Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
¨
No
x
Indicated
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
¨
No
x
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form
10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act). (Check one)
Large Accelerated
Filer
¨
|
Accelerated Filer
¨
|
Non-Accelerated
Filer
¨
|
Smaller Reporting
Company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 2b-2
of the Exchange Act).
Yes
¨
No
x
The
aggregate market value of the registrant’s Common Stock held by non-affiliates
of the registrant as of June 30, 2008 which is the last business day of its most
recently completed second fiscal quarter, was approximately $ 37,303,335 based
on a per share price of $8.90 (which is the average of the ask and bid price
reported by the NASDAQ Stock Market) as of such date. Shares of Common Stock
held by each executive officer and director and by each person who owns 5% or
more of the registrant’s Common Stock have been excluded in that such persons
may be deemed affiliates of the registrant. This determination of affiliate
status is not necessarily a conclusive determination for other
purposes.
As of
March 10, 2009, there were 6,058,007 shares of the registrant’s Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement for the 2009 Annual Meeting of
Shareholders are incorporated by reference into Part III of this
Report.
WGNB
CORP.
2008
Form 10-K Annual Report
TABLE
OF CONTENTS
Item
Number
in
Form 10-K
|
Description
|
|
Page
or
Location
|
|
|
|
|
|
PART
I
|
|
|
|
|
Item
1.
|
Business
|
|
1
|
|
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
19
|
|
|
|
|
|
|
Item
1B.
|
Unresolved
Staff Comments
|
|
19
|
|
|
|
|
|
|
Item
2.
|
Properties
|
|
20
|
|
|
|
|
|
|
Item
3.
|
Legal
Proceedings
|
|
21
|
|
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
21
|
PART
II
|
|
|
|
|
Item
5.
|
Market
for the Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
|
|
21
|
|
|
|
|
|
|
Item
6.
|
Selected
Financial Data
|
|
23
|
|
|
|
|
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial
Condition
and Results of Operations
|
|
24
|
|
|
|
|
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
48
|
|
|
|
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
|
48
|
|
|
|
|
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
|
48
|
|
|
|
|
|
|
Item
9A(T).
|
Controls
and Procedures
|
|
48
|
|
|
|
|
|
|
Item
9B.
|
Other
Information
|
|
49
|
PART
III
|
|
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
|
49
|
|
|
|
|
|
|
Item
11.
|
Executive
Compensation
|
|
49
|
|
|
|
|
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners
and
Management and Related Shareholder Matters
|
|
49
|
|
|
|
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
|
50
|
|
|
|
|
|
|
Item
14.
|
Principal
Accountant Fees and Services
|
|
50
|
PART
IV
|
|
|
|
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
|
50
|
|
|
|
|
|
|
|
Signatures
|
|
54
|
PART
I
Item
1. Business
General
WGNB Corp. (which is
sometimes referred to herein as the “Company” or “WGNB”) is an $892 million
asset bank holding company headquartered in Carrollton, Georgia. The Company was
organized as a business corporation under the laws of the State of Georgia in
1984 and is a registered bank holding company under the Federal Bank Holding
Company Act of 1956, as amended, and under the bank holding company laws of the
State of Georgia. WGNB completed a merger transaction with First Haralson
Corporation (which is sometimes referred to herein as “First Haralson”)
effective July 1, 2007 whereby First Haralson was merged with and into WGNB. In
addition, First National Bank of Georgia, a wholly owned subsidiary of First
Haralson, was merged with and into West Georgia National Bank. After the closing
of the merger, both First Haralson and First National Bank of Georgia ceased to
exist. At the effective date of the merger West Georgia National Bank changed
its name to First National Bank of Georgia.
WGNB
continues to conduct operations in western Georgia through its wholly-owned
subsidiary, First National Bank of Georgia (which is sometimes referred to
herein as the “Bank” or “First National Bank”). The Bank was organized in 1946
as a national banking association under the federal banking laws of the United
States. As of March 10, 2009, WGNB had (i) 6,058,007 issued and outstanding
shares of common stock, no par value per share (which is sometimes referred to
herein as the “Common Stock”), held by approximately 1,200 shareholders of
record and (ii) 1,509,100 shares of Series A Convertible Preferred stock, no par
value per share (which is sometimes referred to herein as the “Series A
Preferred”), held by approximately 240 shareholders of record.
WGNB conducts all of its
business through First National Bank. The executive offices of both WGNB and
First National Bank are located at 201 Maple Street, Carrollton, Georgia 30117.
Access to WGNB’s annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports is available at
its website,
www.fnbga.com
under the investor relations tab.
The
Bank
First
National Bank is a full service commercial bank offering a variety of services
customary for community banks of similar size which are designed to meet the
banking needs of individuals and small to medium-sized businesses. It attracts
most of its deposits from Carroll, Haralson, and Douglas Counties and conducts
most of its lending transactions from an area encompassing Carroll, Haralson,
Douglas, and Paulding Counties.
First National Bank’s main
office is located in Carrollton, Georgia. It operates a total of fourteen
branches and nine additional 24-hour ATM sites located in Carroll, Haralson and
Douglas Counties in Georgia. In Carroll County, First National Bank operates, in
addition to its main office, two branches in the City of Carrollton, one branch
in Villa Rica, one branch in Bowdon and one branch in Temple. In Haralson
County, it operates two branches in Bremen, one branch in Buchanan and two
branches in Tallapoosa. In Douglas County, it operates two branches in the City
of Douglasville and one branch in Villa Rica. In November of 2008, the Bank
closed its Coweta County loan production office. In January of 2009, the Bank
closed its Banco de Progreso locations in Carrollton and Newnan. However, it has
retained eight of the Banco de Progreso operation employees and will continue to
serve Spanish-speaking customers in our market.
As a convenience to its
customers, First National Bank offers at all of its branch locations drive-thru
teller windows and 24-hour automated teller machines. All of our locations
except our Bremen Pacific Avenue and our Carrollton Motor Bank have Saturday
banking hours. It is a member of Star, Cirrus and several other ATM networks of
automated teller machines that permit customers to perform monetary transactions
in most cities throughout the southeast and other regions. First National Bank
also offers Internet banking services through its website located at
www.fnbga.com. Information included on the Bank’s website is not a part of this
Report.
Deposit
Services.
First National Bank offers a full range of deposit services
including checking accounts, NOW accounts, savings accounts and other time
deposits of various types, ranging from money market accounts to longer-term
certificates of deposit. The accounts are all offered to its market area at
rates competitive to those offered in the area. All deposits are insured by the
Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum allowed by
law. In addition, First National Bank has implemented service charge fee
schedules competitive with other financial institutions in its market area
covering such matters as maintenance fees on checking accounts, per item
processing fees on checking accounts, returned check charges and the
like.
As of December 31, 2008,
First National Bank had deposits of approximately $762 million, and
approximately 52 thousand deposit accounts. No material portion of its deposits
relates to one or a few persons or entities (including federal, state and local
governments and agencies). The loss of any one or a few principal deposit
customers would not have a material adverse effect on the operations or earnings
of the Bank.
The following table sets
forth the mix of depository accounts at the Bank as a percentage of total
deposits as of December 31, 2008:
Deposit
Mix
|
|
|
|
At
December 31, 2008
|
|
|
|
|
|
|
Non-interest
bearing demand
|
|
|
9
|
%
|
NOW
accounts and money market
|
|
|
26
|
%
|
Savings
|
|
|
2
|
%
|
Time
Deposits
|
|
|
|
|
Under
$100,000
|
|
|
29
|
%
|
$100,000 and
over
|
|
|
34
|
%
|
|
|
|
100
|
%
|
Lending
Services.
First National Bank’s lending business consists principally of
making consumer loans to individuals and commercial loans to small and
medium-sized businesses and professional concerns. First National Bank also
makes secured real estate loans and first and second mortgage loans for the
acquisition or improvement of personal residences. As of December 31, 2008, the
Bank had approximately $632 million in total loans outstanding, representing 71%
of its total assets of approximately $892 million. The loan portfolio is made up
of both fixed and adjustable rate loans. As of December 31, 2008, approximately
58% of the total loan portfolio was fixed rate and 42% was adjustable rate. Some
of our adjustable rate loans have interest rate floors. The Bank is not
dependent to any material degree upon any single borrower or a few principal
borrowers. The loss of any individual borrower or of a few principal borrowers
would not have a material adverse effect on the operations or earnings of First
National Bank.
Real
Estate Loans.
Loans secured by real estate make up the primary component
of the Bank’s loan portfolio, constituting approximately $538 million, or 85%,
of its total loans as of December 31, 2008. Approximately 55% of the real estate
loans are fixed rate and 45% are adjustable rate. Approximately 36% of the fixed
rate real estate loans mature in one year or less and approximately 92% of the
fixed rate real estate loans mature in five years or less. Real estate loans
consist of commercial real estate loans, construction and development loans,
residential real estate loans and home equity loans. Real estate loans are
collateralized by commercial and residential real estate primarily located in
our primary and secondary market areas. The types of real estate that typically
constitute collateral include primary and secondary residences for individuals,
multi-family projects, places of business, real estate for agricultural uses and
developed and undeveloped land.
Commercial
Loans, Other Than Commercial Loans Secured by Real Estate
. First National
Bank makes loans for commercial purposes in various industries resident to its
market area. As of December 31, 2008, commercial loans constituted approximately
$64 million, or 10%, of its total loans. Approximately 63% of commercial loans
are fixed rate while 27% are adjustable. The typical commercial loan has a
maturity of three years or less. The typical commercial loan has collateral such
as equipment for business use and inventory and may include unsecured working
capital lines.
Consumer
Loans
. The Bank makes a variety of loans to individuals for personal and
household purposes, including secured and unsecured installment and term loans
and lines of credit. As of December 31, 2008, it held approximately $35 million
of consumer loans, representing 5% of total loans. Consumer loans are primarily
fixed rate in nature with 95% of this loan category carrying fixed rates. These
loans are typically collateralized by personal automobiles, recreational
vehicles or cash on deposit and may include unsecured loans to
individuals.
Other
Lending Activities.
First National Bank also engages in secondary-market
mortgage activities whereby it originates mortgage loans on behalf of investor
correspondent banks that fund the loans. The investor correspondent banks
underwrite and price the loans and the Bank receives a fee for originating and
packaging the loans. Periodically, the Bank receives discount points depending
on the pricing of the loan. No mortgage loans are held by the Bank for resale
nor does it service third party loans.
Risks
Associated with Lending Activities.
Consumer and non-mortgage loans to
individuals can entail greater risk, particularly in the case of loans that are
unsecured or secured by rapidly depreciating assets such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower’s continuing financial stability,
and thus are more likely to be adversely affected by job loss, divorce, illness
or personal bankruptcy. Furthermore, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount that can be recovered on such loans.
Commercial loans and loans
secured by commercial and multi-family real estate properties are generally
larger and involve a greater degree of credit risk than one-to-four family
residential mortgage loans. Because payments on these loans are often dependent
on the successful operation of the business or management of the property,
repayment of such loans may be subject to adverse conditions in the economy or
real estate markets. It has been the Bank’s practice to underwrite such loans
based on its analysis of the amount of cash flow generated by the business and
the resulting ability of the borrower to meet its payment obligations. In
addition, the Bank, in general, seeks to obtain a personal guarantee of the loan
by the owner of the business and, under certain circumstances, seeks additional
collateral.
Construction, acquisition
and development loans (“CA&D loans”) are generally considered to involve a
higher degree of credit risk than most other types of loans. Risk of loss on a
CA&D loan is dependent largely upon the accuracy of the initial estimate of
the security property’s value upon completion of construction as compared to the
estimated costs of construction, including interest and fees. In addition, First
National Bank assumes certain risks associated with the borrower’s ability to
complete construction in a timely and workmanlike manner. If the estimate of
value proves to be inaccurate, or if construction is not performed timely or in
a quality manner, the Bank may be confronted with a project which, when
completed, has a value insufficient to assure full repayment or to advance funds
beyond the amount originally committed to permit completion of the project.
Additionally, the Bank limits draws on construction projects on a percentage of
completion basis which is monitored by an independent inspection process. For
the past 12 months, residential real estate values both nationally and in the
Bank’s market have declined significantly from their peak in 2006 and
2007.
CA&D lending has been
particularly difficult beginning in the last half of 2007 and continuing
throughout 2008 with the downturn in the residential real estate market in the
metropolitan Atlanta area which includes our primary and secondary market areas.
As of December 31, 2008, First National Bank had $188 million of CA&D loans
which constituted 30% of total loans. As of December 31, 2008, included in
CA&D loans were approximately $84.4 million of impaired loans that are
either restructured or for which the Bank is no longer accruing interest.
Impaired loans represented 13% of total loans as of December 31, 2008 compared
to 5% of total loans as of December 31, 2007.
Impaired
loans are considered non-performing assets when the accrual of interest is
discontinued. The level of non-performing assets including impaired non-accrual
loans, real estate taken in foreclosure and loans which are 90 days past due
totaled $122.0 million, or 18.0% of total loans plus foreclosed property, as of
December 31, 2008, which are at a historical high and are primarily attributable
to the CA&D portfolio.
Target
Concentrations & Loan Portfolio Mix
. The Bank has target
concentration and portfolio mix limits written in its loan policy. The goal of
the policy is to avoid concentrations that would result in a particular loan or
collateral type, industry or geographic area comprising a large part of the
whole portfolio. Because of the downturn in the Bank’s CA&D portfolio,
management has decreased its desired exposure to that type of lending. The
Bank’s loan portfolio should be varied enough to obtain a balance of maximum
yield and acceptable credit risk. The loan portfolio mix is reported and
reviewed quarterly by our Board of Directors. Concentration targets are also
evaluated periodically to determine changes in risk profiles and market need.
The following represents target concentrations of loans by category as a
percentage of total capital:
Unsecured
loans
|
|
|
30
|
%
|
Loans
secured by:
|
|
|
|
|
Residential
real estate
|
|
|
300
|
%
|
Total
commercial real estate
|
|
|
300
|
%
|
Convenience
stores
|
|
|
20
|
%
|
Hotels/motels
|
|
|
10
|
%
|
Apartments
|
|
|
50
|
%
|
Construction
acquisition & development loans
|
|
|
100
|
%
|
Commercial
and industrial purpose loans
|
|
|
150
|
%
|
Participations
purchased
|
|
|
75
|
%
|
Single
payment notes
|
|
|
300
|
%
|
While the loan policy
includes a provision generally limiting all types of real estate loans to 700%
of total capital, the executive loan committee can approve loans that exceed the
policy limits on a case by case basis where warranted. At the end of the fourth
quarter of 2008, we were within the overall real estate concentration target
although we have approved concentrations above the target in the specific
segments of single family construction and land development. With the benefit of
our experienced lenders and specialized controls, we are actively reducing this
concentration. However, during the last half of 2007 and continuing through
2008, the Bank experienced significant charge-offs and a high level of
non-performing assets primarily because of market deterioration in residential
real estate.
See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Provision and Allowance for Possible Loan and Lease Losses”
and
“-
Non-Performing Assets and Past Due Loans.”
We will continue actively
seeking to diversify our portfolio into other business lines such as commercial
and industrial loans as well as one-to-four family residential
mortgages.
Legal
Lending Limit
. First National Bank is subject to loans to one borrower
limitations prescribed for national banks by the Office of the Comptroller of
the Currency.
See
-- Supervision and Regulation
. The legal lending limit to a single
borrower by regulation is 15% of a bank’s total capital and reserves, plus an
additional 10% of a bank’s capital and reserves if the amount exceeding the 15%
general limit is secured by readily marketable securities. The Bank, however,
has adopted an internal policy requiring all exposure above 15% of capital and
reserves to be approved by the entire Board of Directors unless certain
conditions are met including one or more of the
following:
|
●
|
the
amounts exceeding the limit are sold on a non-recourse
basis;
|
|
|
|
|
●
|
the
amounts exceeding the limit are secured by readily marketable securities,
up to a limit of 25% of capital and
reserves.
|
Loan
Underwriting Standards
. Management recognizes the importance of character
and past performance as consideration in the lending decision process. In
analyzing a credit relationship, primary emphasis is placed on adequacy of cash
flow and the ability of the borrower to service the debt. Secondary emphasis is
placed on the past performance of the borrower, the type or value of the
collateral, the amount of net worth present or any performance of endorsers or
guarantors.
Collateral is not
considered a substitute for the borrower’s ability to repay. Collateral serves
as a way to control the borrower and provide additional sources of repayment in
the event of default. The quality and liquidity of the collateral are of
paramount importance and must be confirmed before the loan is made. The Bank has
loan-to-value and margin guidelines that are varied depending on the type of
collateral offered. Loans secured by liquid assets and securities carry margins
of 75% to 100% depending on the liquidity and price volatility of the asset.
