporated reference herein including matters discussed caption “management’s discussion analysis financial condition results operations” well oral statements made company officers directors employees may constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended “exchange act” forwardlooking statements based management’s beliefs current expectations estimates projections financial services industry economy company bank general words “expect” “anticipate” “intend” “plan” “believe” “seek” “estimate” similar expressions intended identify forwardlooking statements forwardlooking statements guarantees future performance subject risks uncertainties factors may cause actual results performance achievements company differ materially historical results expressed implied forwardlooking statements company cautions readers following important factors among others could cause company’s actual results differ materially forwardlooking statements contained report • effect changes laws regulations including federal state banking laws regulations company bank must comply associated costs compliance laws regulations either currently future applicable • effect changes accounting policies standards guidelines principles may adopted regulatory agencies well financial accounting standards board • effect changes company’s organization compensation benefit plans • effect company’s competitive position within market area increasing consolidation within banking financial services industries including increased competition larger regional outofstate banking organizations well nonbank providers various financial services • effect changes interest rates • effect changes business cycle downturns local regional national economies • matters described part item 1 business risks company cautions foregoing list important factors exclusive factors may impact operations company critical accounting policies company established various accounting policies govern application accounting principles generally accepted united states preparation financial statements significant accounting policies described notes consolidated financial statements certain accounting policies involve significant judgments assumptions management material impact carrying value certain assets liabilities management considers accounting policies critical accounting policies judgments assumptions used management based historical experience factors believed reasonable circumstances nature judgments assumptions made management actual results could differ judgments estimates could material impact carrying value assets liabilities results operations company accounting policies important policies described notes consolidated financial statements reviewed greater understanding company’s financial performance recorded reported company believes allowance loan losses critical accounting policy requires significant judgments estimates used preparation company’s consolidated financial statements allowance loan losses represents management’s estimate probable loan losses inherent loan portfolio calculation allowance loan losses critical accounting estimate due significant judgment assumptions estimates related amount timing estimated losses consideration current historical trends amount timing cash flows related impaired loans please refer section report entitled “balance sheet review provision allowance possible loan lease losses” note 1 note 3 company’s consolidated financial statements detailed description company’s estimation processes methodology related allowance loan losses earnings overview years ended december 31 2004 2003 2002 company reported net earnings 61 million 2004 58 million 2003 55 million 2002 representing increase 48 fiscal years 2003 2004 increase 44 fiscal years 2002 2003 increases three fiscal years primarily attributable bank’s continued loan growth higher noninterest income lower increases noninterest expense net earnings per share fully diluted basis 181 2004 172 2003 169 2002 representing increase 52 fiscal years 2003 2004 18 fiscal years 2002 2003 net earnings per share 2004 2003 entire year 2002 partial year affected previously described common stock offering completed april 2002 increased weighted average number shares outstanding return average assets return average shareholders’ equity 2004 141 1386 respectively compared 151 1422 respectively 2003 155 1556 respectively 2002 company experienced largest annual loan growth terms dollars almost 60 year history 2004 total loans grew 60 million 20 loan growth contributed company’s earnings growth offsetting approximately 50 decline mortgage origination fees 2003 2004 first half 2004 company earned 28 million 083 per diluted share compared 33 million 098 per diluted share second half 2004 comparing earnings first half 2004 second half 2004 company experienced earnings growth 18 net interest income company’s operational results primarily depend earnings bank’s earnings depend large degree net interest income net interest income defined difference interest income received investments loans investment securities federal funds sold etc interest expense deposits borrowings following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets average rate paid interest bearing liabilities interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income company increased 17 million 105 2004 2003 443 thousand 28 2003 2002 net interest income december 31 2004 177 million compared 160 million december 31 2003 156 million december 31 2002 net interest margin interest earning assets 455 2004 465 2003 476 2002 tax equivalent basis beginning early 2001 end 2003 short term interest rates dropped 550 basis points recovered 175 basis points 2004 comparing interest margin 2004 2003 bank’s interest margin declined 10 basis points measuring last three years bank’s interest margin decreased 21 basis points management’s interest rate risk strategies helped mitigate effects rapidly declining increasing interest rates average yield assets 2004 tax equivalent basis 642 33 basis points 2003 cost funds 227 25 basis points 2003 annualized deposit costs reached economic low 2004 likewise 2003 bank’s yield earning assets declined 60 basis points cost funds reduced 60 basis points bank’s balance sheet traditionally slightly liability sensitive 2003 2004 progressed management sought become evenly matched perhaps slightly asset sensitive management sought shift scenario assets reprice faster liabilities therefore rising rate environment bank’s interest margin tend widen rates fall rapidly past three years bank’s cost funds hit economic floor asset yields flatten become slightly variable net result management attempting poise bank’s interest margin increase interest rates rise ability management accomplish objective dependent largely ability manage cost transaction savings accounts accounted 436 average interestbearing liabilities 2004 cost interestbearing liabilities 227 2004 252 2003 312 2002 borrowings federal home loan bank fhlb fixed rate prevented bank’s cost funds decreasing rapidly three years impact fixed rates borrowings would significant 2004 management chosen effectively hedge rates 30 million notional amount swap contract described note 1 financial statements contained elsewhere report swap contract reduced interest expense 2004 323 thousand management anticipates bank’s cost funds positively impacted next seven months 15 million fhlb borrowings mature borrowings replaced lower cost funds considering bank’s yield interestbearing assets 642 2004 675 2003 735 2002 impact decreasing rates asset yields pronounced 2002 2003 even less significant 2004 suggests bank may reached plateau net interest margin rates rose second half 2004 bank’s net interest margin also began expand trend supports management’s strategy increasing asset sensitivity order create upside net interest margin increasing market rates additionally market rates declining management sought implement interest rate floors adjustable rate loans thereby minimizing negative impact falling interest rates following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities tax equivalent basis assuming rate 34 table 1 average consolidated balance sheets net interest analysis thousands nonaccrual loans interest income recorded loans included yield calculation loans periods reported following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate bank assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table 2 changes interest income expense tax equivalent basis thousands income expense income 2004 56 million unchanged 2003 change income 2002 2003 increase 303 thousand 58 increase income primarily due increase volume service charges deposit accounts service charges deposit accounts increased average 119 last two years increase due insufficient funds charges service charges increased new account activity mortgage origination fees decreased 449 2003 2004 decrease less 1 2002 2003 beginning last half 2003 bank experienced slowdown mortgage refinance activity management expected would recover refinance boom took place part 2003 2002 ended however continued low rates increased housing growth maintained normalized volume new home financing bank’s market area particularly northern part carroll northern part douglas southern part paulding counties miscellaneous income 2003 2004 increased 62 thousand 100 decreased 201 thousand 243 2002 2003 increase miscellaneous income 2003 2004 attributable number items none particularly notable increases generally attributable volume increases miscellaneous fees 2003 2004 decrease miscellaneous income 2002 2003 attributable bank settling interest rate swap position accounted fair value hedge august 2002 recognizing nonrecurring gain year 253 thousand expenses increased 912 thousand 72 2004 2003 624 thousand 51 2003 2002 salaries employee benefits increased 499 thousand 65 2003 2004 439 thousand 61 2002 2003 occupancy expense increased 135 thousand 75 2003 2004 comparing 2002 2003 occupancy expense increased 163 thousand 99 2002 2003 operating expenses include professional fees increased 278 thousand 84 2003 2004 increased 22 thousand 07 2002 2003 increase salaries employee benefits years ended 2003 2004 attributable number factors salary costs increased 212 thousand 42 primarily attributable annual raises since full time equivalent number employees significantly change 2003 2004 profit sharing bonus costs increased 201 thousand 137 attributable bonus program introduced 2004 lending staff effort increase loan production profit sharing bonuses also increased slightly increased profitability increases bonus percentages improved asset quality health insurance costs increased 55 thousand 81 increase attributable premium increase company’s health insurance carrier company two full time equivalent employees end 2003 end 2002 increase salaries benefits 2002 2003 439 thousand 61 increase salaries employee benefits years ended 2002 2003 attributable number factors salary costs increased 299 thousand 62 attributable annual raises amounted approximately 4 slight increase full time equivalent employees profit sharing bonus costs increased 78 thousand 56 attributable increased profitability expansion bonus pool health insurance costs increased 87 thousand 147 attributable primarily increase premiums although number covered employees also increased slightly 2003 increase occupancy expense 2004 2003 primarily attributable increase depreciation expense 56 thousand 65 management company’s board directors elected continue update bank’s technology particularly outdated personal computers additionally company refurbished main office branch locations 2003 capital investment full year depreciation 2004 increase occupancy expense 2003 compared 2002 primarily attributable increase depreciation expense 118 thousand 158 depreciation expense also due capital investment bank’s technology updating appearance bank’s main office selected branches actually completed 2003 operating expenses increased 278 thousand 84 2004 2003 legal accounting professional fees totaled 623 thousand 408 thousand 520 thousand 2004 2003 2002 respectively increase legal accounting professional fees 2003 2004 215 thousand 527 bank incurred consulting costs associated executive management change resulting retirement bank’s president first quarter 2004 cost resulted successful transition duties among existing executive management team additionally 2004 company’s cost complying provisions sarbanes oxley act 2002 increased approximately 80 thousand income taxes expressed percentage earnings income taxes marginal tax rate declined 307 2004 317 2003 325 2002 decline marginal tax rate past three years primarily attributable tax credits tax advantaged instruments municipal securities purchased bank additionally october 2002 bank formed wgnb investments inc nevada corporation manage hold trade securities bank effect reducing state income tax liability 2002 2003 2004 balance sheet overview years ended december 31 2004 2003 general 2004 average total assets increased 442 million 115 average deposits increased 293 million 99 average loans increased 423 million 147 average balances recorded 2003 average total assets increased 270 million 75 average deposits increased 172 million 62 average loans increased 251 million 95 amounts recorded 2002 based average balances growth rates greater 2004 2003 2004 percentage growth representative bank’s historical growth rate 2003 percentage growth rate management believes growth 2003 stalled recessionary period began beginning 2002 continued least first half 2003 time commercial enterprises declined expand businesses individuals held spending economic picture locally nationally improved total assets december 31 2004 442 million representing 487 million 124 increase december 31 2003 total deposits increased 351 million 116 2003 2004 total loans increased 604 million 204 2004 management attempted channel excess liquidity new loans loan demand rebounded last half 2003 decline early part year loan demand remained robust 2004 much growth concentrated second half 2004 60 million total loan growth 2004 funded investment federal funds sold totaling 15 million increase deposits 35 million borrowings fhlb 10 million increase deposits 2004 attributable increase noninterest bearing demand accounts 45 million 113 increase time deposit accounts 346 million 305 interest bearing demand accounts actually decreased 47 million 34 2004 decrease occurring december 2004 decline interest bearing demand accounts december 2004 resulted reduction public funds end 2004 certain public entities collect tax revenue typically liquidity remains deposited past year end 2004 funds disbursed year end indicated bank funded loan growth liquidity existed balance sheet subsequently borrowed funds fhlb attracted deposits needed loan growth bank began campaign increase time deposits local national sources mid2004 successful attracting funding minimal increase cost funds total assets december 31 2003 393 million representing 81 million 21 increase december 31 2002 total deposits increased 46 million 15 2002 2003 total loans increased 230 million 84 2003 management attempted invest excess liquidity loans 2003 federal funds sold decreased 190 million total loans increased 230 million investments availablefor sale heldtomaturity increased 39 million decrease federal funds sold increase deposits primarily funded loan investment portfolio growth 2003 2004 five denovo banks began operations contiguous primary service area competition funding increased significantly 2004 loan growth outpaced deposit growth carroll county funding landscape changed along bank’s deposit strategy changed 2004 almost 60 year history bank relied “in market” deposits fund balance sheet growth continued development metropolitan atlanta movement westward loan demand preceded actual movement deposits management expects dynamic continue intends expand deposit gathering strategy towards greater use wholesale market funding sources investments company’s availableforsale investment portfolio 609 million december 31 2004 consisted primarily debt securities provide company source liquidity stable source income vehicle implement asset liability management strategies availableforsale portfolio increased 56 million 101 availableforsale securities december 31 2003 company believes investment portfolio provides balance interest rate credit risk categories balance sheet portfolio also provides vehicle investment available funds supplying securities pledge required collateral certain public deposits securities reported availableforsale stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part company’s overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 48 million december 31 2004 increase 585 thousand 138 compared prior year increase attributable purchase banking industry issued trust preferred securities various issuers across united states particularly southeast company intent ability hold securities maturity following table shows carrying value company’s securities security type december 31 2004 2003 2002 table 3 securities thousands following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2004 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table 4 expected maturity securities thousands mortgagebacked securities included maturities categories anticipated repaid based scheduled maturities actual cash flow mortgage backed securities differs assumption additionally agency securities portfolio call features analysis assumes callable agencies mature final maturity date actual cash flow agency securities may differ assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions bank routine basis evaluates concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions loantodeposit ratios industry trends primary types loans bank’s portfolio residential mortgages home equity loans commercial real estate loans commercial loans consumer installment loans generally bank underwrites loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan exceptions bank’s general policy employ relatively conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans emphasizing lower gross debt ratios consumer loans lower loantovalue ratios types real estate loans given localized nature bank’s lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal shareholders company directors officers bank subject limitations federal reserve principal effect require extensions credit bank executive officers directors ten percent shareholders satisfy certain standards bank routinely makes loans ordinary course business certain directors executive officers company bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2004 loans outstanding directors executive officers company bank associates members immediate families totaled 38 million net participations sold banks nonrecourse basis represented approximately 11 total loans date december 31 2004 none loans outstanding bank related parties nonaccrual past due restructured considered management potential problem loan following table presents loans type dates indicated table 5 loan portfolio thousands following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction mortgage loans consumer loans december 31 2004 table 6 loan portfolio maturity thousands variablefixed rate mix provision allowance possible loan lease losses provision loan losses company 2004 925 thousand compared 350 thousand 2003 483 thousand 2002 increase provision loan losses reflects higher level loan growth 2004 allowance loan losses represented 115 117 138 total loans outstanding december 31 2004 2003 2002 respectively percentage allowance loan losses expressed percentage total loans declined 2003 2002 taking account lower level nonperforming adversely rated loans 2004 net chargeoffs 324 thousand 643 thousand 431 thousand 2004 2003 2002 respectively company independent loan review function loans placed loan grade categories consistent used bank’s regulators loans constantly monitored loan officer loan review function credit quality consistency accuracy grading process bank assures timely recognition credit risks general credit risk increases level allowance loan loss also increase formal allowance loan loss adequacy test performed month end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications additionally evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations management’s judgment determining adequacy allowance based evaluations collectability loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades five eight represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one four stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses loans deemed impaired evaluated individually measure probable loss credit management uses internal loan reviewer independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate however management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions change borrowers’ ability repay addition regulators integral part examination process periodically review company’s allowance loan losses regulators may require company recognize additions allowance based judgments information available time examination management company realizes importance maintaining adequate allowance loan losses professional loan review function effective loan officer identification program management believes able recognize weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance company’s position minimize potential loss problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list company’s migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio cases significant weaknesses exist specific loan specific reserve assigned loan addition general allowance company also evaluates risks associated concentrations credit necessary assign allowance related concentrations credit company adds specific reserve related risks first quarter 2003 bank accepted cash workout nine classified loans amounted 33 million recorded chargeoff amount 337 thousand bank workouts loans 2004 following table presents summary changes allowance loan losses years indicated table 7 allowance loan losses thousands nonperforming assets past due loans nonperforming assets december 31 2004 18 million 50 total loans real estate owned compared 22 million 75 total loans real estate owned december 31 2003 28 million 103 total loans real estate owned december 31 2002 levels nonperforming loans remain relatively low compared bank’s peer group historical level percentage nonperforming assets total loans decreased peak 2001 decrease nonperforming loans 2003 2004 attributable repayment loans nonaccrual reduction loans ninety days past due still accruing bank sold 10 million real estate owned loss 52 thousand 2004 however bank also settled loans foreclosure 2004 amount 794 thousand following table summarizes loans 90 days greater past due nonaccrual loans real estate taken settlement foreclosure years indicated table 8 nonperforming assets thousands may additional loans portfolio may become classified conditions indicate management aware potential problem loans disclosed table result management’s ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest original terms exceptions allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal bank’s loan review function monitors selected accruing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function also identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect company’s liquidity capital resources operations deposits time deposits 100 thousand greater totaled 555 million december 31 2004 compared 310 million yearend 2003 411 million yearend 2002 following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2004 table 9 deposits thousands liquidity bank must maintain daily basis sufficient funds cover withdrawals depositors’ accounts supply potential borrowers funds meet obligations bank keeps cash hand maintains account balances correspondent banks purchases sells federal funds shortterm investments asset liability maturities monitored attempt match variables meet liquidity needs policy bank monitor liquidity meet regulatory requirements local funding requirements management believes bank’s current level liquidity adequate meet needs bank maintains relationships correspondent banks including federal home loan bank provide funds short notice needed bank arrangements correspondent commercial banks short term unsecured advances 200 million december 31 2004 bank drawn available facilities addition subject collateral availability bank line credit fhlb bank drawn 55 million december 31 2004 additional details line credit fhlb see note 6 consolidated financial statements company’s cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents amounted 81 million december 31 2004 represented decrease 192 million december 31 2003 decrease primarily attributable net cash used investing activities 690 million made 614 million increased loans 68 million net increase investment securities cash flow uses offset net cash provided financing activities primarily attributable net increase deposits 351 million 100 million fhlb borrowings cash inflows operations totaled 75 million 2004 cash flows 2003 similar 2004 nature except less volume loan funding deposit generating cash inflows operations totaled 73 million 2003 inflows financing activities totaled 23 million net deposit increases 2003 46 million investing activities bank company used 300 million cash equivalents primarily comprised net changes loans 245 million net increase investment securities 40 million 2003 capital resources total shareholders’ equity december 31 2004 450 million increase 29 million 2003 change equity due 61 million net income less 26 million dividends decrease unrealized holding gain securities available sale 265 thousand net tax occ established certain minimum riskbased capital standards apply national banks company subject certain capital requirements imposed federal reserve december 31 2004 bank exceeded applicable regulatory capital requirements classification “well capitalized” bank company satisfied applicable regulatory requirements imposed federal reserve following tables present company’s regulatory capital position december 31 2004 table 10 complete discussion actual required ratios company subsidiaries see note 9 consolidated financial statements average equity average assets 1020 2004 1059 2003 ratio dividends declared net earnings 423 2004 compared 383 2003 contractual obligations ordinary course operations company enters certain contractual obligations following table summarizes company’s significant fixed determinable contractual obligations payment date december 31 2004 dollars thousands balance sheet risk operations bank company made contractual commitments extend credit ordinary course business activities commitments legally binding agreements lend money bank’s customers predetermined interest rates specified period time december 31 2004 bank issued commitments extend credit 680 million various types commercial lending arrangements additional commitments standby letters credit 84 million company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based credit evaluation borrower collateral varies may include accounts receivable inventory property plant equipment commercial residential real estate company manages credit risk commitments subjecting normal underwriting risk management processes commitments generally fixed expiration dates many expire without drawn upon total commitment level necessarily represent future cash requirements needed fund outstanding commitments company ability liquidate federal funds sold securities availableforsale shortterm basis borrow purchase federal funds financial institutions assetliability management company’s objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize company’s exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure bank’s interest rate exposure repricing gap calculated taking assets reprice mature within given time frame subtracting liabilities reprice mature within time frame difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates bank’s net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates bank’s net interest income decrease rates fall increase rates rise company adopted objective achieving maintaining oneyear cumulative gap percent total assets plus 20 minus 20 consolidated basis company’s oneyear cumulative gap positive 080 total assets december 31 2004 position indicated company exposed potential decreased earnings interest rates continue decline next twelve months due inherent limitations traditional gap analysis company also employs sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk company’s loan investment portfolios significantly impact company’s profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2004 estimated impact immediate increase interest rates 100 basis points would resulted increase net interest income 12month period 04 comparable decrease interest rates resulting decrease net interest income 14 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition volume following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2004 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities company’s savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year subject management’s control table 11 interest rate gap sensitivity thousands december 31 2004 difference company’s assets liabilities repricing maturing within one year 99 million chart indicates excess liabilities repricing maturing within one year thus rise interest rates would theoretically cause company’s net interest income decrease however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing demand money market savings accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustablerate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation company’s operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control company including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies company results operations predictable item 7a item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided wgnb’s consolidated financial statements accompanying footnotes use words like “we” “us” “our” like referring wgnb together subsidiary first national bank cautionary notice regarding forwardlooking statements certain statements made report documents incorporated reference herein including matters discussed caption “management’s discussion analysis financial condition results operations” well oral statements made company officers directors employees may constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended “exchange act” forwardlooking statements based management’s beliefs current expectations estimates projections financial services industry economy company bank general words “expect” “anticipate” “intend” “plan” “believe” “seek” “estimate” similar expressions intended identify forwardlooking statements forwardlooking statements guarantees future performance subject risks uncertainties factors may cause actual results performance achievements differ materially historical results expressed implied forwardlooking statements caution readers following important factors among others could cause actual results differ materially forwardlooking statements contained report · effect changes laws regulations including federal state banking laws regulations must comply associated costs compliance laws regulations either currently future applicable · effect changes accounting policies standards guidelines principles may adopted regulatory agencies well financial accounting standards board · effect changes organization compensation benefit plans · effect competitive position within market area increasing consolidation within banking financial services industries including increased competition larger regional outofstate banking organizations well nonbank providers various financial services · effect changes interest rates · effect changes business cycle downturns local regional national economies · matters described part item 1a risk factors caution foregoing list important factors exclusive factors may impact operations critical accounting policies established various accounting policies govern application accounting principles generally accepted united states america preparation financial statements significant accounting policies described notes consolidated financial statements certain accounting policies involve significant judgments assumptions management material impact carrying value certain assets liabilities management considers accounting policies critical accounting policies judgments assumptions used management based historical experience factors believed reasonable circumstances nature judgments assumptions made management actual results could differ judgments estimates could material impact carrying value assets liabilities results operations accounting policies important policies described notes consolidated financial statements reviewed greater understanding financial performance recorded reported believe allowance loan losses critical accounting policy requires significant judgments estimates used preparation consolidated financial statements allowance loan losses represents management’s estimate probable loan losses inherent loan portfolio calculation allowance loan losses critical accounting estimate due significant judgment assumptions estimates related amount timing estimated losses consideration current historical trends amount timing cash flows related impaired loans please refer section report entitled “balance sheet review provision allowance possible loan lease losses” note 1 note 4 consolidated financial statements detailed description estimation processes methodology related allowance loan losses earnings overview years ended december 31 2007 2006 2005 net earnings 30 million 2007 83 million 2006 71 million 2005 representing decrease 636 fiscal years 2006 2007 increase 178 fiscal years 2005 2006 net earnings per share fully diluted basis 055 2007 166 2006 141 2005 representing decrease 669 fiscal years 2006 2007 increase 177 fiscal years 2005 2006 prior material subsequent event based provision writedowns knew december 31 2007 recorded earnings 73 million 132 earnings per diluted share december 31 2007 return average assets 2007 041 return average shareholders’ total equity 2007 437 return average tangible equity 2007 555 compared 151 return average assets 1654 return average equity 2006 141 return average assets 1508 return average equity 2005 past ten years return average assets averaged 137 return average equity averaged 1406 historically earnings driven primarily balance sheet growth particularly loans attaining greater overhead efficiency two major developments 2007 impacted earnings growth first completed merger first haralson effective july 2007 increased earnings number shares outstanding last half 2007 anticipated merger would neither materially accretive dilutive first twelve months following merger analysis took account nonrecurring nonoperating merger costs estimated cost savings twelve month period expected average number shares outstanding based elections first haralson shareholders connection merger incurred nonrecurring nonoperating merger expenses amount 535 thousand 327 thousand net applicable tax nonrecurring nonoperating merger expenses net applicable taxes reduced diluted earnings per share 006 however overall effect merger twelve month period last six months 2007 first six months 2008 expected material impact diluted earnings per share second began experience asset quality issues third quarter 2007 period nonperforming assets increased 66 million june 30 2007 583 million december 31 2007 including revision attributable material subsequent event increase approximately 517 million 783 majority nonperforming asset increase attributable sixteen residential real estate construction development loan relationships last half 2007 experienced net chargedoff loans 49 million resulted recording loan loss provision amount 94 million second half 2007 including addition attributable material subsequent event additionally chargedoff accrued interest impaired loans amount 473 thousand incurred 804 thousand additional chargedown foreclosed property adjustment updated appraisals foreclosed property total increased provision loan losses chargeoff accrued interest chargedown foreclosed property impact reducing earnings 66 million net applicable taxes 119 per diluted share take account expenses incurred collection loans maintenance properties taken foreclosure discussed elsewhere diversion management’s focus toward collection loans rather production loans items specifically identified diluted earnings per share would approximately 180 84 increase 2006 diluted earnings per share amount 166 acquired loans first haralson impact level nonperforming assets except increase total loan portfolio thereby reducing percentage nonperforming assets total loans much said slowdown metroatlanta residential real estate market past six months question subprime mortgage production subsequent default rate impact construction development loan customers actually produce subprime mortgages excess inventory residential homes lots produced foreclosure subprime loans overbuilding meet demand subprime lending negative impact home values increased time takes sell existing inventory economics significant impact borrower’s ability carry construction development project thereby reduce quality construction development loan portfolio despite experiencing nonperforming assets earnings positively impacted earning asset growth 2007 experienced total loan growth 186 million 391 loan growth includes total loans acquired merger amount 1382 million constituted 744 loan growth experienced 2007 grew total loans 474 million 100 organically 2007 compared loan growth 506 million 119 2006 668 million 187 2005 average loan growth rate past ten years 163 consequently 2007 loan growth less average compared 10 year average ability grow loans quality quantity important ability grow earnings core business lending management maintains underwriting pricing policies procedures designed grow revenues significantly increasing credit interest rate risk exposure much loan growth experienced 2007 took place first half 2007 another key component earnings net interest margin able maintain interest margin actively managing interest rate risk exposure net interest margin compressed 2007 compared 2006 2005 compression net interest margin take place balance sheet protected impact changes market interest rates case balance sheet 2007 completely immune compression interest margin due interest rate risk neutral changes short term market interest rates 2007 however experience interest margin compression 2007 decrease due increase nonperforming assets impact chargingoff accrued unpaid interest impaired loans net interest margin 2007 433 compared 460 2006 437 2005 comparing 2007 2006 two significant financial occurrences fourth quarter 2006 positively impacted net earnings 2006 first realized gain foreclosed property amount 232 thousand fourth quarter 2006 gain considered nonrecurring nature second fourth quarter 2006 earned federal tax credits approximately 144 thousand recognized low moderate income housing project partner tax credits recur 2007 benefit us next nine years finally management continually seeks increase revenues controlling costs 2007 overhead ratio noninterest expensenet interest income plus noninterest income 636 compared 555 2006 557 2005 increase overhead ratio primarily due merger costs impact increased carrying cost nonperforming assets nonperforming assets reduced merger costs absorbed overhead ratio expected decrease net interest income operational results primarily depend earnings bank depend large degree ability generate net interest income net interest income represented 780 785 769 net interest income plus income 2007 2006 2005 respectively following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets loans investment securities federal funds sold average rate paid interest bearing liabilities deposits borrowings interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income increased 53 million 226 2007 2006 34 million 170 2006 2005 net interest income 2007 288 million compared 234 million 2006 200 million 2005 net interest margin interest earning assets 433 2007 460 437 2005 tax equivalent basis beginning early 2001 end 2003 short term interest rates dropped basis points first half 2007 however short term interest rates rebounded 575 basis points beginning last half 2007 short term interest rates declined likely continue decline economic policymakers attempt avoid recession 2008 provide relief subprime homeowners broad fluctuations significant impact us without robust interest rate risk management seek manage interest rate risk fluctuations market rates significant negative impact earnings throughout period increasing decreasing rates margin compressed expanded although extreme volatility short term market interest rates fluctuated comparing 2007 2006 net interest margin decreased 27 basis points 460 2006 433 2007 however interest margin similar 2005 437 believe management’s interest rate risk strategies mitigated effects rapidly changing shortterm interest rates decrease 2008 anticipate margin may compress slightly due rate changes recover six month period interestbearing liabilities reprice primary component interest margin compression 2007 due increase nonperforming loans writeoff accrued interest impaired loans longer carry nonperforming assets balance sheet compressed interest margin becomes use interestbearing liabilities fund noninterest bearing assets thereby reducing net interest margin reduction exasperated chargeoff previously accrued interest stated previously nonperforming assets increased 66 million june 30 2007 583 million december 31 2007 balance nonperforming assets remains calculation net interest margin even though earning status chargedoff interest last half 2007 impaired loans amount 473 thousand also subtracted interest income consequently nonearning asset also chargedoff interest negative impact interest margin 2007 average yield earning assets 2007 830 increase 12 basis points compared 2006 average cost funds 457 2007 increase 30 basis points 2006 yield total loans 2007 865 yield would approximately 882 473 thousand charged interest reduced average balance total loans average nonaccrual loans year 58 million consequently impact loan yield isolating effect nonperforming assets 17 basis points impact nonperforming assets net interest spread 13 basis points 2007 impact nonperforming assets net interest margin could greater 2008 unless average balance nonperforming assets reduced management able minimize amount future chargedoff interest balance sheet traditionally slightly asset sensitive 2005 2007 progressed management sought become evenly matched preparation possibility declining rates management sought shift scenario assets reprice similar fashion slower liabilities therefore falling rate environment interest margin tend increase combining first haralson management studied impact combining interest rate risk position wgnb first haralson found combination produced institution neutral interest rate changes wgnb slightly assetsensitive neutral first haralson slightly liability sensitive produced combination almost neutral interest rate fluctuations one year period one final factor change volume interest income interest expense acquisition assets liabilities first haralson july 1 2007 first haralson’s net interest margin less therefore management estimated combination would dilute net interest margin however volume net interest income mitigated dilutive factor combination companies effective date combination added 92 million federal funds sold 423 million investment securities 1380 million total loans earning assets 1595 million interestbearing deposits 75 million borrowed funds 213 million noninterestbearing deposits following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities tax equivalent basis assuming rate 34 table average consolidated balance sheets net interest analysis thousands nonaccrual loans interest income recorded chargedoff loans included yield calculation loans periods reported following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate us assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table changes interest income expense tax equivalent basis thousands income 2007 841 million increase 17 million 260 compared 2006 increase income 2005 2006 396 thousand 66 increase noninterest income 2007 attributable combination wgnb first haralson last half 2007 first haralson contributed volume service charges deposit accounts atm network fees miscellaneous income another major contributor increase noninterest income due fact realized full year brokerage fees 2007 recently implemented brokerage wealth management operation accounted increase 507 thousand 391 brokerage fees 2006 2007 increase income 2005 2006 attributable certain gains realized 2006 2005 fourth quarter 2006 recognized gain sale foreclosed property amount 232 thousand 2005 recognized gain investment securities available sale amount 228 thousand management rarely elects sell investment securities however particular sale strategy allowed us reposition portfolio rising rates recognize gain associated sale investment securities accomplish selling 38 million bonds approximately 5 portfolio service charges deposit accounts experienced decline 2005 result implementation free checking program accounted greatest increase noninterest income 2006 2007 increase service charges deposit accounts 2006 2007 13 million 321 prior combination first haralson averaged approximately 180 thousand per month service charges deposit accounts thus approximately 11 million increase service charges deposit accounts 2006 2007 attributable revenue derived first haralson’s customer base last six months 2007 remaining 200 thousand increase service charges deposit accounts attributable combined entity’s ability increase combined customer base much enhanced revenue attributable increased overdraft fee income 2007 compared 2006 brokerage wealth management business significant contributor fee income us 2007 wealth management division cumulatively profitable poised contribute significantly earnings future stated increase brokerage fees attributable twelve months operation 2007 compared four months 2006 significant income brokerage fees 2005 first haralson averaged approximately 8 thousand per month brokerage fees prior merger atm network fees increased 270 thousand 347 2007 compared 2006 275 thousand 548 2006 compared 2005 increase continues attributable increased foreign nonwgnb customers usage expanding atm network well increased volume atm debit card revenue attributable addition first haralson’s atm operations wgnb loss sale writedown foreclosed property amount 729 thousand attributable cumulative recognition net gains disposal foreclosed property amount 75 thousand fourth quarter writedown foreclosed property 804 thousand management active continuous valuation property writedown foreclosed property occurred received updated appraisals certain foreclosed properties held indicated need writedown net loss sale writedown foreclosed property fourth quarter compares 2006 fourth quarter gain sale foreclosed property amount 232 thousand included total gain 243 thousand 2006 miscellaneous income 2006 2007 increased 559 thousand 699 2007 recognized 237 thousand gain market value fair value swap described note 10 consolidated financial statements “commitments contingencies derivative instruments hedging activities” compared gain 2006 addition received distribution 118 thousand business development partnership member first quarter 2007 nonrecurring nature also included miscellaneous income 2007 79 thousand income insurance contracts owned first haralson connection supplemental employee retirement plan see note 14 consolidated financial statements “supplemental employee retirement plan” late fees loans included miscellaneous income late fees loans exceeded late fees loans 2006 72 thousand remainder increase miscellaneous income attributable addition first haralson’s miscellaneous revenue line items contributed growth volume fees 2006 2007 miscellaneous income flat 2005 2006 expense expenses increased 68 million 413 2007 2006 21 million 142 2006 2005 case net interest income primary reason increased expenses six months operations include first haralson business increased salaries employee benefits comprised half increase expenses 2007 2006 2005 salaries employee benefits increased 40 million 401 2006 2007 12 million 140 2005 2006 operating expenses increased 19 million 463 occupancy expenses increased 898 thousand 374 comparing 2007 2006 attributable six months operations included first haralson nonrecurring merger costs level noninterest expense absorbed combination first haralson much line management expected based upon due diligence estimation merger costs attainable cost savings first six months following merger offered certain employees voluntary retirement package accepted offerees including certain wgnb employees cost expensed period incurred increase expenses percentage basis material relation year growth increases expected terms asset size first haralson approximately 211 million assets closing merger asset size prior merger 623 million consequently first haralson one third size employed 85 people immediately preceding closing merger management expected revenue expenses would increase 30 40 every category first haralson operated seven branches haralson carroll counties one closed merger carrollton location conversion two operating systems went smoothly time consuming required available human resources companies addition first haralson acquisition added commercial loan production office second banco de progreso location coweta county 2007 also entire year operations chapel hill location douglas county initial banco de progreso location carroll county put service 2006 management expected significant increase expense related expansion efforts increase salaries benefits occupancy operating expense reflected fact believe investment expansion ultimately provide enhanced return shareholders increase salaries benefits 2006 2007 described follows salaries including overtime related payroll taxes increased 30 million 426 profit sharing 401k bonuses deferred compensation expense stock option expense increased 562 thousand 265 employee benefits primarily include employee health life insurance expense increased 467 thousand 536 stockbased compensation expense methodology described fully note 1 consolidated financial statements “stock compensation plans” deferred compensation expense fully described note 14 consolidated financial statements “supplemental employee retirement plan” 186 full time equivalent employees june 30 2007 july 2 2007 added 81 full time equivalent employees increase 435 result first haralson acquisition additional employee count last half 2007 accounted nearly increase salaries benefits year annual salary increases accounted approximately 4 increase 2007 addition two full time equivalent employees loan production office second quarter 2007 five employees second banco de progreso office second quarter less impact salaries merger annual salary increases prior acquisition negotiated certain first haralson executive officers buyout employment contracts expenditures included transaction costs merger thus expensed 2007 however offered voluntary retirement package throughout combined organization post merger certain employees exercised offer resulted expensing approximately 271 thousand salary payroll tax expense related voluntary retirement connection merger subsequent conversion operating systems also incurred 62 thousand overtime expense directly related conversion management considers voluntary retirement offer overtime nonrecurring nature increase profit sharing 401k bonuses deferred compensation employee health life insurance expense similarly attributable merger location expansions completed 2006 2007 occupancy expense increased 898 thousand 374 2007 compared 2006 attributable merger branch expansion previously discussed occupancy expense increased 268 thousand 126 2006 compared 2005 primarily related branch expansion included addition chapel hill branch douglasville banco de progreso branch carrollton 2006 addition seek maintain operating technology high level includes capital purchases personal computers operating equipment software many capital items shorter depreciable lives therefore impact depreciation expense dramatically longerlived assets occupancy expense branches including additional branches first haralson administrative operations offices comprise six major components depreciation utilities property tax operating leases repairs maintenance expense depreciation expense 2007 increased 315 thousand 277 compared 2006 increased 86 thousand 82 compared 2005 likewise utilities expense increased 239 thousand 499 comparing 2007 2006 increased 87 thousand 222 comparing 2006 2005 occupancy expense including property taxes repairs operating leases maintenance increased 344 thousand 434 comparing 2007 2006 increased 95 thousand 132 comparing 2006 2005 operating expenses increased 19 million 463 2006 2007 increased 565 thousand 156 2005 2006 operating expense includes expenses loans professional accounting regulatory fees atm network fees advertising charitable contributions number expenses largest expense category 2007 expense relating loans unusual us total expense loans includes miscellaneous loss loan collection costs expense foreclosed property legal expense related loans appraisal fees increased 333 thousand 1506 comparing 2007 2006 increase expense loans related merger increase due decrease credit quality discussed detail elsewhere report took place last half 2007 expense related foreclosed property increased 158 thousand reflective increase amount foreclosed real estate 2007 expense includes real estate taxes maintenance repairs foreclosed property collection miscellaneous loss loans legal appraisal fees related collection efforts troubled loans increased 175 thousand 2006 2007 increase type expense concern management represents another factor limiting holding period real estate taken foreclosure operating expense includes expenses supplies printing checks paper envelopes related generation customer statements bank operations also includes office supplies letterhead regulatory documentation promotional items redesigned accommodate new name logo 2006 expensed 365 thousand supplies expense compared 558 thousand 2007 increase 193 thousand 528 merger related expenditures supplies 96 thousand 2007 expense reprinting redesign statements promotional literature expected repeated future number customer accounts increased approximately 30 35 merger cause supply expenses increase future result increased volume another expenditure directly related volume customer accounts carry technology data processing expense including software maintenance expense technology data atm debit card processing expense increased 276 thousand 387 comparing 2006 2007 included increase 20 thousand related conversion operating systems connection merger recur postage freight also customer account volume related increased 103 thousand 380 2006 2007 accounting professional fees increased 128 thousand 277 2006 2007 18 thousand 29 2005 2006 increase accounting professional fees less merger internal audit costs incurred order compliance sarbanesoxley section 404 proven costly past three four years first haralson adopted wgnb’s control matrix consequently believe costs spread broader asset base advertising expense increased 2007 91 thousand 362 48 thousand increase related promoting newly combined institution educating market regard name change transportation travel education seminar related expenses increased 132 thousand 656 miscellaneous expense increased 182 thousand 725 2006 2007 items included miscellaneous expense customer employee appreciation gifts functions amortization investment tax credits portfolio management fees seasonal decorations facilities employee health programs community appreciation programs much increase resulted amortization tax credits amount 129 thousand 32 thousand nonrecurring expense new employee apparel reflecting name change merger miscellaneous expense increased 51 thousand 256 2005 2006 due increased annual meeting costs employee functions employment fees income taxes expressed percentage earnings income taxes effective tax rate 42 2007 293 2006 290 2005 purchase tax credits tax advantaged instruments municipal securities us late 2006 2007 impact effective tax rate earnings large provision loan loss reduced income extent tax advantaged instruments greater 2007 previous years balance sheet overview years ended december 31 2007 2006 general 2007 average total assets increased 1912 million 348 average deposits increased 1540 million 350 average loans increased 1385 million 313 average balances recorded 2006 average total assets increased 485 million 97 average deposits increased 467 million 119 average loans increased 459 million 116 amounts recorded 2005 10 year average growth rate assets loans deposits 168 164 158 respectively asset growth past two years attributable robust commercial residential growth market area experienced significant loan growth recent history provided us ability expand new markets total assets december 31 2007 8837 million representing 3083 million 536 increase december 31 2006 merger significant impact asset loan deposit growth 2007 effective july 1 2007 first haralson transferred approximately 212 million total assets 136 million net loans 181 million total deposits growth rates include mergeracquired assets grew organically well excluding impact merger grew total assets 963 million 167 total loans 474 million 100 total deposits 626 million 135 included total asset growth increase intangible assets amount 297 million excluding impact merger intangible assets grew total assets 665 million 116 notable development balance sheet 2007 significant increase level nonperforming assets include impaired loans nonaccrual status loans ninety days past due foreclosed property december 31 2006 nonperforming assets 43 million 09 total loans june 30 2007 nonperforming assets 66 million 128 total loans december 31 2007 nonperforming assets 583 million 88 total loans thus six month period nonperforming assets grew 517 million 783 including material subsequent event occurred march 2008 growth nonperforming assets indicative rapid slowdown residential real estate market entire metroatlanta market area loans affected slowdown include residential construction development management views condition greatest priority focus sees reduction nonperforming assets imperative return high performance management intends reduce level nonperforming assets dependent great extent improvement residential real estate market investments availableforsale investment portfolio 1227 million december 31 2007 consisted primarily debt securities provide us source liquidity stable source income vehicle implement asset liability management strategies amount availableforsale securities portfolio increased significantly compared december 31 2006 investment portfolio grew 584 million 910 2006 2007 acquired 423 million securities first haralson merger additionally increased availableforsale investment portfolio 161 million 250 significant growth compared historical growth portfolio 2007 spread wholesale borrowing debt securities five year high management took advantage spread purchasing debt securities particularly municipal mortgagebacked securities agreement repurchase locked 500 thousand worth net interest income per year next two years see note 8 consolidated financial statements “securities sold repurchase agreement” believe investment portfolio provides balance interest rate credit risk categories balance sheet portfolio also provides vehicle investment available funds supplying securities pledge required collateral certain public deposits securities reported availableforsale stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 79 million december 31 2007 increase 645 thousand 08 compared year ended 2006 portfolio consists banking industry issued trust preferred securities various issuers across united states particularly southeast intent ability hold securities maturity following table shows carrying value securities security type december 31 2007 2006 2005 table securities following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2007 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table expected maturity securities thousands mortgagebacked securities included maturities categories anticipated repaid based average maturities actual cash flow mortgagebacked securities differs assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions routine basis evaluate concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions loantodeposit ratios industry trends primary types loans portfolio residential mortgages home equity construction commercial real estate commercial consumer installment loans generally underwrite loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan exceptions general policy employ relatively conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans emphasizing lower gross debt ratios consumer loans lower loantovalue ratios types real estate loans given localized nature lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal shareholders wgnb directors officers first national bank subject limitations federal reserve principal effect require extensions credit us executive officers directors ten percent shareholders satisfy certain standards routinely make loans ordinary course business certain directors executive officers wgnb first national bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2007 loans outstanding directors executive officers wgnb first national bank associates members immediate families totaled 123 million represented approximately 19 total loans date december 31 2007 none loans outstanding related parties nonaccrual past due restructured following table presents loans type dates indicated table loan portfolio thousands following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction includes nonperforming loans mortgage loans consumer loans december 31 2007 table loan portfolio maturity thousands variablefixed rate mix provision allowance possible loan lease losses provision loan losses 2007 102 million compared 15 million 2006 16 million 2005 increase provision loan losses reflects higher level nonperforming assets criticized classified loans recognized last half 2007 allowance loan losses represented 188 121 126 total loans outstanding december 31 2007 2006 2005 respectively management taken aggressive approach identification recognition potential problem loans addition management attempting recognize impairment loan continue analyze evaluate current market values collateral impaired loans independent loan review function loans placed loan grade categories consistent used regulators loans constantly monitored loan officer loan review function credit quality consistency accuracy grading process seek assure timely recognition credit risks general credit risk increases level allowance loan loss also increase uncertainty prevailing assessing loan quality formal allowance loan loss adequacy test performed month end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications additionally evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations management’s judgment determining adequacy allowance based evaluations collectability loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans nine different categories grades six nine represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one five stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses loans deemed impaired certain types classified loans evaluated individually measure probable loss credit management uses internal loan reviewer times supplemented third party service providers independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions change borrowers’ ability repay addition regulators integral part examination process periodically review allowance loan losses regulators may require us recognize additions allowance based judgments information available time examination management realizes importance maintaining adequate allowance loan losses professional loan review function effective loan officer identification program management believes able recognize weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance position minimize potential loss problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list management elected meet lenders credit staff often greater detail may stable credit quality period special attention given construction land development loans order accurately evaluate exposure loan loss portfolio migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio cases significant weaknesses exist specific loan specific reserve assigned loan also evaluate risks associated concentrations credit necessary assign allowance related concentrations credit add specific reserve related risks following table presents summary changes allowance loan losses years indicated table allowance loan losses thousands nonperforming assets past due loans nonperforming assets december 31 2007 583 million 883 total loans compared 43 million 91 total loans december 31 2006 36 million 085 total loans december 31 2005 levels nonperforming loans historic high us primary cause increase nonperforming asset level decline residential real estate market metroatlanta area past 5 years market area become connected growth metroatlanta residential real estate growth became leading industry market area years residential construction development loans averaged 33 loan portfolio recognition potential impact downturn management began raise credit standards borrowers management however surprised suddenness severity downturn came many market realize impact subprime mortgage lending absorption rate home sales market area subprime lenders began experience credit quality problems related increased rates adjustable subprime market type lending “driedup” homes built meet subprime conforming mortgage demand came market subprime demand decreased sharply homes subject subprime lending began emerging back market foreclosure resulted estimates 28 36 month supply homes sale market five six year supply developed lots excess supply negative impact residential construction development borrowers experiencing much longer expected sales time therefore holding period expense homes residential lots much higher expected time passes borrowers paying interest ownership carry properties diminished financial capacity continue hold property thus experiencing increased number past due loans lead impairment loan possible foreclosure borrowers addition borrowers may file protection bankruptcy laws lengthen collection period loan approximately 80 total amount nonperforming assets december 31 2007 made sixteen loan relationships balances 2 million 7 million per relationship management performed impairment analyses troubled loan relationship continues focus credit quality residential construction development loan portfolio impairment analysis entails evaluating net realizable value properties held collateral loans properties reappraised new appraisals evaluated management generally greater uncertainty real estate values times market downturn expected updated values came less original appraisal therefore led management suspend accrual interest certain instances chargedown balance impaired loans part evaluation collectability impaired asset management must continue make value judgments properties loans updated appraisals knowledge market assurance residential real estate values continue decline loans become impaired thereby causing potential suspension accrued interest chargedown loans management chargeddown properties taken foreclosure 804 thousand last quarter 2007 based upon updated appraisals estimated net realizable value properties decreased management’s critical priority disposing maximizing net realizable value nonperforming assets management considering multiple avenues reduce nonperforming assets holding period nonperforming assets must minimized assets bear cost carry us interest carry maintenance real estate taxes believe ultimate outcome cycle economic downturn largest uncertainty management faces next twelve months believe market high historical projected population income growth potential current downturn short term negative impact asset quality therefore earnings believe long term growth earnings outlook nonetheless remains positive following table summarizes loans 90 days greater past due nonaccrual loans real estate taken settlement foreclosure years indicated table nonperforming assets thousands may additional loans portfolio may become classified conditions dictate management aware potential problem loans disclosed table result managements ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest original terms exceptions allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal loan review function monitors selected accruing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function also identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect liquidity capital resources operations general economic downturn discussed throughout report deposits time deposits 100 thousand greater totaled 2294 million december 31 2007 compared 1454 million yearend 2006 growth time deposits 100 thousand greater 840 million 578 december 31 december 31 2007 growth category deposits attributable merger 82 million increase brokered time deposits 100 thousand greater 284 million increase resulting time deposits within market area 474 million following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2007 table maturity time deposits 100000 greater thousands liquidity must maintain daily basis sufficient funds cover withdrawals depositors accounts supply potential borrowers funds meet obligations keep cash hand maintain account balances correspondent banks purchase sell federal funds shortterm investments asset liability maturities monitored attempt match variables meet liquidity needs policy monitor liquidity meet regulatory requirements local funding requirements management believes current level liquidity adequate meet needs maintain relationships correspondent banks including federal home loan bank fhlb provide funds us short notice needed arrangements correspondent commercial banks short term unsecured advances 248 million december 31 2007 drawn available facilities addition subject collateral availability line credit fhlb drawn 545 million december 31 2007 additional details line credit fhlb see note 7 consolidated financial statements cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents amounted 258 million december 31 2007 represented increase 126 million december 31 2006 net cash provided operating activities 94 million net cash provided operating activities attributable primarily net earnings 30 million addbacks attributable noncash items depreciation amortization accretion provision loan losses totaling 116 million net cash used investing activities 784 million consisted primarily net increase loans 603 million net increase securities available sale heldtomaturity securities 152 million net cash provided financing activities totaled 816 million primarily attributable net increase deposits 627 million increase borrowings federal home loan bank advances junior subordinated debt securities sold repurchase agreement net amount 258 million capital resources total shareholders’ equity december 31 2007 802 million increase 277 million 2006 change equity due 30 million net earnings less 48 million dividends increase unrealized holding gain securities available sale cash flow derivatives 523 thousand net tax exercise stock options increased equity 61 thousand retirement shares repurchase plan swapping stock exercise options decreased equity 31 thousand largest increase equity attributable issuance 1055149 shares stock 2715 per share date merger total amount 287 million occ established certain minimum riskbased capital standards apply national banks subject certain capital requirements imposed federal reserve december 31 2007 first national bank exceeded applicable regulatory capital requirements wgnb satisfied applicable regulatory requirements imposed federal reserve following tables present consolidated regulatory capital position december 31 2007 table capital ratio complete discussion actual required ratios us subsidiary see note 12 consolidated financial statements average equity average assets 947 2007 916 2006 however average tangible equity net goodwill core deposit intangible average assets 74 ratio dividends declared net earnings 1490 2007 compared 433 2006 contractual obligations ordinary course operations enter certain contractual obligations following table summarizes significant fixed determinable contractual obligations payment date december 31 2007 dollars thousands regard federal home loan bank advances obligations contain call dates option issuer therefore advances may called prior maturity date see note 7 financial statements “lines credit” balance sheet risk operations first national bank made contractual commitments extend credit ordinary course business activities commitments legally binding agreements lend money customers predetermined interest rates specified period time december 31 2007 issued commitments extend credit 999 million various types commercial lending arrangements additional commitments standby letters credit 99 million evaluate customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary us upon extension credit based credit evaluation borrower collateral varies may include accounts receivable inventory property plant equipment commercial residential real estate manage credit risk commitments subjecting normal underwriting risk management processes commitments generally fixed expiration dates many expire without drawn upon total commitment level necessarily represent future cash requirements needed fund outstanding commitments ability liquidate federal funds sold securities availableforsale shortterm basis borrow purchase federal funds financial institutions permanent funding obtained assetliability management objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure banks interest rate exposure repricing gap calculated taking assets reprice mature within given time frame subtracting liabilities reprice mature within time frame difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates banks net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates banks net interest income decrease rates fall increase rates rise due inherent limitations traditional gap analysis also employ sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk loan investment portfolios significantly impact profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2007 estimated impact immediate increase interest rates 100 basis points would resulted decrease net interest income 12month period 086 comparable decrease interest rates resulting increase net interest income 127 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition volume following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2007 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year subject management’s control table interest rate gap sensitivity thousands december 31 2007 difference assets liabilities repricing maturing within one year 115 million chart indicates excess assets repricing maturing within one year thus rise interest rates would theoretically cause net interest income increase however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing demand money market savings accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustablerate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies us operations predictable item 7a item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations company may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided company’s consolidated financial statements accompanying footnotes cautionary notice regarding forwardlooking statements certain statements made report documents incorporated reference herein including matters discussed caption “management’s discussion analysis financial condition results operations” well oral statements made wgnb corp “company” officers directors employees may constitute forwardlooking statements within meaning section 21e securities exchange act 1934 amended “exchange act” forwardlooking statements based management’s beliefs current expectations estimates projections financial services industry economy company bank general words “expect” “anticipate” “intend” “plan” “believe” “seek” “estimate” similar expressions intended identify forwardlooking statements forwardlooking statements guarantees future performance subject risks uncertainties factors may cause actual results performance achievements company differ materially historical results expressed implied forwardlooking statements company cautions readers following important factors among others could cause company’s actual results differ materially forwardlooking statements contained report • effect changes laws regulations including federal state banking laws regulations company bank must comply associated costs compliance laws regulations either currently future applicable • effect changes accounting policies standards guidelines principles may adopted regulatory agencies well financial accounting standards board • effect changes company’s organization compensation benefit plans • effect company’s competitive position within market area increasing consolidation within banking financial services industries including increased competition larger regional outofstate banking organizations well nonbank providers various financial services • effect changes interest rates • effect changes business cycle downturns local regional national economies • matters described part item 1 business risks company cautions foregoing list important factors exclusive company undertakes obligation publicly update revise forwardlooking statements critical accounting policies company established various accounting policies govern application accounting principles generally accepted united states preparation financial statements significant accounting policies described notes consolidated financial statements certain accounting policies involve significant judgments assumptions management material impact carrying value certain assets liabilities management considers accounting policies critical accounting policies judgments assumptions used management based historical experience factors believed reasonable circumstances nature judgments assumptions made management actual results could differ judgments estimates could material impact carrying value assets liabilities results operations company accounting policies important policies described notes consolidated financial statements reviewed greater understanding company’s financial performance recorded reported company believes allowance loan losses critical accounting policy requires significant judgments estimates used preparation company’s consolidated financial statements allowance loan losses represents management’s estimate probable loan losses inherent loan portfolio calculation allowance loan losses critical accounting estimate due significant judgment assumptions estimates related amount timing estimated losses consideration current historical trends amount timing cash flows related impaired loans please refer section report entitled “balance sheet review provision allowance possible loan lease losses” note 1 note 3 company’s consolidated financial statements detailed description company’s estimation processes methodology related allowance loan losses earnings overview years ended december 31 2003 2002 2001 company reported net earnings 58 million 2003 55 million 2002 48 million 2001 representing increase 44 fiscal years 2002 2003 increase 158 fiscal years 2001 2002 increases three fiscal years primarily attributable bank’s continued loan growth higher noninterest income lower increases noninterest expense net earnings per share fully diluted basis 172 2003 169 2002 152 2001 representing increase 18 fiscal years 2003 2002 112 fiscal years 2002 2001 net earnings per share 2003 entire year 2002 partial year affected previously described common stock offering completed april 2002 increased weighted average number shares outstanding return average assets return average shareholders’ equity 2003 151 1422 respectively compared 155 1556 respectively 2002 147 1711 respectively 2001 reduction return average equity primarily due large increase equity 2003 2002 increases past two years comprised common stock offering 48 million increase retained earnings 72 million increase comprehensive income 10 million items effect increasing average balance shareholders’ equity 127 million last two years net interest income company’s operational results primarily depend earnings bank’s earnings depend large degree net interest income net interest income defined difference interest income received investments loans investment securities federal funds sold etc interest expense deposits borrowings following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets average rate paid interest bearing liabilities interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income company increased 442 thousand 28 2003 2002 11 million 76 2002 2001 net interest income december 31 2003 160 million compared 156 million december 31 2002 145 million december 31 2001 net interest margin interest earning assets 465 2003 476 2002 484 2001 beginning early 2001 end 2003 short term interest rates dropped 550 basis points comparing interest margin 2003 2002 bank’s interest margin declined 11 basis points measuring last three years bank’s interest margin decreased 19 basis points management’s interest rate risk strategies helped mitigate effects rapidly declining interest rates average yield assets 2003 tax equivalent basis 675 60 basis points 2002 cost funds 252 60 basis points 2002 likewise 2002 bank’s yield earning assets declined 139 points cost funds reduced 147 basis points asset repricing point “caught up” immediate repricing interestbearing transaction account liabilities past three years rapid rate decline benchmark rates declined 475 basis points ten months ten month period ending 2002 bank’s balance sheet traditionally slightly liability sensitive 2003 progressed management sought become evenly matched perhaps slightly asset sensitive assets reprice faster liabilities high percentage transaction accounts increasing amounts adjustable rate assets therefore rising rate environment bank’s interest margin tend widen whereas falling rate environment bank’s interest margin tends narrow however rates fall rapidly past three years bank’s cost funds hit economic floor asset yields flatten become slightly variable net result management attempting poise bank’s interest margin increase interest rates rise cost interestbearing liabilities 252 2003 312 2002 459 2001 representing decrease 60 basis points fiscal 2003 2002 decrease 147 basis points fiscal 2002 2001 borrowings federal home loan bank fhlb fixed rate kept bank’s cost funds decreasing rapidly 2003 management anticipates bank’s cost funds positively impacted next eighteen months 20 million fhlb borrowings mature borrowings replaced lower cost funds one considers yield interestbearing assets 675 2003 735 2002 874 2001 impact decreasing rates asset yields pronounced 2002 2003 suggesting bank may reached range bound plateau net interest margin however longer market interest rates remain low solidified asset yields become increasing rate environment margin slower react positively trend supports management’s strategy increasing asset sensitivity adding interest rate floors adjustable rate loans order create upside increasing market rates prolonged low rates impact lowering company’s net interest margin following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities tax equivalent basis assuming rate 34 table 1 average consolidated balance sheets net interest analysis thousands nonaccrual loans interest income recorded loans included yield calculation loans periods reported taxexempt interest income calculated tax equivalent basis following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate bank assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table 2 changes interest income expense tax equivalent basis thousands income expense income 2003 56 million compared 53 million 2002 46 million 2001 represents increase 302 thousand 58 fiscal 2002 fiscal 2003 increase 701 thousand 154 fiscal 2001 fiscal 2002 increases primarily due increase volume service charges deposit accounts service charges deposit accounts increased average 126 last two years increase due insufficient funds charges service charges increased new account activity mortgage origination fees decreased little less 1 2002 2003 increase 14 2001 2002 primarily last half 2003 bank experienced slow mortgage refinance activity appears refinance boom took place last three years may subsiding however continued low rates increased housing maintained new home financing bank’s market area miscellaneous income 2003 2002 decreased 149 thousand 134 increased 326 thousand 416 2002 2001 primary reason spike miscellaneous income 2002 bank settled interest rate swap position accounted fair value hedge august 2002 recognizing gain 252950 included miscellaneous income 2002 income nonrecurring nature bank hedge positions currently place expenses increased 625 thousand 52 2003 2002 13 million 117 2002 2001 increase 2003 2002 due primarily increase salaries employee benefits 439 thousand 61 increase occupancy expense 163 thousand 99 increase 2002 2001 due increase salaries employee benefits 682 105 increase occupancy expense 91 thousand increase operating expense 495 177 increase salaries employee benefits years ended 2003 2002 attributable following factors increased number full time equivalent employees ii increased costs health insurance iii annual raises increased profit sharing bonuses due higher profitability company two full time equivalent employees end 2003 end 2002 increase salaries benefits 2002 2001 pronounced amounting increase 682 thousand 105 increase salaries employee benefits years ended 2002 2001 attributable following factors increased number full time equivalent employees ii increase commission mortgage origination iii increased costs health insurance iv annual raises increased profit sharing bonuses due higher profitability company ten full time equivalent employees end 2002 2001 primarily due branch expansion 2002 increase occupancy expense 2003 2002 primarily attributable increase depreciation expense 118 thousand 158 attributable capital expenditures updated bank technology refurbishment main office selective branches update appearance increase occupancy expense 2002 compared 2001 primarily attributable full year operations douglasville branch addition increased depreciation expense due additional office space investment bank technology increase operating expense 2003 2002 significant however increase operating expense 2002 2001 495 thousand 177 due increases legal accounting annual fees associated compliance sec regulations listing requirements nasdaq additionally bank paid increased software fees associated bounce protection program commensurate increased fee income taxes expressed percentage earnings income taxes declined 317 2003 325 2002 340 2001 decline marginal tax rate past three years primarily attributable tax credits purchased bank 2001 full effect 2002 2003 addition october 2002 bank formed wgnb investments inc nevada corporation manage hold trade cash securities loans bank effect reducing state income tax liability slightly 2002 significantly 2003 balance sheet overview years ended december 31 2003 2002 general loan deposit growth 2003 slightly 2002 2003 average total assets increased 270 million 75 average deposits increased 172 million 62 average loans increased 251 million 95 amounts recorded 2002 average total assets increased 308 million 94 average deposits increased 158 million 60 average loans increased 139 million 56 amounts recorded 2001 bank’s growth rate 2003 increased slightly compared 2002 reach levels experienced 2001 2000 loan demand rebounded later half 2003 decline early part year past years management allows loan growth drive balance