Loan-to-value ratios on various types of real estate credits generally do not
exceed 85% with many below 80%. Installment loans, in general, allow for a
maximum loan to collateral value of 85%. In addition, there are limits on terms
of repayment of loans for automobiles and related collateral which are dependent
on the age of the asset. There are certain exceptions to the loan-to-value
guidelines that are dependent on the overall creditworthiness of the
borrower.
Loan
Approval
. First National Bank’s loan approval policies provide for
various levels of officer lending authority. When the aggregate outstanding
loans to a single borrower exceeds an individual officer’s lending authority,
the loan request must be considered and approved by an officer with a higher
lending limit or an officers’ loan committee (the “OLC”). Individual officer’s
secured and unsecured lending limits range from $5,000 to $150,000, depending on
seniority. The OLC, which consists of the Bank’s Chief Executive Officer,
President, and three Executive Vice Presidents, has a lending limit of $1
million for secured and $250,000 for unsecured loans. Loans between $1 million
and the Bank’s legal lending limit must be approved by the Bank’s Executive Loan
Committee (the “ELC”), which is made up of the Bank’s CEO, President, one
Executive Vice President and nine outside directors.
Loan
Review.
During 2008, the Bank’s loan review process increased in quantity
as well as quality. Our Chief Credit Officer and loan review staff reviewed and
improved critical policies and procedures in order to adequately support the
current portfolio risk. Particular focus was placed on the CA&D portfolio. A
comprehensive credit administration process is imperative particularly as
portfolio size, complexity and risk exposure
increases.
The Bank
has a comprehensive loan review process involving independent internal loan
review and, as necessary, independent consulting firms. The loan review process
is designed to promote early identification of credit quality problems at both
the relationship level and portfolio level. The scope of loan review activity
for the commercial and business portfolio includes a minimum of 100% of all loan
relationships greater than $1 million and 75% of all loan relationships between
$800 thousand and $1 million. All loan officers are charged with the
responsibility of properly grading their loans. Loan review may modify grades as
part of the loan review process, with the Chief Credit Officer’s approval, to
ensure proper risk identification. Loan reviews are presented to the ELC for
oversight and concurrence. The Bank’s risk identification process is reviewed by
its regulators and its independent auditors giving further oversight and
feedback.
The
Bank’s loan review staff has developed an annual loan review schedule to meet
annual review penetration goals. This process has improved the loan review work
product, making reviews an important part of our individual loan and portfolio
management process. The loan review schedule is reviewed regularly for adherence
to performance and production goals. As necessary, outside loan review
consultants may be retained to increase review coverage.
The Bank
has created a special assets management (“SAM”) department. SAM is a separate
department of the Bank responsible for managing and disposing of non-accrual
loans and foreclosed property. SAM is responsible for establishing policies and
procedures which will allow the Bank and its lenders to focus on serving
performing borrowers and provide independence in managing problem assets from
the original loan relationship. SAM is currently developing management
information systems to track staffing requirements and measure successful and
sound workout activities.
Market
Area
The
following statistical data relating to our market area is based on information
contained in a report published by the University of West Georgia Department of
Economics dated October 28, 2008 and other information published by the FDIC on
its website.
The five county West
Georgia area that we serve has been significantly impacted by the slowdown of
the residential real estate market which continued throughout 2008 and is likely
to continue well into 2009. Institutions that are involved in various aspects of
residential construction and development have also been affected by the
slowdown. The primary effect of this downturn on our business has been a
significant increase in First National Bank’s non-performing assets over the
last eighteen months. The devaluation of property may migrate from residential
to commercial real estate. As the rate of foreclosed property accelerated
through 2008, the demand for property also decreased This phenomena has been
exacerbated by the decrease in employment, not only in the Bank’s market area,
but nationally as well.
See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Provision and Allowance for Possible Loan and Lease
Losses”
and
“
Non-Performing
Assets and Past Due Loans.”
The
Bank’s primary market area includes all of Carroll, Douglas and Haralson
Counties in Georgia. Approximately 70% of its deposit accounts are located in
Carroll County, 26% are located in Haralson County and 4% are located in Douglas
County. However, the Bank attracts loan business from neighboring Coweta and
Paulding Counties as well. Our secondary market area includes the Georgia
counties of Coweta, Heard, Cobb, Polk, Paulding, and the southern portion of
Fulton, and the Alabama counties of Clebourne and Randolph.
Carroll
County, located approximately 45 miles southwest of Atlanta and 90 miles east of
Birmingham, Alabama, ranks 19
th
among
Georgia’s 159 counties in terms of population and 23
rd
in
terms of total personal income. Its major industries include manufacturing,
wholesale and retail trade, food processing, accommodation and food services,
construction and health services. Our main office is located in Carrollton,
which is the county seat for Carroll County. The University of West Georgia,
which serves more than 11,000 students, Southwire Inc. and Tanner Health System
are also headquartered in Carrollton.
Carroll
County continues to be the largest deposit base county in the Bank’s market area
with Douglas County, to its east, and Paulding County, to its north, also
emerging as deposit growth areas. The amount of total deposits in Carroll County
was approximately $2.08 billion as of June 30, 2008, an increase of 4.5% from
total deposits of approximately $1.99 billion as of June 30, 2007. As of June
30, 2008, First National Bank ranked number one in terms of market share for
Carroll County, holding approximately 26% of the market’s deposits. The number
two, three and four banks held, respectively, 14%, 12% and 10% of the market
area’s deposits.
Carroll
County has been severely impacted by a combination of employment declines,
inflationary pressures, especially food and energy prices, and declines in the
housing market. From the first quarter of 2007 to the first quarter of 2008,
total employment in Carroll County declined 4.9% and declined further in the
second through fourth quarters of 2008. On the housing front, single family
housing permits peaked in Carroll County in 2004 at 1,838. By contrast, single
family housing permits in 2008 numbered an annualized amount of 307, a 15 year
low. Housing has been at the forefront of concerns about the local economy.
Declining housing permits, slipping home values due to foreclosures and fading
consumer confidence do not provide much hope for a positive outlook in the
housing sector for Carroll County anytime in the near future.
Haralson
County ranks 59
th
among
Georgia’s 159 counties in terms of population. The amount of total deposits in
Haralson County was approximately $452 million as of June 30, 2008, an increase
of 4.4% over June 30 2007. We entered the Haralson County market through our
acquisition of First Haralson. As of June 30, 2008, the Bank held a 36% market
share of Haralson County deposits. A primary factor for the First Haralson
acquisition was its effect on the resulting market share in WGNB’s and First
Haralson’s respective counties. In Carroll and Haralson Counties alone, our
combination gave us a number one market share position, holding 27% of the
deposits in the combined county market. The second ranked institution held a 15%
deposit market share.
Haralson
County’s housing market, though affected by the economic downturn, has not seen
the declines that other counties in the West Georgia region have faced. Haralson
County’s housing permits peaked in 2005 with 185 permits, but declined in 2008
to an annualized amount of 51 permits. Haralson County’s unemployment rate has
seen an increase from 4.6% to over 6.5% by the end of 2008. Not since 2004, when
clothing manufacturing declined, has Haralson County experienced unemployment
over 6%.
Douglas
County (which has the largest population of our five county West Georgia market
and ranks 16
th
among
all 159 Georgia counties in terms of population) had the second largest deposit
base in our market area with $1.54 billion in total deposits and a 2.0% deposit
growth rate in 2008. The Bank held a 3.3% market share as of June 30, 2008,
ranking ninth in terms of deposits for financial institutions located in Douglas
County. With respect to Carroll, Haralson and Douglas Counties, on a combined
basis, the Bank ranked number one in terms of market share of total deposits in
the combined counties, with a 18.7% market share. The second ranked institution
held a 9.7% market share in the combined counties.
Douglas
County has been the hardest hit by the downturn of the national economy of all
the counties in the West Georgia region. The county’s unemployment rate was over
7% at the end of 2008, well above the 4.5% unemployment rate Douglas County had
at the end of 2007. As of August 2008, initial claims for unemployment had
increased 80% from a year earlier. Housing permit activity decreased sharply as
well. Based on housing permit data, single family construction in Douglas County
had fallen over 70% in 2008 compared to 2007 levels and compared to a statewide
level of 54%.
During
November 2008, the Bank closed its loan production office in Coweta County.
Additionally, the Bank closed its Coweta County and Carrollton locations of
Banco de Progreso in January 2009. The Spanish-speaking population in our market
area has been especially hard hit by the slowdown in residential real estate
construction and loss of employment. Many people in that population have moved
out of the area to find work. Consequently, the prospect for growth in this
market niche has been significantly reduced. As part of our ongoing cost cutting
efforts, we have consolidated those operations into closely located branches
that have been staffed with Spanish speaking tellers, customer service
representatives and lenders.
Competition
The Bank operates in a
competitive environment, competing for deposits and/or loans with commercial
banks, thrifts and other financial entities. Principal competitors include other
small community commercial banks (such as McIntosh Commercial Bank, First
Georgia Banking Company, Community Bank of West Georgia, Peoples Community
National Bank, Douglas County Bank, First Commerce Community Bank and River City
Bank) and larger institutions with branches in the Bank’s market area such as
Bank of North Georgia (a division of Synovus), BB&T, Regions Bank, United
Community Bank, Bank of America, SunTrust Bank and Wachovia Bank, a division of
Wells Fargo. Numerous mergers and consolidations involving banks in the Bank’s
market area have occurred, requiring the Bank to compete with banks with greater
resources. During 2008, for example, Synovus announced the consolidation of
several community banks that were formerly separately chartered into the Bank of
North Georgia.
Despite
its competition, First National Bank of Georgia enjoys the reputation of being
the largest and oldest independent bank in Carroll County recently celebrating
its 62nd year of service. At the time we acquired First National Bank in
Haralson County, that institution enjoyed a 97 year history. With respect to our
competitors, on the other hand, McIntosh Commercial Bank commenced operations in
the fourth quarter of 2002, Community Bank of West Georgia commenced operations
in the second quarter of 2003, First Georgia Banking Company commenced
operations in the third quarter of 2003, Peoples Community National Bank
commenced operations in the third quarter of 2004 and River City Bank commenced
operations in the fourth quarter of 2007. Given the competition for deposits in
Carroll County, deposit rates are increased as banks compete for funds in the
market area.
The primary factors in
competing for deposits are interest rates, personalized services, the quality
and range of financial services, the financial strength of the institution,
convenience of office locations and office hours. Competition for deposits comes
primarily from other commercial banks, savings associations, credit unions,
money market funds and other investment alternatives. The primary factors in
competing for loans are interest rates, loan origination fees, the quality and
range of lending services and personalized services. Competition for loans comes
primarily from other commercial banks, savings associations, mortgage banking
firms, credit unions and other financial intermediaries. Many of the financial
institutions operating in the Bank’s market area offer services such as trust
and international banking, which the Bank does not offer, and have greater
financial resources or have substantially higher lending limits than the
Bank.
To compete with other
financial services providers, the Bank principally relies upon local promotional
activities, personal relationships established by officers, directors and
employees with its customers, and specialized services tailored to meet its
customers’ needs. We believe that the Bank has an opportunity to establish
business ties with customers who have been displaced by the consolidations of
other banks, the financial weakening of competing banks and desire to forge
banking relationships with locally owned and managed institutions. In addition,
as commercial customers’ needs outgrow a de novo bank’s ability to fund their
business, the Bank can serve those customers because it has a higher loan-to-one
borrower limit which has increased as a result of our merger with First
Haralson.
The Bank offers many
personalized services and attracts customers by being responsive and sensitive
to the needs of the community. The Bank relies not only on the goodwill and
referrals of satisfied customers as well as traditional media advertising to
attract new customers, but also on individuals who develop new relationships to
build its customer base. To enhance the Bank’s image in the community, the Bank
supports and participates in many events. Employees, officers and directors
represent the Bank on many boards and local civic and charitable
organizations.
Employees
As of December 31, 2008,
the Bank had 248 full time equivalent employees compared to 268 full time
equivalent employees as of December 31, 2007. None of our employees are a party
to a collective bargaining agreement. Certain executive officers of the Bank
also serve as the officers of WGNB (which does not have compensated employees).
The Company believes that the Bank enjoys satisfactory relations with its
employees.
Supervision
and Regulation
The
Company and the Bank are regulated under federal and state law. These laws and
regulations generally are intended to protect depositors, not shareholders. The
following is a summary description of certain provisions of certain laws which
affect the regulation of bank holding companies and banks. To the extent that
the following summary describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory and
regulatory provisions. Any change in applicable laws or regulations may have a
material effect on the business and prospects of the Company and its bank
subsidiary.
The
Company
The
Company is a bank holding company within the meaning of the Bank Holding Company
Act of 1956, as amended (the “BHCA”). Under the BHCA, the Company is subject to
periodic examination by the Federal Reserve and is required to file periodic
reports of its operations and such additional information as the Federal Reserve
may require. The Company’s and the Bank’s activities are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Investments,
Control and Activities.
With certain limited exceptions, the BHCA
requires every bank holding company to obtain prior approval of the Federal
Reserve:
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to
acquire the ownership or control of more than 5% of any class of voting
stock of any bank not already controlled by it;
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for
it or any subsidiary (other than a bank) to acquire all or substantially
all of the assets of a bank; and
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to
merge or consolidate with any other bank holding
company.
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In
addition, and subject to certain exceptions, the BHCA and the Change in Bank
Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring “control” of a bank holding company, such as the
Company. Under current Federal Reserve policy guidelines, a person generally
will not be viewed as having acquired control where the person holds up to 33%
of the equity of the bank holding company, provided that the investment (i) does
not include ownership of 15% or more of any class of voting securities of the
target and (ii) does not represent more than 33% of a class of voting securities
of the target (including for this purpose nonvoting equity that is convertible
into equity).
The BHCA
further provides that the Federal Reserve may not approve any transaction that
would result in a monopoly, or the effect of which may be substantially to
lessen competition in any section of the country, or that in any other manner
would be in restraint of trade, unless the transaction’s anticompetitive effects
are clearly outweighed by the public interest. The Federal Reserve is also
required to consider the financial and managerial resources and future prospects
of the bank holding companies and banks concerned and the convenience and needs
of the community to be served.
Bank
holding companies generally are also prohibited under the BHCA from engaging in
non-banking activities or from acquiring direct or indirect control of any
company engaged in non-banking activities. However, the Federal Reserve may
permit bank holding companies to engage in certain types of non-banking
activities determined by the Federal Reserve to be closely related to banking or
managing or controlling banks. Activities determined by the Federal Reserve to
fall under this category include:
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making
or servicing loans and certain leases;
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providing
certain data processing services;
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acting
as a fiduciary or investment or financial
advisor;
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providing
discount brokerage services;
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underwriting
bank eligible securities; and
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making
investments designed to promote community
welfare.
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Subsidiary
banks of a bank holding company are subject to certain restrictions on
extensions of credit to the bank holding company or its subsidiaries, on
investments in their securities and on the use of their securities as collateral
for loans to any borrower. These regulations and restrictions may limit the
Company’s ability to obtain funds from the Bank for its cash needs, including
funds for the payment of dividends, interest and operating expenses. Further,
federal law prohibits a bank holding company and its subsidiaries from engaging
in certain tie-in arrangements in connection with any extension of credit, lease
or sale of property, or the furnishing of services. For example, the Bank may
not generally require a customer to obtain other services from it or the
Company, and may not require that a customer promise not to obtain other
services from a competitor as a condition to an extension of credit to the
customer.
Financial
Services Modernization Act.
Although the activities of bank holding
companies have traditionally been limited to the business of banking and
activities closely related or incidental to banking (as discussed above), the
Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act
of 1999) relaxed the previous limitations and permitted bank holding companies
to engage in a broader range of financial activities. Specifically, bank holding
companies may elect to become financial holding companies which may affiliate
with securities firms and insurance companies and engage in other activities
that are financial in nature. Among the activities that are deemed “financial in
nature” include:
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lending,
exchanging, transferring, investing for others or safeguarding money or
securities;
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insuring,
guaranteeing, or indemnifying against loss, harm, damage, illness,
disability, or death, or providing and issuing annuities, and acting as
principal, agent, or broker with respect thereto;
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providing
financial, investment, or economic advisory services, including advising
an investment company;
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issuing
or selling instruments representing interests in pools of assets
permissible for a bank to hold directly; and
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underwriting,
dealing in or making a market in
securities.
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A bank
holding company may become a financial holding company under this statute only
if each of its subsidiary banks is well capitalized, is well managed and has at
least a satisfactory rating under the Community Reinvestment Act. A bank holding
company that falls out of compliance with such requirement may be required to
cease engaging in certain activities. Any bank holding company that does not
elect to become a financial holding company remains subject to the bank holding
company restrictions of the Act.
Under
this legislation, the Federal Reserve Board serves as the primary “umbrella”
regulator of financial holding companies with supervisory authority over each
parent company and limited authority over its subsidiaries. The primary
regulator of each subsidiary of a financial holding company will depend on the
type of activity conducted by the subsidiary. For example, broker-dealer
subsidiaries will be regulated largely by securities regulators and insurance
subsidiaries will be regulated largely by insurance authorities.
We have
no current plans to register as a financial holding company.
Source
of Strength; Cross-Guarantee.
Under Federal Reserve policy, a bank
holding company is expected to act as a source of financial strength to its bank
subsidiaries and to commit resources to support these subsidiaries. This support
may be required at times when, absent such policy, the bank holding company
might not otherwise provide such support. Under these provisions, a bank holding
company may be required to loan money to its subsidiary banks in the form of
capital notes or other instruments which qualify for capital under regulatory
rules. Under the BHCA, the Federal Reserve may require a bank holding company to
terminate any activity or relinquish control of a nonbank subsidiary (other than
a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that
such activity or control constitutes a serious risk to the financial soundness
or stability of any subsidiary depository institution of the bank holding
company. Further, federal bank regulatory authorities have additional discretion
to require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution’s financial condition. The Bank may be required to indemnify, or
cross-guarantee, the FDIC against losses it incurs with respect to any other
bank controlled by the Company, which in effect makes the Company’s equity
investments in healthy bank subsidiaries available to the FDIC to assist any
failing or failed bank subsidiary of the Company.
State
Regulation.
Activities of the Company are subject to certain provisions
of The Financial Institutions Code of Georgia and regulations issued pursuant to
such code. These provisions are administered by The Georgia Department of
Banking & Finance, which has concurrent jurisdiction with the Federal
Reserve over the activities of the Company. The laws and regulations
administered by The Georgia Department of Banking & Finance are generally
consistent with, or supplemental to, those federal laws and regulations
discussed herein.
The
Bank
As a
national bank, the Bank is subject to the supervision and examination by the
Office of the Comptroller of the Currency (the “OCC”). Deposits in the Bank are
insured by the FDIC up to a maximum amount allowable by law per depositor,
subject to aggregation rules. The OCC and the FDIC regulate or monitor all areas
of the Bank’s commercial banking operations, including security devices and
procedures, adequacy of capitalization and loan loss reserves, loans,
investments, borrowings, deposits, mergers, consolidations, reorganizations,
issuance of securities, payment of dividends, interest rates, establishment of
branches, and other aspects of its operations. The OCC requires the Bank to
maintain certain capital ratios and imposes limitations on the Bank’s aggregate
investment in real estate, bank premises and furniture and fixtures. The Bank is
currently required by the OCC to prepare quarterly reports on the Bank’s
financial condition and to conduct an annual audit of its financial affairs in
compliance with minimum standards and procedures prescribed by the
OCC.
Under
FDICIA, all insured institutions must undergo periodic on-site examination by
their appropriate banking agency. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate.
Insured institutions are required to submit annual reports to the FDIC and the
appropriate agency (and state supervisor when applicable). FDICIA also directs
the FDIC to develop with other appropriate agencies a method for insured
depository institutions to provide supplemental disclosure of the estimated fair
market value of assets and liabilities, to the extent feasible and practicable,
in any balance sheet, financial statement, report of condition or other report
of any insured depository institution. FDICIA also requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured
depository institutions and depository institution holding companies relating,
among other things, to: (i) internal controls, information systems and audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
risk exposure; and (v) asset quality.
Community
Reinvestment Act
. The Community Reinvestment Act requires that, in
connection with examinations of financial institutions within their respective
jurisdictions, the Federal Reserve, the FDIC or any other appropriate federal
agency, shall evaluate the record of each financial institution in meeting the
credit needs of its local community, including low and moderate income
neighborhoods. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Failure to
adequately meet these criteria could pose additional requirements and
limitations on the bank. The Bank was examined for CRA compliance in December
2006 and received a CRA rating of “satisfactory.”
Other
Regulations.
Interest and certain other charges collected or contracted
for by the Bank are subject to Georgia usury laws and certain federal laws
concerning interest rates. The Bank’s loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, the Soldiers’ and Sailors’ Civil Relief Act of 1940
governing the repayment terms of, and property rights underlying, secured
obligations of persons in military service, and the rules and regulations of the
various federal agencies charged with the responsibility of implementing such
federal laws. The deposit operations of the Bank also are subject to the Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers’ rights and liabilities arising from the use of automated teller
machines and other electronic banking services. The Bank’s commercial
transactions are also subject to the provisions of the Uniform Commercial Code
and other provisions of The Georgia Code Annotated.
Deposit
Insurance
The
deposits of the Bank are currently insured to the maximum allowable by law per
depositor, subject to aggregation rules. The FDIC establishes rates for the
payment of premiums by federally insured banks and thrifts for deposit
insurance. Since 1993, insured depository institutions like the Bank have paid
for deposit insurance under a risk-based premium system. Insurance of deposits
may be terminated by the FDIC upon a finding that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC. Due to its severe consequences, the FDIC
historically uses insurance termination as an enforcement action of last resort
and the termination process itself involves substantial notice, a formal
adjudicative hearing and federal appellate review. In instances where insurance
deposit is terminated, the financial institution is required to notify its
depositors and insured funds on the date of termination that they will continue
to be insured for at least six months and up to two years, at the discretion of
the FDIC. After the date of termination, no new deposits accepted by the
financial institution will be federally insured.
The FDIC imposes a
risk-based deposit premium assessment system, which was amended pursuant to the
Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this
system, as amended, the assessment rates for an insured depository institution
vary according to the level of risk incurred in its activities. To arrive at an
assessment rate for a banking institution, the FDIC places it in one of four
risk categories determined by reference to its capital levels and supervisory
ratings. In addition, in the case of those institutions in the lowest risk
category, the FDIC further determines its assessment rate based on certain
specified financial ratios or, if applicable, its long-term debt ratings. On
December 16, 2008, the FDIC adopted a final rule increasing risk-based
assessment rates uniformly by 7 basis points, on an annual basis, for the first
quarter of 2009. Currently, banks pay between 5 and 43 basis points of their
domestic deposits for FDIC insurance. Under the final rule, risk-based rates
would range between 12 and 50 basis points (annualized) for the first quarter
2009 assessment, depending on the insured institution’s risk category as
described above. The assessment rate schedule can change from time to time, at
the discretion of the FDIC, subject to certain limits. The FDIC has published
guidelines under the Reform Act on the adjustment of assessment rates for
certain institutions. Under the current system, premiums are assessed quarterly.
The Reform Act also provides for a one-time premium assessment credit for
eligible insured depository institutions, including those institutions in
existence and paying deposit insurance premiums on December 31, 1996, or certain
successors to any such institution. The assessment credit is determined based on
the eligible institution’s deposits at December 31, 1996 and is applied
automatically to reduce the institution’s quarterly premium assessments to the
maximum extent allowed, until the credit is exhausted. In addition, insured
deposits have been required to pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation (“FICO”) to fund the closing and
disposal of failed thrift institutions by the Resolution Trust
Corporation.
On February 27, 2009, the
FDIC adopted an interim rule, with request for comment, which would institute a
one-time special assessment of 20 cents per $100 of domestic deposits on FDIC
insured institutions. If approved, the Company estimates that the assessment
would total approximately $1.525 million. The assessment would be payable on
September 30, 2009.
Dividends
The
Company is a legal entity separate and distinct from the Bank. The principal
source of cash flow for the Company is dividends from the Bank. The amount of
dividends that may be paid by the Bank to the Company depends on the Bank’s
earnings and capital position and is subject to various statutory and regulatory
limitations. In addition, the Federal Reserve has stated that bank holding
companies should refrain from or limit dividend increases or reduce or eliminate
dividends under circumstances in which the bank holding company fails to meet
minimum capital requirements or in which its earnings are impaired.
As a
national bank, the Bank may not pay dividends from its paid-in-capital. All
dividends must be paid out of retained earnings, after deducting expenses,
including reserves for losses and bad debts. In addition, a national bank is
prohibited from declaring a dividend on its shares of common stock until its
surplus equals its stated capital, unless there has been transferred to surplus
no less than one-tenth of the bank’s net profits of the preceding two
consecutive half-year periods (in the case of an annual dividend). The approval
of the OCC is required if the total of all dividends declared by a national bank
in any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus. Under FDICIA, the Bank may not pay a dividend if, after
paying the dividend, the Bank would be undercapitalized.
See
Capital Adequacy.
As discussed below,
additional capital requirements imposed by the OCC may limit the Bank’s ability
to pay dividends to the Company. The Bank declared dividends in the amount of
$1,908,142 to the Company during 2008. Under the OCC guidelines, as of December
31, 2008, the Bank could not pay additional dividends to the Company without
obtaining prior regulatory approval.
In addition to the
availability of funds from the Bank, the future dividend policy of the Company
is subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, financial condition, cash needs
and general business conditions. The terms of our Series A Preferred also
prohibit us from paying dividends on our Common Stock unless dividends on our
Series A Preferred are paid for the applicable quarterly period. If dividends
should be declared in the future, the amount of such dividends presently cannot
be estimated and it cannot be known whether such dividends would continue for
future periods.
Capital
Adequacy
Federal
bank regulatory authorities have adopted risk-based capital guidelines for banks
and bank holding companies that are designed to:
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make
regulatory capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies;
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account
for off-balance sheet exposure; and
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minimize
disincentives for holding liquid
assets.
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The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the
minimums.
The
current guidelines require all bank holding companies and federally regulated
banks to maintain a minimum risk-based Total Capital ratio equal to 8%, of which
at least 4% must be Tier 1 capital. The degree of regulatory scrutiny of a
financial institution will increase, and the permissible activities of the
institution will decrease, as it moves downward through the capital categories.
Bank holding companies controlling financial institutions can be called upon to
boost the institution’s capital and to partially guarantee the institution’s
performance under their capital restoration plans. Tier 1 capital includes
shareholders’ equity, qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, but excludes goodwill
and most other intangible assets and excludes the allowance for loan and lease
losses. Tier 2 capital includes the excess of any preferred stock not included
in Tier 1 capital, mandatory convertible securities, hybrid capital instruments,
subordinated debt and intermediate-term preferred stock and general reserves for
loan and lease losses up to 1.25% of risk-weighted assets.
Under the guidelines,
banks’ and bank holding companies’ assets are given risk-weights of 0%, 20%, 50%
and 100%. In addition, certain off-balance sheet items are given credit
conversion factors to convert them to asset equivalent amounts to which an
appropriate risk-weight will apply. These computations result in the total
risk-weighted assets. Most loans are assigned to the 100% risk category, except
for first mortgage loans fully secured by residential property and, under
certain circumstances, residential construction loans, both of which carry a 50%
rating. Most investment securities are assigned to the 20% category, except for
municipal or state revenue bonds, which have a 50% rating, and direct
obligations of or obligations guaranteed by the United States Treasury or United
States Government agencies, which have a 0% rating.
Failure
to meet capital guidelines could subject a bank to a variety of enforcement
remedies, including the termination of deposit insurance by the FDIC, and to
certain restrictions on its business.
The
Federal Reserve also has implemented a leverage ratio, which is Tier 1 capital
as a percentage of average total assets less intangible assets, to be used as a
supplement to the risk-based guidelines. The principal objective of the leverage
ratio is to place a constraint on the maximum degree to which a bank holding
company may leverage its equity capital base. The Federal Reserve has
established a minimum 3% leverage ratio of Tier 1 capital to total assets for
the most highly rated bank holding companies and insured banks. All other bank
holding companies and insured banks will be required to maintain a leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
tangible Tier 1 Leverage ratio is the ratio of a banking organization’s Tier 1
capital, less all intangibles, to total assets, less all
intangibles.
FDICIA
established a capital-based regulatory plan designed to promote early
intervention for troubled banks and requires the FDIC to choose the least
expensive resolution of bank failures. The capital-based regulatory framework
contains five categories of compliance with regulatory capital requirements,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. To qualify as a
well capitalized institution, a bank must have a leverage ratio of no less than
5%, a Tier 1 risk-based ratio of no less than 6%, and a total risk-based capital
ratio of no less than 10%. The bank must also not be under any order or
directive from the appropriate regulatory agency to meet and maintain a specific
capital level.
Under
FDICIA, regulators must take prompt corrective action against depository
institutions that do not meet minimum capital requirements. FDICIA and the
related regulations establish five capital categories as shown in the following
table:
Classification
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Total
Risk-
Based
Capital
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Tier
I
Risk-
Based
Capital
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Tier
I
Leverage
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Well
Capitalized (1)
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10
%
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6
%
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5
%
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Adequately
Capitalized (1)
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8
%
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4
%
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4
%
(2)
|
|
|
|
|
|
|
|
Undercapitalized
(3)
|
|
<8
%
|
|
<4
%
|
|
<4
%
|
|
|
|
|
|
|
|
Significantly
Undercapitalized (3)
|
|
<6
%
|
|
<3
%
|
|
<3
%
|
|
|
|
|
|
|
|
Critically
Undercapitalized (3)
|
|
—
|
|
—
|
|
<2
%
|
|
|
|
|
(1)
|
An
institution must meet all three minimums.
|
|
(2)
|
3%
for composite 1-rated institutions, subject to appropriate federal banking
agency guidelines.
|
|
(3)
|
An
institution is classified as undercapitalized if it is below the specified
capital level for any of the three capital
measures.
|
A
depository institution may be deemed to be in a capitalization category that is
lower than is indicated by its actual capital position if it receives a less
than satisfactory examination rating in any one of four categories. As a
depository institution moves downward through the capitalization categories, the
degree of regulatory scrutiny will increase and the permitted activities of the
institution will decrease. Action may be taken by a depository institution’s
primary federal regulator against an institution that falls into one of the
three undercapitalized categories, including the requirement of filing a capital
plan with the institution’s primary federal regulator, prohibition on the
payment of dividends and management fees, restrictions on executive
compensation, and increased supervisory monitoring. Other restrictions may be
imposed on the institution either by its primary federal regulator or by the
FDIC, including requirements to raise additional capital, sell assets, or sell
the institution.
As of the
date of this Report, the Company and the Bank are considered to be
well capitalized according to their current regulatory capital requirements. The
Bank received certain requests relating to capital from its primary regulator,
the OCC, the terms of which are confidential. Management is in the process of
complying with certain of these requests. If the regulatory capital requirements
are not met and/or maintained, additional regulatory actions may be taken
against the Bank. See Note 12
of
the Notes to Consolidated Financial Statements for additional
details.
Interstate
Banking and Branching Restrictions
Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
“Riegle-Neal Act”), an adequately capitalized and adequately managed bank
holding company may acquire a bank across state lines, without regard to whether
such acquisition is permissible under state law. A bank holding company is
considered to be “adequately capitalized” if it meets all applicable federal
regulatory capital standards.
While the
Riegle-Neal Act precludes a state from entirely insulating its banks from
acquisition by an out-of-state holding company, a state may still provide that a
bank may not be acquired by an out-of-state company unless the bank has been in
existence for a specified number of years, not to exceed five years.
Additionally, the Federal Reserve may not approve an interstate acquisition
which would result in the acquirer’s controlling more than 10% of the total
amount of deposits of insured depository institutions in the United States with
30% or more of the deposits in the home state of the target bank. A state may
waive the 30% limit based on criteria that does not discriminate against
out-of-state institutions. The limitations do not apply to the initial entry
into a state by a bank holding company unless the state has a deposit
concentration cap that applies on a nondiscriminatory basis to in-state or
out-of-state bank holding companies making an initial acquisition.
The
Riegle-Neal Act permits banks with different home states to merge unless a
particular state opts out of the statute. Georgia adopted legislation which has
permitted interstate bank mergers since June 1, 1997.
The
Riegle-Neal Act also permits national and state banks to establish de novo
branches in another state if there is a law in that state which applies equally
to all banks and expressly permits all out-of-state banks to establish de novo
branches. However, in 1996, Georgia adopted legislation which opts out of this
provision. The Georgia legislation provides that, with the prior approval of the
Georgia Department of Banking and Finance, after July 1, 1996, a bank may
establish three new or additional de novo branch banks anywhere in Georgia and,
beginning July 1, 1998, a bank may establish new or additional branch banks
anywhere in the state with prior regulatory approval.
Privacy
Financial
institutions are required to disclose their policies for collecting and
protecting confidential information. Customers generally may prevent financial
institutions from sharing nonpublic personal financial information with
nonaffiliated third parties except under narrow circumstances, such as the
processing of transactions requested by the consumer. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing to consumers.
It
is the Bank’s policy not to disclose any personal information unless required by
law.