sheet growth thus slowdown loan growth typically reflected balance sheet total assets december 31 2003 393 million representing 81 million 21 increase december 31 2002 total deposits increased 46 million 15 2002 2003 total loans increased 230 million 84 2003 management attempted employ excess liquidity loans 2003 federal funds sold decreased 190 million total loans increased 230 million investments available sale held maturity increased 39 million federal funds sold decrease deposit increase basically funded loan investment portfolio growth increase deposits 2003 attributable increase noninterest bearing demand accounts 21 million 56 increase interestbearing demand accounts 145 million 117 decrease time deposit accounts 142 million 111 interestbearing demand accounts accounted vast majority deposit increases 2003 attribute interestbearing noninterestbearing demand deposit growth three events occurred 2003 first three independent competing community banks remained carroll county merged regional banks 2002 displacement led new checking account customers bank second time deposit rates continue low customers moved funds money market accounts hopes longer term cd rates increase immediate future stock market would viable investment alternative third bank deposit relationships numerous county municipal authorities deposit relationships banking industry known public funds end 2003 certain public entities collected tax revenue amount 7 million subsequently deposited bank causing bank’s liquidity increase amount deposit bank year end 2003 typically disbursed first quarter following year local regional economy softened beginning 2001 loan demand fell last half 2001 trend continued throughout 2002 first half 2003 bank grown loan portfolio 437 million 236 2000 253 million 111 2001 197 million 77 2002 230 84 2003 loans periods funded principally increased demand deposit accounts lower cost funding source fhlb borrowings typically lower comparable certificates deposit rates terms total assets december 31 2002 385 million representing 349 million 100 increase december 31 2001 total deposits increased 182 million 65 2001 2002 total loans increased 197 million 77 2002 demand deposit accounts accounted vast majority deposit increases 2002 loan production 2002 funded principally deposit growth liquidity 2003 2002 abundant local competition acquired regional banks stock market languished investments company’s availableforsale investment portfolio 553 million december 31 2003 consisted primarily debt securities provide company source liquidity stable source income serve vehicle implement asset liability management strategies represented increase 31 million 60 521 million held december 31 2002 company believes investment portfolio provides balance interest rate credit risk categories balance sheet providing vehicle investment available funds supplying securities pledge required collateral certain public deposits investment securities availableforsale category stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part company’s overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 425 million december 31 2003 increase 750 thousand 214 compared prior year increase attributable purchase banking industry issued trust preferred securities various issuers across united states particularly southeast company intent ability hold securities maturity following table shows carrying value company’s securities security type december 31 2003 2002 2001 table 3 investment portfolio thousands following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2003 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table 4 expected maturity securities thousands mortgage backed securities included maturities categories anticipated repaid based scheduled maturities actual cash flow mortgage backed securities differs assumption additionally agency securities portfolio call features analysis assumes callable agencies mature final maturity date actual cash flow agency securities may differ assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions bank routine basis evaluates concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions loan deposit ratios industry trends primary types loans bank’s portfolio residential mortgages home equity loans commercial real estate loans commercial loans consumer installment loans generally bank underwrites loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan exceptions bank’s general policy require conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans emphasizing lower gross debt ratios consumer loans lower loantovalue ratios types real estate loans given localized nature bank’s lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal shareholders company directors officers bank subject limitations federal reserve principal effect require extensions credit bank executive officers directors ten percent shareholders satisfy certain standards bank routinely makes loans ordinary course business certain directors executive officers company bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2003 loans commitments outstanding directors executive officers company bank associates members immediate families totaled 47 million net participations sold banks nonrecourse basis represented approximately 16 total loans date december 31 2003 none loans outstanding bank related parties nonaccrual past due restructured considered management potential problem loan following table presents loans type dates indicated table 5 loan portfolio thousands following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction mortgage loans consumer loans december 31 2003 table 6 loan portfolio maturity thousands variablefixed rate mix provision allowance possible loan lease losses provision loan losses company 2003 350 thousand compared 483 thousand 2002 911 thousand 2001 decrease provision loan losses reflects slower loan growth lower level nonperforming adversely rated loans 2003 expressed percentage total loans compared 2001 2002 company’s methodology described measuring adequacy allowance loan loss continues indicate sufficient reserve expected losses portfolio allowance loan losses represented 117 138 147 total loans outstanding december 31 2003 2002 2001 respectively total chargeoffs 790 thousand 695 thousand 200 thousand compared recoveries 147 thousand 263 thousand 90 thousand 2003 2002 2001 respectively company independent loan review function loans placed loan grade categories consistent used bank’s regulators loans constantly monitored loan officer loan review function credit quality consistency accuracy grading process bank assures timely recognition credit risks general credit risk increases level allowance loan loss also increase formal allowance loan loss adequacy test performed month end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications additionally evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations management’s judgment determining adequacy allowance based evaluations collectability loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades five though eight represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one four stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses loans deemed impaired evaluated individually measure probable loss credit management uses internal loan reviewer independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate however management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions change borrowers’ ability repay addition regulators integral part examination process periodically review company’s allowance loan losses regulators may require company recognize additions allowance based judgments information available time examination management company realizes importance maintaining adequate allowance loan losses professional loan review function effective loan officer identification program management recognizing weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance company’s position minimize potential loss problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list company’s migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio cases significant weaknesses exist specific loan specific reserve assigned loans addition general allowance company also evaluates risks associated concentrations credit necessary assign allowance related concentrations credit company adds specific reserve related risks first quarter 2003 bank accepted cash workout nine classified loans amounted 33 million recorded chargeoff amount 337 thousand following table presents summary changes allowance loan losses years indicated table 7 allowance loan losses thousands nonperforming assets past due loans nonperforming assets december 31 2003 22 million 75 total loans real estate owned compared 28 million 103 total loans real estate owned december 31 2002 39 million 155 total loans real estate owned december 31 2001 levels nonperforming loans remain relatively low compared bank’s peer group historical level percentage nonperforming assets total loans decreased peak 2001 decrease nonperforming loans 2002 2003 attributable repayment loans nonaccrual removal loans nonaccrual status amount 444 thousand reduction loans ninety days past due amount 590 thousand bank sold 171 thousand real estate owned loss 16 thousand 2003 however bank also settled loans foreclosure 2003 amount 660 thousand following table summarizes loans 90 days greater past due nonaccrual loans real estate taken settlement foreclosure years indicated table 8 nonperforming assets thousands may additional loans portfolio may become classified conditions indicate management aware potential problem loans disclosed table result management’s ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest original terms exceptions allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal bank’s loan review function continually monitors selected accruing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function also identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect company’s liquidity capital resources operations deposits time deposits 100 thousand greater totaled 310 million december 31 2003 compared 411 million yearend 2002 415 million yearend 2001 following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2003 table 9 deposits thousands liquidity bank must maintain daily basis sufficient funds cover withdrawals depositors’ accounts supply potential borrowers funds meet obligations bank keeps cash hand maintains account balances correspondent banks purchases sells federal funds shortterm investments asset liability maturities monitored attempt match variables meet liquidity needs policy bank monitor liquidity meet regulatory requirements local funding requirements management believes bank’s current level liquidity adequate meet needs bank maintains relationships correspondent banks including federal home loan bank “fhlb” provide funds short notice needed bank arrangements correspondent commercial banks short term unsecured advances 110 million december 31 2003 bank drawn available facilities addition bank line credit fhlb amount 567 million bank drawn 45 million december 31 2003 lines credit varying terms maturities disclosed detail notes financial statements company’s cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents decreased 204 million total 272 million december 31 2003 compared 477 million december 31 2002 decrease primarily attributable net cash used investing activities 300 million made 245 million increased loans 40 million net increase investment securities cash flow uses offset net cash provided financing activities primarily attributable net increase deposits 46 million cash inflows operations totaled 73 million 2003 cash inflows operations totaled 51 million 2002 inflows financing activities totaled 300 million net deposit increases 2002 182 million fhlb advances 10 million investing activities used 184 million cash equivalents principally composed net changes loans 205 million 2002 company also completed common stock offering april 2002 generated net cash proceeds 48 million capital resources total shareholders’ equity december 31 2003 421 million increase 36 million 2002 increase equity due 58 million net income less 22 million dividends increase unrealized holding gain securities available sale 79 thousand net tax occ established certain minimum riskbased capital standards apply national banks company subject certain capital requirements imposed federal reserve december 31 2003 bank exceeded applicable regulatory capital requirements classification “well capitalized” bank company satisfied applicable regulatory requirements imposed federal reserve following tables present company’s regulatory capital position december 31 2002 table 10 capital ratio leverage ratio complete discussion actual required ratios company subsidiaries see note 9 consolidated financial statements average equity average assets 1059 2003 997 2002 ratio dividends declared net earnings 383 2003 compared 351 2002 contractual obligations ordinary course operations company enters certain contractual obligations following table summarizes company’s significant fixed determinable contractual obligations payment date december 31 2003 dollars thousands balance sheet risk operations bank company made contractual commitments extend credit ordinary course business activities commitments legally binding agreements lend money bank’s customers predetermined interest rates specified period time december 31 2003 bank issued commitments extend credit 51587000 various types commercial lending arrangements additional commitments standby letters credit 2402000 company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based credit evaluation borrower collateral varies may include accounts receivable inventory property plant equipment commercial residential real estate company manages credit risk commitments subjecting normal underwriting risk management processes commitments generally fixed expiration dates many expire without drawn upon total commitment level necessarily represent future cash requirements needed fund outstanding commitments company ability liquidate federal funds sold securities availableforsale shortterm basis borrow purchase federal funds financial institutions assetliability management company’s objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize company’s exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure bank’s interest rate exposure repricing gap calculated taking assets reprice mature within given time frame subtracting liabilities reprice mature within time frame difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates bank’s net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates bank’s net interest income decrease rates fall increase rates rise company adopted objective achieving maintaining oneyear cumulative gap percent total assets plus 20 minus 20 consolidated basis company’s oneyear cumulative gap negative 378 total assets december 31 2003 position indicated company exposed potential decreased earnings interest rates continue decline next twelve months due inherent limitations traditional gap analysis company also employs sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk company’s loan investment portfolios significantly impact company’s profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2003 estimated impact immediate increase interest rates 100 basis points would resulted decrease net interest income 12month period 28 comparable decrease interest rates resulting decrease net interest income 29 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition volume following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2003 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities company’s savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year subject management’s control table 11 interest rate gap sensitivity thousands december 31 2003 difference company’s liabilities assets repricing maturing within one year 149 million chart indicates excess liabilities repricing maturing within one year thus rise interest rates would cause company’s net interest income decline however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustablerate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation company’s operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control company including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies company results operations predictable item 7a item 7 management’s discussion analysis financial condition results operations purpose following discussion address information relating financial condition results operations company may readily apparent review consolidated financial statements notes thereto begin page report discussion read conjunction information provided company’s consolidated financial statements accompanying footnotes earnings overview years ended december 31 2002 2001 2000 company reported net earnings 55 million 2002 48 million 2001 44 million 2000 representing increase 158 fiscal years 2001 2002 increase 87 fiscal years 2000 2001 increases three fiscal years primarily attributable bank’s continued loan growth higher noninterest income lower increases noninterest expense net earnings per share fully diluted basis 169 2002 152 2001 141 2000 representing increase 112 fiscal years 2001 2002 78 fiscal years 2000 2001 net earnings per share 2002 affected previously described common stock offering completed april 2002 increased number shares outstanding return average assets return average shareholders’ equity 2002 155 1556 respectively compared 147 1711 respectively 2001 159 1858 respectively 2000 reduction return average equity primarily due large increase equity 2002 increase comprised common stock offering 48 million increase retained earnings 35 million increase comprehensive income 922 thousand items effect increasing average balance shareholders’ equity 77 million 2001 net interest income company’s operational results primarily depend earnings bank’s earnings depend large degree net interest income net interest income defined difference interest income received investments loans investment securities federal funds sold etc interest expense deposits borrowings following discussion analysis net interest margin assumes stated tax equivalent basis nontaxable interest restated taxable equivalent rate banking industry uses two key ratios measure relative profitability net interest income net interest rate spread measures difference average yield interest earning assets average rate paid interest bearing liabilities interest rate spread eliminates impact noninterest bearing deposits gives direct perspective effect market interest rate movements commonly used measure net interest margin net interest margin defined net interest income percent average total interest earning assets takes account positive impact investing noninterestbearing deposits net interest income increased 11 million 76 2002 2001 787 thousand 57 2001 2000 net interest income december 31 2002 156 million compared 145 million 2001 137 million 2000 net interest margin interest earning assets 476 2002 484 2001 544 2000 beginning early 2001 end 2002 short term interest rates dropped 525 basis points comparing interest margin 2002 2001 bank’s interest margin declined 8 basis points measuring three year high 2000 bank’s interest margin decreased 68 basis points bank entered interest rate swap december 2001 benefited interest margin 2002 bank recorded net benefit reduced interest expense 168 thousand addition management’s interest rate risk strategies helped mitigate effects rapidly declining interest rates 2002 bank’s cost funds reduced 147 basis points yield earning assets declined 139 basis points resulting net interest spread widening 2002 8 basis points asset repricing point “caught up” immediate repricing interestbearing transaction account liabilities decrease net interest margin 2000 2001 primarily due rapid decline prime discount rates 2001 assets repriced quickly funding sources benchmark rates declined 475 basis points ten months bank’s balance sheet traditionally slightly liability sensitive liabilities reprice faster assets high percentage transaction accounts therefore rising rate environment bank’s interest margin tends narrow whereas falling rate environment bank’s interest margin tends widen however rates fall rapidly drastically bank’s cost funds hit economic floor instance bank paying 25 checking account 30 savings account 35 money market account market rates decrease 475 basis points savings money market rate fall fraction amount due competitive issues additionally time deposits fixed maturity unable decline quickly transaction accounts net result bank’s interest margin narrows since yield earning assets fall cost funds bank’s management asset liability management process attempts manage interest sensitivity position however balance sheet management technique completely shield bank’s margin precipitous interest rate movement experienced 2001 2002 cost interestbearing liabilities 312 2002 459 2001 480 2000 representing decrease 147 basis points fiscal 2001 2002 decrease 21 basis points fiscal 2000 2001 one considers yield interestbearing assets 735 2002 874 2001 942 2000 impact decreasing rates asset yields pronounced 2002 2001 cost funds decline period greater yields 2001 2002 decreased 139 basis points opposed increase 68 basis points 1999 2000 comparing net interest margins 476 2002 484 2001 544 one clearly identify impact net interest margin rates declined 475 basis points last ten months 2001 another 50 basis points 2002 prolonged low rates impact lowering company’s net interest margin following table shows past three years relationship interest income interest expense average daily balances interestearning assets interestbearing liabilities tax equivalent basis assuming rate 34 table 1 average consolidated balance sheets net interest analysis thousands nonaccrual loans interest income recorded loans included yield calculation loans periods reported taxexempt interest income calculated tax equivalent basis following table shows relative impact net interest income changes annual average daily outstanding balances volume interestearning assets interestbearing liabilities rates earned rate bank assets liabilities variances resulting combination changes rate volume allocated proportion absolute dollar amounts change category table 2 changes interest income expense tax equivalent basis thousands income expense income 2002 53 million compared 46 million 2001 30 million 2000 represents increase 701 thousand 154 fiscal 2001 fiscal 2002 increase 16 million 522 fiscal 2000 fiscal 2001 continuing increases comparative years primarily due increase volume service charges deposit accounts specifically attributable insufficient funds charges deposit accounts service charges deposit accounts increased average 24 last two years increase due insufficient funds charges service charges increased new account activity mortgage origination fees increased 14 2001 2002 235 2000 2001 primarily due continued low mortgage rates 2001 2002 customers desiring either refinance existing homes purchase new homes bank settled interest rate swap position accounted fair value hedge august 2002 recognizing gain 252950 included miscellaneous income 2002 income nonrecurring nature bank hedge positions currently place expenses increased 13 million 117 2002 2001 increase due increase salaries employee benefits 682 thousand 105 increase occupancy expense 91 thousand 58 increase operating expense 494 thousand 177 increase salary employee benefits attributable following factors increased number full time equivalent employees ii full year wages staff douglasville branch opened mid 2001 iii increased commissions mortgage loan originators due increase mortgage origination activity iv increased costs health insurance v annual raises increased profit sharing bonuses due higher profitability company 10 full time equivalent employees end 2002 end 2001 increase occupancy expense 2002 compared 2001 primarily attributable full year operations douglasville branch addition increased depreciation expense due additional office space investment bank technology increase operating expense due increases legal accounting annual fees associated compliance sec regulations listing requirements nasdaq additionally bank paid increased software fees associated bounce protection program commensurate increased fee income notable increases expenses 2000 2001 related occupancy operating expenses increasing 492 thousand 127 increase due increased occupancy operating costs associated mirror lake douglasville offices increased costs associated bounce protection program income taxes expressed percentage earnings income taxes declined 33 2002 34 2001 36 2000 decline marginal tax rate past three years primarily attributable tax credits purchased bank 2001 full effect 2002 addition october 2002 bank formed wgnb investments inc nevada corporation manage hold trade cash securities loans bank effect reducing state income tax liability slightly 2002 balance sheet overview years ended december 31 2002 2001 general 2002 average total assets increased 308 million 94 average deposits increased 158 million 60 average loans increased 139 million 56 recorded 2001 average total assets increased 499 million 180 average deposits increased 394 million 176 average loans increased 387 million 184 recorded 2000 bank’s growth rate 2002 slowed significantly compared 2001 2000 attributable slowdown economy business expansion bank’s market area management endeavors let loan growth drive balance sheet growth thus slowdown loan growth reflected balance sheet total assets december 31 2002 385 million representing 35 million 100 increase december 31 2001 total deposits increased 182 million 65 2001 2002 total loans increased 197 million 77 2002 increase deposits 2002 attributable increase noninterest bearing demand accounts 51 million 154 increase interestbearing demand accounts 144 million 131 decrease time deposit accounts 20 million 16 demand accounts accounted vast majority deposit increases 2002 attribute demand deposit growth three events occurred 2002 first three independent competing community banks remained carroll county merged regional banks displacement led new checking account customers bank second time deposit rates low customers moved funds money market accounts hopes longer term cd rates increase immediate future third bank deposit relationships numerous county municipal authorities deposit relationships banking industry known public funds end 2002 certain public entities collected tax revenue amount 6 million subsequently deposited bank causing bank’s liquidity increase amount deposit bank year end 2002 typically disbursed first quarter following year local regional economy softened loan demand fell last half 2001 trend continued throughout 2002 bank grown loan portfolio 437 million 236 2000 253 million 111 2001 197 million 77 2002 loans funded principally increased demand deposit accounts lower cost funding source fhlb borrowings typically lower comparable certificates deposit rates terms bank experienced approximately 7 million loan payoffs fourth quarter 2002 detrimental effect loan growth 2002 also factor underlying spike bank’s liquidity year end total assets december 31 2001 350 million representing 61 million 211 increase december 31 2000 total deposits increased 467 million 200 2000 2001 total loans increased 253 million 111 2001 little less half increase deposits came result increase 210 million 238 interestbearing demand accounts 2000 2001 time deposits accounts increased 229 million 214 2001 june 30 2001 bank grown 283 million loans however actual growth year 253 million deposit growth hand remained strong throughout 2001 customers sought move funds stock market back bank flight safety approximately fifty percent loan growth experienced company funded fhlb advances remainder funded principally increases deposit accounts investments company’s availableforsale investment portfolio 521 million december 31 2002 consisted primarily debt securities provide company source liquidity stable source income represented decrease 28 million 51 549 million held december 31 2001 company believes investment portfolio provides balance interest rate credit risk categories balance sheet providing vehicle investment available funds supplying securities pledge required collateral certain public deposits investment securities availableforsale stated fair value securities may sold retained maturity pledged collateral liquidity borrowing response changing interest rates changes prepayment risk factors part company’s overall asset liability management strategy investment securities heldtomaturity stated amortized cost totaled 35 million december 31 2002 increase 15 million 75 compared prior year increase attributable purchase banking industry issued trust preferred securities various issuers across united states southeast company intent ability hold securities maturity following table shows carrying value company’s securities security type december 31 2002 2001 2000 table 3 investment portfolio thousands following table presents expected maturity amortized cost securities maturity date average yields based amortized cost obligations fully taxable basis assuming 34 marginal tax rate december 31 2002 composition maturityrepricing distribution securities portfolio subject change depending rate sensitivity capital liquidity needs table 4 expected maturity securities thousands mortgage backed securities included maturities categories anticipated repaid based scheduled maturities actual cash flow mortgage backed securities differs assumption additionally agency securities portfolio call features analysis assumes callable agencies mature final maturity date actual cash flow agency securities may differ assumption yields taxexempt securities calculated tax equivalent basis loans loan concentrations defined aggregate credits extended number borrowers engaged similar activities resident geographic region would cause similarly affected economic conditions bank routine basis evaluates concentrations purposes policing concentrations making necessary adjustments lending practices reflect current economic conditions loan deposit ratios industry trends primary types loans bank’s portfolio residential mortgages home equity loans commercial real estate loans commercial loans consumer installment loans generally bank underwrites loans based upon borrower’s debt service capacity cash flow consideration past performance loans creditors well evaluation collateral securing loan exceptions bank’s general policy require conservative underwriting policies primarily analysis borrowers’ debt service coverage capabilities commercial real estate loans emphasizing lower gross debt ratios consumer loans lower loantovalue ratios types real estate loans given localized nature bank’s lending activities primary risk factor affecting portfolio whole health local economy west georgia area effects value local real estate incomes local professionals business firms loans directors executive officers principal shareholders company directors officers bank subject limitations federal reserve principal effect require extensions credit bank executive officers directors ten percent shareholders satisfy certain standards bank routinely makes loans ordinary course business certain directors executive officers company bank associates members immediate families accordance federal reserve guidelines loans made substantially terms including interest rates collateral prevailing comparable transactions others involve normal risk collectibility present unfavorable features december 31 2002 loans commitments outstanding directors executive officers company bank associates members immediate families totaled 54 million net participations sold banks nonrecourse basis represented approximately 20 total loans date december 31 2002 none loans outstanding bank related parties nonaccrual past due restructured considered management potential problem loan following table presents loans type dates indicated table 5 loan portfolio thousands following table sets forth maturity distribution based upon contractual dates interest rate sensitivity commercial financial agricultural loans real estate construction mortgage loans consumer loans december 31 2002 table 6 loan portfolio maturity thousands variablefixed rate mix provision allowance possible loan lease losses provision loan losses company 2002 483 thousand compared 911 thousand 2001 509 thousand 2000 decrease provision loan losses reflects slower loan growth lower level nonperforming loans 2002 compared 2001 company’s methodology described measuring adequacy allowance loan loss continues indicate sufficient reserve expected losses portfolio allowance loan losses represented 138 147 128 total loans outstanding december 31 2002 2001 2000 respectively total chargeoffs 695 thousand 200 thousand 77 thousand compared recoveries 264 thousand 89 thousand 208 thousand 2002 2001 2000 respectively company independent loan review function loans placed loan grade categories consistent used bank’s regulators loans constantly monitored loan officer loan review function credit quality consistency accuracy grading process bank assures timely recognition credit risks general credit risk increases level allowance loan loss also increase formal allowance loan loss adequacy test performed month end specific amounts loss estimated problem loans historical loss percentages applied balance portfolio using certain portfolio stratifications additionally evaluation takes consideration factors changes nature volume loan portfolio current economic conditions regulatory examination results existence loan concentrations management’s judgment determining adequacy allowance based evaluations collectability loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades five though eight represent criticized classified loans assigned allocations loss based management’s estimate potential loss generally based historical losses andor collateral deficiencies loans graded one four stratified type allocated loss ranges based historical loss experience strata combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses loans deemed impaired evaluated individually measure probable loss credit management uses internal loan reviewer independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions change borrowers’ ability repay addition regulators integral part examination process periodically review company’s allowance loan losses regulators may require company recognize additions allowance based judgments information available time examination management company realizes importance maintaining adequate allowance loan losses professional loan review function effective loan officer identification program management recognizing weaknesses loan portfolio timely manner early identification deteriorating credit attributes allows management take proactive role documenting established plan enhance company’s position minimize potential loss problem loan identification program outlined management able identify loans exhibit weakness classify classified criticized loan list company’s migration analysis assigns historical loss amounts pools loans according classifications risk ratings calculate general allowance overall portfolio cases significant weaknesses exist specific loan specific reserve assigned loans addition general allowance company also evaluates risks associated concentrations credit necessary assign allowance related concentrations credit company adds specific reserve related risks following table presents summary changes allowance loan losses years indicated table 7 allowance loan losses thousands nonperforming assets past due loans nonperforming assets december 31 2002 28 million 103 total loans real estate owned compared 39 million 155 total loans real estate owned december 31 2001 14 million 63 total loans real estate owned december 31 2000 levels nonperforming loans remain relatively low percentage nonperforming assets total loans decreased peak 2001 decrease nonperforming loans 2001 2002 attributable loans nonaccrual paying coming nonaccrual status amount 677 thousand reduction loans ninety days past due amount 550 thousand following table summarizes loans 90 days greater past due nonaccrual loans real estate taken settlement foreclosure years indicated table 8 nonperforming assets thousands may additional loans portfolio may become classified conditions indicate management aware potential problem loans disclosed table result management’s ongoing review loan portfolio loans classified nonaccrual generally past due principal interest payments 90 days otherwise reasonable expect collection principal interest original terms exceptions allowed 90 day past due loans well secured process collection generally payments received nonaccrual loans applied directly principal bank’s loan review function continually monitors selected accruing loans general economic conditions changes within particular industry could cause borrowers financial difficulties loan review function also identifies loans high degrees credit risks focus loan review management maintain low level nonperforming assets return current nonperforming assets earning status management unaware known trends events uncertainties reasonably likely material effect company’s liquidity capital resources operations deposits time deposits 100 thousand greater totaled 411 million december 31 2002 compared 415 million yearend 2001 312 million yearend 2000 following table sets forth scheduled maturities time deposits 100 thousand greater december 31 2002 table 9 deposits thousands liquidity bank must maintain daily basis sufficient funds cover withdrawals depositors’ accounts supply potential borrowers funds meet obligations bank keeps cash hand maintains account balances correspondent banks purchases sells federal funds shortterm investments asset liability maturities monitored attempt match meet liquidity needs policy bank monitor liquidity meet regulatory requirements local funding requirements management believes bank’s current level liquidity adequate meet needs bank maintains relationships correspondent banks including federal home loan bank “fhlb” provide funds short notice needed bank arrangements correspondent commercial banks short term unsecured advances 110 million december 31 2002 bank drawn available facilities addition bank line credit fhlb amount 539 million bank drawn 45 million december 31 2002 lines credit varying terms maturities disclosed detail notes financial statements company’s cash flows composed three classifications cash flows operating activities cash flows investing activities cash flows financing activities cash equivalents increased 167 million total 477 million december 31 2002 compared 310 million december 31 2001 increase primarily attributable net cash provided financing activities 300 million made 182 million increased deposits 100 million borrowing proceeds 48 million offering proceeds offset items totaling approximately 29 million cash inflows operations totaled 51 million 2002 outflows investing activities totaled 184 million net loan increases 2002 205 million cash inflows operations totaled 64 million 2001 inflows financing activities totaled 544 million net deposit increases 2001 467 million fhlb advances 10 million investing activities used 418 million cash equivalents principally composed net advances loans customers 255 million net cash flows invested securities 144 million 2001 bank purchased property equipment operations future expansion amounting 13 million capital resources total shareholders’ equity december 31 2002 385 million increase 93 million 2001 increase equity due public offering company completed april 2002 sales efforts directors officers company offered sold 200000 shares common stock 2400 per share net proceeds offering less offering costs 48 million offering combined 55 million net income less 19 million dividends increase unrealized holding gain securities available sale 922 thousand net tax accounted large increase shareholders’ equity occ established certain minimum riskbased capital standards apply national banks company subject certain capital requirements imposed federal reserve december 31 2002 bank exceeded applicable regulatory capital requirements classification “well capitalized” bank company satisfied applicable regulatory requirements imposed federal reserve following tables present company’s regulatory capital position december 31 2002 table 10 complete discussion actual required ratios company subsidiaries see note 9 consolidated financial statements average equity average assets 997 2002 857 2001 ratio dividends declared net earnings 351 2002 compared 355 2001 balance sheet risk operations bank company made contractual commitments extend credit ordinary course business activities commitments legally binding agreements lend money bank’s customers predetermined interest rates specified period time december 31 2002 bank issued commitments extend credit 40842000 various types commercial lending arrangements additional commitments standby letters credit 1658000 company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based credit evaluation borrower collateral varies may include accounts receivable inventory property plant equipment commercial residential real estate company manages credit risk commitments subjecting normal underwriting risk management processes assetliability management company’s objective manage assets liabilities provide satisfactory consistent level profitability within framework established cash loan investment borrowing capital policies certain officers charged responsibility monitoring policies procedures designed ensure acceptable composition assetliability mix overall philosophy management support asset growth primarily growth deposits borrowing strategies minimize company’s exposure interest rate risk objective policy control interest sensitive assets liabilities minimize impact substantial movements interest rates earnings assetliability mix monitored regular basis report reflecting interest sensitive assets interest sensitive liabilities prepared presented management assetliability management committee least quarterly basis one method measure bank’s interest rate exposure repricing gap calculated taking assets reprice mature within given time frame subtracting liabilities reprice mature within time frame difference two amounts called “gap” amount either liabilities assets reprice without corresponding asset liability repricing negative gap liabilities repricing assets generally indicates bank’s net interest income decrease interest rates rise increase interest rates fall positive gap generally indicates bank’s net interest income decrease rates fall increase rates rise company adopted objective achieving maintaining oneyear cumulative gap percent total assets plus 20 minus 20 consolidated basis company’s oneyear cumulative gap negative 359 total assets december 31 2002 position indicated company exposed potential decreased earnings interest rates continue decline next twelve months due inherent limitations traditional gap analysis company also employs sophisticated modeling techniques monitor potential changes net interest income net income market value portfolio equity various interest rate scenarios market risk loss adverse changes market prices rates arising primarily interest rate risk company’s loan investment portfolios significantly impact company’s profitability net interest income adversely impacted assets liabilities react changes interest rates yearend 2002 estimated impact immediate increase interest rates 100 basis points would resulted decrease net interest income 12month period 7 comparable decrease interest rates resulting decrease net interest income 7 management finds methodologies meaningful evaluating market risk sensitivity however factors affect net interest income levels nonearning assets changes portfolio composition volume following table summarizes amounts interestearning assets interestbearing liabilities outstanding december 31 2002 expected mature prepay reprice future time periods shown except stated amount assets liabilities mature reprice particular period determined accordance