Anti-Terrorism
Legislation
In the wake of the tragic
events of September 11
th
, on
October 26, 2001, the President signed the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA
PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are
subject to prohibitions against specified financial transactions and account
relationships as well as enhanced due diligence and “know your customer”
standards in their dealings with foreign financial institutions and foreign
customers. For example, the enhanced due diligence policies, procedures, and
controls generally require financial institutions to take reasonable
steps—
|
●
|
to
conduct enhanced scrutiny of account relationships to guard against money
laundering and report any suspicious transaction;
|
|
|
|
|
●
|
to
ascertain the identity of the nominal and beneficial owners of, and the
source of funds deposited into, each account as needed to guard against
money laundering and report any suspicious
transactions;
|
|
●
|
to
ascertain for any foreign bank, the shares of which are not publicly
traded, the identity of the owners of the foreign bank, and the nature and
extent of the ownership interest of each such owner; and
|
|
|
|
|
●
|
to
ascertain whether any foreign bank provides correspondent accounts to
other foreign banks and, if so, the identity of those foreign banks and
related due diligence
information.
|
Under the
USA PATRIOT Act, financial institutions are required to establish anti-money
laundering programs. The USA PATRIOT Act sets forth minimum standards for these
programs, including:
|
●
|
the
development of internal policies, procedures, and
controls;
|
|
|
|
|
●
|
the
designation of a compliance officer;
|
|
|
|
|
●
|
an
ongoing employee training program; and
|
|
|
|
|
●
|
an
independent audit function to test the
programs.
|
In
addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt
rules increasing the cooperation and information sharing between financial
institutions, regulators, and law enforcement authorities regarding individuals,
entities and organizations engaged in, or reasonably suspected based on credible
evidence of engaging in, terrorist acts or money laundering activities. Any
financial institution complying with these rules will not be deemed to have
violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed
above. The Bank currently has policies and procedures in place designed to
comply with the USA PATRIOT Act.
Regulation
W
The Company and its
banking affiliates are subject to Regulation W, which provides guidance on
permissible activities and transactions between affiliated companies. In
general, subject to certain specified exemptions, a bank or its subsidiaries are
limited in their ability to engage in “covered transactions” with
affiliates:
|
●
|
to
an amount equal to 10% of the bank’s capital and surplus, in the case of
covered transactions with any one affiliate; and
|
|
|
|
|
●
|
to
an amount equal to 20% of the bank’s capital and surplus, in the case of
covered transactions with all
affiliates.
|
In
addition, a bank and its subsidiaries may engage in covered transactions and
other specified transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the bank or its subsidiary,
as those prevailing at the time for comparable transactions with nonaffiliated
companies. A “covered transaction” includes:
|
●
|
a
loan or extension of credit to an affiliate;
|
|
|
|
|
●
|
a
purchase of, or an investment in, securities issued by an
affiliate;
|
|
|
|
|
●
|
a
purchase of assets from an affiliate, with some
exceptions;
|
|
|
|
|
●
|
the
acceptance of securities issued by an affiliate as collateral for a loan
or extension of credit to any party; and
|
|
|
|
|
●
|
the
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
|
In
addition, under Regulation W:
|
●
|
a
bank and its subsidiaries may not purchase a low-quality asset from an
affiliate;
|
|
|
|
|
●
|
covered
transactions and other specified transactions between a bank or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices; and
|
|
|
|
|
●
|
with
some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging from
100% to 130%, depending on the type of collateral, of the amount of the
loan or extension of credit.
|
The Bank
is also subject to certain restrictions imposed by the Federal Reserve on
extensions of credit to executive officers, directors, principal shareholders,
or any related interest of such persons. Extensions of credit (i) must be made
on substantially the same terms, including interest rates and collateral, and
following credit underwriting procedures that are at least as stringent as those
prevailing at the time for comparable transactions with persons not covered
above and who are not employees, and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features. The Bank is also
subject to certain lending limits and restrictions on overdrafts to such
persons.
Consumer
Credit Reporting
On December 4, 2003, the
President signed the Fair and Accurate Credit Transactions Act (the FAIR Act),
amending the federal Fair Credit Reporting Act (the FCRA). Amendments to the
FCRA include, among other things:
|
|
new
requirements for financial institutions to develop policies and procedures
to identify potential identity theft and, upon the request of a consumer,
place a fraud alert in the consumer’s credit file stating that the
consumer may be the victim of identity theft or other
fraud;
|
|
|
|
|
|
new
consumer notice requirements for lenders that use consumer report
information in connection with risk-based credit pricing
programs;
|
|
|
|
|
|
for
entities that furnish information to consumer reporting agencies(which
would include the Bank), new requirements to implement procedures and
policies regarding the accuracy and integrity of the furnished
information, and regarding the correction of previously furnished
information that is later determined to be inaccurate;
and
|
|
|
|
|
|
a
new requirement for mortgage lenders to disclose credit scores to
consumers.
|
The
amendments also prohibit a business that receives consumer information from an
affiliate from using that information for marketing purposes unless the consumer
is first provided a notice and an opportunity to direct the business not to use
the information for such marketing purposes, subject to certain exceptions. The
Company and the Bank have implemented procedures to comply with those new
rules.
Recent
Legislation and Regulatory Action
Emergency
Economic Stabilization Act of 2008
On October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted. EESA enables
the federal government, under terms and conditions to be developed by the
Secretary of the Treasury, to insure troubled assets, including mortgage-backed
securities, and collect premiums from participating financial institutions. EESA
includes, among other provisions: (a) the $700 billion Troubled Assets Relief
Program (“TARP”), under which the Secretary of the Treasury is authorized to
purchase, insure, hold, and sell a wide variety of financial instruments,
particularly those that are based on or related to residential or commercial
mortgages originated or issued on or before March 14, 2008; and (b) an increase
in the amount of deposit insurance provided by the FDIC. Both of these specific
provisions are discussed in the below sections.
Troubled
Assets Relief Program (TARP)
Under the TARP, the
Department of Treasury authorized a voluntary capital purchase program (“CPP”)
to purchase up to $250 billion of senior preferred shares of qualifying
financial institutions that elected to participate by November 14, 2008.
Participating companies must adopt certain standards for executive compensation,
including (a) prohibiting “golden parachute” payments as defined in EESA to
senior Executive Officers; (b) requiring recovery of any compensation paid to
senior Executive Officers based on criteria that is later proven to be
materially inaccurate; and (c) prohibiting incentive compensation that
encourages unnecessary and excessive risks that threaten the value of the
financial institution. The terms of the CPP also limit certain uses of capital
by the issuer, including repurchases of company stock, and increases in
dividends. The Company is currently evaluating its participation in the TARP and
CPP. The Company has applied for CPP funding under the TARP program. Its
application remains pending as of the date of this
Report.
Temporary
Liquidity Guarantee Program
Pursuant to the EESA, the
maximum deposit insurance amount per depositor has been increased from $100,000
to $250,000 until December 31, 2009. Additionally, on October 14, 2008, after
receiving a recommendation from the boards of the FDIC and the Federal Reserve,
and consulting with the President, the Secretary of the Treasury signed the
systemic risk exception to the FDIC Act, enabling the FDIC to establish its
Temporary Liquidity Guarantee Program (“TLGP”). Under the transaction account
guarantee program of the TLGP, the FDIC will fully guarantee, until the end of
2009, all non-interest-bearing transaction accounts, including NOW accounts with
interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The
TLGP also guarantees all senior unsecured debt of insured depository
institutions or their qualified holding companies issued between October 14,
2008 and June 30, 2009 with a stated maturity greater than 30 days. All eligible
institutions were permitted to participate in both of the components of the TLGP
without cost for the first 30 days of the program. Following the initial 30 day
grace period, institutions were assessed at the rate of ten basis points for
transaction account balances in excess of $250,000 for the transaction account
guarantee program and at the rate of either 50, 75, or 100 basis points of the
amount of debt issued, depending on the maturity date of the guaranteed debt,
for the debt guarantee program. Institutions were required to opt-out of the
TLGP if they did not wish to participate. The Company did not choose to opt out
of either the transaction account guarantee program or debt guarantee program
components of the TGLP.
Financial
Stability Plan
On February 10, 2009, the
Financial Stability Plan (“FSP”) was announced by the U.S. Treasury Department.
The FSP is a comprehensive set of measures intended to shore up the financial
system. The core elements of the plan include making bank capital injections,
creating a public-private investment fund to buy troubled assets, establishing
guidelines for loan modification programs and expanding the Federal Reserve
lending program. The U.S. Treasury Department has indicated more details
regarding the FSP are to be announced on a newly created government website,
FinancialStability.gov, in the next several weeks. We continue to monitor these
developments and assess their potential impact on our
business.
American
Recovery and Reinvestment Act of 2009
On February 17, 2009, the
American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. ARRA is
intended to provide a stimulus to the U.S. economy in the wake of the economic
downturn brought about by the subprime mortgage crisis and the resulting credit
crunch. The bill includes federal tax cuts, expansion of unemployment benefits
and other social welfare provisions, and domestic spending in education,
healthcare, and infrastructure, including the energy structure. The new law also
includes numerous non-economic recovery related items, including a limitation on
executive compensation in federally aided banks.
Under ARRA, an institution
will be subject to the following restrictions and standards through out the
period in which any obligation arising from financial assistance provided under
TARP remains outstanding:
|
|
Limits
on compensation incentives for risk taking by senior executive
officers.
|
|
|
Requirement
of recovery of any compensation paid based on inaccurate financial
information.
|
|
|
Prohibition
on “Golden Parachute Payments”.
|
|
|
Prohibition
on compensation plans that would encourage manipulation of reported
earnings to enhance the compensation of
employees.
|
|
●
|
Publicly
registered TARP recipients must establish a board compensation committee
comprised entirely of independent directors, for the purpose of reviewing
employee compensation plans.
|
|
●
|
Prohibition
on bonus, retention award, or incentive compensation, except for payments
of long term restricted stock.
|
|
●
|
Limitation
on luxury expenditures.
|
|
|
TARP
recipients are required to permit a separate shareholder vote to approve
the compensation of executives, as disclosed pursuant to the SEC’s
compensation disclosure rules.
|
|
●
|
The
chief executive officer and chief financial officer of each TARP recipient
will be required to provide a written certification of compliance with
these standards to the
SEC.
|
The
foregoing is a summary of requirements to be included in standards to be
established by the Secretary of the U.S. Treasury Department.
Homeowner
Affordability and Stability Plan
On February 18, 2009, the
Homeowner Affordability and Stability Plan (“HASP”) was announced by the
President of the United States. HASP is intended to support a recovery in the
housing market and ensure that workers can continue to pay off their mortgages
through the following elements:
|
|
Provide
access to low-cost refinancing for responsible homeowners suffering from
falling home prices.
|
|
|
A
$75 billion homeowner stability initiative to prevent foreclosure and help
responsible families stay in their homes.
|
|
|
Support
low mortgage rates by strengthening confidence in Fannie Mae and Freddie
Mac.
|
More
details regarding HASP are expected. We continue to monitor these
developments and assess their potential impact on our business
Other
Regulatory Developments
The Basel Committee on
Banking Supervision’s “Basel II” regulatory capital guidelines originally
published in June 2004 and adopted in final form by U.S. regulatory agencies in
November 2007 are designed to promote improved risk measurement and management
processes and better align minimum capital requirements with risk. The Basel II
guidelines became operational in April 2008, but are mandatory only for “core
banks,” i.e., banks with consolidated total assets of $250 billion or more. They
are thus not applicable to the Bank, which continues to operate under U.S.
risk-based capital guidelines consistent with “Basel I” guidelines published in
1988.
Federal regulators issued
for public comment in December 2006 proposed rules (designated as “Basel IA”
rules) applicable to non-core banks that would have modified the existing U.S.
Basel I-based capital framework. In July 2008, however, these regulators issued,
instead of the Basel 1A proposals, a new rulemaking involving a “standardized
approach” that would implement some of the simpler approaches for both credit
risk and operational risk from the more advanced Basel II framework. Non-core
U.S. depository institutions would be allowed to opt in to the standardized
approach or elect to remain under the existing Basel 1-based regulatory capital
framework. The new rulemaking remained pending at the end of
2008.
In
January 2008, with the support of the Bank’s Board of Directors, the Bank began
initiating a series of corrective actions to mitigate the impact of increasing
non-performing assets while maintaining communications with the OCC examiners.
Among the actions taken are the following:
|
|
assigning
of additional asset recovery staff including management whose sole
responsibility is to manage and reduce non-performing assets as quickly as
possible;
|
|
|
|
|
|
continuing
review and revision, as appropriate, of loan portfolio management
procedures and processes including loan diversification, increased
underwriting standards, intensified loan review and aggressive problem
asset identification;
|
|
|
maintaining
a valuation process which we believe balances rapid collection of
non-performing loans and reduction of foreclosed property with maximizing
the net realizable value of these assets for the shareholders;
and
|
|
|
|
|
|
taking
necessary steps, including raising capital through a public offering of
our Series A Preferred stock, in order to be considered well capitalized
as determined by regulatory standards applicable to the Bank and
us.
|
All of
these steps have been reported in prior SEC filings and other communications
with our shareholders including through investor presentations and our annual
shareholders meeting. These steps are designed to improve risk management,
enhance internal controls over credit administration, focus on our market, and
return the Bank to profitable community banking. During these presentations,
management shared that we may formalize these actions with our
regulators.
On
November 12, 2008, the Bank, entered into a formal written agreement with the
Office of the OCC. The Bank has agreed to undertake certain actions within
designated timeframes and operate in compliance with the provisions of the
agreement during its term. The agreement is based on the results of an
examination of the Bank by the OCC commenced on April 28, 2008.
The
provisions of the agreement include the following: (i) within 45 days,
the Board of Directors of the Bank is required to adopt and implement a written
action plan detailing the Board’s assessment of what needs to be done to improve
the Bank, specifying how the Board will implement the plan and setting forth a
timetable for the implementation of the plan, which must be submitted to the OCC
for review and prior determination of no supervisory objection; (ii) within
45 days, the Board is required to update, review and implement its written asset
diversification program which must be submitted to the OCC for review and prior
determination of no supervisory objection; (iii) within 90 days, the Board
is required to adopt and implement a written program to eliminate the basis for
criticism of assets identified as problem assets; (iv) within 60 days, the Board
is required to establish a Loan Workout Department for the purpose of restoring
and reclaiming classified assets, including commercial real estate loans, and
submit for supervisory review a capable loan workout specialist; (v) within
90 days, the Board is required to update and implement its three-year budget and
capital plan, which must be submitted to the OCC for review and prior
determination of no supervisory objection. Compliance with the agreement is to
be monitored by a committee of at least seven directors, two of whom can be
employees or controlling shareholders of the Bank or any of its affiliates or a
family member of such person. The committee is required to submit written
progress reports on a quarterly basis and the Agreement requires the Bank to
make periodic reports and filings with the OCC. The Bank has submitted all plans
within the timeframes outlined in the agreement.
New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of the nation’s financial institutions operating in the United States. The
Company cannot predict whether or in what form any proposed regulation or
statute will be adopted or the extent to which its business may be affected by
any new regulation or statute.
Effect
of Governmental Monetary Policies
The
earnings of the Company are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government and its agencies.
The Federal Reserve’s monetary policies have had, and are likely to continue to
have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order to curb inflation or
combat a recession. The monetary policies of the Federal Reserve have major
effects upon the levels of bank loans, investments and deposits through its open
market operations in United States government securities and through its
regulation of the discount rate on borrowings of member banks and the reserve
requirements against member bank deposits. It is not possible to predict the
nature or impact of future changes in monetary and fiscal policies.
Item
1A. Risk Factors
Not applicable.
Item
1B. Unresolved Staff Comments
Not applicable.
The
following table sets forth information regarding our current offices and banking
facilities:
|
Facility
|
Location
|
Ownership
|
|
|
|
|
|
WGNB
and First National Bank
Corporate
Offices
|
201
Maple Street
Carrollton,
Carroll County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Main
Branch Office
|
201
Maple Street
Carrollton,
Carroll County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
First
Tuesday Mall Office
|
1004
Bankhead Highway
Carrollton,
Carroll County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Motor
Office
|
314
Newnan Street
Carrollton,
Carroll County, Georgia
|
Leased
|
|
|
|
|
|
First
National Bank
Villa
Rica Office
|
725
Bankhead Highway
Villa
Rica, Carroll County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Bowdon
Office
|
205
East College Street
Bowdon,
Carroll County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Temple
Office
|
184
Carrollton Street
Temple,
Carroll County,
Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Bremen
Financial Center
(former
First Haralson headquarters)
|
900
Atlantic Avenue
Bremen,
Haralson County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Bremen
Office
|
501
Pacific Avenue
Bremen,
Haralson County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Buchanan
Office
|
3559
Business 27
Buchanan,
Haralson County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Tallapoosa
Office
|
3408
Georgia Hwy 100
Tallapoosa,
Haralson County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Tallapoosa
Office
|
39
Bowden Street
Tallapoosa,
Haralson County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Mirror
Lake Office
|
Village
at Mirror Lake Shopping Center
Douglasville,
Douglas County, Georgia
|
Owned
|
|
|
|
|
|
First
National Bank
Highway
5 Office
|
9557
Georgia Hwy 5
Douglasville,
Douglas County, Georgia
|
Leased
|
|
|
|
|
|
First
National Bank
Chapel
Hill Office
|
9360
The Landing Drive
(adjacent
to Arbor Place Mall)
Douglasville,
Douglas County, Georgia
|
Owned
|
All
locations are typical of branch banking facilities located throughout the United
States and all locations, except the Motor offices, are full service locations.
Each branch location has an ATM that is either walk-up or drive-up. The Bank
also operates nine additional ATMs on leased properties located throughout the
Carrollton, Bremen and Villa Rica areas. The Motor offices provide primarily
teller and ATM transactions and do not originate loans.
The
Bank’s main office, operations center and related parking are located on
approximately 2.5 acres. The main office is a two-story building with a total of
approximately 19,100 square feet housing its lobby, retail offices,
administrative and executive offices. The operations center is a two-story
building with a total of approximately 12,200 square feet housing a computer
room, administrative offices and storage facilities. The branch offices in
Carroll County (with the exception of the Motor office which is approximately
700 square feet) are typical of other banking facilities and are approximately
3,000 to 5,000 square feet in size.
The
Bremen Financial Center is a two-story building located on approximately 3
acres
that contains approximately 20,000 square feet. The other Haralson County
branches are typical of our other locations and are approximately 3,000 to 4,000
square feet in size (with the exception of the Tallapoosa motor branch which is
approximately 700 square feet).
The
Mirror Lake and Chapel Hill branches provided a new look for the Bank and
contain customer-centric features such as concierge customer service areas with
workstations and Internet connectivity. The Mirror Lake branch utilizes a remote
teller system and is designed to be high-touch customer service and low-touch
transactional service. The new Chapel Hill branch (formerly a Wachovia location)
was built in 2001 and is a 3,400 square foot building on approximately one acre
with brick and veneer exterior.
Item
3. Legal Proceedings
While the Company and its
subsidiaries are from time to time party to various legal proceedings arising
from the ordinary course of business, management believes that there are no
proceedings of material risk threatened or pending.
Item
4. Submission of Matters to a Vote of Security Holders
No matters were submitted
to a vote of shareholders of the Company during the fourth quarter of the fiscal
year covered by this Report.
PART
II
Item
5. Market for Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Market
Information
The Company’s Common Stock
is traded on the NASDAQ Capital Market System under trading symbol “WGNB”.
Approximately 1,200 shareholders (including holders having security positions
held through a clearing agency or nominee) held our Common Stock as of March 10,
2009. Set forth below are the high and low sales prices for each full quarterly
period during 2007 and 2008 and the dividends declared and paid per share of
Common Stock for those periods.
|
|
|
Price
Range Per Share
|
|
|
|
|
|
|
|
Low
|
|
|
High
|
|
|
Dividends
Paid
Per Share
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
27.50
|
|
|
$
|
33.00
|
|
|
$
|
0.197
|
|
|
Second
Quarter
|
|
|
28.32
|
|
|
|
31.60
|
|
|
|
0.203
|
|
|
Third
Quarter
|
|
|
24.79
|
|
|
|
28.08
|
|
|
|
0.210
|
|
|
Fourth
Quarter
|
|
|
19.79
|
|
|
|
24.24
|
|
|
|
0.210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
15.00
|
|
|
$
|
21.55
|
|
|
$
|
0.210
|
|
|
Second
Quarter
|
|
|
8.16
|
|
|
|
16.89
|
|
|
|
0.105
|
|
|
Third
Quarter
|
|
|
4.28
|
|
|
|
9.37
|
|
|
|
0.000
|
|
|
Fourth
Quarter
|
|
|
2.27
|
|
|
|
6.99
|
|
|
|
0.000
|
|
Dividends
The declaration of future
dividends is within the discretion of the Board of Directors and will depend,
among other things, upon business conditions, earnings, the financial condition
of the Bank and the Company, and regulatory requirements. The terms of our
Series A Preferred also prohibit us from paying dividends on our Common Stock
unless dividends on our Series A Preferred are paid for the applicable quarterly
period.
See
“Business – Supervision and Regulation –
Dividends.”
Recent
Sales of Unregistered Securities
The Company did not issue
any securities during the year ended December 31, 2008 that were not registered
under the Securities Act.
Issuer
Purchases of Equity Securities
The Company did not
repurchase any of its securities during the fourth quarter of
2008.
Item
6. Selected Financial Data
The selected consolidated
financial data of the Company for and as of the end of each of the periods
indicated in the five-year period ended December 31, 2008 have been derived from
the audited consolidated financial statements of the Company. The selected
consolidated financial data should be read in conjunction with the consolidated
financial statements of the Company, including the notes to those consolidated
financial statements contained elsewhere in this
Report.
|
|
Year
Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands, except share and per share data)
|
|
For
the Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest income
|
|
$
|
48,113
|
|
|
$
|
55,828
|
|
|
$
|
42,093
|
|
|
$
|
32,546
|
|
|
$
|
25,268
|
|
Total
interest expense
|
|
|
25,611
|
|
|
|
27,181
|
|
|
|
18,727
|
|
|
|
12,583
|
|
|
|
7,570
|
|
Net
interest income
|
|
|
22,502
|
|
|
|
28,647
|
|
|
|
23,366
|
|
|
|
19,963
|
|
|
|
17,698
|
|
Provision
for loan losses
|
|
|
14,900
|
|
|
|
10,206
|
|
|
|
1,465
|
|
|
|
1,550
|
|
|
|
925
|
|
Net
interest income after provision for loan losses
|
|
|
7,602
|
|
|
|
18,441
|
|
|
|
21,901
|
|
|
|
18,413
|
|
|
|
16,773
|
|
Other
income
|
|
|
7,617
|
|
|
|
8,068
|
|
|
|
6,404
|
|
|
|
6,008
|
|
|
|
5,637
|
|
Other
expense
|
|
|
28,234
|
|
|
|
23,341
|
|
|
|
16,519
|
|
|
|
14,464
|
|
|
|
13,664
|
|
Goodwill
impairment
|
|
|
24,128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Earnings
(loss) before income taxes
|
|
|
(37,143
|
)
|
|
|
3,168
|
|
|
|
11,786
|
|
|
|
9,957
|
|
|
|
8,746
|
|
Income
(benefit) taxes
|
|
|
(6,393
|
)
|
|
|
134
|
|
|
|
3,458
|
|
|
|
2,889
|
|
|
|
2,682
|
|
Net
(loss) earnings
|
|
|
(30,750
|
)
|
|
|
3,034
|
|
|
|
8,327
|
|
|
|
7,067
|
|
|
|
6,064
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) earnings
|
|
|
(5.12
|
)
|
|
|
.55
|
|
|
|
1.67
|
|
|
|
1.42
|
|
|
|
1.22
|
|
Diluted
(loss) earnings
|
|
|
(5.12
|
)
|
|
|
.55
|
|
|
|
1.66
|
|
|
|
1.41
|
|
|
|
1.21
|
|
Diluted
(loss) exclusive of goodwill impairment
|
|
|
(1.14
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cash
dividends declared
|
|
|
0.32
|
|
|
|
.82
|
|
|
|
.72
|
|
|
|
.61
|
|
|
|
.52
|
|
Book
value
|
|
|
7.43
|
|
|
|
13.23
|
|
|
|
10.50
|
|
|
|
9.61
|
|
|
|
9.01
|
|
Tangible
book value
|
|
|
6.62
|
|
|
|
8.37
|
|
|
|
10.50
|
|
|
|
9.61
|
|
|
|
9.01
|
|
At
Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
631,500
|
|
|
|
659,963
|
|
|
|
474,319
|
|
|
|
423,720
|
|
|
|
356,909
|
|
Earning
assets
|
|
|
727,316
|
|
|
|
739,334
|
|
|
|
550,466
|
|
|
|
503,275
|
|
|
|
425,062
|
|
Assets
|
|
|
892,219
|
|
|
|
883,665
|
|
|
|
575,329
|
|
|
|
523,643
|
|
|
|
441,929
|
|
Total
deposits
|
|
|
761,693
|
|
|
|
706,377
|
|
|
|
462,813
|
|
|
|
429,049
|
|
|
|
338,398
|
|
Shareholders’
equity
|
|
|
56,929
|
|
|
|
80,151
|
|
|
|
52,496
|
|
|
|
47,952
|
|
|
|
44,962
|
|
Tangible
shareholders’ equity
|
|
|
52,052
|
|
|
|
50,718
|
|
|
|
52,496
|
|
|
|
47,952
|
|
|
|
44,962
|
|
Common
shares outstanding
|
|
|
6,058,007
|
|
|
|
6,057,594
|
|
|
|
5,000,613
|
|
|
|
4,987,794
|
|
|
|
4,988,661
|
|
Average
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans
|
|
|
652,597
|
|
|
|
580,387
|
|
|
|
441,883
|
|
|
|
395,943
|
|
|
|
330,159
|
|
Earning
assets
|
|
|
803,578
|
|
|
|
683,998
|
|
|
|
522,703
|
|
|
|
473,480
|
|
|
|
404,121
|
|
Assets
|
|
|
897,715
|
|
|
|
740,862
|
|
|
|
549,691
|
|
|
|
501,191
|
|
|
|
428,637
|
|
Deposits
|
|
|
729,451
|
|
|
|
594,564
|
|
|
|
440,560
|
|
|
|
393,851
|
|
|
|
325,991
|
|
Shareholders’
equity
|
|
|
77,745
|
|
|
|
69,412
|
|
|
|
50,358
|
|
|
|
46,857
|
|
|
|
43,742
|
|
Tangible
shareholders’ equity
|
|
|
48,580
|
|
|
|
54,695
|
|
|
|
50,358
|
|
|
|
46,857
|
|
|
|
43,742
|
|
Weighted
average shares outstanding
|
|
|
6,057,613
|
|
|
|
5,534,851
|
|
|
|
4,998,103
|
|
|
|
4,986,930
|
|
|
|
4,958,604
|
|
Weighted
average diluted shares outstanding
|
|
|
6,057,613
|
|
|
|
5,560,038
|
|
|
|
5,024,668
|
|
|
|
5,024,429
|
|
|
|
5,034,495
|
|
Key
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
(3.43
|
)%
|
|
|
0.41
|
%
|
|
|
1.51
|
%
|
|
|
1.41
|
%
|
|
|
1.41
|
%
|
ROAA
exclusive of goodwill impairment
|
|
|
(0.74
|
)%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Return
on average equity
|
|
|
(39.55
|
)%
|
|
|
4.37
|
%
|
|
|
16.54
|
%
|
|
|
15.08
|
%
|
|
|
13.86
|
%
|
ROAE
exclusive of goodwill impairment
|
|
|
(8.52
|
)%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Return
on average tangible equity
|
|
|
(63.30
|
)%
|
|
|
5.55
|
%
|
|
|
16.54
|
%
|
|
|
15.08
|
%
|
|
|
13.86
|
%
|
ROATE
exclusive of goodwill impairment
|
|
|
(13.63
|
)%
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
interest margin, taxable equivalent
|
|
|
2.97
|
%
|
|
|
4.33
|
%
|
|
|
4.60
|
%
|
|
|
4.37
|
%
|
|
|
4.55
|
%
|
Dividend
payout ratio
|
|
NM
|
|
|
|
149.09
|
%
|
|
|
43.11
|
%
|
|
|
43.19
|
%
|
|
|
42.62
|
%
|
Average
equity to average assets
|
|
|
8.66
|
%
|
|
|
9.37
|
%
|
|
|
9.16
|
%
|
|
|
9.35
|
%
|
|
|
10.20
|
%
|
Average
loans to average deposits
|
|
|
89.46
|
%
|
|
|
97.62
|
%
|
|
|
100.30
|
%
|
|
|
100.53
|
%
|
|
|
101.28
|
%
|
Overhead
ratio exclusive of goodwill impairment
|
|
|
93.74
|
%
|
|
|
63.57
|
%
|
|
|
55.49
|
%
|
|
|
55.69
|
%
|
|
|
58.56
|
%
|
NM
– Not meaningful
Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
The purpose of the
following discussion is to address information relating to our financial
condition and results of operations that may not be readily apparent from a
review of the consolidated financial statements and notes thereto, which begin
on page F-1 of this Report. This discussion should be read in conjunction with
information provided in WGNB’s consolidated financial statements and
accompanying footnotes. When we use words like “we,” “us,” “our” and the like,
we are referring to WGNB together with its subsidiary, First National
Bank.
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the statements
made in this Report and in documents incorporated by reference herein, including
matters discussed under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” as well as oral statements made
by the Company or its officers, directors or employees, may constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking
statements are based on management’s beliefs, current expectations, estimates
and projections about the financial services industry, the economy and about the
Company and the Bank in general. The words “expect,” “anticipate,” “intend,”
“plan,” “believe,” “seek,” “estimate” and similar expressions are intended to
identify such forward-looking statements. Such forward-looking statements are
not guarantees of future performance and are subject to risks, uncertainties and
other factors that may cause our actual results, performance or achievements to
differ materially from historical results or from any results expressed or
implied by such forward-looking statements. We caution readers that the
following important factors, among others, could cause our actual results to
differ materially from the forward-looking statements contained in this
Report:
|
●
|
the
effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which we must comply, and the
associated costs of compliance with such laws and regulations either
currently or in the future as applicable;
|
|
|
|
|
|
the
effect of changes in accounting policies, standards, guidelines or
principles, as may be adopted by the regulatory agencies as well as by the
Financial Accounting Standards Board;
|
|
|
|
|
|
the
effect of changes in our organization, compensation and benefit
plans;
|
|
|
|
|
|
the
effect on our competitive position within our market area of the
increasing consolidation within the banking and financial services
industries, including the increased competition from larger regional and
out-of-state banking organizations as well as non-bank providers of
various financial services;
|
|
|
|
|
●
|
the
effect of changes in interest rates;
|
|
|
|
|
●
|
the
effect of compliance, or failure to comply within stated deadlines, of the
provisions of our formal agreement with our primary
regulators;
|
|
|
|
|
●
|
the
effect of changes in the business cycle and downturns in local, regional
or national economies;
|
|
|
|
|
●
|
the
effect of the continuing deterioration of the local economies in which we
conduct operations which results in, among other things, a deterioration
in credit quality or a reduced demand for credit, including a resultant
adverse effect on our loan portfolio and allowance for loan and lease
losses;
|
|
|
|
|
●
|
the
possibility that our allowance for loan and lease losses proves to be
inappropriate or that federal and state regulators who periodically review
our loan portfolio require us to increase the provision for loan losses or
recognize loan charge-offs;
|
|
|
|
|
●
|
the
effect of the current and anticipated deterioration in the housing market
and the residential construction industry which may lead to increased loss
severities and further worsening of delinquencies and non-performing
assets in our loan portfolios;
|
|
|
|
|
●
|
the
effect of the significant number of construction loans we have in our loan
portfolios, which may pose more credit risk than other types of mortgage
loans typically made by banking institutions due to the disruptions in
credit and housing markets.
|
|
●
|
the
effect of troubled institutions in our market area continuing to dispose
of problem assets which, given the already excess inventory of residential
homes and lots will continue to negatively impact home values and increase
the time it takes us or our borrowers to sell existing
inventory;
|
|
|
|
|
●
|
the
effect of public perception that banking institutions are risky
institutions for purposes of regulatory compliance or safeguarding
deposits which may cause depositors nonetheless to move their funds to
larger institutions; and
|
|
|
|
|
●
|
the
possibility that we could be held responsible for environmental
liabilities of properties acquired through
foreclosure.
|
We
caution that the foregoing list of important factors is not exclusive of other
factors which may impact our operations.
CRITICAL
ACCOUNTING POLICIES
We have established
various accounting policies which govern the application of accounting
principles generally accepted in the United States of America in the preparation
of our financial statements. These significant accounting policies are described
in the Notes to the consolidated financial statements. Certain accounting
policies involve significant judgments and assumptions by management which have
a material impact on the carrying value of certain assets and liabilities;
management considers these accounting policies to be critical accounting
policies. The judgments and assumptions used by management are based on
historical experience and other factors, which are believed to be reasonable
under the circumstances. Because of the nature of the judgments and assumptions
made by management, actual results could differ from these judgments and
estimates which could have a material impact on the carrying value of our assets
and liabilities and results of operations. All accounting policies are
important, and all policies described in Notes to the consolidated financial
statements should be reviewed for a greater understanding of how our financial
performance is recorded and reported.
We believe the allowance
for loan losses is a critical accounting policy that requires the most
significant judgments and estimates used in the preparation of our consolidated
financial statements. The allowance for loan losses represents management’s
estimate of probable loan losses inherent in the loan portfolio. Calculation of
the allowance for loan losses is a critical accounting estimate due to the
significant judgment, assumptions and estimates related to the amount and timing
of estimated losses, consideration of current and historical trends and the
amount and timing of cash flows related to impaired loans. Please refer to the
section of this Report entitled “Balance Sheet Review – Provision and Allowance
for Possible Loan and Lease Losses” and Note 1 and Note 4 to our consolidated
financial statements for a detailed description of our estimation processes and
methodology related to the allowance for loan losses.