contractual terms asset liability adjustable rate loans included period interest rates next scheduled adjust rather period due fixed rate loans mortgagebacked securities included periods anticipated repaid based scheduled maturities although cash flows received often differ scheduled maturities company’s savings accounts interestbearing demand accounts money market deposit accounts generally subject immediate withdrawal included “one year less” category although historical experience proven deposits less interest rate sensitive course year subject management’s control table 11 interest rate gap sensitivity thousands december 31 2002 difference company’s liabilities assets repricing maturing within one year 126 million chart indicates excess liabilities repricing maturing within one year thus rise interest rates would cause company’s net interest income decline however certain shortcomings inherent method analysis presented foregoing table example although certain assets liabilities may similar maturities periods repricing may react different degrees different points time changes market interest rates case analyzing accounts disclosed one year less category liabilities necessarily reprice quickly degree rates general additionally certain assets adjustablerate mortgages features restrict changes interest rates shortterm basis life asset changes interest rates prepayment rates early withdrawal levels ability borrowers service debt among factors may change significantly assumptions made table impact inflation changing prices monetary policies primary effect inflation company’s operations reflected increased operating costs unlike industrial companies virtually assets liabilities financial institution monetary nature result changes interest rates significant effect performance financial institution effects changes general rate inflation changes prices interest rates necessarily move direction magnitude prices goods services interest rates highly sensitive many factors beyond control company including influence domestic foreign economic conditions monetary fiscal policies united states government federal agencies particularly federal reserve federal reserve implements national monetary policy seeking curb inflation combat recession open market operations united states government securities control discount rate applicable borrowing banks establishment reserve requirements bank deposits actions federal reserve areas influence growth bank loans investments deposits affect interest rates charged loans paid deposits nature timing impact future changes federal monetary fiscal policies company results operations predictable item 7a item 7a quantitative qualitative disclosures market risk information regarding market risk financial instruments see “management’s discussion analysis financial condition results operation assetliability management” principal market risk exposure interest rates item 8 item 7a quantitative qualitative disclosures market risk information regarding market risk company’s financial instruments see “management’s discussion analysis financial condition results operation assetliability management” company’s principal market risk exposure interest rates item 8 item 7a quantitative qualitative disclosures market risk information regarding market risk company’s financial instruments see “management’s discussion analysis financial condition results operation assetliability management” company’s principal market risk exposure interest rates item 8 item 7a quantitative qualitative disclosures market risk information regarding market risk company’s financial instruments see “management’s discussion analysis financial condition results operation assetliability management” company’s principal market risk exposure interest rates item 8 item 7a quantitative qualitative disclosures market risk information regarding market risk company’s financial instruments see “management’s discussion analysis financial condition results operation assetliability management” company’s principal market risk exposure interest rates item 8 item 7a quantitative qualitative disclosures market risk information regarding market risk financial instruments see “management’s discussion analysis financial condition results operation assetliability management” principal market risk exposure interest rates item 8 item 7a quantitative qualitative disclosures market risk information regarding market risk company’s financial instruments see “management’s discussion analysis financial condition results operation assetliability management” company’s principal market risk exposure interest rates item 8 item 7a quantitative qualitative disclosures market risk information regarding market risk company’s financial instruments see “management’s discussion analysis financial condition results operation assetliability management” company’s principal market risk exposure interest rates item 8 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page presented summary unaudited consolidated quarterly financial data years ended december 31 2008 2007 quarterly financial information unaudited thousands except per share data item 9 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page incorporated herein reference presented summary unaudited consolidated quarterly financial data years ended december 31 2001 2000 quarterly financial information unaudited thousands except per share data item 9 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page presented summary unaudited consolidated quarterly financial data years ended december 31 2005 2004 quarterly financial information unaudited thousands except per share data item 9 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page presented summary unaudited consolidated quarterly financial data years ended december 31 2006 2005 quarterly financial information unaudited thousands except per share data item 9 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page incorporated herein reference presented summary unaudited consolidated quarterly financial data years ended december 31 2004 2003 quarterly financial information unaudited thousands except per share data item 9 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page presented summary unaudited consolidated quarterly financial data years ended december 31 2007 2006 quarterly financial information unaudited thousands except per share data item 9 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page incorporated herein reference presented summary unaudited consolidated quarterly financial data years ended december 31 2003 2002 quarterly financial information unaudited thousands except per share data item 9 item 8 financial statements supplementary data consolidated financial statements company including notes thereto report independent auditors included report beginning page incorporated herein reference presented summary unaudited consolidated quarterly financial data years ended december 31 2002 2001 quarterly financial information unaudited thousands except per share data item 9 item 15 exhibits financial statement schedules 32 articles amendment amended restated articles incorporation incorporated reference exhibit 31 current report form 8k filed june 19 2008 33 second articles amendment amended restated articles incorporation regarding designations preferences rights series convertible preferred stock incorporated reference exhibit 31 current report form 8k filed june 26 2008 34 third articles amendment amended restated articles incorporation regarding restatement designations preferences rights series convertible preferred stock incorporated reference exhibit 31 current report form 8k filed july 22 2008 35 amended restated bylaws incorporated reference exhibit 32 form 10sb 41 see exhibits 31 35 provisions company’s articles incorporation bylaws defining rights shareholders 42 specimen certificate representing shares common stock incorporated reference exhibit 42 form 10sb 43 specimen certificate representing shares series convertible preferred stock incoprorated reference exhibit 43 registration statement form s1 registration 333151820 filed june 20 2008 44 amended restated trust agreement dated july 2 2007 incorporated reference exhibit 41 company’s current report form 8k filed july 6 2007 “july 2007 form 8k” 45 indenture dated july 2 2007 wgnb corp wilmington trust company incorporated reference exhibit 42 july 2007 form 8k 46 guarantee agreement dated july 2 2007 wgnb corp wilmington trust company incorporated reference exhibit 43 july 2007 form 8k 47 wgnb corp direct stock purchase dividend reinvestment plan incorporated reference form s3 filed may 20 2008 amended november 6 2008 101 employment agreement dated july 11 2006 hb lipham iii wgnb corp west georgia national bank incorporated reference exhibit 101 company’s current report form 8k dated july 11 2006 102 bonus stock option agreement dated september 23 1998 company hb lipham iii incorporated reference exhibit 106 form 10sb 103 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 104 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 105 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 106 employment agreement dated august 8 2005 among wgnb corp west georgia national bank steven j haack incorporated reference exhibit 101 company’s current report form 8k dated august 8 2005 107 employment agreement dated july 11 2005 west georgia national bank w galen hobbs jr incorporated reference exhibit 101 company’s current report form 8k dated july 11 2005 108 second amendment bonus stock option agreement dated june 17 2002 company hb lipham iii incorporated reference exhibit 107 company’s quarterly report form 10q quarter ended june 30 2002 “63002 form 10q 109 incentive stock option agreement dated march 12 2002 company hb lipham iii incorporated reference exhibit 108 63002 form 10q 1010 amendment bonus stock option agreement dated may 30 2002 company w galen hobbs jr incorporated reference exhibit 1010 63002 form 10q 1011 incentive stock option agreement dated march 12 2002 company w galen hobbs jr incorporated reference exhibit 1011 63002 form 10q 1012 amendment bonus stock option agreement dated april 26 2002 company steven j haack incorporated reference exhibit 1013 63002 form 10q 1013 incentive stock option agreement dated march 12 2002 company steven j haack incorporated reference exhibit 1014 63002 form 10q 1014 stock incentive plan incorporated reference appendix company’s definitive proxy statement 2004 annual meeting 1015 employment agreement dated december 31 2002 company william r whitaker incorporated reference exhibit 1031 company annual report form 10k year ended december 31 2004 “2004 form 10k” 1016 bonus stock option agreement dated december 27 2004 company william r whitaker incorporated reference exhibit 1032 2004 form 10k 1017 separations agreement release dated february 14 2006 company bank l leighton alston incorporated reference exhibit 1023 company’s annual report form 10k year ended december 31 2005 1018 employment agreement dated july 1 2007 among wgnb corp west georgia national bank randall f eaves incorporated reference exhibit 101 july 2007 form 8k 1019 employment agreement dated july 1 2007 among wgnb corp west georgia national bank mary covington incorporated reference exhibit 102 july 2007 form 8k 1020 employment agreement dated january 2 2007 robert gordy jr west georgia national bank incorporated reference exhibit 101 company’s quarterly report form 10q quarter ended march 31 2007 1021 first amendment employment agreement among hb lipham wgnb corp first national bank georgia dated december 31 2008 incorporated reference exhibit 101 company’s current report form 8k dated december 31 2008 “123108 8k” 1022 first amendment employment agreement among randall f eaves wgnb corp first national bank georgia dated december 30 2008 incorporated reference exhibit 102 123108 8k 1023 first amendment employment agreement among steven j haack wgnb corp first national bank georgia dated december 31 2008 incorporated reference exhibit 103 123108 8k 1024 first amendment employment agreement among mary covington wgnb corp first national bank georgia dated december 31 2008 incorporated reference exhibit 104 123108 8k 1025 first amendment employment agreement w galen hobbs jr first national bank georgia dated december 31 2008 incorporated reference exhibit 105 123108 8k 1026 first amendment employment agreement robert gordy jr first national bank georgia dated december 31 2008 incorporated reference exhibit 106 123108 8k 1027 agreement first national bank georgia comptroller currency dated november 12 2008 incorporated reference exhibit 101 company’s quarterly report form 10q quarter ended september 30 2008 subsidiary wgnb corp consent porter keadle moore llp 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanes oxley act 2002 321 certification chief executive officer pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant section 906 sarbanes oxley act 2002 signatures pursuant requirements section 13 15d exchange act registrant duly caused report signed behalf undersigned thereunto duly authorized date march 10 2009 pursuant requirements exchange act report signed following persons behalf registrant capacities dates indicated wgnb corp consolidated financial statements december 31 2008 2007 report independent registered public accounting firm porter keadle moore llp report independent registered public accounting firm board directors stockholders wgnb corp subsidiary carrollton georgia audited accompanying consolidated balance sheets wgnb corp subsidiary december 31 2008 2007 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2008 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiary december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america porter keadle moore llp atlanta georgia march 10 wgnb corp consolidated balance sheets december 31 2008 2007 assets see accompanying notes consolidated financial statements wgnb corp consolidated statements operations years ended december 31 2008 2007 2006 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income loss years ended december 31 2008 2007 2006 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2008 2007 2006 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2008 2007 2006 wgnb corp consolidated statements cash flows continued years ended december 31 2008 2007 2006 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies basis presentation consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiary first national bank georgia “bank” significant intercompany accounts transactions eliminated consolidation bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll haralson douglas coweta paulding counties georgia accounting reporting policies company methods applying principles conform accounting principles generally accepted united states america gaap general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income cash equivalents purposes reporting cash flows cash equivalents include cash due banks interestbearing funds banks federal funds sold securities company classifies securities one three categories trading availableforsale heldtomaturity trading securities bought held principally purpose selling near term heldtomaturity securities company ability intent hold security maturity securities included trading heldtomaturity classified availableforsale trading availableforsale securities recorded fair value heldtomaturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities availableforsale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value availableforsale heldtomaturity investment cost deemed temporary charged earnings establishes new cost basis security premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified availableforsale included earnings derived using specific identification method determining cost securities sold loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan fees consisting delinquent payment charges common loan servicing fees recognized earned impaired nonaccrual loans company evaluates certain loans particularly residential construction development credits impairment individual basis loans considered impaired probable collection amounts due according contractual terms loan agreement become doubtful instance restructured loan contractual terms loan agreement refer original loan agreement collateral dependent loans impairment measured based fair value collateral impairment measured based present value expected future cash flows discounted loan’s effective interest rate except collateral dependent loans wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued impaired nonaccrual loans impaired loans necessarily placed nonaccrual status possible impaired loan may collateralized assets fair values excess recorded value loan case loan would continue accrue interest point fair value achieved collateral sold settlement loan normally placed nonaccrual management believes collection principal interest become doubtful loan becomes 90 days past due principal interest unless loan well secured process collection loan placed nonaccrual status previously accrued uncollected interest considered uncollectible reversed interest income current period payment received loan nonaccrual status generally applied reduce carrying value loan nonaccrual loans returned accrual status become current principal interest become well secured process collection collectibility longer doubtful allowance loan losses allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment based historical losses current economic environment adequate absorb probable losses existing loans amounts deemed uncollectible chargedoff deducted allowance recoveries loans previously chargedoff added back allowance management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors nature changes composition loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans nine different categories grades assigned allocations allowance based company’s loss experience peer loss experience migration analysis internal external economic factors combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses management uses devoted internal loan reviewers independent lending function challenge corroborate loan grading system provide additional analysis determining adequacy allowance loan losses future provisions estimated loan losses time company utilizes independent external loan reviewers supplement challenge internal loan reviewers management believes allowance loan losses adequate management uses available information provide reserves recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgment information available time examination premises equipment premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment buildings improvements 39 years furniture equipment 10 years wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued cash surrender value life insurance cash surrender value life insurance carried cash value based upon accrued earnings underlying contract added balance asset core deposit intangible core deposit intangible amortized straightline method period benefit generally 10 years core deposit intangible reviewed impairment whenever events changes circumstances indicate recovery value underlying asset gave rise core deposit intangible becomes permanently impaired goodwill represents cost acquired company excess fair value net assets acquired goodwill amortized useful life instead subject two step impairment test accordance statement financial accounting standards “sfas” 142 goodwill intangible assets first step compares fair value reporting unit company carrying amount goodwill carrying amount goodwill exceeds fair value reporting unit second step conducted whereby implied fair value goodwill compared carrying value goodwill implied fair value less carrying amount goodwill impairment loss recognized investments include federal home loan bank “fhlb” stock federal reserve bank stock investments federal state income tax credit partnerships equity securities investments readily determinable fair value carried cost included assets accompanying consolidated balance sheets foreclosed property properties acquired foreclosure carried lower cost fair value less estimated costs dispose fair value defined amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns charged earnings period need arises securities sold repurchase agreements company sells securities agreements repurchase agreements treated borrowings obligations repurchase securities sold reflected liability securities underlying agreements reflected assets consolidated balance sheets income taxes company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued income taxes continued company adopted financial accounting standards board “fasb” interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” january 1 2007 tax position recognized benefit “more likely not” tax position would sustained tax examination tax examination presumed occur amount recognized largest amount tax benefit greater 50 percent likely realized examination tax positions meeting “more likely not” test tax benefit recorded adoption fin 48 effect company’s financial statements derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements accounting changes fair value derivative depends intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change swap contract terminated cumulative change fair value amortized income original hedge period underlying hedged instrument sold settled company immediately recognizes cumulative change derivative’s value component earnings stock compensation plans sfas 123 revised 2004 sfas 123 r sharebased payment adopted company required date january 1 2006 using modified prospective transition method provided standard sfas 123 r addresses accounting sharebased payment transactions company receives employee services exchange equity instruments company sfas 123 r requires company recognize compensation expense “grant date fair value” stock options granted employees statement earnings using fairvaluebased method company recognized 174500 177500 128250 stock based compensation years ended december 31 2008 2007 2006 respectively associated stock option grants company recognizing compensation expense stock option grants graded vesting schedules straightline basis requisite service period award permitted sfas 123 r december 31 2008 467307 unrecognized compensation cost related stock option grants cost expected recognized remaining vesting period approximately five years grantdate fair value option granted 2008 2007 2006 337 639 447 respectively fair value option estimated date grant using blackscholes model following weighted average assumptions used grants 2008 2007 2006 earnings per share basic earnings per share based weighted average number common shares outstanding period effects potential common shares outstanding period included diluted earnings per share stock options described note 14 granted key management personnel sfas 128 earnings per share requires employee equity share options nonvested shares similar equity instruments granted employees treated potential common shares computing diluted earnings per share diluted earnings per share based actual number options shares granted yet forfeited unless would antidilutive company uses “treasury stock” method equity instruments granted sharebased payment transactions provided sfas 128 determine diluted earnings per share wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued earnings per share continued set forth table showing reconciliation amounts used computation basic diluted earnings per share reconciliation amounts periods ended december 31 2007 2006 presented presentation period ended december 31 2008 set forth inclusion potential common shares diluted loss per share calculation periods would antidilutive basic earnings per share 2008 computed dividing net loss 2008 less dividends paid preferred shareholders weighted average common shares outstanding 2008 follows 30750429 less 253528 divided 6057613 shares reconciliation amounts used computation “basic earnings per share” “diluted earnings per share” years ended december 31 2007 2006 follows recent accounting pronouncements business combinations december 2007 fasb issued sfas 141r business combinations sfas 141 r significantly change entities apply acquisition method business combinations significant changes affecting company account business combinations statement include acquisition date acquirer obtains control identifiable assets acquired liabilities assumed noncontrolling interests acquiree stated fair value acquisition date assets liabilities arising noncontractual contingencies measured acquisition date fair value likely meet definition asset liability acquisition date adjustments subsequently made provisional amounts recorded acquisition date made retroactively measurement period exceed one year acquisition related restructuring costs meet criteria sfas 146 accounting cost associated exit disposal activities expensed incurred transaction costs expensed incurred reversals deferred income tax valuation allowances income tax contingencies recognized earnings subsequent measurement period allowance loan losses acquiree permitted recognized acquirer additionally sfas 141r requires new modified disclosures surrounding subsequent changes acquisitionrelated contingencies contingent consideration noncontrolling interest interests acquisitionrelated transaction costs fair values cash flows expected collected acquired loans enhanced goodwill rollforward company required apply sfas 141r prospectively business combinations completed january 1 2009 accounting transfers financial assets repurchase financing transactions february 2008 fasb issued fasb staff position “fsp” fas 1403 accounting transfers financial assets repurchase financing transactions statement provides guidance regarding accounting transfer financial asset repurchase financing counterparties transactions circumstances certain criteria must met order account transactions linked transaction wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued recent accounting pronouncements accounting transfers financial assets repurchase financing transactions fsp becomes effective fiscal years interim periods beginning november 15 2008 company anticipate fsp material effect company’s financial position results operations disclosures derivative instruments hedging activities march 2008 fasb issued sfas 161 disclosures derivative instruments hedging activities sfas 161 amendment sfas 133 accounting derivative instruments hedging activities objective sfas 161 expand disclosure requirements sfas 133 intent improve financial reporting entity uses derivative instruments derivative instruments related hedged items accounted sfas 133 related interpretations derivative instruments related hedged items affect entitys financial position financial performance cash flows statement effective financial statements issued fiscal years beginning november 15 2008 company anticipate new accounting pronouncement material effect financial position results operations hierarchy generally accepted accounting principles may 2008 fasb issued sfas 162 hierarchy generally accepted accounting principles sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity generally accepted accounting principles gaap united states gaap hierarchy current gaap hierarchy set forth american institute certified public accountants aicpa statement auditing standards 69 meaning present fairly conformity generally accepted accounting principles criticized 1 directed auditor rather entity 2 complex 3 ranks fasb statements financial accounting concepts subject level due process fasb statements financial accounting standards industry practices widely recognized generally accepted subject due process fasb believes gaap hierarchy directed entities entity auditor responsible selecting accounting principles financial statements presented conformity gaap accordingly fasb concluded gaap hierarchy reside accounting literature established fasb issuing statement achieve result company anticipate new accounting pronouncement material effect financial position results operations determining fair value financial asset market asset active october 2008 fasb issued fsp fas 1573 determining fair value financial asset market asset active fsp clarifies application sfas 157 fair value measurements market active provides example illustrate key considerations determining fair value financial asset market financial asset active fsp fas 1573 provides guidance 1 entitys assumption considered measuring fair value relevant observable inputs exist 2 available observable inputs market active considered measuring fair value 3 use market quotes considered assessing relevance observable unobservable inputs available measure fair value fsp staff position effective immediately company anticipate new accounting pronouncement material effect financial position results operations accounting standards issued proposed fasb standard setting entities require adoption future date expected material impact company’s consolidated financial statements upon adoption reclassifications certain reclassifications made prior years’ consolidated statements conform presentation used 2008 wgnb corp notes consolidated financial statements continued 2 material business combination january 22 2007 wgnb corp entered agreement plan reorganization among wgnb corp west georgia national bank first haralson corporation first national bank georgia whereby first haralson corporation merged wgnb corp acquisition 100 percent outstanding common shares first haralson corporation concurrently first national bank georgia merged west georgia national bank upon closing transaction west georgia national bank changed name first national bank georgia transaction approved companies’ shareholders closed june 29 2007 effective date july 1 2007 first haralson corporation headquartered buchanan georgia operated five branches haralson county two branches carroll county results operations acquisition included company’s consolidated financial statements date acquisition july 1 2007 terms merger agreement first haralson corporation’s shareholders elected receive cash wgnb corp common stock combination two shareholders made elections aggregate chose cash consideration amount 16315423 shares wgnb corp stock amount 1055149 valued 2725 per share together total acquisition costs 1746463 resulted total consideration 46814696 date closing addition terms merger agreement allowed first haralson corporation pay onetime special dividend exceed 7250000 aggregate approximately 3567 per share first haralson corporation share first haralson corporation shareholders prior closing transaction one primary business objectives transaction strengthen company’s presence along interstate 20 corridor western georgia combined entity retained number one market share ranking carroll haralson counties additionally transaction enhanced company’s core deposits diversified loan portfolio combination also created top 20 financial institution georgia terms total deposits following table summarizes estimated fair values assets acquired liabilities assumed closing date july 1 2007 wgnb corp notes consolidated financial statements continued 2 material business combination continued financial information presents proforma earnings wgnb corp assuming operations first haralson corporation included consolidated earnings beginning earliest reporting period 3 securities availableforsale heldtomaturity december 31 2008 2007 summarized follows wgnb corp notes consolidated financial statements continued 3 securities continued amortized cost estimated fair value investment securities availableforsale heldtomaturity december 31 2008 contractual maturity shown expected maturities differ contractual maturities borrowers right call prepay certain obligations without call prepayment penalties following summary fair values securities unrealized losses december 31 2008 2007 december 31 2008 unrealized losses investment securities portfolio related debt securities unrealized losses debt securities arose due changing interest rates considered temporary december 31 2008 tables 18 securities 88 securities issued mortgage backed securities contained unrealized losses 85 149 securities issued state political subdivisions contained unrealized losses three securities issued corporations contained unrealized losses unrealized losses considered temporary acceptable investment grades security repayment sources principal interest largely government backed wgnb corp notes consolidated financial statements continued 3 securities continued proceeds sales securities availableforsale 2008 2007 28966259 5993155 respectively gross gain 435067 2008 gains losses recognized upon sales 2007 due investment securities acquired first haralson acquisition sold shortly merger date reposition investment portfolio investment securities acquired acquisition acquired fair market value sales securities availableforsale 2006 investment securities fair value approximately 92431000 91679000 december 31 2008 2007 respectively pledged secure public deposits required law purposes addition certificates deposit banks amount 12000000 pledged secure public deposits december 31 2008 4 loans major classifications loans december 31 2008 2007 summarized follows bank grants loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding haralson coweta douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market line credit agreements federal home loan bank federal reserve bank see note 8 bank pledges acceptable loans blanket lien collateral borrowings december 31 2008 loans totaling 106200000 pledged federal home loan bank 20849000 pledged secure open line credit federal reserve bank december 31 2007 loans totaling 111378000 pledged federal home loan bank changes allowance loan losses years ended december 31 2008 2007 2006 follows company considers loan impaired probable unable collect amounts due according original terms loan agreement impaired loans include loans accruing interest restructured loans accruing interest company measures impairment loan loanbyloan basis nonaccrual loans collection interest probable cash flows received recorded reduction principal restructured loans modified terms original contract give debtor practical arrangement meeting financial obligations amounts impaired loans probable collection charged immediately impaired loans related amounts included allowance loan losses december 31 2008 2007 follows wgnb corp notes consolidated financial statements continued 4 loans continued average amount impaired loans 2008 2007 53794000 5807000 respectively interest income recognized impaired loans 119985 2008 642057 2007 interest income recognized impaired loans 2006 5 premises equipment major classifications premises equipment december 31 2008 2007 summarized follows depreciation expense amounted 1635033 1449463 1134746 2008 2007 2006 respectively 6 intangible assets intangible assets include goodwill core deposit intangible generated result merger first haralson corporation july 1 2007 changes goodwill 2008 2007 follows annual assessment goodwill september 30 2008 concluded goodwill impaired sfas 142 goodwill intangible assets requires goodwill reviewed impairment least annually impairment condition exists carrying amount goodwill exceeds fair value sfas 142 identifies two step impairment test used test impairment measure amount impairment loss recognized two tests performed third party using three valuation approaches market approach income approach cost approach based testing determined entire amount goodwill recorded september 30 2008 impaired loss impairment goodwill amount 24127865 recorded expense statement operations year ended december 31 2008 core deposit intangible amortized estimated useful life 10 years using straightline method summary core deposit intangible asset december 31 2008 2007 follows wgnb corp notes consolidated financial statements continued 6 intangible assets continued amortization expense core deposit intangible 573798 286902 2008 2007 respectively company recorded amortization core deposit intangible 2006 prior merger amortization expense estimated 573798 per year years 2009 2013 7 deposits december 31 2008 scheduled maturities time deposits follows bank held 137662153 91127044 certificates deposit obtained efforts third party brokers december 31 2008 2007 respectively weighted average interest rate deposits december 31 2008 2007 431 477 respectively deposits outstanding december 31 2008 mature follows 8 lines credit december 31 2008 bank collateralized line credit overnight borrowings 15800000 correspondent bank none outstanding line credit collateralized investment securities market values december 31 2007 bank uncollateralized line credit overnight borrowings 24800000 correspondent bank none outstanding bank collateralized line credit overnight borrowings federal reserve bank atlanta credit availability 8256000 none outstanding december 31 2008 line collateralized certain qualifying real estate commercial loans portfolio physically held federal reserve bank line credit federal reserve bank atlanta 2007 bank line credit fhlb amount 20 percent assetswhich approximately 126440000 subject available qualifying collateral december 31 2008 fhlb advances secured bank’s stock fhlb it’s qualifying 14 family first mortgage loans qualified commercial loans addition fhlb accepts federal funds sold fhlb certain investment securities collateral advances fhlb line credit subject available collateral bank december 31 2008 2007 bank advances outstanding fhlb amounting 52000000 54500000 respectively bank pledged sufficient collateral december 31 2008 2007 borrowings early conversion option allows fhlb convert certain advances variable interest rate upon notification bank following advances require quarterly interest payments wgnb corp notes consolidated financial statements continued 8 lines credit continued december 31 december 31 9 securities sold repurchase agreements company securities sold repurchase agreements december 31 2008 company securities sold repurchase agreements 20000000 december 31 2007 company entered transaction november 23 2007 agreement maturity date november 23 2012 became callable issuer company november 23 2009 interest paid quarterly rate 390 company required issuer pay securities sold repurchase june 2008 10 junior subordinated debentures company entered junior subordinated debenture connection acquisition first haralson debenture qualifies tier capital risk based capital guidelines subject certain limitations debentures issued june 15 2007 amount 10825000 floating rate 90 day libor plus 155 payable quarterly debenture redeemable mandatory basis upon maturity june 2037 callable without premium june 2012 interest rate december 31 2008 355 11 commitments balance sheet commitments company party financial instruments balance sheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations balance sheet instruments cases company requires collateral support financial instruments credit risk following table summarizes balance sheet financial instruments december 31 2008 2007 wgnb corp notes consolidated financial statements continued 11 commitments continued balance sheet commitments continued commitments extend credit agreements lend customer long violation condition established contract standby letters credit conditional commitments issued company guarantee performance customer third party commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension commitment based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property credit risk involved issuing letters credit essentially involved extending loans derivative instruments hedging activities company one fifteen interest rate swap positions december 31 2008 2007 respectively 2006 company entered series fourteen interest rate swap agreements total notional amount 41156509 related issuance brokered certificates deposit interest rate swap contracts various notional amounts maturity dates receive fixed rates pay floating rates company designated fourteen swap fixed variable rate contracts fair value hedges accordingly recording fair value derivatives well fair value items hedged balance sheet changes fair value swap contracts items hedged recorded current period earnings company terminated fair value interest rate swap positions april 2008 gain amount 626070 company recognizing gain transaction original term swaps company recognized 482809 gain 2008 fair value swap contracts accounted fair value hedges 263474 december 31 2007 recorded assets balance sheet objective fourteen swap agreements decrease company’s interest rate risk exposure asset sensitive company remains susceptible interest rate risk downward rate environment part attributable fixed rate nature company’s brokered certificates deposit company using swap agreements convert fixed rate brokered certificates deposit borrowings floating rate instruments consequently interest rate swap contracts allowed company hedge changes fair value brokered certificates deposit borrowings resulted changes benchmark interest rates company entered interest rate swap december 4 2007 maturity date june 15 2012 objective swap lock fixed rate opposed contractual variable interest rate junior subordinated debentures interest rate swap contract notional amount 10825000 hedging variable rate junior subordinated debentures described note 10 consolidated financial statements company receives variable rate 90 day libor rate plus 155 pays fixed rate 577 company designated swap junior subordinated debentures cash flow hedge accordingly recording fair value derivative balance sheet changes fair value swap contract recorded current period component comprehensive income net tax fair value swap contract accounted cash flow hedge loss 843869 29636 december 31 2008 2007 respectively value swap recorded liabilities balance sheet december 31 2008 2007 wgnb corp notes consolidated financial statements continued 11 commitments continued derivative instruments hedging activities continued company uses long haul method afforded sfas 133 assess effectiveness hedging activity company assesses effectiveness cash flow hedge comparing cumulative change anticipated cash flows hedged exposure hedging period cumulative change anticipated cash flows hedging derivative company utilizes “hypothetical derivative method” compute cumulative change anticipated interest cash flows hedged exposure extent cumulative change anticipated cash flows hedging derivative offsets 80 120 cumulative change anticipated interest cash flows hedged exposure hedge deemed effective company assessed effectiveness fair value hedge contracts regressing market price including premium paid brokered certificates deposit dependent variables market price interest rate swap independent variable quarterly basis contracts matured regression analysis include data set values retrospective realized historical prices prospective shocked scenario analysis basis hedge considered effective correlation coefficient within 80 120 r square highly correlative value 1 fstat large signifying high explanatory power company’s cash flow hedge remained effective since inception 12 stockholders’ equity common stock june 10 2008 company’s shareholders voted amend company’s amended restated articles incorporation order increase number authorized common stock shares 10000000 shares 125 par value per share 20000000 shares par value preferred stock june 10 2008 company’s shareholders voted amend company’s amended restated articles incorporation order authorize creation 10000000 shares preferred stock par value issuance terms designated board one series future june 20 2008 company filed form s1 securities exchange commission register 3750000 shares series convertible preferred stock “series preferred” sale company’s shareholders rights offering completed september 22 2008 total 1153508 shares series preferred sold shareholders rights offering remaining registered shares subject ongoing public offering extended april 15 2009 december 31 2008 total 1509100 shares series preferred sold including sold rights offering holders series preferred entitled receive declared board directors legally available assets noncumulative cash dividends liquidation preference 800 per share series preferred