EARNINGS
OVERVIEW
For
the Years Ended December 31, 2008, 2007 and 2006
Our net loss for 2008 was
$30.8 million which includes a non-cash charge for impairment of goodwill in the
amount of $24.1 million. The net loss was $6.6 million, or $1.14 per common
share, exclusive of the charge for goodwill impairment. The net loss for 2008
compares to net earnings of $3.0 million, or $0.55 per diluted common share, in
2007 and $8.3 million, or $1.66 per diluted common share, in 2006. Excluding the
goodwill charge,the return on average assets for 2008 was (0.74)%, the return on
average shareholders’ total equity for 2008 was (8.52)%, and the return on
average tangible equity for 2008 was (13.63)%. This compared to a 0.41% return
on average assets and 4.37% return on average equity for 2007, and a 1.51%
return on average assets and 16.54% return on average equity for 2006. Over the
past ten years, our return on average assets has averaged 1.16% and our return
on average equity has averaged 9.20% excluding the goodwill charge in
2008.
Historically, our earnings
have been driven primarily by balance sheet growth, particularly in loans, and
attaining greater overhead efficiency. Being a suburb of Atlanta along heavily
traveled Interstate 20 West, our market has been driven by residential and
commercial real estate development. During 2007, we completed our merger with
First Haralson which also had a significant presence in west Georgia. The merger
increased both earnings and the number of shares outstanding for the last half
of 2007. We anticipated that the merger would be neither materially accretive
nor dilutive in the first eighteen months following the merger. Our analysis
took into account non-recurring, non-operating merger costs, estimated cost
savings over a twelve to eighteen month period and the expected average number
of shares outstanding based on the elections of First Haralson shareholders. The
merger of the two entities actually proved to be very beneficial to the Company
since it increased our core earnings base and helped brace us for a significant
decrease in credit quality that began in the last half of 2007 and continued
throughout 2008.
The acquired loans of
First Haralson had no impact on the level of non-performing assets except to
increase the total loan portfolio, thereby reducing the percentage of
non-performing assets to total loans. Nor did the operations of First Haralson
have a negative impact on the charge-down of goodwill incurred in the fourth
quarter of 2008. Statement of Financial Accounting Standards No. 142,
“Goodwill
and Other
Intangible
Assets”
, requires companies to perform an annual test for goodwill
impairment. As a result of the general decline in market valuations for bank
stocks, the deterioration of economic conditions and our financial performance
as impacted by loan quality deterioration during 2008, we concluded that the
goodwill resulting from the Company’s acquisition of First Haralson on July 1,
2007 was impaired
.
Therefore, we charged-off the entire amount of goodwill recorded on our
balance sheet.
Much has
been said about the slowdown in the metro-Atlanta residential real estate market
over the past eighteen months. There is no question that the subprime mortgage
production and subsequent default rate has had an impact on our construction and
development borrowers. While we did not actually produce subprime mortgages, the
excess inventory of residential homes and lots that has been produced by
foreclosure on subprime loans and over-building to meet the demand of subprime
lending has had a negative impact on home values and increased the time it takes
to sell existing inventory. These economics have had a significant impact on our
borrower’s ability to carry the construction or development project and, as a
result, have reduced the quality of our overall construction and development
loan portfolio.
We began
to experience credit quality issues in the third quarter of 2007. The reduction
in asset quality continued throughout 2008 as both the national and local
economies continued to deteriorate. Since the middle of 2007, our non-performing
assets increased from $6.6 million as of June 30, 2007 to $58.3 million as of
December 31, 2007, an increase of approximately $51.7 million, or 783%. As of
December 31, 2008, non-performing assets totaled $122.0 million, an increase of
110% from the end of 2007. The majority of the non-performing asset increase was
attributable to approximately twenty-six residential real estate construction
and development loan relationships. In the midst of record credit deterioration
in the residential real estate market, we recorded a loan loss provision of
$14.9 million and incurred net charge-offs of $16.1 million, or 2.46% of average
loans outstanding in 2008. Particularly hard hit in the metro-Atlanta area were
the south and west suburbs which comprise much of our market area. Over the last
eighteen months comprising the last half of 2007 and all of 2008, we experienced
net charged-off loans of $21.1 million which resulted in our recording loan loss
provisions in the amount of $24.3 million.
In
addition to the elevated loan loss provision and charged-off loans, we recorded
charged-off interest on impaired loans in the amount of $2.9 million, realized a
loss on sale or charge-down of $1.2 million of foreclosed property and incurred
$2.4 million in expense on collection of impaired loans and maintenance of
foreclosed property during 2008.
We
measure our core earnings before taxes by adding back the charge on goodwill
impairment and credit related charges such as loan loss provision, charged-off
interest on impaired loans, loss on sale or write-down of foreclosed property
and expense on collection of impaired loans and maintenance of foreclosed
property. Core earnings before taxes for 2008 were $7.2 million.
Our net
interest margin compressed significantly in 2008 when compared to 2007 and 2006.
Our net interest margin was significantly impacted by the increase in
non-performing assets and increased liquidity that have been carried on the
balance sheet throughout 2008. The Bank had $122.0 million of non-performing
assets and $75.4 million of cash and cash equivalents on the balance sheet as of
December 31, 2008. The net interest margin was 2.97%, 4.33% and 4.60% in 2008,
2007 and 2006, respectively. As loans became impaired, we ceased accruing
interest on the balance of the loan. Therefore, the loans became non-performing
assets classified as impaired loans and, if not cured, eventually became
foreclosed property. The Bank must maintain interest-bearing deposits to cover
the balance in non-performing assets and excess liquidity which results in
compressing the net interest margin. The net interest margin was also compressed
by the amount of interest income that was charged-off on impaired loans. In
addition, the Bank increased its interest-bearing deposits to fund increased
liquidity needs. The safety and availability of our customer deposits became a
priority in response to increased headline risk in 2008 as banks across the
country (including very large banks and Georgia banks) began to
fail.
In
addition, compression of the net interest margin can take place if our balance
sheet is not protected from the impact of changes in market interest rates.
While not completely immune to compression of the net interest margin due to
interest rate risk, rapidly falling market interest rates negatively impacted
the net interest margin in late 2008. As interest rates approach zero, our
certificates of deposit require time to reprice to match falling loan and cash
and cash equivalent yields. If rates fall rapidly and certificate of deposit
rates remain high because of perceived risk in the banking system, our margin
could continue to be negatively impacted.
Management
continually seeks to increase revenues while controlling costs. In 2008, our
overhead ratio excluding the charge for the impairment of goodwill (non-interest
expense/net interest income plus non-interest income) was 93.7%, compared to
63.6% in 2007 and 55.5% in 2006. The increase in the overhead ratio is primarily
due to the impact of increased collection and carrying cost of non-performing
assets. Once non-performing assets are reduced and expense reduction measures
are realized, the overhead ratio is expected to decrease to historical
levels.
Net
Interest Income
Our
operational results primarily depend on the earnings of the Bank which depend,
to a large degree, on its ability to generate net interest income. Net interest
income represented 74.7%, 78.0% and 78.5% of net interest income plus other
income in 2008, 2007 and 2006, respectively. The following discussion and
analysis of net interest margin assumes and is stated on a tax equivalent basis.
That is, non-taxable interest is restated at its taxable equivalent
rate.
The
banking industry uses two key ratios to measure the relative profitability of
net interest income. The net interest rate spread measures the difference
between the average yield on interest earning assets (loans, investment
securities and federal funds sold) and the average rate paid on interest bearing
liabilities (deposits and other borrowings). The interest rate spread eliminates
the impact of non-interest bearing deposits and gives a direct perspective on
the effect of market interest rate movements. The other commonly used measure is
net interest margin which is defined as net interest income as a percent of
average total interest earning assets and takes into account the positive impact
of investing non-interest-bearing deposits.
Our net
interest income decreased by $6.1 million, or 21.5%, in 2008 from 2007, and
increased by $5.3 million, or 22.6%, in 2007 from 2006. Net interest income for
2008 was $22.5 million compared to $28.6 million for 2007 and $23.4 million for
2006. The net interest margin on interest earning assets was 2.97% in 2008,
4.33% in 2007 and 4.60% in 2006 on a tax equivalent basis.
Market
interest rates have been very volatile during the past five to six years. From
mid 2004 through the first half of 2007, short term interest rates increased 575
basis points from 2003 levels. Beginning in the last half of 2007 though 2008,
short term interest rates declined over 600 basis points and are likely to
remain at historic lows for the foreseeable future. These broad fluctuations can
have a significant impact on our net interest margin and net interest income
without robust interest rate risk management. We seek to manage our interest
rate risk such that fluctuations in market rates do not have a significant
negative impact on earnings. Throughout the period of increasing and decreasing
rates our margin compressed and expanded although not with the extreme
volatility that short term market interest rates have fluctuated. The decline in
net interest margin that we experienced in 2008 was partly due to rapidly
declining interest rates. However, most of the compression was due to the
increase in non-performing assets and increased liquidity levels.
The
increase in non-performing assets and the write-off of accrued interest on
impaired loans was a primary component of our interest margin compression in
2008. The larger the amount of non-performing assets as a percentage on our
balance sheet, the more compressed the net interest margin becomes. We employ
interest-bearing deposits to fund non-interest bearing assets thereby reducing
the net interest margin. Margin reduction is further exacerbated when we
charge-off previously accrued interest. As stated above, non-performing assets
increased from $58.3 million as of December 31, 2007 to $122.0 million as of
December 31, 2008. The annual average balance of non-accrual loans for 2008 was
$51.3 million. Further, we charged-off interest in 2008 on impaired loans in the
amount of $2.9 million. We include the average balance of nonaccrual loans in
the denominator and we subtract charged-off interest from the numerator in the
calculation of the net interest margin.
Additionally,
we were hampered in our interest rate risk management strategy because of the
necessity to increase our liquidity (cash reserves) in 2008. Because of the
uncertainty that arose in the banking industry in 2008 and the fear created by
the local and national media, we increased our amount of cash and liquid assets
to cover any potential withdrawals that may have taken place. The amount of
interest earned on liquid assets is currently less than the cost of obtaining
funds. The Federal Reserve reduced the target federal funds rate (the rate
earned on liquid assets) to between zero and 0.25% in the fourth quarter of
2008. Our average yield on federal funds sold was 1.47% for 2008. This compares
to our average cost of funds in the amount of 3.49% for 2008. The negative
spread plus the interest carry on non-performing assets compresses both our net
interest margin and net interest income. Our net interest margin decreased by
136 basis points, comparing 2008 to 2007. Our net interest margin was 2.97% in
2008 compared to 4.33% in 2007. The net interest margin in 2006 was 4.60% which
is more representative of our historical net interest margin. Over the past ten
years including 2008, our net interest margin has averaged 4.57%.
Our
average yield on earning assets in 2008 was 6.16%, a decrease of 214 basis
points compared to 2007 and a decrease of 202 basis points from 2006. Our
average cost of funds was 3.49% in 2008, a decrease of 108 basis points from
2007 and 78 basis points from 2006. The yield on total loans in 2008 was 6.35%,
but the yield would have been approximately 7.38% had we not had the $2.9
million of charged–off interest and reduced the average balance of total loans
by the average non-accrual loans of $51.3 million. Consequently, the impact to
the loan yield isolating the effect of charged-off interest and non-accrual
loans in 2008 was 103 basis points. The impact of non-performing assets on the
net interest spread was 57 basis points in 2008. The impact of non-performing
assets on the net interest margin could be greater in 2009 unless the average
balance of non-performing assets is reduced and management is able to minimize
the amount of future charged-off interest.
The following table shows, for the past
three years, the relationship between interest income and interest expense and
the average daily balances of interest-earning assets and interest-bearing
liabilities on a tax equivalent basis assuming a rate of 34%:
Table
1
|
|
Average
Consolidated Balance Sheets and Net Interest Analysis
|
|
(in
thousands)
|
|
|
|
For
the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
earnings assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
24,877
|
|
|
|
366
|
|
|
|
1.47
|
%
|
|
$
|
11,691
|
|
|
|
614
|
|
|
|
5.25
|
%
|
|
$
|
12,133
|
|
|
|
641
|
|
|
|
5.28
|
%
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
62,565
|
|
|
|
3,671
|
|
|
|
5.87
|
%
|
|
|
49,907
|
|
|
|
3,295
|
|
|
|
6.60
|
%
|
|
|
40,528
|
|
|
|
2,491
|
|
|
|
6.15
|
%
|
Tax
exempt
|
|
|
63,539
|
|
|
|
3,996
|
|
|
|
6.29
|
%
|
|
|
42,013
|
|
|
|
2,699
|
|
|
|
6.42
|
%
|
|
|
28,159
|
|
|
|
1,825
|
|
|
|
6.48
|
%
|
Total Investments and Federal Funds Sold
|
|
|
150,981
|
|
|
|
8,033
|
|
|
|
5.32
|
%
|
|
|
103,611
|
|
|
|
6,608
|
|
|
|
6.38
|
%
|
|
|
80,820
|
|
|
|
4,957
|
|
|
|
6.13
|
%
|
Loans
(including loan fees):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
650,850
|
|
|
|
41,307
|
|
|
|
6.35
|
%
|
|
|
579,126
|
|
|
|
50,057
|
|
|
|
8.64
|
%
|
|
|
440,939
|
|
|
|
37,695
|
|
|
|
8.55
|
%
|
Tax
Exempt
|
|
|
1,747
|
|
|
|
147
|
|
|
|
8.41
|
%
|
|
|
1,261
|
|
|
|
123
|
|
|
|
9.74
|
%
|
|
|
944
|
|
|
|
94
|
|
|
|
9.96
|
%
|
Total
Loans
|
|
|
652,597
|
|
|
|
41,454
|
|
|
|
6.35
|
%
|
|
|
580,387
|
|
|
|
50,180
|
|
|
|
8.65
|
%
|
|
|
441,883
|
|
|
|
37,789
|
|
|
|
8.55
|
%
|
Total
interest earning assets
|
|
|
803,578
|
|
|
|
49,487
|
|
|
|
6.16
|
%
|
|
|
683,998
|
|
|
|
56,788
|
|
|
|
8.30
|
%
|
|
|
522,703
|
|
|
|
42,746
|
|
|
|
8.18
|
%
|
Other
non-interest earnings assets
|
|
|
94,137
|
|
|
|
|
|
|
|
|
|
|
|
56,864
|
|
|
|
|
|
|
|
|
|
|
|
26,988
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
897,715
|
|
|
|
|
|
|
|
|
|
|
$
|
740,862
|
|
|
|
|
|
|
|
|
|
|
$
|
549,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
207,231
|
|
|
|
3,530
|
|
|
|
1.70
|
%
|
|
$
|
172,706
|
|
|
|
6,259
|
|
|
|
3.62
|
%
|
|
$
|
137,747
|
|
|
|
4,995
|
|
|
|
3.63
|
%
|
Savings
|
|
|
25,329
|
|
|
|
96
|
|
|
|
0.38
|
%
|
|
|
20,631
|
|
|
|
242
|
|
|
|
1.17
|
%
|
|
|
16,908
|
|
|
|
185
|
|
|
|
1.09
|
%
|
Time
|
|
|
424,315
|
|
|
|
19,088
|
|
|
|
4.50
|
%
|
|
|
337,058
|
|
|
|
17,373
|
|
|
|
5.15
|
%
|
|
|
232,143
|
|
|
|
10,776
|
|
|
|
4.64
|
%
|
FHLB
advances
& other borrowings
|
|
|
76,972
|
|
|
|
2,897
|
|
|
|
3.76
|
%
|
|
|
63,966
|
|
|
|
3,307
|
|
|
|
5.16
|
%
|
|
|
51,985
|
|
|
|
2,771
|
|
|
|
5.33
|
%
|
Total
interest-bearing liabilities
|
|
|
733,847
|
|
|
|
25,611
|
|
|
|
3.49
|
%
|
|
|
594,361
|
|
|
|
27,181
|
|
|
|
4.57
|
%
|
|
|
438,783
|
|
|
|
18,727
|
|
|
|
4.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
|
72,576
|
|
|
|
|
|
|
|
|
|
|
|
64,170
|
|
|
|
|
|
|
|
|
|
|
|
53,762
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
13,547
|
|
|
|
|
|
|
|
|
|
|
|
12,919
|
|
|
|
|
|
|
|
|
|
|
|
6,787
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
77,745
|
|
|
|
|
|
|
|
|
|
|
|
69,412
|
|
|
|
|
|
|
|
|
|
|
|
50,359
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
Shareholders’
equity
|
|
$
|
897,715
|
|
|
|
|
|
|
|
|
|
|
$
|
740,862
|
|
|
|
|
|
|
|
|
|
|
$
|
549,691
|
|
|
|
|
|
|
|
|
|
Excess
of interest-earning assets
over interest-bearing
liabilities
|
|
$
|
89,637
|
|
|
|
|
|
|
|
|
|
|
$
|
89,637
|
|
|
|
|
|
|
|
|
|
|
$
|
83,920
|
|
|
|
|
|
|
|
|
|
Ratio
of interest-earning assets to
interest-bearing
liabilities
|
|
|
109.50
|
%
|
|
|
|
|
|
|
|
|
|
|
115.08
|
%
|
|
|
|
|
|
|
|
|
|
|
119.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income tax equivalent
|
|
|
|
|
|
|
23,876
|
|
|
|
|
|
|
|
|
|
|
|
29,607
|
|
|
|
|
|
|
|
|
|
|
|
24,019
|
|
|
|
|
|
Net
interest spread
|
|
|
|
|
|
|
|
|
|
|
2.67
|
%
|
|
|
|
|
|
|
|
|
|
|
3.73
|
%
|
|
|
|
|
|
|
|
|
|
|
3.91
|
%
|
Net
interest margin on interest earning assets
|
|
|
|
|
|
|
|
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
|
4.33
|
%
|
|
|
|
|
|
|
|
|
|
|
4.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
Equivalent Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
(1,325
|
)
|
|
|
|
|
|
|
|
|
|
|
(919
|
)
|
|
|
|
|
|
|
|
|
|
|
(621
|
)
|
|
|
|
|
Loans
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
22,502
|
|
|
|
|
|
|
|
|
|
|
$
|
28,647
|
|
|
|
|
|
|
|
|
|
|
$
|
23,366
|
|
|
|
|
|
Non-accrual
loans and the interest income that was recorded and/or charged-off on these
loans are included in the yield calculation for loans in all periods
reported.