dividends payable rate per annum equal 9 quarterly arrears march 15 june 15 september 15 december 15 commencing december 15 2008 company prohibited paying dividends common stock unless dividends particular quarterly dividend period declared paid series preferred series preferred perpetual mature specified date series preferred subject mandatory redemption provisions shares become convertible shares common stock option holder september 22 2011 september 15 2013 company may option time cause series preferred converted shares common stock event dissolution liquidation series preferred shareholders receive preference 800 per share claims common shareholders holders series preferred shares voting rights except required law direct stock purchase dividend reinvestment plan may 22 2008 company filed form s3 securities exchange commission register 500000 shares common stock direct stock purchase dividend reinvestment plan offers holders company’s common stock new investors opportunity reinvest dividends company’s common stock purchase common stock optional cash payments 250 10000 per month without payment brokerage commissions service charges plan amended company’s board directors october 2008 order permit holders series preferred reinvest dividends paid series preferred shares company’s common stock december 31 2008 413 shares average price 354 per share issued company direct stock purchase dividend reinvestment plan wgnb corp notes consolidated financial statements continued stock repurchase plan beginning 1996 board directors approved stock repurchase plan 2000000 company’s common stock currently outstanding 2001 board directors approved additional 1000000 used stock repurchase plan company retired shares 2008 1345 38202 shares common stock 2007 2006 respectively december 31 2008 company 557547 remaining reacquire shares stock repurchase plan 13 regulatory matters november 12 2008 bank entered formal written agreement “agreement” occ agreement requires bank undertake certain actions within designated time frames operate compliance provisions thereof term board directors management bank implemented many provisions continue support compliance agreement actions undertaken follows implement asset recovery staff continue enhance loan portfolio management procedures processes continue diversify loan portfolio maintain valuation process foreclosed property maximizing net realizable value shareholders continue raise capital provide written plans action reduce nonperforming assets provide three year budget capital plan compliance agreement monitored committee made seven directors company december 31 2008 bank process complying agreement october 3 2008 congress passed emergency economic stabilization act 2008 eesa creates troubled asset relief program tarp provides us secretary treasury broad authority implement certain actions help restore stability liquidity us markets capital purchase program cpp announced us treasury october 14 2008 part tarp pursuant cpp us treasury purchase 250 billion senior preferred shares standardized terms qualifying financial institutions purpose cpp encourage us financial institutions build capital increase flow financing us businesses consumers support us economy cpp voluntary requires participating institution comply number restrictions provisions including standards executive compensation corporate governance limitations share repurchases declaration payment dividends common shares cpp allows qualifying financial institutions issue senior preferred shares us treasury aggregate amounts 1 percent 3 percent institutions risk weighted assets senior preferred shares senior preferred shares qualify tier 1 capital rank senior common stock senior preferred shares pay cumulative dividend rate 5 percent per annum first five years reset rate 9 percent per annum year five senior preferred shares nonvoting class voting rights matters could adversely affect shares senior preferred shares callable par three years prior end three years senior preferred shares may redeemed proceeds qualifying equity offering tier 1 perpetual preferred common stock us treasury may also transfer senior preferred shares third party time conjunction purchase senior preferred shares treasury receive warrants purchase common stock aggregate market price equal 15 percent senior preferred shares exercise price warrants market price participating institutions common stock time issuance calculated 20trading day trailing average companies participating cpp must adopt us treasurys standards executive compensation corporate governance company currently evaluating participation cpp company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet minimum capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets certain circumstances regulators may impose higher minimum capital levels otherwise adjust institution’s capital category based market conditions wgnb corp notes consolidated financial statements continued 13 regulatory matters continued bank received certain requests relating capital primary regulator occ terms confidential management process complying certain requests regulatory capital requirements met andor maintained additional regulatory actions may taken bank december 31 2008 2007 recent notification federal deposit insurance corporation categorized bank well capitalized adequately capitalized respectively regulatory framework prompt corrective action categorized well adequately capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table presented company’s bank’s actual capital amounts ratios dividends paid bank primary source funds available company banking regulations limit amount dividends may paid without prior approval regulatory authorities restrictions based level regulatory classified assets prior years’ net earnings ratio equity capital total assets december 31 2008 bank cannot pay dividends without obtaining prior regulatory approval 14 incentive stock option plan january 11 1994 incentive stock option plan “1994 plan” company may grant options certain key officers acquire shares common stock company fair value number shares determined annually agreed upon formulas total 240000 shares common stock reserved possible issuance 1994 plan december 31 2003 company distributed options available awards 1994 plan options may exercised prior five years date grant exercisable later ten years date april 8 2003 shareholders approved wgnb corp 2003 stock incentive plan “2003 plan” 2003 plan company may grant options certain key officers acquire shares common stock company fair value incentive stock options less 85 fair value nonqualified stock options number shares determined annually agreed upon formulas total 990000 shares common stock reserved possible issuance 2003 plan maximum 525000 shares issued nonqualified stock option grants 2008 company granted 66515 options available awards 2003 plan options 2003 plan distributed commencing 2004 fiscal year terminate february 14 2015 unless previously terminated board directors options approved plan distributed options may exercised participants vesting period five years ratably 20 per year options exercisable later ten years date grant compensation cost amount 174500 177500 128250 recognized stock options years end december 31 2008 2007 2006 respectively 1994 2003 plans 59930 178986 options respectively unexercised december 31 2008 options exercised 2008 total intrinsic value options exercised 2007 2006 2128 578435 respectively wgnb corp notes consolidated financial statements continued 14 incentive stock option plan continued summary status company’s stock option plans december 31 2008 2007 2006 changes years ending dates presented following information applies options outstanding december 31 2008 15 supplemental employee retirement plan company assumed postretirement benefit plan provide retirement benefits first haralson key officers plan company assumed whole life insurance contracts lives officer increase cash surrender value contracts less company’s cost funds constitutes bank’s contribution plan year going forward event insurance contracts fail produce positive returns bank obligation contribute plan company recognized 200730 90725 compensation expense related plan 2008 2007 respectively 16 stock split september 12 2006 company’s board directors declared threefortwo stock split shareholders record october 16 2006 payable november 15 2006 share per share amounts restated reflect stock split occurred january 1 2005 wgnb corp notes consolidated financial statements continued 17 defined contribution plan company began qualified retirement plan pursuant internal revenue code section 401k 1996 covering substantially employees subject certain minimum age service requirements contribution plan employees voluntary 2008 2007 2006 company matched 100 participants’ contributions 6 participants’ salaries subject annual 401k contribution limits company also made discretionary contributions plan 2007 2006 5 participants’ salaries contributions plan charged expense 2008 2007 2006 503708 658767 547255 respectively 18 income taxes components provision income tax expense benefit consolidated statements operations years ended december 31 2008 2007 2006 follows differences provision income taxes amount computed applying statutory federal income tax rate loss earnings income taxes follows following summarizes net deferred tax asset included component assets december 31 2008 2007 wgnb corp notes consolidated financial statements continued 19 related party transactions bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2008 december 31 2008 2007 deposits directors executive officers related interests totaled approximately 8360000 10251000 respectively 20 operating expenses components operating expenses exceed 1 total interest income follows 21 fair value effective january 1 2008 company adopted sfas 157 fair value measurements provides framework measuring fair value generally accepted accounting principles sfas 157 applies financial instruments measured reported fair value basis company utilizes fair value measurements record fair value adjustments certain assets liabilities determine fair value disclosures securities availableforsale derivatives certain deposits recorded fair value recurring basis additionally time company may required record fair value assets nonrecurring basis impaired loans foreclosed property nonrecurring fair value adjustments typically involve application lower cost market accounting writedowns individual assets fair value hierarchy sfas 157 company groups assets liabilities fair value three levels based markets assets liabilities traded reliability assumptions used determine fair value levels level 1 valuation based upon quoted prices identical instruments traded active markets level 2 valuation based upon quoted market prices similar instruments active markets quoted prices identical similar instruments markets active modelbased valuation techniques significant assumptions observable market level 3 valuation generated modelbased techniques use least one significant assumption observable market unobservable assumptions reflect estimates assumptions market participants would use pricing asset liability valuation techniques include use option pricing models discounted cash flow models similar techniques following description valuation methodologies used assets liabilities recorded fair value wgnb corp notes consolidated financial statements continued 21 fair value continued securities availableforsale securities availableforsale recorded fair value recurring basis fair value measurement based upon quoted prices available quoted prices available fair values measured using independent pricing models modelbased valuation techniques present value future cash flows adjusted security’s credit rating prepayment assumptions factors credit loss assumptions level 1 securities include traded active exchanges us treasury securities traded dealers brokers active overthecounter markets level 2 securities include mortgagebacked securities issued government sponsored enterprises corporate debt securities municipal bonds securities classified level 3 include assetbacked securities less liquid markets loans company record loans fair value recurring basis however time loan considered impaired allowance loan losses established loans probable payment interest principal made accordance contractual terms loan agreement considered impaired loan identified individually impaired management measures impairment accordance sfas 114 accounting creditors impairment loan fair value impaired loans estimated using one several methods including collateral value market value similar debt enterprise value liquidation value discounted cash flows impaired loans requiring allowance represent loans fair value expected repayments collateral exceed recorded investments loans december 31 2008 substantially impaired loans evaluated based fair value collateral accordance sfas 157 impaired loans allowance established based fair value collateral require classification fair value hierarchy fair value collateral based observable market price current appraised value company records impaired loan nonrecurring level 2 appraised value available management determines fair value collateral impaired appraised value observable market price company records impaired loan nonrecurring level 3 foreclosed assets foreclosed assets adjusted fair value upon transfer loans foreclosed assets subsequently foreclosed assets carried lower carrying value fair value fair value based upon independent market prices appraised values collateral management’s estimation value collateral fair value collateral based observable market price current appraised value company records foreclosed asset nonrecurring level 2 appraised value available management determines fair value collateral impaired appraised value observable market price company records foreclosed asset nonrecurring level 3 intangible assets identified intangible assets subject impairment testing projected cash flow valuation method used completion impairment testing valuation method requires significant degree management judgment event projected undiscounted net operating cash flows less carrying value asset recorded fair value determined valuation model company classifies intangible assets subjected nonrecurring fair value adjustments level 3 wgnb corp notes consolidated financial statements continued 21 fair value continued derivative financial instruments company uses interest rate swaps manage interest rate risk valuation instruments determined using widely accepted valuation techniques including discounted cash flow analysis expected cash flows derivative analysis reflects contractual terms derivatives including period maturity uses observable marketbased inputs including interest rate curves implied volatilities fair values interest rate swaps determined using market standard methodology netting discounted future fixed cash receipts discounted expected variable cash payments variable cash payments based expectation future interest rates forward curves derived observable market interest rate curves comply provisions sfas 157 company incorporates credit valuation adjustments appropriately reflect nonperformance risk respective counterparty’s nonperformance risk fair value measurements adjusting fair value derivative contracts effect nonperformance risk company considered impact netting applicable credit enhancements collateral postings thresholds mutual puts guarantees although company determined majority inputs used value derivatives fall within level 2 fair value hierarchy credit valuation adjustments associated derivatives utilize level 3 inputs estimates current credit spreads evaluate likelihood default counterparties however december 31 2008 company assessed significance impact credit valuation adjustments overall valuation derivative positions determined credit valuation adjustments significant overall valuation derivatives result company determined derivative valuations entirety classified level 2 fair value hierarchy assets liabilities recorded fair value recurring basis table presents recorded amount company’s assets liabilities measured fair value recurring basis december 31 2008 aggregated level fair value hierarchy within measurements fall assets recorded fair value nonrecurring basis company may required time measure certain assets fair value nonrecurring basis accordance us generally accepted accounting principles include assets measured lower cost market recognized fair value cost end period table presents company’s assets measured fair value nonrecurring basis december 31 2008 level fair value hierarchy within measurements fall wgnb corp notes consolidated financial statements continued 21 fair value continued fair value financial instruments company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiary rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance cash equivalents cash due banks interestbearing funds banks federal funds sold carrying amount reasonable estimate fair value securities fair values investment securities based quoted market prices loans fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value cash surrender value life insurance fair value cash surrender value life insurance based net surrender value insurance contract deposits fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal home loan bank advances fair value advances outstanding based quoted value provided fhlb junior subordinated debentures floating rate junior subordinated debentures carrying amount reasonable estimate fair value securities sold repurchase agreements fair value securities sold repurchase agreements estimated amount company would receive pay terminate contracts reporting date derivative instruments derivative instruments fair value estimated amount company would receive pay terminate contracts reporting date taking account current unrealized gains losses open contracts commitments extend credit standby letters credit balance sheet instruments commitments extend credit standby letters credit generally shortterm variable interest rates therefore carrying value estimated fair value associated instruments immaterial wgnb corp notes consolidated financial statements continued 21 fair value continued limitations fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgments estimates subjective nature involve uncertainties matters significant judgment therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing balance sheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates carrying amount estimated fair values company’s financial instruments december 31 2008 2007 follows wgnb corp notes consolidated financial statements continued 22 wgnb corp parent company financial information balance sheets december 31 2008 2007 assets statements operations years ended december 31 2008 2007 2006 wgnb corp notes consolidated financial statements continued 22 wgnb corp parent company financial information continued statements cash flows years ended december 31 2008 2007 2006 item 15 exhibits financial statement schedules a1 financial statements following financial statements filed report independent registered public accounting firm consolidated balance sheets december 31 2005 2004 consolidated statements earnings years ended december 31 2005 2004 consolidated statements comprehensive income years ended december 31 2005 consolidated statements changes stockholders’ equity years ended december 31 2005 2004 2003 consolidated statements cash flows years ended december 31 2005 2004 notes consolidated financial statements 2 financial statement schedules financial statement schedules omitted applicable required information incorporated consolidated financial statements related notes 3 following exhibits filed report 31 amended restated articles incorporation incorporated reference exhibit 31 company’s registration statement form 10sb filed june 14 2000 “form 10sb” 32 amended restated bylaws incorporated reference exhibit 32 form 10sb 41 see exhibits 31 32 provisions company’s articles incorporation bylaws defining rights shareholders 42 specimen certificate representing shares common stock incorporated reference exhibit 42 form 10sb 43 rights agreement dated february 12 1997 company suntrust bank atlanta incorporated reference exhibit 43 form 10sb 101 employment agreement dated may 27 2005 among wgnb corp west georgia national bank l leighton alston incorporated reference exhibit 101 company’s form 8k dated may 27 2005 102 incentive stock option plan incorporated reference exhibit 102 form 10sb 103 bonus stock option agreement dated may 11 1993 company l leighton alston incorporated reference exhibit 103 form 10sb 104 first amendment bonus stock option agreement dated june 14 1994 company l leighton alston incorporated reference exhibit 104 form 10sb 105 bonus stock option agreement dated september 23 1998 company hb lipham iii incorporated reference exhibit 106 form 10sb 106 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 107 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 108 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 109 employment agreement dated august 8 2005 among wgnb corp west georgia national bank steven j haack incorporated reference exhibit 101 company’s form 8k dated august 8 2005 1010 employment agreement dated august 8 2005 among wgnb corp west georgia national bank hb lipham iii incorporated reference exhibit 102 company’s form 8k dated august 8 2005 1011 employment agreement dated july 11 2005 west georgia national bank w galen hobbs jr incorporated reference exhibit 101 company’s form 8k dated july 11 2005 1012 amendment bonus stock option agreement dated june 17 2002 company l leighton alston incorporated reference exhibit 102 company’s form 10q quarter ended 63002 “63002 form 10q” 1013 incentive stock option agreement dated march 12 2002 company l leighton alston incorporated reference exhibit 103 63002 form 10q 1014 second amendment bonus stock option agreement dated june 17 2002 company hb lipham iii incorporated reference exhibit 107 63002 form 10q 1015 incentive stock option agreement dated march 12 2002 company hb lipham iii incorporated reference exhibit 108 63002 form 10q 1016 amendment bonus stock option agreement dated may 30 2002 company w galen hobbs jr incorporated reference exhibit 1010 63002 form 10q 1017 incentive stock option agreement dated march 12 2002 company w galen hobbs jr incorporated reference exhibit 1011 63002 form 10q 1018 amendment bonus stock option agreement dated april 26 2002 company steven j haack incorporated reference exhibit 1013 63002 form 10q 1019 incentive stock option agreement dated march 12 2002 company steven j haack incorporated reference exhibit 1014 63002 form 10q 1020 stock incentive plan incorporated reference appendix company’s definitive proxy statement 2004 annual meeting 1021 employment agreement dated december 31 2002 company william r whitaker incorporated reference exhibit 1031 company annual report form 10k year ended 123104 “2004 form 10k” 1022 bonus stock option agreement dated december 27 2004 company william r whitaker incorporated reference exhibit 1032 2004 form 10k 1023 separation agreement release dated february 14 2006 among wgnb corp west georgia national bank l leighton alston subsidiary wgnb corp 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanes oxley act 2002 321 certification chief executive officer pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant section 906 sarbanes oxley act 2002 indicates management contract compensatory plan arrangement signatures pursuant requirements section 13 15d exchange act registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements exchange act report signed following persons behalf registrant capacities dates indicated h b lipham iii date march 14 2006 hb lipham iii president chief executive officer principal executive officer steven j haack date march 14 2006 steven j haack secretary treasurer principal financial accounting officer w green date march 14 2006 w green chairman board date march 14 2006 wanda w calhoun director grady w cole date march 14 2006 grady w cole director richard duncan date march 14 2006 richard duncan director l g joyner date march 14 2006 lg jack joyner director r david perry date march 14 2006 r david perry director date march 14 2006 l richard plunkett director date march 14 2006 thomas e reeve iii md director thomas richards date march 14 2006 thomas richards director oscar w roberts iii date march 14 2006 oscar w roberts iii director date march 14 2006 frank thomasson iii director j thomas vance date march 14 2006 j thomas vance director charles willis sr date march 14 2006 charles willis sr director wgnb corp consolidated financial statements december 31 2005 2004 independent accountants’ report thereon report independent registered public accounting firm board directors stockholders wgnb corp subsidiary audited accompanying consolidated balance sheets wgnb corp subsidiary december 31 2005 2004 related consolidated statements earnings comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2005 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiary december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america atlanta georgia february 13 2006 wgnb corp consolidated balance sheets december 31 2005 2004 see accompanying notes consolidated financial statements wgnb corp consolidated statements earnings years ended december 31 2005 2004 2003 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income years ended december 31 2005 2004 2003 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2005 2004 2003 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2005 2004 2003 wgnb corp consolidated statements cash flows continued years ended december 31 2005 2004 2003 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies basis presentation consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiary west georgia national bank “bank” significant intercompany accounts transactions eliminated consolidation bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll paulding douglas counties georgia accounting reporting policies company methods applying principles conform accounting principles generally accepted united states america gaap general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income cash equivalents purposes reporting cash flows cash equivalents include cash due banks federal funds sold securities company classifies securities one three categories trading availableforsale heldtomaturity trading securities bought held principally purpose selling near term heldtomaturity securities company ability intent hold security maturity securities included trading heldtomaturity classified availableforsale trading availableforsale securities recorded fair value heldtomaturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities availableforsale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value availableforsale heldtomaturity investment cost deemed temporary charged earnings establishes new cost basis security premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified availableforsale included earnings derived using specific identification method determining cost securities sold loans allowance loan losses loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued loans allowance loan losses continued accrual interest discontinued loan management believes considering economic business conditions collection efforts borrower’s financial condition collection interest doubtful allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment based historical losses current economic environment adequate absorb probable losses existing loans may become uncollectible loans deemed uncollectible chargedoff deducted allowance recoveries loans previously chargedoff added back allowance management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades assigned allocations loss based peer group loss experience regulatory guidelines combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgments information available time examination premises equipment premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment buildings improvements 15 39 years furniture equipment 10 years real estate properties acquired foreclosure carried lower cost defined fair value foreclosure fair value less estimated costs dispose fair value defined amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns provided charge income allowance losses real estate period need arises income taxes company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued income taxes continued event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements accounting changes fair value derivative depends intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change swap contract terminated cumulative change fair value amortized income original hedge period underlying hedged instrument sold settled company immediately recognizes cumulative change derivative’s value component earnings stock compensation plans december 31 2005 company sponsors stockbased compensation plans described fully note 10 company accounts plans recognition measurement principles apb opinion 25 “accounting stock issued employees” related interpretations stockbased employee compensation cost reflected net earnings options granted plans exercise price equal market value underlying common stock date grant following table illustrates effect net earnings per share company applied fair value recognition provisions statement financial accounting standards “sfas” 123 “accounting stockbased compensation” stockbased employee compensation years ended december 31 2005 2003 fair value option estimated date grant using blackscholes model following weighted average assumptions used grants 2005 2004 2003 respectively dividend yield 286 240 risk free interest rates 409 427 expected life 10 years price volatilities 11 29 compensation expense included proforma results determined based fair value option time grant multiplied number options granted allocated vesting period wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued earnings per share basic earnings per share based weighted average number common shares outstanding period effects potential common shares outstanding period included diluted earnings per share stock options described note 10 granted key management personnel recent accounting pronouncements december 2004 financial accounting standards board “fasb” adopted statement financial accounting standards 123r sharebased payment “sfas 123r” revises amends sfas 123 sfas 123r requires sharebased payments employees including stock options recognized financial statements based fair values upon adoption pro forma disclosure longer alternative financial statement recognition sfas 123r effective company financial statements beginning december 15 2005 company adopt provisions sfas 123r first quarter 2006 financial statement impact expected materially different shown existing pro forma disclosure required original sfas 123 march 2004 emerging issues task force “eitf” issued eitf 031 meaning otherthantemporary impairment application certain investments “eitf 031” eitf 031 provides guidance evaluating whether investment otherthantemporarily impaired disclosure guidance effective otherthantemporary impairment evaluations made reporting periods beginning june 15 2004whereas recognition measurement guidance deferred disclosures required eitf 031 included note 2 consolidated financial statements company recognize impairment loss investment 2005 2004 2003 accounting standards issued proposed fasb standard setting entities require adoption future date expected material impact company’s consolidated financial statements upon adoption wgnb corp notes consolidated financial statements continued 2 securities availableforsale heldtomaturity december 31 2005 2004 summarized follows wgnb corp notes consolidated financial statements continued 2 securities continued amortized cost estimated fair value investment securities availableforsale heldtomaturity december 31 2005 contractual maturity shown expected maturities differ average life contractual maturities borrowers right call prepay certain obligations without call prepayment penalties following summary fair values securities unrealized losses december 31 2005 2004 wgnb corp notes consolidated financial statements continued 2 securities continued december 31 2005 unrealized losses investment securities portfolio related debt securities unrealized losses debt securities arose due changing interest rates considered temporary december 31 2005 tables 22 securities 60 securities issued us government agencies government sponsored corporations including mortgage backed securities contained unrealized losses 30 85 securities issued state political subdivisions contained unrealized losses two five securities issued corporations contained unrealized losses unrealized losses considered temporary acceptable investment grades security repayment sources principal interest largely government backed december 31 2004 unrealized losses investment securities portfolio related debt securities unrealized losses debt securities arose due changing interest rates considered temporary december 31 2004 tables 9 98 securities issued state political subdivisions contained unrealized losses 7 60 securities issued us government agencies government sponsored corporations including mortgagebacked securities contained unrealized losses unrealized losses considered temporary acceptable investment grades security repayment sources principal interest largely government backed proceeds sales securities availableforsale 2005 3789185 gross gains 227863 gross losses recognized sales securities availableforsale 2004 2003 investment securities fair value approximately 61904000 56601000 december 31 2005 2004 respectively pledged secure public deposits required law purposes 3 loans major classifications loans december 31 2005 2004 summarized follows company grants loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market line credit agreement federal home loan bank see note 6 bank pledges acceptable loans blanket lien collateral borrowings changes allowance loan losses years ended december 31 2005 2004 2003 follows wgnb corp notes consolidated financial statements continued 4 premises equipment major classifications premises equipment december 31 2005 2004 summarized follows depreciation expense amounted 1048865 919153 863369 2005 2004 2003 respectively 5 deposits december 31 2005 scheduled maturities time deposits follows bank held 55577610 19580452 certificates deposit obtained efforts third party brokers december 31 2005 2004 respectively weighted average interest rate deposits december 31 2005 2004 393 334 respectively deposits outstanding december 31 mature follows 6 lines credit bank lines credit overnight borrowings 20800000 december 31 2005 2004 bank also line credit federal home loan bank atlanta fhlb credit availability totaling 128720000 december 31 2005 fhlb advances secured bank’s stock fhlb qualifying 14 family first mortgage loans qualified commercial loans advances fhlb line credit subject available collateral bank december 31 2005 2004 bank advances outstanding fhlb amounting 42000000 55000000 respectively bank 13928000 excess collateral available december 31 2005 additional borrowing early conversion option allows fhlb convert advances variable interest rate upon notification bank following advances require quarterly interest payments wgnb corp notes consolidated financial statements continued 6 lines credit continued 7 commitments contingencies balance sheet commitments company party financial instruments balance sheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations balance sheet instruments cases company requires collateral support financial instruments credit risk following table summarizes balance sheet financial instruments december 31 2005 2004 commitments extend credit agreements lend customer long violation condition established contract commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property derivative instruments hedging activities december 31 2005 2004 company held interest rate swap position company entered swap may 24 2004 36month period interest rate swap contract notional amount 30000000 company receives fixed rate 340 pays rate 90 day libor floating quarterly 90 day libor 439 december 31 2005 236 december 31 2004 wgnb corp notes consolidated financial statements continued 7 commitments contingencies continued derivative instruments hedging activities continued objective swap manage company’s interest rate risk exposure company susceptible interest rate risk outside tolerance asset liability management policy interest rates would remained low moved lower early 2004 part attributable fixed rate nature certain borrowings federal home loan bank preceding rapid decline market interest rates discount rate historic low economic data suggested rates could remain low extended period time management modeled swap using multiple interest rate environments determined interest rate risk exposure would greatly reduced engaging payfixed receive floating interest rate swap company uses long haul method assess effectiveness current hedging activity accounted hedge instrument fair value hedge company determined hedge effective measuring change net present value expected cash flows interest advances change market value swap company determined swap effective 2005 2004 contingencies various legal actions proceedings pending threatened company subsidiary seek relief damages amounts substantial actions proceedings arise ordinary course company’s business consultation legal counsel management believes aggregate liability resulting pending threatened actions proceedings material adverse effect company’s financial condition 8 stock repurchase plan 1996 board directors approved stock repurchase plan 2000000 company’s common stock currently outstanding 2001 board directors approved additional 1000000 used stock repurchase plan company retired 1770 32086 5847 shares common stock 2005 2004 2003 respectively december 31 2005 company 891525 remaining reacquire shares stock repurchase plan 9 regulatory matters company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet specific capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets management believes december 31 2005 2004 company bank met capital adequacy requirements subject 1994 plan expired according terms wgnb corp notes consolidated financial statements continued 9 regulatory matters continued december 31 2005 2004 recent notification federal deposit insurance corporation categorized bank well capitalized regulatory framework prompt corrective action categorized well capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table conditions events since notification management believes changed institution’s category presented company’s bank’s actual capital amounts ratios dividends paid bank primary source funds available company banking regulations limit amount dividends may paid without prior approval regulatory authorities restrictions based level regulatory classified assets prior years’ net earnings ratio equity capital total assets december 31 2005 bank could pay approximately 4011000 dividends without obtaining prior regulatory approval 10 incentive stock option plan january 11 1994 incentive stock option plan “1994 plan” company may grant options certain key officers acquire shares common stock company fair value number shares determined annually agreed upon formulas total 160000 shares common stock reserved possible issuance 1994 plan december 31 2003 company distributed options available awards 1994 plan options may exercised prior five years date grant exercisable later ten years date compensation cost recognized stock options december 31 2005 1994 plan expired according terms wgnb corp notes consolidated financial statements continued 10 incentive stock option plan continued april 8 2003 shareholders approved wgnb corp 2003 stock incentive plan “2003 plan” 2003 plan company may grant options certain key officers acquire shares common stock company fair value incentive stock options less 85 fair value nonqualified stock options number shares determined annually agreed upon formulas total 660000 shares common stock reserved possible issuance 2003 plan maximum 350000 shares issued nonqualified stock option grants december 31 2005 company distributed 23730 options available awards 2003 plan options 2003 plan distributed commencing fiscal year terminate february 3 2014 unless previously terminated board directors options approved plan distributed options may exercised participants vesting period five years ratably 20 per year options exercisable later ten years date grant compensation cost recognized stock options december 31 2005 summary status company’s stock option plans december 31 2005 2004 2003 changes years ending dates presented following information applies options outstanding december 31 2005 11 defined contribution plan company began qualified retirement plan pursuant internal revenue code section 401k 1996 covering substantially employees subject certain minimum age service requirements contribution plan employees voluntary 2005 2004 2003 company matched 100 participants’ contributions 6 participants’ salaries subject annual 401k contribution limits company also made discretionary contributions plan 2005 2004 2003 5 participants’ salaries contributions plan charged expense 2005 2004 2003 491265 453704 433505 respectively wgnb corp notes consolidated financial statements continued 12 income taxes components provision income taxes consolidated statements earnings years ended december 31 2005 2004 2003 follows differences provision income taxes amount computed applying statutory federal income tax rate earnings income taxes follows following summarizes net deferred tax asset included component assets december 31 2005 2004 wgnb corp notes consolidated financial statements continued 13 related party transactions bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2005 december 31 2005 2004 deposits directors executive officers related interests totaled approximately 7559000 8300000 respectively 14 operating expenses components operating expenses exceed 1 total interest income follows 15 fair value financial instruments company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiaries rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance cash equivalents cash due banks federal funds sold carrying amount reasonable estimate fair value securities fair values investment securities based quoted market prices loans fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value deposits fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal home loan bank advances fair value advances outstanding based quoted value provided fhlb wgnb corp notes consolidated financial statements continued 15 fair value financial instruments continued derivative instruments derivative instruments fair value estimated amount company would receive pay terminate contracts reporting date taking account current unrealized gains losses open contracts commitments extend credit standby letters credit balance sheet instruments commitments extend credit standby letters credit generally shortterm variable interest rates therefore carrying value estimated fair value associated instruments immaterial limitations fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgments estimates subjective nature involve uncertainties matters significant judgment therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing balance sheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates carrying amount estimated fair values company’s financial instruments december 31 2005 2004 follows wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information balance sheets december 31 2005 2004 statements earnings years ended december 31 2005 2004 2003 wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information continued statements cash flows years ended december 31 2005 2004 2003 item 15 exhibits financial statement schedules a1 financial statements following financial statements filed report independent registered public accounting firm consolidated balance sheets december 31 2006 2005 consolidated statements earnings years ended december 31 2006 2005 consolidated statements comprehensive income years ended december 31 2006 consolidated statements changes stockholders’ equity years ended december 31 2006 2005 2004 consolidated statements cash flows years ended december 31 2006 2005 notes consolidated financial statements 2 financial statement schedules financial statement schedules omitted applicable required information incorporated consolidated financial statements related notes 3 following exhibits filed report 31 amended restated articles incorporation incorporated reference exhibit 31 company’s registration statement form 10sb filed june 14 2000 “form 10sb” 32 amended restated bylaws incorporated reference exhibit 32 form 10sb 41 see exhibits 31 32 provisions company’s articles incorporation bylaws defining rights shareholders 42 specimen certificate representing shares common stock incorporated reference exhibit 42 form 10sb 43 rights agreement dated february 12 1997 company suntrust bank atlanta incorporated reference exhibit 43 form 10sb 101 employment agreement dated july 11 2006 hb lipham iii wgnb corp west georgia national bank incorporated reference exhibit 101 company’s form 8k dated july 11 2006 102 bonus stock option agreement dated september 23 1998 company hb lipham iii incorporated reference exhibit 106 form 10sb 103 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 104 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 105 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 106 employment agreement dated august 8 2005 among wgnb corp west georgia national bank steven j haack incorporated reference exhibit 101 company’s form 8k dated august 8 2005 107 employment agreement dated july 11 2005 west georgia national bank w galen hobbs jr incorporated reference exhibit 101 company’s form 8k dated july 11 2005 108 second amendment bonus stock option agreement dated june 17 2002 company hb lipham iii incorporated reference exhibit 107 company’s form 10q quarter ended june 30 2002 “63002 form 10q 109 incentive stock option agreement dated march 12 2002 company hb lipham iii incorporated reference exhibit 108 63002 form 10q 1010 amendment bonus stock option agreement dated may 30 2002 company w galen hobbs jr incorporated reference exhibit 1010 63002 form 10q 1011 incentive stock option agreement dated march 12 2002 company w galen hobbs jr incorporated reference exhibit 1011 63002 form 10q 1012 amendment bonus stock option agreement dated april 26 2002 company steven j haack incorporated reference exhibit 1013 63002 form 10q 1013 incentive stock option agreement dated march 12 2002 company steven j haack incorporated reference exhibit 1014 63002 form 10q 1014 stock incentive plan incorporated reference appendix company’s definitive proxy statement 2004 annual meeting 1015 employment agreement dated december 31 2002 company william r whitaker incorporated reference exhibit 1031 company annual report form 10k year ended december 31 2004 “2004 form 10k” 1016 bonus stock option agreement dated december 27 2004 company william r whitaker incorporated reference exhibit 1032 2004 form 10k 1017 separations agreement release dated february 14 2006 company bank l leighton alston incorporated reference exhibit 1023 company’s form 10k year ended december 31 2005 subsidiary wgnb corp consent porter keadle moore llp 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanes oxley act 2002 321 certification chief executive officer pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant section 906 sarbanes oxley act 2002 indicates management contract compensatory plan arrangement signatures pursuant requirements section 13 15d exchange act registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements exchange act report signed following persons behalf registrant capacities dates indicated hb lipham iii date february 14 hb lipham iii president chief executive officer director principal executive officer steven j haack date february 14 2007 steven j haack secretary treasurer principal financial accounting officer w green date february 15 2007 w green chairman board wanda w calhoun director date february 2007 grady w cole date february 15 2007 grady w cole director richard duncan date february 15 2007 richard duncan directer r david perry date february 15 2007 r david perry director l richard plunkett date february 15 2007 l richard plunkett director thomas e reeve iii md director date february 2007 thomas richards date february 14 2007 thomas richards director oscar w roberts iii director date february 2007 frank thomasson iii date february 15 2007 frank thomasson iii director j thomas vance date february 15 2007 j thomas vance director charles willis sr director date february wgnb corp consolidated financial statements december 31 2006 2005 report independent registered public accounting firm report independent registered public accounting firm board directors stockholders wgnb corp subsidiary audited accompanying consolidated balance sheets wgnb corp subsidiary december 31 2006 2005 related consolidated statements earnings comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2006 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiary december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america atlanta georgia february 5 2007 certified public accountants suite 1800 ÿ peachtree street ne ÿ atlanta georgia 30303 ÿ phone 4045884200 ÿ fax 4045884222 ÿ wwwpkmcom wgnb corp consolidated balance sheets december 31 2006 2005 see accompanying notes consolidated financial statements wgnb corp consolidated statements earnings years ended december 31 2006 2005 2004 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income years ended december 31 2006 2005 2004 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2006 2005 2004 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2006 2005 2004 wgnb corp consolidated statements cash flows continued years ended december 31 2006 2005 2004 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies basis presentation consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiary west georgia national bank “bank” significant intercompany accounts transactions eliminated consolidation bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll paulding douglas counties georgia accounting reporting policies company methods applying principles conform accounting principles generally accepted united states america gaap general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income cash equivalents purposes reporting cash flows cash equivalents include cash due banks federal funds sold securities company classifies securities one three categories trading availableforsale heldtomaturity trading securities bought held principally purpose selling near term heldtomaturity securities company ability intent hold security maturity securities included trading heldtomaturity classified availableforsale trading availableforsale securities recorded fair value heldtomaturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities availableforsale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value availableforsale heldtomaturity investment cost deemed temporary charged earnings establishes new cost basis security premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified availableforsale included earnings derived using specific identification method determining cost securities sold loans allowance loan losses loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued loans allowance loan losses continued accrual interest discontinued loan management believes considering economic business conditions collection efforts borrower’s financial condition collection interest doubtful allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment based historical losses current economic environment adequate absorb probable losses existing loans may become uncollectible loans deemed uncollectible chargedoff deducted allowance recoveries loans previously chargedoff added back allowance management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans eight different categories grades assigned allocations loss based peer group loss experience regulatory guidelines combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgments information available time examination premises equipment premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment buildings improvements 15 39 years furniture equipment 3 10 years investments include federal home loan bank “fhlb” stock federal reserve bank stock investments federal state income tax credit partnerships equity securities investments readily determinable fair value carried cost real estate properties acquired foreclosure carried lower cost defined fair value foreclosure fair value less estimated costs dispose fair value defined amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns provided charge income allowance losses real estate period need arises income taxes company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued income taxes continued event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements accounting changes fair value derivative depends intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change swap contract terminated cumulative change fair value amortized income original hedge period underlying hedged instrument sold settled company immediately recognizes cumulative change derivative’s value component earnings stock compensation plans statement financial accounting standards 123 revised 2004 sfas no123 r “sharebased payment” adopted company required effective date january 1 2006 using modified prospective transition method provided standard sfas 123 r addresses accounting sharebased payment transactions company receives employee services exchange equity instruments company sfas 123 r requires company recognize compensation expense “grant date fair value” stock options granted employees statement earnings using fairvaluebased method prior adoption sfas 123 r company utilized recognition measurement principles previously permissible accounting principles board opinion 25 apb 25 “accounting stock issued employees” related interpretations apb 25 compensation expense recognized statement earnings since exercise price grant date equal market value underlying stock following table presents effect net earnings per common share years ended december 31 2005 2004 fairvaluebased method required sfas 123r applied periods company recognized 128250 stockbased employee compensation expense year ended december 31 2006 associated stock option grants company recognizing compensation expense stock option grants graded vesting schedules straightline basis requisite service period award required sfas 123 r december 31 2006 279901 unrecognized compensation cost related stock option grants cost expected recognized vesting period approximately five years wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued stock compensation plans continued grantdate fair value option granted 2006 2005 2004 447 296 612 respectively fair value option estimated date grant using blackscholes model following weighted average assumptions used grants 2006 2005 2004 earnings per share basic earnings per share based weighted average number common shares outstanding period effects potential common shares outstanding period included diluted earnings per share stock options described note 10 granted key management personnel recent accounting pronouncements accounting conditional asset retirement obligations march 2005 financial accounting standards board issued fasb interpretation 47 “accounting conditional asset retirement obligations” “fin 47” interpretation clarifies term “conditional asset retirement obligation” used sfas 143 “accounting asset retirement obligations” refers legal obligation perform asset retirement activity timing method settlement conditional future event may within control entity according fin 47 entity required recognize liability fair value conditional asset retirement obligation incurred liability’s fair value reasonably estimated provisions fin47 effective fiscal years ending december 15 2005 implementation fin 47 affect company’s consolidated financial position results operations cash flows wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued recent accounting pronouncements continued accounting uncertainty income taxes june 2006 fasb issued fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement “fin 48” interpretation clarifies management expected evaluate income tax position taken expected taken likelihood realization recording amounts position financial statements fin 48 also requires expanded disclosure respect income tax positions taken certain realized interpretation effective fiscal years beginning december 15 2006 require management evaluate every open tax position exists every jurisdiction date initial adoption company completed assessment impact determined adjustment company’s tax reserve necessary fair value measurements september 2006 fasb issued sfas 157 fair value measurements sfas 157 require new fair value measurements rather provides enhanced guidance pronouncements require permit assets liabilities measured fair value however application statement may change fair value determined statement effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years financial statement impact expected material company’s financial position results operations disclosures accounting standards issued proposed fasb standard setting entities require adoption future date expected material impact company’s consolidated financial statements upon adoption reclassifications certain reclassifications made prior years consolidated statements conform presentation used 2006 2 securities availableforsale heldtomaturity december 31 2006 2005 summarized follows wgnb corp notes consolidated financial statements continued 2 securities continued amortized cost estimated fair value investment securities availableforsale heldtomaturity december 31 2006 contractual maturity shown expected maturities differ average life contractual maturities borrowers right call prepay certain obligations without call prepayment penalties following summary fair values securities unrealized losses december 31 2006 2005 wgnb corp notes consolidated financial statements continued 2 securities continued december 31 2006 unrealized losses investment securities portfolio related debt securities unrealized losses debt securities arose due changing interest rates considered temporary december 31 2006 tables 19 securities 59 securities issued us government agencies government sponsored corporations including mortgage backed securities contained unrealized losses 22 93 securities issued state political subdivisions contained unrealized losses one five securities issued corporations contained unrealized losses unrealized losses considered temporary acceptable investment grades security repayment sources principal interest largely government backed december 31 2005 unrealized losses investment securities portfolio related debt securities unrealized losses debt securities arose due changing interest rates considered temporary december 31 2005 tables 22 60 securities issued us government agencies government sponsored corporations including mortgagebacked securities contained unrealized losses 30 85 securities issued state political subdivisions contained unrealized losses two five securities issued corporations contained unrealized losses unrealized losses considered temporary acceptable investment grades security repayment sources principal interest largely government backed proceeds sales securities availableforsale 2005 3789185 gross gains 227863 gross losses recognized sales securities availableforsale 2006 2004 investment securities fair value approximately 60360000 61904000 december 31 2006 2005 respectively pledged secure public deposits required law purposes 3 loans major classifications loans december 31 2006 2005 summarized follows wgnb corp notes consolidated financial statements continued 3 loans continued company grants loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market line credit agreement federal home loan bank see note 6 bank pledges acceptable loans blanket lien collateral borrowings december 31 2006 2005 loans totaling 79604000 89632000 respectively pledged secure federal home loan bank advances changes allowance loan losses years ended december 31 2006 2005 2004 follows 4 premises equipment major classifications premises equipment december 31 2006 2005 summarized follows depreciation expense amounted 1134746 1048866 919153 2006 2005 2004 respectively 5 deposits december 31 2006 scheduled maturities time deposits follows bank held 62713161 55577610 certificates deposit obtained efforts third party brokers december 31 2006 2005 respectively weighted average interest rate deposits december 31 2006 2005 505 393 respectively deposits outstanding december 31 2006 mature follows 6 lines credit bank lines credit overnight borrowings 20800000 december 31 2006 2005 2475000 outstanding december 31 2006 bank also line credit federal home loan bank atlanta fhlb credit availability totaling 139230000 december 31 2006 fhlb advances secured bank’s stock fhlb it’s qualifying 14 family first mortgage loans qualified commercial loans addition fhlb accepts certain investment securities collateral advances fhlb line credit subject available collateral bank december 31 2006 2005 bank advances outstanding fhlb amounting 52000000 42000000 respectively bank adequate collateral available december 31 2006 borrowing early conversion option allows fhlb convert advances variable interest rate upon notification bank following advances require quarterly interest payments wgnb corp notes consolidated financial statements continued 6 lines credit continued december 31 2006 december 31 2005 7 commitments contingencies balance sheet commitments company party financial instruments balance sheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations balance sheet instruments cases company requires collateral support financial instruments credit risk following table summarizes balance sheet financial instruments december 31 2006 2005 wgnb corp notes consolidated financial statements continued 7 commitments contingencies continued balance sheet commitments continued commitments extend credit agreements lend customer long violation condition established contract commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property standby letters credit conditional commitments issued company guarantee performance customer third party credit risk involved issuing letters credit essentially involved extending loans derivative instruments hedging activities december 31 2006 company held sixteen interest rate swap positions company entered swap may 24 2004 matures may 24 2007 interest rate swap contract notional amount 30000000 company receives fixed rate 340 pays rate 90 day libor floating quarterly 90 day libor 536 december 31 2006 439 december 31 2005 company entered series fifteen interest rate swap agreements total notional amount 41156509 september 19 2006 related issuance brokered certificates deposit interest rate swap contracts various notional amounts maturity dates receive fixed rates pay floating rates stated terms basis points plus minus 1 month libor rate follows month libor rate initiation contracts 533 pay floating rate changes month monthly reset date contract spread indicated remains constant 1 month libor rate contract 535 total notional amount contracts remained 41156509 december 31 2006 objective swap agreements decrease company’s interest rate risk exposure asset sensitive company remains susceptible interest rate risk downward rate environment part attributable fixed rate nature company’s brokered certificates deposit federal home loan bank borrowings company using swap agreements convert fixed rate brokered certificates deposit borrowings floating rate instruments consequently interest rate swap contracts allow company hedge changes fair value brokered certificates deposit borrowings result changes benchmark interest rates benchmark interest rate defined 1 month libor rate order achieve hedge objective company agreed pay floating rate interest exchange receiving fixed rate interest hedge instruments equal fixed rate coupon certificates deposit borrowings wgnb corp notes consolidated financial statements continued 7 commitments contingencies continued derivative instruments hedging activities continued company uses long haul method afforded sfas 133 “accounting derivative instruments hedging activities” assess effectiveness current hedging activity accounted hedge instruments fair value hedges company assesses effectiveness hedge contracts regressing market price including premium paid brokered certificates deposit borrowings dependent variables market price interest rate swap independent variable quarterly basis contracts matured regression analysis include data set values retrospective realized historical prices prospective shocked scenario analysis basis hedge considered effective correlation coefficient within “80120” rule r square highly correlative value 1 fstat large signifying high explanatory power company designated swap contracts fair value hedges accordingly recording fair value derivative well fair value item hedged balance sheet changes fair value swap contracts items hedged recorded current period earnings contingencies various legal actions proceedings pending threatened company subsidiary seek relief damages amounts substantial actions proceedings arise ordinary course company’s business consultation legal counsel management believes aggregate liability resulting pending threatened actions proceedings material adverse effect company’s financial condition 8 stock repurchase plan beginning 1996 board directors approved stock repurchase plan 2000000 company’s common stock currently outstanding 2001 board directors approved additional 1000000 used stock repurchase plan company retired 12000 2655 48129 shares common stock 2006 2005 2004 respectively december 31 2006 company 588482 remaining reacquire shares stock repurchase plan 9 regulatory matters company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet specific capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets management believes december 31 2006 2005 company bank met capital adequacy requirements subject december 31 2006 2005 recent notification federal deposit insurance corporation categorized bank well capitalized regulatory framework prompt corrective action categorized well capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table conditions events since notification management believes changed institution’s category presented company’s bank’s actual capital amounts ratios wgnb corp notes consolidated financial statements continued 9 regulatory matters continued dividends paid bank primary source funds available company banking regulations limit amount dividends may paid without prior approval regulatory authorities restrictions based level regulatory classified assets prior years’ net earnings ratio equity capital total assets december 31 2006 bank could pay approximately 11626000 dividends without obtaining prior regulatory approval 10 incentive stock option plan january 11 1994 incentive stock option plan “1994 plan” company may grant options certain key officers acquire shares common stock company fair value number shares determined annually agreed upon formulas total 240000 shares common stock reserved possible issuance 1994 plan december 31 2003 company distributed options available awards 1994 plan options may exercised prior five years date grant exercisable later ten years date compensation cost amount 86000 recognized stock options december 31 2006 plan 1994 plan expired according terms however 61233 options unexercised december 31 2006 april 8 2003 shareholders approved wgnb corp 2003 stock incentive plan “2003 plan” 2003 plan company may grant options certain key officers acquire shares common stock company fair value incentive stock options less 85 fair value nonqualified stock options number shares determined annually agreed upon formulas total 990000 shares common stock reserved possible issuance 2003 plan maximum 525000 shares issued nonqualified stock option grants 2006 company distributed 33470 options available awards 2003 plan options 2003 plan distributed commencing 2004 fiscal year terminate february 14 2015 unless previously terminated board directors options approved plan distributed options may exercised participants vesting period five years ratably 20 per year options exercisable later ten years date grant compensation cost amount 42250 recognized stock options december 31 2006 2003 plan 69003 options unexercised december 31 2006 wgnb corp notes consolidated financial statements continued 10 incentive stock option plan continued summary status company’s stock option plans december 31 2006 2005 2004 changes years ending dates presented following information applies options outstanding december 31 2006 total intrinsic value options exercised 2006 2005 2004 578435 6013 959350 respectively intrinsic value exercisable options based market price 2751 december 31 2006 11 stock split september 12 2006 company’s board directors declared threefortwo stock split shareholders record october 16 2006 payable november 15 2006 share per share amounts restated reflect stock split occurred january 1 2004 12 defined contribution plan company began qualified retirement plan pursuant internal revenue code section 401k 1996 covering substantially employees subject certain minimum age service requirements contribution plan employees voluntary 2006 2005 2004 company matched 100 participants’ contributions 6 participants’ salaries subject annual 401k contribution limits company also made discretionary contributions plan 2006 2005 2004 5 participants’ salaries contributions plan charged expense 2006 2005 2004 547255 491265 455172 respectively wgnb corp notes consolidated financial statements continued 13 income taxes components provision income taxes consolidated statements earnings years ended december 31 2006 2005 2004 follows differences provision income taxes amount computed applying statutory federal income tax rate earnings income taxes follows following summarizes net deferred tax asset included component assets december 31 2006 2005 wgnb corp notes consolidated financial statements continued 14 related party transactions bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2006 december 31 2006 2005 deposits directors executive officers related interests totaled approximately 7114000 7559000 respectively 15 operating expenses components operating expenses exceed 1 total interest income follows 16 fair value financial instruments company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiary rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance cash equivalents cash due banks federal funds sold carrying amount reasonable estimate fair value securities fair values investment securities based quoted market prices loans fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value deposits fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal funds purchased federal funds purchased carrying amount reasonable estimate fair value federal home loan bank advances fair value advances outstanding based quoted value provided fhlb wgnb corp notes consolidated financial statements continued 16 fair value financial instruments continued derivative instruments derivative instruments fair value estimated amount company would receive pay terminate contracts reporting date taking account current unrealized gains losses open contracts commitments extend credit standby letters credit balance sheet instruments commitments extend credit standby letters credit generally shortterm variable interest rates therefore carrying value estimated fair value associated instruments immaterial limitations fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgments estimates subjective nature involve uncertainties matters significant judgment therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing balance sheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates carrying amount estimated fair values company’s financial instruments december 31 2006 2005 follows wgnb corp notes consolidated financial statements continued 17 wgnb corp parent company financial information balance sheets december 31 2006 2005 statements earnings years ended december 31 2006 2005 2004 wgnb corp notes consolidated financial statements continued 17 wgnb corp parent company financial information continued statements cash flows years ended december 31 2006 2005 2004 wgnb corp notes consolidated financial statements continued 18 subsequent events unaudited january 22 2007 wgnb corp entered agreement plan reorganization among wgnb corp west georgia national bank first haralson corporation first national bank georgia whereby first haralson corporation merged wgnb corp concurrently first national bank georgia merged west georgia national bank consummation transaction subject approval companies’ shareholders anticipated close second quarter 2007 first haralson corporation headquartered buchanan georgia operates four branches haralson county two branches carroll county december 31 2006 first haralson corporation held 2154 million total assets 1399 million total loans 1769 million total deposits 257 million shareholders’ equity fiscal year ended december 31 2006 first haralson corporation recorded net income 2400000 terms merger agreement first haralson corporation’s shareholders may elect receive cash wgnb corp common stock combination two 46250000 aggregate shareholder election subject limits minimum 11562500 maximum 18500000 cash consideration issued merger addition terms merger agreement allow first haralson corporation pay onetime special dividend exceed 7250000 aggregate approximately 3567 per share first haralson corporation share first haralson corporation shareholders prior closing proposed transaction unanimously approved boards directors companies subject shareholder regulatory approvals well customary conditions closing item 15 exhibits financial statement schedules financial statement schedules omitted applicable required information incorporated consolidated financial statements related notes 107 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 108 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 109 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 1010 employment agreement dated august 30 2000 company richard duncan incorporated reference exhibit 1011 company’s annual report form 10ksb filed february 21 2001 “2000 form 10ksb” 1011 employment agreement dated august 31 2000 company steven j haack incorporated reference exhibit 1013 2000 form 10ksb 1012 employment agreement dated august 31 2000 company hb lipham iii incorporated reference exhibit 1014 2000 form 10ksb 1013 employment agreement dated august 31 2000 company w galen hobbs jr incorporated reference exhibit 1015 2000 form 10ksb 1014 amendment employment agreement dated may 30 2002 company l leighton alston incorporated reference exhibit 101 company’s annual report form 10q filed august 13 2002 “63002 form 10q” 1015 amendment bonus stock option agreement dated june 17 2002 company l leighton alston incorporated reference exhibit 102 63002 form 10q 1016 incentive stock option agreement dated march 12 2002 company l leighton alston incorporated reference exhibit 103 63002 form 10q 1017 amendment employment agreement dated april 11 2002 company richard duncan incorporated reference exhibit 104 63002 form 10q 1018 incentive stock option agreement dated march 12 2002 company richard duncan incorporated reference exhibit 105 63002 form 10q 1019 amendment employment agreement dated april 11 2002 company hb lipham iii incorporated reference exhibit 106 63002 form 10q 1020 second amendment bonus stock option agreement dated june 17 2002 company hb lipham iii incorporated reference exhibit 107 63002 form 10q 1021 incentive stock option agreement dated march 12 2002 company hb lipham iii incorporated reference exhibit 108 63002 form 10q 1022 amendment employment agreement dated april 11 2002 company w galen hobbs jr incorporated reference exhibit 109 63002 form 10q 1023 amendment bonus stock option agreement dated may 30 2002 company w galen hobbs jr incorporated reference exhibit 1010 63002 form 10q 1024 incentive stock option agreement dated march 12 2002 company w galen hobbs jr incorporated reference exhibit 1011 63002 form 10q 1025 amendment employment agreement dated april 11 2002 company steven j haack incorporated reference exhibit 1012 63002 form 10q 1026 amendment bonus stock option agreement dated april 26 2002 company steven j haack incorporated reference exhibit 1013 63002 form 10q 1027 incentive stock option agreement dated march 12 2002 company steven j haack incorporated reference exhibit 1014 63002 form 10q 1028 2003 stock incentive plan incorporated reference appendix 2004 proxy statement 1029 amendment employment agreement dated may 10 2004 company steven j haack 1030 employment agreement dated december 31 2002 company william r whitaker 1031 bonus stock option agreement dated december 27 2004 company william r whitaker subsidiary wgnb corp consent porter keadle moore llp 311 certification chief executive officer pursuant section 302 sarbanesoxley act 312 certification chief financial officer pursuant section 302 sarbanes oxley act 321 certification chief executive officer pursuant section 906 sarbanesoxley act 322 certification chief financial officer pursuant section 906 sarbanes oxley act indicates management contract compensatory plan arrangement signatures pursuant requirements section 13 15d exchange act registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements exchange act report signed following persons behalf registrant capacities dates indicated l leighton alston date march 22 2005 l leighton alston president chief executive officer director principal executive officer steven j haack date march 22 2005 steven j haack secretary treasurer principal financial accounting officer w green chairman board date march 2005 wanda w calhoun director date march 2005 grady w cole date march 23 2005 grady w cole director richard duncan date march 23 2005 richard duncan director l g joyner date march 23 2005 lg jack joyner director r david perry director date march 2005 l richard plunkett director date march 2005 thomas e reeve iii md date march 23 2005 thomas e reeve iii md director thomas richards date march 23 2005 thomas richards director date march 2005 oscar w roberts iii director frank thomasson iii date march 23 2005 frank thomasson iii director j thomas vance date march 23 2005 j thomas vance director charles willis sr date march 23 2005 charles willis sr director wgnb corp consolidated financial statements december 31 2004 2003 independent accountants’ report thereon porter keadle moore llp report independent registered public accounting firm board directors stockholders wgnb corp subsidiaries audited accompanying consolidated balance sheets wgnb corp subsidiaries december 31 2004 2003 related consolidated statements earnings comprehensive income changes stockholders’ equity cash flows three years ended december 31 2004 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiaries december 31 2004 2003 results operations cash flows three years ended december 31 2004 conformity generally accepted accounting principles united states america atlanta georgia january 21 2005 certified public accountants suite 1800 • 235 peachtree street ne • atlanta georgia 30303 • phone 4045884200 • fax 4045884222 • wwwpkmcom wgnb corp consolidated balance sheets december 31 2004 2003 see accompanying notes consolidated financial statements wgnb corp consolidated statements earnings years ended december 31 2004 2003 2002 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income years ended december 31 2004 2003 2002 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2004 2003 2002 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2004 2003 2002 wgnb corp consolidated statements cash flows continued years ended december 31 2004 2003 2002 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies following summary significant policies procedures basis presentation consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiary west georgia national bank “bank” significant intercompany accounts transactions eliminated consolidation 2002 company completed public offering 200000 shares common stock purchase price 2400 per share aggregate amount 4800000 offering conducted company’s officers directors bestefforts basis without compensation company received net proceeds offering 4766654 representing total offering proceeds 4800000 less offering expenses 33346 2002 company merged operation west georgia credit services inc bank company additionally company ceased offering nontraditional consumer financing wgcs operated name mortgage loan solutions commenced operations 1997 serving paulding douglas carroll counties bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll douglas counties georgia accounting reporting policies company methods applying principles conform accounting principles generally accepted united states america gaap general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income cash equivalents purposes reporting cash flows cash equivalents include cash due banks federal funds sold securities company classifies securities one three categories trading available sale held maturity trading securities bought held principally purpose selling near term held maturity securities company ability intent hold security maturity securities included trading held maturity classified available sale trading available sale securities recorded fair value held maturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities available sale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value available sale investment cost deemed temporary charged earnings establishes new cost basis security premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified available sale included earnings derived using specific identification method determining cost securities sold wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued loans allowance loan losses loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan accrual interest discontinued loan management believes considering economic business conditions collection efforts borrower’s financial condition collection interest doubtful allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment based historical losses current economic environment adequate absorb probable losses existing loans may become uncollectible loans deemed uncollectible chargedoff deducted allowance recoveries loans previously chargedoff added back reserve management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgments information available time examination premises equipment premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment building improvements 15 39 years furniture equipment 3 10 years real estate properties acquired foreclosure carried lower cost defined fair value foreclosure fair value less estimated costs dispose accounting literature defines fair value amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns provided charge income allowance losses real estate period need arises income taxes company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued income taxes continued event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements accounting changes fair value derivative depends intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change swap contract settled terminated cumulative change fair value amortized income original hedge period underlying hedged instrument sold company immediately recognizes cumulative change derivative’s value component earnings december 31 2004 company held interest rate swap entered means managing interest rate risk accounted hedge instrument fair value hedge interest rate swap contract notional amount 30000000 used hedge bank’s fixed rate interest risk related borrowing federal home loan bank interest rate swap contract company received fixed rate 340 paid rate 90 day libor 236 december 31 2004 december 31 2003 2002 company hold interest rate swap position stock compensation plans statement financial accounting standards “sfas” 123 “accounting stockbased compensation” encourages entities adopt fair value based method accounting employee stock compensation plans whereby compensation cost measured grant date based value award recognized service period usually vesting period however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board opinion 25 “accounting stock issued employees” whereby compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock options issued company’s stock option plan intrinsic value grant date opinion 25 compensation cost recognized company elected continue accounting methodology opinion 25 result provided pro forma disclosures net earnings per share disclosures fair value based method accounting applied compensation cost plan determined based upon fair value options grant dates company’s net earnings net earnings per share would reduced proforma amounts indicated wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued stock compensation plans continued fair value option estimated date grant using blackscholes model following weighted average assumptions used grants 2004 2003 2002 respectively dividend yield 240 risk free interest rates 427 414 expected life 10 years price volatilities 29 25 applied years ended 2004 2003 2002 respectively disclosure purposes company immediately recognized expense associated option grants assuming awards vest compensation expense included proforma results determined based fair value option time grant multiplied number options granted net related tax effect earnings per share earnings per common share based weighted average number common shares outstanding period effects potential common shares outstanding period included diluted earnings per share stock options described note 10 granted key management personnel new accounting standards accounting standards issued proposed financial accounting standards board standard setting entities require adoption future date expected material impact company’s consolidated financial statements upon adoption sharebased payment december 2004 fasb revised sfas 123 “sfas 123 ®” sfas 123 ® sharebased payment requires share based payments employees including grants employee stock options recognized financial statements based fair values pro forma disclosure longer alternative financial statement recognition sfas 123 ® effective periods beginning june 15 2005 company still evaluating transition provisions allowed sfas 123 ® expects adopt standard third quarter 2005 financial statement impact expected materially different shown existing pro forma disclosure required original sfas 123 wgnb corp notes consolidated financial statements continued wgnb corp notes consolidated financial statements continued 2 securities continued amortized cost estimated fair value investment securities available sale held maturity december 31 2004 contractual maturity shown expected maturities differ contractual maturities borrowers right call prepay certain obligations without call prepayment penalties following summary fair values securities market losses december 31 2004 company determined decline fair value amortized cost basis temporary purposes promulgated statement financial accounting standards 115 accounting certain debt equity securities since securities losses twelve month period wgnb corp notes consolidated financial statements continued company grants loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market line credit agreement federal home loan bank see note 6 bank pledges acceptable loans blanket lien collateral borrowings changes allowance loan losses years ended december 31 2004 2003 2002 follows wgnb corp notes consolidated financial statements continued wgnb corp notes consolidated financial statements continued 6 lines credit continued 7 commitments company party financial instruments balance sheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations balance sheet