The following table shows the relative
impact on net interest income of changes in the annual average daily outstanding
balances (volume) of interest-earning assets and interest-bearing liabilities
and the rates earned (rate) by us on such assets and liabilities. Variances
resulting from a combination of changes in rate and volume are allocated in
proportion to the absolute dollar amounts of the change in each
category.
Table
2
Changes
in Interest Income and Expense on a Tax Equivalent Basis
(in
thousands)
|
|
Increase (decrease) due to changes
in:
|
|
|
|
2008 over 2007
|
|
|
2007 over 2006
|
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
|
Volume
|
|
|
Rate
|
|
|
Total
|
|
Interest
income on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
funds sold
|
|
$
|
194
|
|
|
|
(442
|
)
|
|
|
(248
|
)
|
|
$
|
(23
|
)
|
|
|
(4
|
)
|
|
|
(27
|
)
|
Taxable
investments
|
|
|
743
|
|
|
|
(367
|
)
|
|
|
376
|
|
|
|
619
|
|
|
|
186
|
|
|
|
805
|
|
Non-taxable
investments
|
|
|
1,354
|
|
|
|
(56
|
)
|
|
|
1,298
|
|
|
|
890
|
|
|
|
(16
|
)
|
|
|
874
|
|
Taxable
loans
|
|
|
4,552
|
|
|
|
(13,303
|
)
|
|
|
(8,751
|
)
|
|
|
11,983
|
|
|
|
379
|
|
|
|
12,362
|
|
Non-taxable
loans
|
|
|
40
|
|
|
|
(17
|
)
|
|
|
23
|
|
|
|
31
|
|
|
|
(2
|
)
|
|
|
29
|
|
Total
Interest Income
|
|
|
6,883
|
|
|
|
(
14,185
|
)
|
|
|
(
7,302
|
)
|
|
|
13,500
|
|
|
|
543
|
|
|
|
14,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
588
|
|
|
|
(3,318
|
)
|
|
|
(2,730
|
)
|
|
|
1,267
|
|
|
|
(2
|
)
|
|
|
1,265
|
|
Savings
|
|
|
18
|
|
|
|
(164
|
)
|
|
|
(146
|
)
|
|
|
44
|
|
|
|
13
|
|
|
|
57
|
|
Time
|
|
|
3,925
|
|
|
|
(2,210
|
)
|
|
|
1,715
|
|
|
|
5,408
|
|
|
|
1,189
|
|
|
|
6,597
|
|
FHLB
advances & other borrowings
|
|
|
581
|
|
|
|
(990
|
)
|
|
|
(409
|
)
|
|
|
704
|
|
|
|
(168
|
)
|
|
|
536
|
|
Total
Interest Expense
|
|
|
5,112
|
|
|
|
(
6,682
|
)
|
|
|
(
1,570
|
)
|
|
|
7,423
|
|
|
|
1,032
|
|
|
|
8,455
|
|
Increase
(decrease) in net interest income
|
|
$
|
1,771
|
|
|
|
(
7,503
|
)
|
|
|
(
5,732
|
)
|
|
$
|
6,077
|
|
|
|
(489
|
)
|
|
|
5,588
|
|
Other income in 2008 was $7.6 million,
a decrease of $451 thousand, or 5.6%, when compared to 2007. Most of the
increase in service charges on deposit accounts and ATM network fees for 2008
was attributable to the combination of WGNB and First Haralson. The merger took
place in July of 2007. Consequently, there is a half year of First Haralson’s
other non-interest income included in our 2007 operations and a full year in
2008.
Including a half year of First
Haralson’s operations in 2007 versus the full year of operations in 2008 for the
merged entities had the greatest impact on service charges on deposit accounts
and ATM network fees. Service charges on deposit accounts increased by $891
thousand, or 16.6% in 2008 compared to 2007. Much of the increase in service
charges on deposit accounts was attributable to non-sufficient funds charges.
Non-sufficient funds charges increased by $835 thousand, or 17.0%, from 2007 to
2008. Service charges on demand, money market and savings deposits increased by
$50 thousand from 2007 to 2008. While both non-sufficient funds and service
charge revenue increased, the increase was not as robust as it had been in prior
years. Deposit holders have become more fee sensitive as the economy has
worsened. Customers are choosing free checking accounts and taking greater care
not to overdraft their accounts as frequently as a means to conserve
money.
The increase in service charges on
deposit accounts from 2006 to 2007 was $1.3 million, or 32.1%. Prior to the
combination, First Haralson averaged approximately $180 thousand per month in
service charges on deposit accounts. Thus, approximately $1.1 million of the
increase in service charges on deposit accounts from 2006 to 2007 was
attributable to revenue derived from First Haralson’s customer base for the last
six months of 2007. The remaining $200 thousand increase in service charges on
deposit accounts is attributable to our combined entity’s ability to increase
the combined customer base with much of the enhanced revenue being attributable
to increased overdraft fee income in 2007 compared to 2006.
ATM network fees increased by $422
thousand, or 40.3%, comparing 2008 to 2007. ATM network fees increased by $270
thousand, or 34.7%, in 2007 compared to 2006. The increase in ATM network fees,
which are volume driven revenues, continues to be attributable to increased
foreign (non-First National Bank of Georgia customers) usage of our expanding
ATM network as well as the increased volume of ATM and debit card revenue
attributable to the addition of First Haralson’s ATM operations to the
operations of WGNB.
Mortgage origination fees decreased by
$116 thousand, or 29.7%, from 2007 to 2008 and were flat between 2006 and 2007.
The decline in mortgage fee income was attributable to the much publicized
credit and mortgage foreclosure crisis that took place in 2008. After the
subprime losses of 2007 and 2008, mortgage underwriting standards have since
increased. Credit extension has also decreased due to falling residential real
estate values. Mortgage lenders are reluctant to lend on housing because of an
inability to determine how low home values will continue to fall. Consumer
confidence, too, is at an all time low while unemployment rates continue to
increase. Consumers do not feel confident enough about the immediate future to
make large purchases like homes or automobiles, despite decreasing
prices.
Our wealth management business was a
significant contributor to fee income for us in 2008 and 2007. However, due to
the volatility and sharp decrease in the equities market, fee income
attributable to wealth management services decreased by $194 thousand, or 30.4%,
comparing 2008 to 2007. The wealth management division had become cumulatively
profitable through 2007 after its start-up in 2006. Despite the 30.4% decline in
revenue in 2008, however, the wealth management division missed the breakeven
point by only $24 thousand. Comparing 2007 to 2006, most of the increase in
brokerage fees was attributable to twelve months of operation in 2007 compared
to four months in 2006.
During 2008, and extending into January
2009, we closed three locations. Due to deteriorating economic conditions and
the cost saving measures discussed below, we closed our loan production office
in Coweta County and the two locations of our Banco de Progreso division. All
three locations were leased. Consequently, we wrote down the book value of the
leasehold improvements for all locations. In addition, we sold a small amount of
surplus fixed assets during 2008 that resulted in a small loss. The charge-offs
and sale of fixed assets resulted in a net loss of $303 thousand, most of which
was recognized in the fourth quarter of 2008.
In August
of 2008, the Company repaid its $20.0 million securities sold under a repurchase
agreement and paid a fee of $683 thousand. The Company also sold securities
available-for-sale during the third quarter in the amount of $21.5 million for a
net gain of $329 thousand. In addition, the Company sold $7.3 million of
securities in the first and second quarters of 2008 for a net gain of $106
thousand. The total net gain on the sale of securities for 2008 was $435
thousand compared to no gain or loss on the sale of securities in 2007 and 2006.
The sale of securities and the reduction of debt during 2008 resulted in
deleveraging of approximately $20 million of the Bank’s balance sheet giving the
Company greater capital coverage and more available liquidity.
Management continues to actively manage
our non-performing asset portfolio. Included in the management of the
non-performing asset portfolio is the valuation and sales of the non-performing
loans and foreclosed property. During 2008, we sold $18.9 million of
non-performing loans and foreclosed property. The total loss on sale or
write-down of property for 2008 was $1.2 million comprised of a loss on
write-downs of non-performing loans and foreclosed property of $1.1 million and
a loss on sales of non-performing loans and foreclosed property of approximately
$100 thousand. In total, we received 91% of the original loan balance on the
sales of these non-performing loans and foreclosed property.
The loss on the sale and write-down of
foreclosed property during 2007 in the amount of $729 thousand was attributable
to a cumulative recognition of net gains on disposal of foreclosed property in
the amount of $75 thousand and a fourth quarter write-down of foreclosed
property of $804 thousand. The write-down of foreclosed property occurs after we
receive updated appraisals on certain foreclosed properties we hold. The updated
appraisal may result in the need for further write-down of non-performing loans
or foreclosed property. The net loss on the sale and write-down of foreclosed
property in the fourth quarter of 2007 compared to a 2006 gain on the sale of
foreclosed property in the amount of $243 thousand. Over the past three years,
the net loss on sale or subsequent write-down of non-performing loans and
foreclosed property totaled $1.7 million.
Miscellaneous
income decreased by $447 thousand comparing 2008 to 2007. During 2007, we
recognized $237 thousand in gain in the market value of a fair value swap
described in Note 11 to the consolidated financial statements “
Commitments – Derivative Instruments
and Hedging Activities”
compared to no gain during 2008 or 2006. The
Company terminated its fair value interest rate swap position in April 2008 for
a gain in the amount of $626 thousand. The Company is recognizing the gain
on the transaction over the original term of the swap. The Company recognized
$483 thousand of the gain during 2008. However, the gain is recognized as a
reduction in interest expense on the original instruments hedged. In addition,
we received a distribution of $118 thousand from a business development
partnership in which we are a member in the first quarter of 2007 which was
non-recurring in nature and therefore no such revenue was recognized in 2008 or
2006.
Included
in miscellaneous income in 2008 and 2007 was $163 thousand and $78 thousand,
respectively, of income on insurance contracts that were owned by First Haralson
in connection with its supplemental employee retirement plan.
See Note 15 to the consolidated
financial statements –
“
Supplemental Employee Retirement
Plan”
. No income was recognized in 2006 since prior to the merger, the
Company had no such plan in place.
Late fees
on loans are included in miscellaneous income. Late fees on loans in 2008 were
$372 thousand compared to $365 thousand in 2007 which, in turn, exceeded late
fees on loans in 2006 by $72 thousand. The remainder of the difference in
miscellaneous income is attributable to the addition of First Haralson’s
miscellaneous revenue and other line items which contributed to our growth in
the volume of fees from 2006 for a half year in 2007 and a full year in
2008.
Other
Expense
Management focused on expense reduction
in 2008. It became clear in early 2008 that credit collection cost, loan loss
provision, write-down of and maintenance and carrying costs of non-performing
assets and foreclosed property would increase dramatically. We anticipated a
significant increase in expenses from 2007 to 2008 resulting from adding a full
year of the expenses of the merged entities compared to a half year in 2007.
However, we sought to reduce staff and facilities overhead that did not
contribute to the core revenue of the Bank or collection and management of
non-performing assets and foreclosed property. At the time of the merger, we
structured sufficient management and staff to continue to grow the institution.
In the fourth quarter of 2008, we reduced a layer of management flattening the
organizational chart for 2009. Loan demand and volume dramatically decreased in
2008 as consumers and business owners sought to reduce outstanding debt. Lending
on residential real estate, the primary business of the West Georgia area, also
decreased dramatically in 2008 compared to the last five years. Management
undertook staff reductions and branch and facilities closings in the fourth
quarter of 2008. Much of these cost savings will be realized in 2009 and we
estimate that other non-interest expense will be reduced by approximately $3.0
million compared to 2008. The bulk of that reduction is anticipated to take
place in salaries and benefits and occupancy expense.
We continue to have a strong desire to
support our community with our over 60 year history and heritage of serving our
customers with their depository and borrowing needs. We feel that our core
franchise value will remain intact through maintaining the number one deposit
market share community bank in the West Georgia area. We focused on consumer and
local business deposit and lending needs in 2008 and placed much less emphasis
on generating larger loans on residential real estate or commercial properties.
Therefore, our staff reduction and facilities closings were undertaken with that
strategy in mind. Additionally, we created a Special Assets Management division
(“SAM”) whose sole function is to maintain, manage, market and dispose of
non-performing assets and foreclosed properties. This division of duties allows
our remaining lending staff to focus on serving new customers and maintaining
the performing loan portfolio. The SAM was staffed with existing experienced
commercial lenders and support staff thereby avoiding the need to hire
additional staff. As the economy improves, the Bank will have retained our most
valuable lenders. The goal of our SAM division is to realize the maximum value
on impaired loans and foreclosed property for our shareholders while disposing
of the loans and property as quickly as possible to reduce the interest and
carrying cost to conserve the Company’s capital and cash reserves.
We closed the Coweta County loan
production office in November of 2008. That office was designed to serve the
growing residential and commercial development market in Coweta County which was
dramatically and suddenly impacted by the slowdown in the metro-Atlanta economic
conditions. West Georgia, including Carroll, Haralson, Douglas and Coweta
Counties, experienced increased unemployment and decreased demand for both
residential and commercial real estate. Additionally, our Banco de Progreso
division was also impacted by the downturn in economic conditions. In response,
we have consolidated our Banco de Progreso operations into our traditional
branches. We will continue to serve the Spanish-speaking community’s deposit and
loan needs in our nearby branches. We closed the Newnan Banco de Progreso branch
and the Carrollton Banco de Progreso locations in January 2009. All three
locations were leased and we have negotiated a satisfactory termination of
leases. We accrued the impact of the closing of the facilities, including
write-down of leasehold improvements and severance benefits related to staff
reduction, in 2008. We anticipate that the Bank will realize significant staff
and occupancy cost savings in 2009.
Other expenses increased by $29.0
million, or 124.3%, in 2008 over 2007 and by $6.8 million, or 41.3%, in 2007
over 2006. As mentioned in the overview, we charged-off all of our goodwill
recorded in connection with the merger with First Haralson in the amount of
$24.1 million in the fourth quarter of 2008. The charge-off of goodwill is
classified as other expenses and is a non-cash item which has no impact on the
Bank’s regulatory capital or liquidity position. A core deposit intangible in
the amount of $4.9 million remains intact and was determined to not be impaired
as a result of the impairment testing.
The charge-off of goodwill represented
83.1% of the $29.0 million increase in other expense. Statement of Financial
Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible
Assets,”
requires companies to perform an annual test for goodwill
impairment. As a result of the general decline in market valuations for bank
stocks including our own market capitalization and the deterioration of economic
conditions during 2008, and in connection with the preparation of our annual
financial statements for 2008, the Company concluded that the goodwill resulting
from the Company’s acquisition of First Haralson on July 1, 2007 was
impaired.
Impairment is a condition that exists
when the carrying amount of goodwill exceeds its fair value. SFAS No. 142
requires a two-step impairment test that should be used to test the impairment
and measure the amount of impairment loss to be recognized. The first step of
the goodwill impairment test compares the fair value of the Company with its
carrying amount including goodwill. Fair value is the amount at which the
Company could be bought or sold in a current transaction between willing parties
in an other than forced or liquidation sale. If the fair value of the Company
exceeds its carrying amount, the goodwill is not considered impaired. If the
carrying amount of the Company exceeds its fair value, then a second step is
required to measure the amount of impairment.