instruments cases company requires collateral support financial instruments credit risk following table summarizes balance sheet financial instruments december 31 2004 2003 commitments extend credit agreements lend customer long violation condition established contract commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property various legal actions proceedings pending threatened company subsidiaries seek relief damages amounts substantial actions proceedings arise ordinary course company’s business consultation legal counsel management believes aggregate liability resulting pending threatened actions proceedings material adverse effect company’s financial condition wgnb corp notes consolidated financial statements continued 8 stock repurchase plan 1996 board directors approved stock repurchase plan 2000000 company’s common stock currently outstanding 2001 board directors approved additional 1000000 used stock repurchase plan company retired 12858 shares common stock 2004 december 31 2004 company 943871 remaining reacquire shares stock repurchase plan 9 regulatory matters company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet specific capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets management believes december 31 2004 company bank met capital adequacy requirements subject december 31 2004 recent notification federal deposit insurance corporation categorized bank well capitalized regulatory framework prompt corrective action categorized well capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table conditions events since notification management believes changed institution’s category presented company’s bank’s actual capital amounts ratios wgnb corp notes consolidated financial statements continued wgnb corp notes consolidated financial statements continued differences provision income taxes amount computed applying statutory federal income tax rate earnings income taxes follows wgnb corp notes consolidated financial statements continued 13 related party transactions bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2004 15 fair value financial instruments company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiaries rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance wgnb corp notes consolidated financial statements continued 15 fair value financial instruments continued cash equivalents cash due banks federal funds sold carrying amount reasonable estimate fair value securities fair values investment securities based quoted market prices loans fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value deposits fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal home loan bank advances fair value advances outstanding based quoted value provided fhlb commitments extend credit standby letters credit balance sheet instruments commitments extend credit standby letters credit generally shortterm variable interest rates therefore carrying value estimated fair value associated instruments immaterial limitations fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgements estimates subjective nature involve uncertainties matters significant judgement therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing balance sheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates carrying amount estimated fair values company’s financial instruments december 31 2004 2003 follows wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information balance sheets december 31 2004 2003 statements earnings years ended december 31 2004 2003 2002 wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information continued statements cash flows years ended december 31 2004 2003 2002 item 15 exhibits financial statement schedules a1 financial statements following financial statements filed report 2 financial statement schedules financial statement schedules omitted applicable required information incorporated consolidated financial statements related notes 3 following exhibits filed report 31 amended restated articles incorporation incorporated reference exhibit 31 company’s registration statement form 10sb filed june 14 2000 “form 10sb” 32 amended restated bylaws incorporated reference exhibit 32 form 10sb 41 see exhibits 31 32 provisions company’s articles incorporation bylaws defining rights shareholders 42 specimen certificate representing shares common stock incorporated reference exhibit 42 form 10sb 43 rights agreement dated february 12 1997 company suntrust bank atlanta incorporated reference exhibit 43 form 10sb 44 amended restated trust agreement dated july 2 2007 incorporated reference exhibit 41 company’s current report form 8k filed july 6 2007 “july 2007 form 8k” 45 indenture dated july 2 2007 wgnb corp wilmington trust company incorporated reference exhibit 42 july 2007 form 8k 46 guarantee agreement dated july 2 2007 wgnb corp wilmington trust company incorporated reference exhibit 43 july 2007 form 8k 101 employment agreement dated july 11 2006 hb lipham iii wgnb corp west georgia national bank incorporated reference exhibit 101 company’s current report form 8k dated july 11 2006 102 bonus stock option agreement dated september 23 1998 company hb lipham iii incorporated reference exhibit 106 form 10sb 103 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 104 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 105 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 106 employment agreement dated august 8 2005 among wgnb corp west georgia national bank steven j haack incorporated reference exhibit 101 company’s current report form 8k dated august 8 2005 107 employment agreement dated july 11 2005 west georgia national bank w galen hobbs jr incorporated reference exhibit 101 company’s current report form 8k dated july 11 2005 108 second amendment bonus stock option agreement dated june 17 2002 company hb lipham iii incorporated reference exhibit 107 company’s quarterly report form 10q quarter ended june 30 2002 “63002 form 10q 109 incentive stock option agreement dated march 12 2002 company hb lipham iii incorporated reference exhibit 108 63002 form 10q 1010 amendment bonus stock option agreement dated may 30 2002 company w galen hobbs jr incorporated reference exhibit 1010 63002 form 10q 1011 incentive stock option agreement dated march 12 2002 company w galen hobbs jr incorporated reference exhibit 1011 63002 form 10q 1012 amendment bonus stock option agreement dated april 26 2002 company steven j haack incorporated reference exhibit 1013 63002 form 10q 1013 incentive stock option agreement dated march 12 2002 company steven j haack incorporated reference exhibit 1014 63002 form 10q 1014 stock incentive plan incorporated reference appendix company’s definitive proxy statement 2004 annual meeting 1015 employment agreement dated december 31 2002 company william r whitaker incorporated reference exhibit 1031 companys annual report form 10k year ended december 31 2004 “2004 form 10k” 1016 bonus stock option agreement dated december 27 2004 company william r whitaker incorporated reference exhibit 1032 2004 form 10k 1017 separations agreement release dated february 14 2006 company bank l leighton alston incorporated reference exhibit 1023 company’s annual report form 10k year ended december 31 2005 1018 employment agreement dated july 1 2007 among wgnb corp west georgia national bank randall f eaves incorporated reference exhibit 101 july 2007 form 8k 1019 employment agreement dated july 1 2007 among wgnb corp west georgia national bank mary covington incorporated reference exhibit 102 july 2007 form 8k 1020 employment agreement dated january 2 2007 robert gordy jr west georgia national bank incorporated reference exhibit 101 companys quarterly rerport form 10q quarter ended march 31 2007 subsidiary wgnb corp consent porter keadle moore llp 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanes oxley act 2002 321 certification chief executive officer pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant section 906 sarbanes oxley act 2002 indicates management contract compensatory plan arrangement signatures pursuant requirements section 13 15d exchange act registrant duly caused report signed behalf undersigned thereunto duly authorized date march 28 pursuant requirements exchange act report signed following persons behalf registrant capacities dates indicated hb lipham iii date march 28 2008 hb lipham iii chief executive officer director principal executive officer steven j haack date march 28 2008 steven j haack secretary treasurer principal financial accounting officer w green date march 28 w green chairman board swanda w calhoun date march 28 2008 wanda w calhoun director grady w cole date march 28 2008 grady w cole director mary c covington date march 28 2008 mary c covington executive vice president director randall f eaves date march 28 2008 randall f eaves president director date loy howard director date r david perry director l richard plunkett date march 28 2008 l richard plunkett director date donald c rhodes director thomas richards date march 28 2008 thomas richards director j thomas vance date march 28 2008 j thomas vance director wgnb corp consolidated financial statements december 31 2007 2006 report independent registered public accounting firm report independent registered public accounting firm board directors stockholders wgnb corp subsidiary carrollton georgia audited accompanying consolidated balance sheets wgnb corp subsidiary december 31 2007 2006 related consolidated statements earnings comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2007 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiary december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america atlanta georgia march 28 certified public accountants suite 1800 ÿ peachtree street ne ÿ atlanta georgia 30303 ÿ phone 4045884200 ÿ fax 4045884222 ÿ wwwpkmcom wgnb corp consolidated balance sheets december 31 2007 2006 see accompanying notes consolidated financial statements wgnb corp consolidated statements earnings years ended december 31 2007 2006 2005 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income years ended december 31 2007 2006 2005 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2007 2006 2005 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2007 2006 2005 wgnb corp consolidated statements cash flows continued years ended december 31 2007 2006 2005 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies basis presentation consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiary first national bank georgia “bank” significant intercompany accounts transactions eliminated consolidation bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll haralson douglas coweta paulding counties georgia accounting reporting policies company methods applying principles conform accounting principles generally accepted united states america gaap general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income cash equivalents purposes reporting cash flows cash equivalents include cash due banks interestbearing funds banks federal funds sold securities company classifies securities one three categories trading availableforsale heldtomaturity trading securities bought held principally purpose selling near term heldtomaturity securities company ability intent hold security maturity securities included trading heldtomaturity classified availableforsale trading availableforsale securities recorded fair value heldtomaturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities availableforsale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value availableforsale heldtomaturity investment cost deemed temporary charged earnings establishes new cost basis security premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified availableforsale included earnings derived using specific identification method determining cost securities sold loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan fees consisting delinquent payment charges common loan servicing fees recognized earned wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued impaired nonaccrual loans company evaluates certain loans particularly residential construction development credits impairment individual basis loans considered impaired probable collection amounts due according contractual terms loan agreement become doubtful instance restructured loan contractual terms loan agreement refer original loan agreement collateral dependent loans impairment measured based fair value collateral impairment measured based present value expected future cash flows discounted loan’s effective interest rate except collateral dependent loans impaired loans necessarily placed nonaccrual status possible impaired loan may collateralized assets fair values excess recorded value loan case loan would continue accrue interest point fair value achieved collateral sold settlement loan normally placed nonaccrual management believes collection principal interest become doubtful loans become days past due principal interest unless well secured process collection loan placed nonaccrual status previously accrued uncollected interest considered uncollectable reversed interest income current period payment received loan nonaccrual status generally applied reduce carrying value loan nonaccrual loans returned accrual status become current principal interest become well secured process collection collectibility longer doubtful allowance loan losses allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment based historical losses current economic environment adequate absorb probable losses existing loans amounts deemed uncollectible chargedoff deducted allowance recoveries loans previously chargedoff added back allowance management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors nature changes composition loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans determining adequacy allowance loan losses management uses loan grading system rates loans nine different categories grades assigned allocations allowance based company’s loss experience peer loss experience migration analysis internal external economic factors combination results compared monthly recorded allowance loan losses material differences adjusted increasing decreasing provision loan losses management believes allowance loan losses adequate management uses available information provide reserves recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgment information available time examination premises equipment premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued cash surrender value life insurance cash surrender value life insurance carried cash value based upon accrued earnings underlying contract added balance asset core deposit intangible core deposit intangible amortized straightline method period benefit generally 10 years core deposit intangible reviewed impairment whenever events changes circumstances indicate recovery value underlying asset gave rise core deposit intangible becomes permanently impaired goodwill represents cost acquired company excess fair value net assets acquired goodwill amortized useful life instead subject two step impairment test accordance statement financial accounting standard “sfas” 142 goodwill intangible assets first step compares fair value reporting unit company carrying amount goodwill carrying amount goodwill exceeds fair value reporting unit second step conducted whereby implied fair value goodwill compared carrying value goodwill implied fair value less carrying amount goodwill impairment loss recognized investments include federal home loan bank “fhlb” stock federal reserve bank stock investments federal state income tax credit partnerships equity securities investments readily determinable fair value carried cost foreclosed property properties acquired foreclosure carried lower cost fair value less estimated costs dispose fair value defined amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns charged earnings period need arises securities sold repurchase agreements company sells securities agreements repurchase agreements treated borrowings obligations repurchase securities sold reflected liability securities underlying agreements reflected assets consolidated balance sheets income taxes company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued income taxes continued company adopted fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 “fin 48” january 1 2007 tax position recognized benefit “more likely not” tax position would sustained tax examination tax examination presumed occur amount recognized largest amount tax benefit greater 50 percent likely realized examination tax positions meeting “more likely not” test tax benefit recorded adoption fin 48 effect company’s financial statements derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements accounting changes fair value derivative depends intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change swap contract terminated cumulative change fair value amortized income original hedge period underlying hedged instrument sold settled company immediately recognizes cumulative change derivative’s value component earnings stock compensation plans sfas 123 revised 2004 sfas 123 r sharebased payment adopted company required date january 1 2006 using modified prospective transition method provided standard sfas 123 r addresses accounting sharebased payment transactions company receives employee services exchange equity instruments company sfas 123 r requires company recognize compensation expense “grant date fair value” stock options granted employees statement earnings using fairvaluebased method company recognized 177500 128250 stock based compensation years ended december 31 2007 2006 respectively associated stock option grants company recognizing compensation expense stock option grants graded vesting schedules straightline basis requisite service period award permitted sfas 123 r december 31 2007 417651 unrecognized compensation cost related stock option grants cost expected recognized remaining vesting period approximately five years grantdate fair value option granted 2007 2006 2005 639 447 296 respectively fair value option estimated date grant using blackscholes model following weighted average assumptions used grants 2007 2006 2005 wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued recent accounting pronouncements fair value measurements september 2006 financial accounting standards board fasb issued statement 157 fair value measurements sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands disclosures fair value measurements changes current practice resulting application statement relate definition fair value methods used measure fair value expanded disclosures fair value measurements sfas 157 effective fiscal years beginning november 15 2007 earlier application encouraged company anticipate adoption new accounting principle material effect financial position results operation noncontrolling interests consolidated financial statements december 2007 fasb issued statement 160 noncontrolling interests consolidated financial statements amendment arb 51 sfas 160 statement amends arb 51 establish accounting reporting standards noncontrolling interest subsidiary deconsolidation subsidiary sfas 160 effective fiscal years beginning december 15 2008 company anticipate adoption new accounting principle material effect financial position results operation business combinations december 2007 fasb revised statement 141revised 2007 business combinations sfas 141r sfas 141 organizations utilized announcement date measurement date purchase price acquired entity sfas 141r requires measurement date acquirer obtains control acquiree generally referred acquisition date sfas 141r significant impact accounting transaction costs restructuring costs well initial recognition contingent assets liabilities assumed business combination sfas 141r adjustments acquired entity’s deferred tax assets uncertain tax position balances occurring outside measurement period recorded component income tax expense rather goodwill sfas 141r effective business combinations acquisition date beginning first annual reporting period beginning december 15 2008 provisions sfas 141r applied prospectively impact company cannot determined transactions occur accounting standards issued proposed fasb standard setting entities require adoption future date expected material impact company’s consolidated financial statements upon adoption reclassifications certain reclassifications made prior years’ consolidated statements conform presentation used 2007 wgnb corp notes consolidated financial statements continued 2 material business combination january 22 2007 wgnb corp entered agreement plan reorganization among wgnb corp west georgia national bank first haralson corporation first national bank georgia whereby first haralson corporation merged wgnb corp acquisition 100 percent outstanding common shares first haralson corporation concurrently first national bank georgia merged west georgia national bank upon closing transaction west georgia national bank changed name first national bank georgia transaction approved companies’ shareholders closed june 29 2007 effective date july 1 2007 first haralson corporation headquartered buchanan georgia operated five branches haralson county two branches carroll county results operations acquisition included company’s consolidated financial statements date acquisition july 1 2007 terms merger agreement first haralson corporation’s shareholders elected receive cash wgnb corp common stock combination two shareholders made elections aggregate chose cash consideration amount 16315423 shares wgnb corp stock amount 1055149 valued 2725 per share together total acquisition costs 1746463 resulted total consideration 46814696 date closing addition terms merger agreement allowed first haralson corporation pay onetime special dividend exceed 7250000 aggregate approximately 3567 per share first haralson corporation share first haralson corporation shareholders prior closing transaction one primary business objectives transaction strengthen company’s presence along interstate 20 corridor western georgia combined entity retained number one market share ranking carroll haralson counties additionally transaction enhanced company’s core deposits diversified loan portfolio combination also created top 20 financial institution georgia terms total deposits following table summarizes estimated fair values assets acquired liabilities assumed closing date july 1 2007 wgnb corp notes consolidated financial statements continued 2 material business combination continued financial information presents proforma earnings wgnb corp assuming operations first haralson corporation included consolidated earnings beginning earliest reporting period 3 securities amortized cost estimated fair value investment securities availableforsale heldtomaturity december 31 2007 contractual maturity shown expected maturities differ contractual maturities borrowers right call prepay certain obligations without call prepayment penalties wgnb corp notes consolidated financial statements continued 3 securities continued following summary fair values securities unrealized losses december 31 2007 2006 december 31 2007 unrealized losses investment securities portfolio related debt securities unrealized losses debt securities arose due changing interest rates considered temporary december 31 2007 tables 17 securities 85 securities issued us government sponsored enterprises including mortgage backed securities contained unrealized losses 45 206 securities issued state political subdivisions contained unrealized losses three 12 securities issued corporations contained unrealized losses unrealized losses considered temporary acceptable investment grades security repayment sources principal interest largely government backed wgnb corp notes consolidated financial statements continued 3 securities continued proceeds sales securities availableforsale 2007 2005 5993155 3789185 respectively gross gain 227863 2005 gains losses recognized upon sales 2007 due investment securities acquired first haralson acquisition sold shortly merger date reposition investment portfolio investment securities acquired acquisition acquired fair market value sales securities availableforsale 2006 investment securities fair value approximately 91679000 60360000 december 31 2007 2006 respectively pledged secure public deposits required law purposes 4 loans major classifications loans december 31 2007 2006 summarized follows bank grants loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding haralson coweta douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market line credit agreement federal home loan bank see note 7 bank pledges acceptable loans blanket lien collateral borrowings december 31 2007 2006 loans totaling 111378000 79604000 respectively pledged secure federal home loan bank advances changes allowance loan losses years ended december 31 2007 2006 2005 follows wgnb corp notes consolidated financial statements continued 4 loans continued company considers loan impaired probable unable collect amounts due according original terms loan agreement company measures impairment loan loanbyloan basis amounts impaired loans probable collection charged immediately impaired loans related amounts included allowance loan losses december 31 2007 2006 follows average amount impaired loans 2007 2006 5807000 2230000 respectively interest income recognized impaired loans 642057 2007 none 2006 2005 5 premises equipment major classifications premises equipment december 31 2007 summarized follows depreciation expense amounted 1449463 1134746 1048866 2007 2006 2005 respectively 6 deposits december 31 2007 scheduled maturities time deposits follows bank held 91127044 62713161 certificates deposit obtained efforts third party brokers december 31 2007 2006 respectively weighted average interest rate deposits december 31 2007 2006 477 505 respectively deposits outstanding december 31 2007 mature follows wgnb corp notes consolidated financial statements continued 7 lines credit bank lines credit overnight borrowings 24800000 december 31 2007 2006 none outstanding december 31 2007 bank also line credit federal home loan bank atlanta fhlb credit availability totaling 214150000 december 31 2007 fhlb advances secured bank’s stock fhlb it’s qualifying 14 family first mortgage loans qualified commercial loans addition fhlb accepts certain investment securities collateral advances fhlb line credit subject available collateral bank december 31 2007 2006 bank advances outstanding fhlb amounting 54500000 52000000 respectively bank adequate collateral available december 31 2007 borrowings early conversion option allows fhlb convert certain advances variable interest rate upon notification bank following advances require quarterly interest payments 8 securities sold repurchase agreements company securities sold repurchase agreements amount 20000000 december 31 2007 company entered transaction november 23 2007 agreement maturity date november 23 2012 becomes callable issuer company november 23 2009 interest rate call date maturity date 390 payable quarterly 9 junior subordinated debentures company entered junior subordinated debenture connection acquisition first haralson debenture qualifies tier capital risk based capital guidelines subject certain limitations debentures issued june 15 2007 amount 10825000 floating rate day libor plus 155 payable quarterly debenture redeemable mandatory basis upon maturity june 2037 callable without premium june 2012 wgnb corp notes consolidated financial statements continued 10 commitments contingencies balance sheet commitments company party financial instruments balance sheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations balance sheet instruments cases company requires collateral support financial instruments credit risk following table summarizes balance sheet financial instruments december 31 2007 2006 commitments extend credit agreements lend customer long violation condition established contract standby letters credit conditional commitments issued company guarantee performance customer third party commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension commitment based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property standby letters credit conditional commitments issued company guarantee performance customer third party credit risk involved issuing letters credit essentially involved extending loans derivative instruments hedging activities december 31 2007 company held fifteen interest rate swap positions company entered swap december 4 2007 matures june 15 2012 objective swap lock fixed rate opposed contractual variable interest rate junior subordinated debentures interest rates near historical lows interest rate swap contract notional amount 10825000 hedging variable rate junior subordinated debentures described note 9 consolidated financial statements company receives variable rate 90 day libor rate plus 155 pays fixed rate 577 company designated swap variable fixed rate contract cash flow hedge accordingly recording fair value derivative balance sheet changes fair value swap contract recorded current period component comprehensive income net tax fair value swap contract accounted cash flow hedge loss 29636 december 31 2007 recorded liabilities balance sheet 2006 company entered series fourteen interest rate swap agreements total notional amount 41156509 related issuance brokered certificates deposit interest rate swap contracts various notional amounts maturity dates receive fixed rates pay floating rates stated terms basis points plus minus 1 month libor rate follows wgnb corp notes consolidated financial statements continued 10 commitments contingencies continued derivative instruments hedging activities continued month libor rate initiation contracts 533 pay floating rate changes month monthly reset date contract spread indicated remains constant 1 month libor rate contract 460 total notional amount contracts remained 41156509 december 31 2007 company designated fourteen swap fixed variable rate contracts fair value hedges accordingly recording fair value derivatives well fair value items hedged balance sheet changes fair value swap contracts items hedged recorded current period earnings fair value swap contracts accounted fair value hedges 263474 262184 december 31 2007 2006 respectively recorded assets balance sheet objective fourteen swap agreements decrease company’s interest rate risk exposure asset sensitive company remains susceptible interest rate risk downward rate environment part attributable fixed rate nature company’s brokered certificates deposit company using swap agreements convert fixed rate brokered certificates deposit borrowings floating rate instruments consequently interest rate swap contracts allow company hedge changes fair value brokered certificates deposit borrowings result changes benchmark interest rates benchmark interest rate defined 1 month libor rate order achieve hedge objective company agreed pay floating rate interest exchange receiving fixed rate interest hedge instruments equal fixed rate coupon certificates deposit borrowings company uses long haul method afforded sfas 133 accounting derivative instruments hedging activities assess effectiveness current hedging activity company assesses effectiveness cash flow hedge comparing cumulative change anticipated cash flows hedged exposure hedging period cumulative change anticipated cash flows hedging derivative company utilizes “hypothetical derivative method” compute cumulative change anticipated interest cash flows hedged exposure extent cumulative change anticipated cash flows hedging derivative offsets 80 120 cumulative change anticipated interest cash flows hedged exposure hedge deemed effective company assesses effectiveness fair value hedge contracts regressing market price including premium paid brokered certificates deposit dependent variables market price interest rate swap independent variable wgnb corp notes consolidated financial statements continued 10 commitments contingencies continued derivative instruments hedging activities continued quarterly basis contracts matured regression analysis include data set values retrospective realized historical prices prospective shocked scenario analysis basis hedge considered effective correlation coefficient within 80 120 r square highly correlative value 1 fstat large signifying high explanatory power company’s cash flow hedges fair value hedges remained effective since inception contingencies various legal actions proceedings pending threatened company subsidiary seek relief damages amounts substantial actions proceedings arise ordinary course company’s business consultation legal counsel management believes aggregate liability resulting pending threatened actions proceedings material adverse effect company’s financial condition 11 stock repurchase plan beginning 1996 board directors approved stock repurchase plan 2000000 company’s common stock currently outstanding 2001 board directors approved additional 1000000 used stock repurchase plan company retired 1345 38202 2655 shares common stock 2007 2006 2005 respectively december 31 2007 company 557547 remaining reacquire shares stock repurchase plan 12 regulatory matters company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet specific capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets management believes december 31 2007 2006 company bank met capital adequacy requirements subject december 31 2007 2006 recent notification federal deposit insurance corporation categorized bank adequately capitalized well capitalized respectively regulatory framework prompt corrective action categorized well capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table first quarter 2008 company contributed 2028000 capital bank management believes change banks capital category well capitalized presented company’s bank’s actual capital amounts ratios wgnb corp notes consolidated financial statements continued 12 regulatory matters continued dividends paid bank primary source funds available company banking regulations limit amount dividends may paid without prior approval regulatory authorities restrictions based level regulatory classified assets prior years’ net earnings ratio equity capital total assets december 31 2007 bank could pay dividends amount 1031000 plus net income 2008 subject maintaining certain capital requirements without obtaining prior regulatory approval 13 incentive stock option plan january 11 1994 incentive stock option plan “1994 plan” company may grant options certain key officers acquire shares common stock company fair value number shares determined annually agreed upon formulas total 240000 shares common stock reserved possible issuance 1994 plan december 31 2003 company distributed options available awards 1994 plan options may exercised prior five years date grant exercisable later ten years date april 8 2003 shareholders approved wgnb corp 2003 stock incentive plan “2003 plan” 2003 plan company may grant options certain key officers acquire shares common stock company fair value incentive stock options less 85 fair value nonqualified stock options number shares determined annually agreed upon formulas total 990000 shares common stock reserved possible issuance 2003 plan maximum 525000 shares issued nonqualified stock option grants 2007 company granted 49398 options available awards 2003 plan options 2003 plan distributed commencing 2004 fiscal year terminate february 14 2015 unless previously terminated board directors options approved plan distributed options may exercised participants vesting period five years ratably 20 per year options wgnb corp notes consolidated financial statements continued 13 incentive stock option plan continued exercisable later ten years date grant compensation cost amount 177500 128250 recognized stock options years end december 31 2007 2006 respectively 1994 2003 plans 59930 116527 options respectively unexercised december 31 2007 summary status company’s stock option plans december 31 2007 2006 2005 changes years ending dates presented following information applies options outstanding december 31 2007 total intrinsic value options exercised 2007 2006 2005 2128 578435 6013 respectively intrinsic value exercisable options based market price 1997 december 31 2007 14 supplemental employee retirement plan company assumed postretirement benefit plan provide retirement benefits first haralson key officers plan company assumed whole life insurance contracts lives officer increase cash surrender value contracts less company’s cost funds constitutes bank’s contribution plan year going forward event insurance contracts fail produce positive returns bank obligation contribute plan company recognized 90725 compensation expense related plan 2007 15 stock split september 12 2006 company’s board directors declared threefortwo stock split shareholders record october 16 2006 payable november 15 2006 share per share amounts restated reflect stock split occurred january 1 2005 16 defined contribution plan company began qualified retirement plan pursuant internal revenue code section 401k 1996 covering substantially employees subject certain minimum age service requirements contribution plan employees voluntary 2007 2006 2005 company matched 100 participants’ contributions 6 participants’ salaries subject annual 401k contribution limits company also made discretionary contributions plan 2007 2006 5 participants’ salaries contributions plan charged expense 2007 2006 2005 658767 547255 491265 respectively wgnb corp notes consolidated financial statements continued 17 income taxes components provision income taxes consolidated statements earnings years ended december 31 2007 2006 2005 follows differences provision income taxes amount computed applying statutory federal income tax rate earnings income taxes follows following summarizes net deferred tax asset included component assets december 31 2007 2006 18 related party transactions bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2007 wgnb corp notes consolidated financial statements continued 18 related party transactions continued december 31 2007 2006 deposits directors executive officers related interests totaled approximately 10251000 7114000 respectively 19 operating expenses components operating expenses exceed 1 total interest income follows 20 fair value financial instruments company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiary rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance cash equivalents cash due banks interestbearing funds banks federal funds sold carrying amount reasonable estimate fair value securities fair values investment securities based quoted market prices loans fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value cash surrender value life insurance fair value cash surrender value life insurance based net surrender value insurance contract deposits fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal funds purchased federal funds purchased carrying amount reasonable estimate fair value federal home loan bank advances fair value advances outstanding based quoted value provided fhlb wgnb corp notes consolidated financial statements continued 20 fair value financial instruments continued junior subordinated debentures floating rate junior subordinated debentures carrying amount reasonable estimate fair value securities sold repurchase agreements fair value securities sold repurchase agreements estimated amount company would receive pay terminate contracts reporting date derivative instruments derivative instruments fair value estimated amount company would receive pay terminate contracts reporting date taking account current unrealized gains losses open contracts commitments extend credit standby letters credit balance sheet instruments commitments extend credit standby letters credit generally shortterm variable interest rates therefore carrying value estimated fair value associated instruments immaterial limitations fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgments estimates subjective nature involve uncertainties matters significant judgment therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing balance sheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates carrying amount estimated fair values company’s financial instruments december 31 2007 2006 follows wgnb corp notes consolidated financial statements continued 21 wgnb corp parent company financial information balance sheets december 31 2007 2006 statements earnings years ended december 31 2007 2006 2005 wgnb corp notes consolidated financial statements continued 21 wgnb corp parent company financial information continued statements cash flows years ended december 31 2007 2006 2005 item 15 exhibits reports form 8k a1 financial statements following financial statements filed report independent auditors’ report porter keadle moore llp consolidated balance sheets december 31 2003 2002 consolidated statements earnings years ended december 31 2003 2002 2001 consolidated statements comprehensive income years ended december 31 2003 2002 2001 consolidated statements changes stockholders’ equity years ended december 31 2003 2002 2001 consolidated statements cash flows years ended december 31 2003 2002 2001 notes consolidated financial statements 2 financial statement schedules financial statement schedules omitted applicable required information incorporated consolidated financial statements related notes 3 following exhibits filed report 31 amended restated articles incorporation incorporated reference exhibit 31 company’s registration statement form 10sb filed june 14 2000 “form 10sb” 32 amended restated bylaws incorporated reference exhibit 32 form 10sb 41 see exhibits 31 32 provisions company’s articles incorporation bylaws defining rights shareholders 42 specimen certificate representing shares common stock incorporated reference exhibit 42 form 10sb 43 rights agreement dated february 12 1997 company suntrust bank atlanta incorporated reference exhibit 43 form 10sb 101 employment agreement dated september 10 1996 company l leighton alston incorporated reference exhibit 101 form 10sb 102 incentive stock option plan incorporated reference exhibit 102 form 10sb 103 bonus stock option agreement dated may 11 1993 company l leighton alston incorporated reference exhibit 103 form 10sb 104 first amendment bonus stock option agreement dated june 14 1994 company l leighton alston incorporated reference exhibit 104 form 10sb 105 bonus stock option agreement dated june 14 1994 company richard duncan incorporated reference exhibit 105 form 10sb 106 bonus stock option agreement dated september 23 1998 company hb lipham iii incorporated reference exhibit 106 form 10sb 107 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 108 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 109 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 1010 employment agreement dated august 30 2000 company richard duncan incorporated reference exhibit 1011 company’s annual report form 10ksb filed february 21 2001 “2000 form 10ksb” 1011 employment agreement dated august 31 2000 company steven j haack incorporated reference exhibit 1013 2000 form 10ksb 1012 employment agreement dated august 31 2000 company hb lipham iii incorporated reference exhibit 1014 2000 form 10ksb 1013 employment agreement dated august 31 2000 company w galen hobbs jr incorporated reference exhibit 1015 2000 form 10ksb 1014 amendment employment agreement dated may 30 2002 company l leighton alston incorporated reference exhibit 101 company’s annual report form 10q filed august 13 2002 “63002 form 10q” 1015 amendment bonus stock option agreement dated june 17 2002 company l leighton alston incorporated reference exhibit 102 63002 form 10q 1016 incentive stock option agreement dated march 12 2002 company l leighton alston incorporated reference exhibit 103 63002 form 10q 1017 amendment employment agreement dated april 11 2002 company richard duncan incorporated reference exhibit 104 63002 form 10q 1018 incentive stock option agreement dated march 12 2002 company richard duncan incorporated reference exhibit 105 63002 form 10q 1019 amendment employment agreement dated april 11 2002 company hb lipham iii incorporated reference exhibit 106 63002 form 10q 1020 second amendment bonus stock option agreement dated june 17 2002 company hb lipham iii incorporated reference exhibit 107 63002 form 10q 1021 incentive stock option agreement dated march 12 2002 company hb lipham iii incorporated reference exhibit 108 63002 form 10q 1022 amendment employment agreement dated april 11 2002 company w galen hobbs jr incorporated reference exhibit 109 63002 form 10q 1023 amendment bonus stock option agreement dated may 30 2002 company w galen hobbs jr incorporated reference exhibit 1010 63002 form 10q 1024 incentive stock option agreement dated march 12 2002 company w galen hobbs jr incorporated reference exhibit 1011 63002 form 10q 1025 amendment employment agreement dated april 11 2002 company steven j haack incorporated reference exhibit 1012 63002 form 10q 1026 amendment bonus stock option agreement dated april 26 2002 company steven j haack incorporated reference exhibit 1013 63002 form 10q 1027 incentive stock option agreement dated march 12 2002 company steven j haack incorporated reference exhibit 1014 63002 form 10q 1028 2003 stock incentive plan incorporated reference appendix 2004 proxy statement subsidiary wgnb corp 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanes oxley act 2002 321 certification chief executive officer pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant section 906 sarbanes oxley act 2002 indicates management contract compensatory plan arrangement october 7 2003 company furnished current report form 8k disclose item 12 issuance press release announcing company’s results operations quarterly period ended september 30 2003 signatures pursuant requirements section 13 15d exchange act registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements exchange act report signed following persons behalf registrant capacities dates indicated wgnb corp consolidated financial statements december 31 2003 2002 independent accountants’ report thereon porter keadle moore llp report independent certified public accountants board directors stockholders wgnb corp subsidiaries audited accompanying consolidated balance sheets wgnb corp subsidiaries december 31 2003 2002 related consolidated statements earnings comprehensive income changes stockholders’ equity cash flows three years ended december 31 2003 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiaries december 31 2003 2002 results operations cash flows three years ended december 31 2003 conformity auditing standards generally accepted united states america atlanta georgia january 30 2004 certified public accountantssuite 1800 • 235 peachtree street ne • atlanta georgia 30303 • phone 4045884200 • fax 4045884222 • wwpkmcom wgnb corp consolidated balance sheets december 31 2003 2002 see accompanying notes consolidated financial statements wgnb corp consolidated statements earnings years ended december 31 2003 2002 2001 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income years ended december 31 2003 2002 2001 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2003 2002 2001 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2003 2002 2001 wgnb corp consolidated statements cash flows continued years ended december 31 2003 2002 2001 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies following summary significant policies procedures basis presentation consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiary west georgia national bank “bank” significant intercompany accounts transactions eliminated consolidation 2002 company completed public offering 200000 shares common stock purchase price 2400 per share aggregate amount 4800000 offering conducted company’s officers directors bestefforts basis without compensation company received net proceeds offering 4766654 representing total offering proceeds 4800000 less offering expenses 33346 2002 company merged operation wgcs bank company additionally company ceased offering nontraditional consumer financing wgcs operated name mortgage loan solutions commenced operations 1997 serving paulding douglas carroll counties bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll douglas counties georgia accounting reporting policies company methods applying principles conform accounting principles generally accepted united states america gaap general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income cash equivalents purposes reporting cash flows cash equivalents include cash due banks federal funds sold securities company classifies securities one three categories trading available sale held maturity trading securities bought held principally purpose selling near term held maturity securities company ability intent hold security maturity securities included trading held maturity classified available sale trading available sale securities recorded fair value held maturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities available sale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value available sale investment cost deemed temporary charged earnings establishes new cost basis security premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified available sale included earnings derived using specific identification method determining cost securities sold wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued loans allowance loan losses loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan accrual interest discontinued loan management believes considering economic business conditions collection efforts borrower’s financial condition collection interest doubtful allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment based historical losses current economic environment adequate absorb probable losses existing loans may become uncollectible loans deemed uncollectible chargedoff deducted allowance recoveries loans previously chargedoff added back reserve management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgments information available time examination premises equipment premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment building improvements 15 39 years furniture equipment 3 10 years real estate properties acquired foreclosure carried lower cost defined fair value foreclosure fair value less estimated costs dispose accounting literature defines fair value amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns provided charge income allowance losses real estate period need arises income taxes company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued income taxes continued event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements changes fair value derivative depend intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change swap contract settled terminated cumulative change fair value amortized income original hedge period underlying hedged instrument sold company immediately recognizes cumulative change derivative’s value component earnings december 31 2003 2002 company hold interest rate swap position december 31 2001 company held interest rate swap entered means managing interest rate risk accounted hedge instrument fair value hedge interest rate swap contract notional amount 20000000 used hedge bank’s fixed rate interest risk related borrowing federal home loan bank interest swap contract company received fixed rate 345 paid rate 90 day libor 189 december 31 2001 2002 company recognized 252950 gains related settlement interest rate swap reported component income stock compensation plans statement financial accounting standards “sfas” 123 “accounting stockbased compensation” encourages entities adopt fair value based method accounting employee stock compensation plans whereby compensation cost measured grant date based value award recognized service period usually vesting period however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board opinion 25 “accounting stock issued employees” whereby compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock options issued company’s stock option plan intrinsic value grant date opinion 25 compensation cost recognized company elected continue accounting methodology opinion 25 result provided pro forma disclosures net income earnings per share disclosures fair value based method accounting applied compensation cost plan determined based upon fair value options grant dates company’s net earnings net earnings per share would reduced proforma amounts indicated wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued stock compensation plans continued fair value option estimated date grant using blackscholes model 2003 2002 minimum value model 2001 following weighted average assumptions used grants 2003 2002 2001 respectively dividend yield 240 200 risk free interest rates 427 414 500 respectively expected life 10 years related 2002 2001 applied price volatilities 29 25 respectively disclosure purposes company immediately recognized expense associated option grants assuming awards vest compensation expense included proforma results determined based fair value option time grant multiplied number options granted net tax effect net comprehensive income gaap generally requires recognized revenues expenses gains losses included net income although certain changes assets liabilities unrealized gains losses available sale securities reported separate component equity section consolidated balance sheets items along net income components comprehensive income company presents comprehensive income separate consolidated statement comprehensive income earnings per share earnings per common share based weighted average number common shares outstanding period effects potential common shares outstanding period included diluted earnings per share stock options described note 10 granted key management personnel new accounting standards january 2003 fasb issued fin 46 “consolidation variable interest entities” “fin 46” interpretation accounting research bulletin 51 “consolidated financial statements” addresses consolidation business enterprises variable interest entities provisions fin 46 effective immediately variable interest entities created january 31 2003 first fiscal year interim period beginning june 15 2003 variable interest entities enterprise holds variable interest acquired february 1 2003 company interest variable interest entity therefore adoption fin 46 impact company’s financial position results operations wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued new accounting standards continued may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” “sfas 150” changes accounting certain financial instruments previous guidance issuers could account equity sfas 150 effective interim periods beginning june 15 2003 requires instruments classified liabilities statements financial position since company instrument adoption sfas 150 impact company’s financial position results operations reclassifications certain reclassifications made prior years consolidated financial statements conform presentation used 2003 2 investment securities investment securities available sale heldtomaturity december 31 2003 2002 summarized follows wgnb corp notes consolidated financial statements continued 2 investment securities continued amortized cost estimated fair value investment securities available sale held maturity december 31 2003 contractual maturity shown expected maturities differ contractual maturities borrowers right call prepay certain obligations without call prepayment penalties following summary fair values securities market losses december 31 2003 company determined decline fair value amortized cost basis temporary purposes promulgated statement financial accounting standards 115 accounting certain debt equity securities since securities losses twelve month period december 31 2003 unrealized losses investment securities portfolio related debt securities unrealized losses debt securities arose due changing interest rates considered temporary december 31 2003 tables 4 88 securities issued state political subdivisions contained unrealized losses 4 71 securities issued us government agencies government sponsored corporations including mortgagebacked securities contained unrealized losses unrealized losses considered temporary acceptable investment grades security repayment sources principal interest government backed wgnb corp notes consolidated financial statements continued company grants loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market wgnb corp notes consolidated financial statements continued early conversion option allows fhlb convert advances variable interest rate upon notification bank fhlb advances secured bank’s stock fhlb 14 family first mortgage loans qualified commercial loans 7 commitments company party financial instruments balance sheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations balance sheet instruments wgnb corp notes consolidated financial statements continued commitments extend credit agreements lend customer long violation condition established contract commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property 9 regulatory matters company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet specific capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets management believes december 31 2003 company bank met capital adequacy requirements subject wgnb corp notes consolidated financial statements continued 9 regulatory matters continued december 31 2003 recent notification federal deposit insurance corporation categorized bank well capitalized regulatory framework prompt corrective action categorized well capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table conditions events since notification management believes changed institution’s category presented company’s bank’s actual capital amounts ratios dividends paid bank primary source funds available company banking regulations limit amount dividends may paid without prior approval regulatory authorities restrictions based level regulatory classified assets prior years’ net earnings ratio equity capital total assets december 31 2003 bank could pay approximately 7168000 dividends without obtaining prior regulatory approval wgnb corp notes consolidated financial statements continued following information applies options outstanding december 31 2003 wgnb corp notes consolidated financial statements continued differences provision income taxes amount computed applying statutory federal income tax rate earnings income taxes follows wgnb corp notes consolidated financial statements continued 13 related party transactions bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2003 14 operating expenses components operating expenses exceed 1 total interest income follows 15 fair value financial instruments company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiaries rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance cash equivalents cash due banks federal funds sold carrying amount reasonable estimate fair value investment securities fair values investment securities based quoted market prices loans fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value deposits fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal home loan bank advances fair value advances outstanding based quoted value provided fhlb wgnb corp notes consolidated financial statements continued 15 fair value financial instruments continued commitments extend credit standby letters credit balance sheet instruments commitments extend credit standby letters credit generally shortterm variable interest rates therefore carrying value estimated fair value associated instruments immaterial limitations fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgements estimates subjective nature involve uncertainties matters significant judgement therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing balance sheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information balance sheets december 31 2003 2002 statements earnings years ended december 31 2003 2002 2001 wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information continued statements cash flows years ended december 31 2003 2002 2001 item 15 exhibits reports form 8k a1 financial statements following financial statements filed report independent auditors’ report porter keadle moore llp consolidated balance sheets december 31 2002 2001 consolidated statements earnings years ended december 31 2002 2001 2000 consolidated statements comprehensive income years ended december 31 2002 2001 2000 consolidated statements changes stockholders’ equity years ended december 31 2002 2001 2000 consolidated statements cash flows years ended december 31 2002 2001 2000 2 financial statement schedules financial statement schedules omitted applicable required information incorporated consolidated financial statements related notes 3 following exhibits filed report 31 amended restated articles incorporation incorporated reference exhibit 31 company’s registration statement form 10sb filed june 14 2000 “form 10sb” 32 amended restated bylaws incorporated reference exhibit 32 form 10sb 41 see exhibits 31 32 provisions company’s articles incorporation bylaws defining rights shareholders 42 specimen certificate representing shares common stock incorporated reference exhibit 42 form 10sb 43 rights agreement dated february 12 1997 company suntrust bank atlanta incorporated reference exhibit 43 form 10sb 101 employment agreement dated september 10 1996 company l leighton alston incorporated reference exhibit 101 form 10sb 102 incentive stock option plan incorporated reference exhibit 102 form 10sb 103 bonus stock option agreement dated may 11 1993 company l leighton alston incorporated reference exhibit 103 form 10sb 104 first amendment bonus stock option agreement dated june 14 1994 company l leighton alston incorporated reference exhibit 104 form 10sb 105 bonus stock option agreement dated june 14 1994 company richard duncan incorporated reference exhibit 105 form 10sb 106 bonus stock option agreement dated september 23 1998 company hb lipham iii incorporated reference exhibit 106 form 10sb 107 bonus stock option agreement dated september 23 1998 company w galen hobbs jr incorporated reference exhibit 107 form 10sb 108 bonus stock option agreement dated september 23 1998 company steven j haack incorporated reference exhibit 108 form 10sb 109 form election payment director meeting fees incorporated reference exhibit 1010 form 10sb 1010 employment agreement dated august 30 2000 company richard duncan incorporated reference exhibit 1011 company’s annual report form 10ksb filed february 21 2001 “2000 form 10ksb” 1011 employment agreement dated august 31 2000 company steven j haack incorporated reference exhibit 1013 2000 form 10ksb 1012 employment agreement dated august 31 2000 company hb lipham iii incorporated reference exhibit 1014 2000 form 10ksb 1013 employment agreement dated august 31 2000 company w galen hobbs jr incorporated reference exhibit 1015 2000 form 10ksb 1014 amendment employment agreement dated may 30 2002 company l leighton alston incorporated reference exhibit 101 company’s annual report form 10q filed august 13 2002 “63002 form 10q” 1015 amendment bonus stock option agreement dated june 17 2002 company l leighton alston incorporated reference exhibit 102 63002 form 10q 1016 incentive stock option agreement dated march 12 2002 company l leighton alston incorporated reference exhibit 103 63002 form 10q 1017 amendment employment agreement dated april 11 2002 company richard duncan incorporated reference exhibit 104 63002 form 10q 1018 incentive stock option agreement dated march 12 2002 company richard duncan incorporated reference exhibit 105 63002 form 10q 1019 amendment employment agreement dated april 11 2002 company hb lipham iii incorporated reference exhibit 106 63002 form 10q 1020 second amendment bonus stock option agreement dated june 17 2002 company hb lipham iii incorporated reference exhibit 107 63002 form 10q 1021 incentive stock option agreement dated march 12 2002 company hb lipham iii incorporated reference exhibit 108 63002 form 10q 1022 amendment employment agreement dated april 11 2002 company w galen hobbs jr incorporated reference exhibit 109 63002 form 10q 1023 amendment bonus stock option agreement dated may 30 2002 company w galen hobbs jr incorporated reference exhibit 1010 63002 form 10q 1024 incentive stock option agreement dated march 12 2002 company w galen hobbs jr incorporated reference exhibit 1011 63002 form 10q 1025 amendment employment agreement dated april 11 2002 company steven j haack incorporated reference exhibit 1012 63002 form 10q 1026 amendment bonus stock option agreement dated april 26 2002 company steven j haack incorporated reference exhibit 1013 63002 form 10q 1027 incentive stock option agreement dated march 12 2002 company steven j haack incorporated reference exhibit 1014 63002 form 10q subsidiary wgnb corp 991 certification chief executive officer pursuant section 906 sarbanesoxley act 2002 992 certification chief financial officer pursuant section 906 sarbanes oxley act 2002 indicates management contract compensatory plan arrangement pursuant commission release 338212 certification treated “accompanying” annual report form 10k “filed” part report purposes section 18 exchange act otherwise subject liability section 18 exchange act certification deemed incorporated reference filing securities act 1933 amended exchange act except extent registrant specifically incorporates reference b reports form 8k reports form 8k filed quarter ended december 31 2002 signatures accordance section 13 15d exchange act registrant caused report signed behalf undersigned thereunto duly authorized date march 19 2003 power attorney know men presents person whose signature appears constitutes appoints l leighton alston steven j haack either attorneyinfact power substitution capacities sign amendments report file exhibits thereto documents connection therewith securities exchange commission hereby ratifying confirming said attorneysinfact substitute substitutes may cause done virtue hereof accordance requirements exchange act report signed following persons behalf registrant capacities dates indicated l leighton alston l leighton alston president chief executive officer director principal executive officer date march 19 2003 steven j haack steven j haack secretary treasurer principal financial accounting officer date march 19 2003 w green w green chairman board date march 24 2003 wanda w calhoun director date march 2003 grady w cole grady w cole director date march 27 2003 richard duncan richard duncan director date march 24 2003 lg joyner lg jack joyner director date march 24 2003 r david perry director date march 2003 l richard plunkett director date march 2003 thomas e reeve iii thomas e reeve iii md director date march 27 2003 thomas richards thomas richards director date march 24 2003 oscar w roberts iii oscar w roberts iii director date march 26 2003 frank thomasson iii frank thomasson iii director date march 27 2003 j thomas vance director date march 2003 charles willis sr charles willis sr director date march 24 2003 certifications l leighton alston chief executive officer wgnb corp certify 1 reviewed annual report form 10k wgnb corp 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 19 2003 l leighton alston l leighton alston chief executive officer steven j haack principal financial officer wgnb corp certify 1 reviewed annual report form 10k wgnb corp 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 19 2003 steven j haack steven j haack treasurer principal financial officer wgnb corp consolidated financial statements december 31 2002 2001 independent accountants’ report thereon letterhead porter keadle moore llp report independent certified public accountants board directors stockholders wgnb corp subsidiaries audited accompanying consolidated balance sheets wgnb corp subsidiaries december 31 2002 2001 related consolidated statements earnings comprehensive income changes stockholders’ equity cash flows three years ended december 31 2002 financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects financial position wgnb corp subsidiaries december 31 2002 2001 results operations cash flows three years ended december 31 2002 conformity auditing standards generally accepted united states america porter keadle moore llp atlanta georgia january 31 2003 wgnb corp consolidated balance sheets december 31 2002 2001 see accompanying notes consolidated financial statements wgnb corp consolidated statements earnings years ended december 31 2002 2001 2000 see accompanying notes consolidated financial statements wgnb corp consolidated statements comprehensive income years ended december 31 2002 2001 2000 see accompanying notes consolidated financial statements wgnb corp consolidated statements changes stockholders’ equity years ended december 31 2002 2001 2000 see accompanying notes consolidated financial statements wgnb corp consolidated statements cash flows years ended december 31 2002 2001 2000 wgnb corp consolidated statements cash flows continued years ended december 31 2002 2001 2000 see accompanying notes consolidated financial statements wgnb corp notes consolidated financial statements 1 summary significant accounting policies following summary significant policies procedures consolidated financial statements wgnb corp “company” include financial statements wholly owned subsidiaries west georgia national bank “bank” west georgia credit services inc “wgcs” significant intercompany accounts transactions eliminated consolidation bank commenced business 1946 upon receipt banking charter office comptroller currency “occ” bank primarily regulated occ undergoes periodic examinations regulatory agency company regulated federal reserve also subject periodic examinations bank provides full range commercial consumer banking services principally carroll douglas counties georgia 2002 company merged operation wgcs bank company additionally company ceased offering nontraditional consumer financing wgcs operated name mortgage loan solutions commenced operations 1997 serving paulding douglas carroll counties accounting reporting policies company methods applying principles conform generally accepted accounting principles general practices within banking industry preparing financial statements management required make estimates assumptions affect reported amounts assets liabilities date balance sheet income expenses year actual results could differ significantly estimates material estimates common banking industry particularly susceptible significant change operating cycle one year include limited determination allowance loan losses valuation real estate acquired connection foreclosures satisfaction loans valuation allowances associated realization deferred tax assets based future taxable income purposes reporting cash flows cash equivalents include cash due banks federal funds sold company classifies securities one three categories trading available sale held maturity trading securities bought held principally purpose selling near term held maturity securities company ability intent hold security maturity securities included trading held maturity classified available sale trading available sale securities recorded fair value held maturity securities recorded amortized cost adjusted amortization premiums accretion discounts unrealized holding gains losses net related tax effect securities available sale excluded earnings reported separate component accumulated comprehensive income stockholders’ equity realized transfers securities categories recorded fair value date transfer decline market value available sale investment cost deemed temporary charged earnings establishes new cost basis security wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued premiums discounts amortized accreted life related security adjustment yield realized gains losses securities classified available sale included earnings derived using specific identification method determining cost securities sold loans allowance loan losses loans stated principal amount outstanding net unearned interest allowance loan losses interest income loans recognized manner results level yield principal amount outstanding nonrefundable loan fees deferred net certain direct origination costs amortized income life related loan accrual interest discontinued loan management believes considering economic business conditions collection efforts borrower’s financial condition collection interest doubtful allowance loan losses established provision loan losses charged expense loans charged allowance loan losses management believes collectibility principal unlikely allowance represents amount management’s judgment based historical losses current economic environment adequate absorb probable losses existing loans may become uncollectible loans deemed uncollectible chargedoff deducted allowance recoveries loans previously chargedoff added back reserve management’s judgment determining adequacy allowance based evaluations collectibility loans evaluations take consideration factors changes nature volume loan portfolio current economic conditions may affect borrower’s ability pay overall portfolio quality review specific problem loans management believes allowance loan losses adequate management uses available information recognize losses loans future additions allowance may necessary based changes economic conditions addition various regulatory agencies integral part examination process periodically review company’s allowance loan losses agencies may require company recognize additions allowance based judgments information available time examination premises equipment carried cost less accumulated depreciation computed using straightline method estimated useful lives related assets retired otherwise disposed cost related accumulated depreciation removed accounts resulting gain loss reflected earnings period cost maintenance repairs improve extend useful life respective asset charged income incurred whereas significant renewals improvements capitalized range estimated useful lives premises equipment building improvements 15 39 years furniture equipment 3 10 years properties acquired foreclosure carried lower cost defined fair value foreclosure fair value less estimated costs dispose accounting literature defines fair value amount expected received current sale willing buyer seller forced liquidation sale fair values foreclosure based appraisals losses arising acquisition foreclosed properties charged allowance loan losses subsequent writedowns provided charge income allowance losses real estate period need arises wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued company accounts income taxes liability method accordingly deferred tax assets liabilities recognized future tax consequences attributable differences financial statement carrying amounts existing assets liabilities respective tax bases operating loss tax credit carryforwards deferred tax assets liabilities measured using enacted tax rates expected apply taxable income years temporary differences expected recovered settled effect deferred tax assets liabilities change tax rates recognized income period includes enactment date event future tax consequences differences financial reporting bases tax bases assets liabilities results deferred tax assets evaluation probability able realize future benefits indicated asset required valuation allowance provided portion deferred tax asset likely portion deferred tax asset realized assessing realizability deferred tax assets management considers scheduled reversals deferred tax liabilities projected future taxable income tax planning strategies derivative instruments hedging activities company recognizes fair value derivatives assets liabilities financial statements changes fair value derivative depend intended use derivative instrument inception change fair value instruments used fair value hedges accounted earnings period simultaneous accounting fair value change item hedged change fair value effective portion cash flow hedges accounted comprehensive income rather earnings change fair value derivative instruments intended hedge accounted earnings period change swap contract settled terminated cumulative change fair value amortized income original hedge period underlying hedged instrument sold company immediately recognizes cumulative change derivative’s value component earnings sfas 123 “accounting stockbased compensation” encourages entities adopt fair value based method accounting employee stock compensation plans whereby compensation cost measured grant date based value award recognized service period usually vesting period however also allows entity continue measure compensation cost plans using intrinsic value based method accounting prescribed accounting principles board opinion 25 “accounting stock issued employees” whereby compensation cost excess quoted market price stock grant date measurement date amount employee must pay acquire stock options issued company’s stock option plan intrinsic value grant date opinion 25 compensation cost recognized company elected continue accounting methodology opinion 25 result provided pro forma disclosures net income earnings per share disclosures fair value based method accounting applied wgnb corp notes consolidated financial statements continued stock compensation plans continued compensation cost plan determined based upon fair value options grant dates company’s net earnings net earnings per share would reduced proforma amounts indicated gaap generally requires recognized revenues expenses gains losses included net income although certain changes assets liabilities unrealized gains losses available sale securities reported separate component equity section consolidated balance sheets items along net income components comprehensive income company presents comprehensive income separate consolidated statement comprehensive income earnings per common share based weighted average number common shares outstanding period effects potential common shares outstanding period included diluted earnings per share stock options described note 10 granted key management personnel 2000 company completed two one stock split earnings per share related average shares outstanding reporting period restated reflect effects stock split wgnb corp notes consolidated financial statements continued 1 summary significant accounting policies continued earnings per share continued effective october 1 2002 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 147 “acquisitions certain financial institutions” amends sfas 72 “accounting certain acquisitions banking thrift institutions” also requires transactions accounted accordance sfas 141 “business combinations” sfas 142 “goodwill intangible assets” specifically requirement sfas 72 recognize subsequently amortize excess fair value liabilities assumed fair value tangible identifiable intangible assets acquired unidentifiable intangible asset longer applies business combinations within scope sfas 72 addition statement amends sfas 144 “accounting impairment disposal longlived assets” include scope longterm customerrelationship intangible asset financial institutions depositor borrowerrelationship intangible assets credit cardholder intangible assets consequently intangible assets subject undiscounted cash flow recoverability test impairment loss recognition measurement provisions sfas 144 requires longlived assets held used new pronouncement significant impact financial position results operations company additionally effective december 15 2002 fasb issued sfas 148 “accounting stockbased compensation transition disclosure amendment fasb statement 123” statement provides alternative methods transition voluntary change fair value based method accounting stockbased employee compensation addition statement amends disclosure requirements statement 123 require prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results new pronouncement significant impact financial position company certain reclassifications made prior years consolidated financial statements conform presentation used 2002 wgnb corp notes consolidated financial statements continued 2 investment securities wgnb corp notes consolidated financial statements continued 2 investment securities continued amortized cost estimated fair value investment securities available sale held maturity december 31 2002 contractual maturity shown expected maturities differ contractual maturities borrowers right call prepay certain obligations without call prepayment penalties company grants loans extensions credit individuals variety businesses corporations primarily located general trade area carroll paulding douglas counties georgia although bank diversified loan portfolio substantial portion loan portfolio collateralized improved unimproved real estate dependent upon real estate market wgnb corp notes consolidated financial statements continued wgnb corp notes consolidated financial statements continued early conversion option allows fhlb convert advances variable interest rate upon notification bank fhlb advances secured bank’s stock fhlb 14 family first mortgage loans qualified commercial loans wgnb corp notes consolidated financial statements continued company party financial instruments balance sheet risk normal course business meet financing needs customers financial instruments include commitments extend credit standby letters credit instruments involve varying degrees elements credit risk excess amount recognized balance sheet contractual amounts instruments reflect extent involvement company particular classes financial instruments company’s exposure credit loss event nonperformance party financial instrument commitments extend credit standby letters credit represented contractual amount instruments company uses credit policies making commitments conditional obligations balance sheet instruments commitments extend credit agreements lend customer long violation condition established contract commitments generally fixed expiration dates termination clauses may require payment fee since many commitments may expire without drawn upon total commitment amounts necessarily represent future cash requirements company evaluates customer’s creditworthiness casebycase basis amount collateral obtained deemed necessary company upon extension credit based management’s credit evaluation collateral held varies may include unimproved improved real estate certificates deposit personal property standby letters credit conditional commitments issued company guarantee performance customer third party credit risk involved issuing letters credit essentially involved extending loan facilities customers company bank subject various regulatory capital requirements administered federal banking agencies failure meet minimum capital requirements initiate certain mandatory possibly additional discretionary actions regulators undertaken could direct material effect company’s bank’s financial statements certain adequacy guidelines regulatory framework prompt corrective action company bank must meet specific capital guidelines involve quantitative measures assets liabilities certain offbalancesheet items calculated regulatory accounting practices capital amounts classification also subject qualitative judgments regulators components risk weightings factors quantitative measures established regulation ensure capital adequacy require company bank maintain minimum amounts ratios total tier capital riskweighted assets tier capital average assets management believes december 31 2002 company bank met capital adequacy requirements subject wgnb corp notes consolidated financial statements continued 9 regulatory matters continued december 31 2002 recent notification federal deposit insurance corporation categorized bank well capitalized regulatory framework prompt corrective action categorized well capitalized bank must maintain minimum total riskbased tier riskbased tier leverage ratios set forth table conditions events since notification management believes changed institution’s category presented company’s bank’s actual capital amounts ratios dividends paid bank primary source funds available company banking regulations limit amount dividends may paid without prior approval regulatory authorities restrictions based level regulatory classified assets prior years’ net earnings ratio equity capital total assets december 31 2002 bank could pay approximately 6682000 addition current earnings without obtaining prior regulatory approval wgnb corp notes consolidated financial statements continued wgnb corp notes consolidated financial statements continued differences provision income taxes amount computed applying statutory federal income tax rate earnings income taxes follows bank conducts transactions directors executive officers including companies beneficial interests normal course business bank’s policy comply federal regulations require loan transactions directors executive officers made substantially terms prevailing time made comparable loans persons following summary reflects activity related party loans 2002 wgnb corp notes consolidated financial statements continued components operating expenses exceed 1 total interest income follows company required disclose fair value information financial instruments whether recognized face balance sheet practicable estimate value assumptions used estimation fair value company’s financial instruments detailed quoted prices available fair values based estimates using discounted cash flows valuation techniques use discounted cash flows significantly affected assumptions used including discount rate estimates future cash flows following disclosures considered surrogate liquidation value company subsidiaries rather goodfaith estimate increase decrease value financial instruments held company since purchase origination issuance cash due banks federal funds sold carrying amount reasonable estimate fair value fair values investment securities based quoted market prices fair value fixed rate loans estimated discounting future cash flows using current rates similar loans would made borrowers similar credit ratings variable rate loans carrying amount reasonable estimate fair value fair value demand deposits savings accounts certain money market deposits amount payable demand reporting date fair value fixed maturity certificates deposit estimated discounting future cash flows using rates currently offered deposits similar remaining maturities federal home loan bank advances fair value advances outstanding based quoted value provided fhlb borrowings based variable rates carrying value reasonable estimate fair value commitments extend credit standby letters credit balance sheet instruments commitments extend credit standby letters credit generally shortterm variable interest rates therefore carrying value estimated fair value associated instruments immaterial derivative instruments wgnb corp notes consolidated financial statements continued 15 fair value financial instruments continued fair value estimates made specific point time based relevant market information financial instrument estimates reflect premium discount could result offering sale one time company’s entire holdings particular financial instrument market exists significant portion company’s financial instruments fair value estimates based many judgements estimates subjective nature involve uncertainties matters significant judgement therefore cannot determined precision changes assumptions could significantly affect estimates fair value estimates based existing balance sheet financial instruments without attempting estimate value anticipated future business value assets liabilities considered financial instruments significant assets liabilities considered financial instruments include deferred income taxes premises equipment addition tax ramifications related realization unrealized gains losses significant effect fair value estimates considered estimates wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information balance sheets december 31 2002 2001 statements earnings years ended december 31 2002 2001 2000 wgnb corp notes consolidated financial statements continued 16 wgnb corp parent company financial information continued statements cash flows years ended december 31 2002 2001 2000