The second step of the goodwill
impairment test requires performing a purchase price allocation as if a business
combination were consummated on the date of the impairment test, with the fair
value of the Company serving as a proxy for the purchase price. Fair values of
the assets and liabilities are determined to measure the implied value of
goodwill at the test date. If the implied fair value of the goodwill is lower
than its carrying amount, goodwill impairment is indicated, and the carrying
amount of goodwill is written down to its implied fair value. The valuation
approaches that were implemented in measuring fair value were the cost approach,
the income approach and the market approach. The cost approach is based on the
amount that currently would be required to replace the service capacity of an
asset often referred to as current replacement cost. The income approach uses
valuation techniques to convert future amounts of cash flows or earnings to a
discounted amount. The market approach uses observable prices and other relevant
information that is generated by market transactions involving identical or
comparable assets or liabilities.
As was the case in net interest income
and other income, the primary reason for increased expenses for 2008 from 2007,
other than the goodwill impairment charge, is twelve months of operations which
include the First Haralson operations in 2008 compared to only six months in
2007. Increased salaries and employee benefits were a significant component of
the increase in other non-interest expenses in 2008 from 2007 and 2006. Salaries
and employee benefits increased $743 thousand, or 5.3%, from 2007 to 2008 and
$4.0 million, or 40.1%, from 2006 to 2007. Occupancy expenses increased by $661
thousand, or 20.0%, from 2007 to 2008, and $898 thousand, or 37.4%, from 2006 to
2007. Other operating expenses increased $1.5 million, or 26.7%, comparing 2008
to 2007 and $1.7 million, or 42.2%, comparing 2007 to 2006. Operations in 2007
included non-recurring merger costs which were not incurred in either 2008 or
2006.
The level of other non-interest expense
that we absorbed in the combination with First Haralson is very much in line
with what management expected based upon our due diligence and the estimation of
merger costs and attainable cost savings in the eighteen months following the
merger. We offered certain employees voluntary retirement packages which were
accepted by some of the staff members, including certain WGNB employees. That
cost was expensed in the period in which it was incurred, but primarily in 2007.
While the increase in expenses on a percentage basis was material in relation to
our year over year increase in salary and employee benefits expense, the
increase from 2006 to 2007 was much greater than from 2007 to 2008. As indicated
previously, we did experience cost savings in 2008 salary and employee benefits
that were offset by increases in non-interest expense related to non-performing
loans and foreclosed property.
In terms of asset size, First Haralson
had approximately $211 million in assets as of the closing of the merger in July
2007. Our asset size prior to the merger was $623 million. Consequently, First
Haralson was one third our size and employed 85 people immediately preceding the
closing of the merger. Management expected that both revenue and expenses would
increase by 30% to 40% depending on the category. First Haralson operated seven
branches in Haralson and Carroll Counties, one of which closed after the merger
(the Carrollton location). While the conversion of the two operating systems
went very smoothly, it was very time consuming and required all available human
resources from both companies during 2007. We were able to reduce staff and
expenses in 2008 once the operations were absorbed and stabilized as a single
entity
In addition to the First Haralson
acquisition, we added 11 full time employees when we opened a commercial loan
production office and a second Banco De Progreso location in Coweta County
during 2007. We also experienced an entire year of operations from our Chapel
Hill location in Douglas County and our initial Banco De Progreso location in
Carroll County, both of which were placed in service in 2006. Management
expected a significant increase in expense related to our expansion efforts and
the 2007 increase in salaries and benefits, occupancy and other operating
expense reflected that fact. The downturn in the national and local economy,
however, had a significant impact on our expansion strategy which we rapidly
reversed in 2008. We believed at the time we formed our business strategy, that
the investment in expansion would ultimately provide an enhanced return to our
shareholders. However, our expansion strategy has been suspended until economic
conditions improve.
The increase in salaries and benefits
comparing 2007 to 2008 is broken down as follows: Salaries and overtime
increased by $2.0 million, or 22.2%; and employee benefits including
profit-sharing, bonus, 401k, deferred compensation, payroll tax and employee
health and life insurance expense decreased $1.3 million, or 27.4%. Most of the
decrease in employee benefits from 2007 to 2008 was attributable to profit
sharing and bonus expense which decreased by $1.9 million, or 100%. No bonuses
or profit sharing payments were incurred in 2008 as management sought to
decrease expenses. The only employee benefit category that increased from 2007
to 2008 was employee health and life insurance expense (by $317 thousand, or
23.7%) and deferred compensation expense (by $120 thousand, or 121.2%) both of
which were attributable to twelve months as opposed to six months of operations
as a merged entity for those two years of comparison. Our deferred compensation
expense is more fully described in Note 15 to the consolidated financial
statements “
Supplemental
Employee Retirement Plan
”.
We had 186 full time equivalent
employees as of June 30, 2007, just before the merger. On July 2, 2007, we added
81 full time equivalent employees (for an increase of 43.5%) as a result of the
First Haralson merger. As of December 31, 2008, we had 248 full time equivalent
employees, a reduction of 7.1% from July 1, 2007. During 2008, management
allowed attrition to reduce staff (by 15 positions) until the fourth quarter of
2008 when we reduced staff further by 11 positions. The reduction of an
additional 11 positions took place in January 2009 with the closing of the Banco
de Progreso locations. Our lending staff was also reduced through the
reassignment of six staff members to the SAM division as described above. The
SAM division employs six staff members. Much of the reduction in staff took
place in specific departments such as residential mortgage origination which was
greatly reduced in 2008. In addition, we realized a reduction of the management
team. Several management positions were eliminated as a result of a flattening
of the organization chart. We attempted to maintain customer service, teller
positions and fewer consumer lender and commercial lender positions in order to
continue to serve our core depositor and borrower base. Several bilingual
customer service representatives, tellers, lenders and operational staff that
were in the Banco de Progreso division were retained in order to serve the needs
of our Spanish-speaking customers. In past years, merit and cost of living
increases accounted for 4% to 5% of increased salary expense. In 2008, however,
approximately 1% of the increase in salaries was attributable to merit and cost
of living increases. Comparing 2007 to 2006, the additional employee count in
the last half of 2007 resulting from the merger accounted for nearly all of the
increase in salaries and benefits. Annual merit increases accounted for less
than 4% of the increased salaries in 2007 from 2006.
We are required to continue to expense
options despite the low probability that they will be exercised in the near
future. Comparing the exercise price of outstanding options to the market value
of the Company’s stock, the outstanding options had no intrinsic value to
employees as of December 31, 2008. Options expense was $175 thousand in 2008
compared to $178 thousand in 2007. We do not anticipate that options will be
granted in 2009. Our stock-based compensation expense methodology is described
more fully in Note 1 to the consolidated financial statements
“Stock Compensation
Plans”.
The increase in salaries and benefits
from 2006 to 2007 are described as follows: Salaries, overtime and related
payroll taxes increased $3.0 million, or 42.6%; profit sharing, 401k, bonuses,
deferred compensation expense and stock option expense increased $562 thousand,
or 26.5%; and employee benefits which primarily included employee health and
life insurance expense increased $467 thousand, or 53.6%.
Prior to the merger, we
negotiated with certain First Haralson executive officers to buyout their
employment agreements. Those expenditures were included in transaction costs of
the merger and, thus, were not expensed in 2007. However, we offered voluntary
retirement packages throughout the combined organization post merger. Certain
employees exercised this offer which resulted in our expensing approximately
$271 thousand in salary and payroll tax expense related to voluntary retirement.
In connection with the merger and subsequent conversion of operating systems, we
also incurred $62 thousand in overtime expense that was directly related to the
conversion. Management considered both the voluntary retirement offer and the
overtime to be non-recurring in nature in 2007. The increase in profit sharing,
401k, bonuses, deferred compensation and employee health and life insurance
expense is similarly attributable to the merger and location expansions
completed in 2006 and 2007.
We plan no merit or cost of living
salary increases in 2009 and have reduced the amount by which the Company
matches employees’ contributions to the 401k retirement plan from a maximum 6%
of an employee’s salary in 2008 to 1% in 2009. In 2007 and 2006, the Company
paid an additional 5% of an employee’s salary into the 401k plan as a component
of the profit sharing. No such payment was made in 2008 nor is there intention
to make such payment in 2009. Additionally, we do not intend to increase staff
and anticipate that we will experience normal attrition in 2009. This change in
compensation and staffing strategy is estimated to reduce salary and benefits
expense by approximately $2.0 million in 2009, when compared to
2008.
Occupancy expense increased by $661
thousand, or 20.0%, from 2007 to 2008. Most of the increase is attributable to a
full year of operations and depreciation expense of First Haralson’s operations
in 2008 compared to only six months in 2007. Depreciation expense increased by
$185 thousand, comparing the year ended 2007 with 2008. The increase in
depreciation expense from 2007 to 2008 was attributable to the additional fixed
assets of First Haralson which were recorded at their market value as of July
2007, rather than at their historical cost. All other occupancy expense
increased by $476 thousand, or 25.7%. This increase was projected based on post
merger analysis and branch additions in 2006 and 2007. We anticipate that we
will experience cost savings in lease, utilities, real estate taxes and other
occupancy expense that was previously associated with the discontinued Coweta
County loan production office and the two Banco de Progreso locations, which
will no longer be incurred in 2009.
Occupancy expense increased by $898
thousand, or 37.4%, in 2007 when compared to 2006, which is attributable to the
merger and branch expansion previously discussed. Occupancy expense of the
branches including the additional branches of First Haralson and administrative
and operations offices comprise six major components: depreciation, utilities,
property tax, operating leases, repairs and maintenance expense. Depreciation
expense in 2007 increased by $315 thousand, or 27.7%, compared to 2006.
Likewise, utilities expense increased $239 thousand, or 49.9%, comparing 2007 to
2006. All other occupancy expense including property taxes, maintenance and
repairs, and operating leases, increased by $344 thousand, or 43.4%, comparing
2007 to 2006.
Expense on loans and foreclosed
property increased dramatically from 2007 to 2008 as credit quality continued to
deteriorate. Included in expense on loans for all periods are legal, collection
and appraisal expenses on impaired loans and maintenance, management,
improvement costs and real estate taxes attributable to foreclosed property.
Expense on loans and foreclosed property increased by $1.96 million, or over
five times the amount realized in 2007 which, in turn, was almost two and a half
times the amount expended in 2006. Expense on foreclosed property was $1.93
million in 2008, an increase of $1.76 million, or eleven times the amount
recorded in 2007. Expense on impaired loans was $458 thousand in 2008, an
increase of $203 thousand, or 79.9%, compared to 2007.
Approximately 75% of our
foreclosed property is either developed or partially developed residential lots
or raw residential and commercial land. Consequently, much of the expense
related to foreclosed property in 2008 was current and past due real estate
taxes, erosion control and cleanup of the properties after foreclosure. We paid
current and past due real estate taxes in the amount of $1.0 million either at
foreclosure or in the fourth quarter of 2008. Approximately 50% of the real
estate taxes paid in 2008 were past due. Expense for legal fees related to
foreclosure of property was $280 thousand. We incurred erosion and water control
costs, property management, maintenance and property improvement costs of
approximately $650 thousand.
The expense on impaired loans includes
appraisal fees, legal costs and other expenses incurred in the collection of
loans that have not yet been foreclosed. The balance of impaired loans was $71.6
million as of December 31, 2008 compared to $46.4 million as of December 31,
2007. The increase in collection costs has been a function of more volume in
2008 than 2007. The Company typically experiences loan related expense that is
equivalent to what we expensed in 2006. Appraisal, environmental, survey and
title exam fees were $171 thousand, legal costs for collection of loans were
$153 thousand and other loan administration expenses were $134 thousand in 2008.
The expenses in 2008 and the last half of 2007 were more concentrated in
collection costs rather than in loan production and underwriting costs which
were the bulk of similar expenses in early 2007 and 2006. Total expense on loans
increased by $333 thousand, or 150.6%, comparing 2007 to 2006. Expense related
to foreclosed property increased by $158 thousand which is reflective of the
increased amount of foreclosed real estate in 2007 from 2006. Collection, legal
and appraisal fees related to collection efforts on troubled loans increased by
$175 thousand from 2006 to 2007.
The increase in expense on loans and
foreclosed property is of primary concern to management and represents another
factor in limiting the desired holding period of real estate taken in
foreclosure and the quantity of impaired loans. We anticipate that as
construction, acquisition and development loans are decreased in 2009 and become
a reduced percentage of the loan portfolio, the expense on loans and foreclosed
property will decrease. Because of the uncertainty related to the credit quality
of our construction, acquisition and development loan portfolio and the
potential credit weakness that may migrate to our commercial and consumer loan
portfolios, management has only limited knowledge as to whether cost savings can
be achieved in this expense category. Much of the Bank’s market area, including
commercial and professional enterprises and small businesses, has historically
been dependent on residential real estate development, construction and sales
and related commercial development retail trade for a significant portion of
their revenue.
Other
operating expenses increased by $1.5 million, or 26.7%, from 2007 to 2008, and
increased by $1.7 million, or 42.2%, from 2006 to 2007. Other operating expense
includes professional, accounting and regulatory fees, ATM network fees,
advertising, charitable contributions and FDIC insurance. Also included in other
operating expense are costs for supplies such as printing, checks, paper and
envelopes related and postage attributable to Bank operations and customer
statements.
Accounting and other professional fees
increased by $117 thousand, or 19.7%, from 2007 to 2008, and by $128 thousand,
or 27.7%, from 2006 to 2007. The increase in accounting and other professional
fees had less to do with the merger and more to do with ongoing internal audit
and compliance costs related to Sarbanes-Oxley Section 404. The expenses related
to the compliance burdens of being a listed public company have proven to be
more costly with regard to consulting with accountants and attorneys than
anticipated. Legal expenses increased by $104 thousand, or 85.8%, from 2007 to
2008. We incurred increased attorneys fees related to communicating and
complying with increased banking scrutiny and regulation. Legal fees related to
collection of loans are not included in this line item for any period. Rather,
those legal fees are included in expense on loans and foreclosed
property.
Premiums paid to the Federal Deposit
Insurance Corporation (“FDIC”) for deposit insurance increased dramatically from
2007 to 2008. Deposit insurance premium expense was $535 thousand in 2008
compared to $62 thousand in 2007, almost a nine-fold increase. The increase is
somewhat attributable to the increase in deposits due to the First Haralson
merger, but the overwhelming reason for the increase in deposit insurance
premium expense for all banks is the increased risk and exposure the banking
industry has placed on the deposit insurance fund in the last eighteen months.
The Bank recognized a credit awarded to the banking industry in the last half of
2006 and throughout 2007. This credit was exhausted prior to 2008. During 2006
and 2007, deposit insurance expense had trended downward because the estimated
loss rate on the insurance fund had historically been very low. We anticipate
that deposit insurance premiums will increase further in 2009 since the Bank is
participating in the Temporary Liquidity Guarantee Program created by the FDIC.
The safety of bank deposits is of utmost importance in maintaining confidence in
the national banking system. Changes in regulation and supervisory issues are
likely to continue and be more defined and refined in 2009. There is a proposal
that will require banks to recapitalize the FDIC fund with a one-time assessment
in 2009. The estimate of the rate is $200 thousand per $100 million of deposits.
This one-time assessment along with the increase in FDIC insurance rates will
have a significant impact on other non-interest expense in 2009.
Advertising expense in 2008 decreased
by $82 thousand, or 24.1%, from 2007. Advertising expense increased in 2007 by
$91 thousand, or 36.2%, compared to 2006. However, $48 thousand of the increase
in 2007 was related to promoting the newly combined institution and educating
the market with regard to our name change. Advertising expense is somewhat
discretionary. As part of our cost cutting efforts, we purposely reduced the
amount of advertising expense we incurred. Like advertising, charitable
contributions expense is discretionary. Contribution expense increased much less
than anticipated in 2008 over 2007. Management is attempting to be very visible
in the communities in which the Bank serves. The best way for a community bank
to accomplish this is to maintain its contribution to local charities.
Contribution expense was budgeted to increase by approximately 25% from 2007 to
2008. The actual increase was 13.5%.
ATM
network and non-network expense increase by $226 thousand, or 51.3%. ATM
expense, like ATM revenue, is volume sensitive and was impacted by twelve months
of the ATM network of First Haralson in 2008 compared to six months in 2007. ATM
network revenue increased by $420 thousand, comparing 2008 to 2007.
Consequently, the increase in ATM revenue outpaced the increase in ATM
expense.
Another merger related expense is the
amortization of the core deposit intangible. Again, this amortization, like the
goodwill impairment, is a non-cash charge. During the twelve months of 2008, we
recorded $573 thousand of amortization of the core deposit intangible, an
increase of $286 thousand, or 100%, compared to that in 2007.
The core deposit intangible is
amortized on a straight-line basis over the period of benefit, which is
estimated to be ten years. The core deposit intangible is reviewed for
impairment annually as events or changes in circumstances indicate that the
value in the underlying asset may have given rise to the core deposit intangible
becoming permanently impaired. We have determined that the value of our core
deposit intangible was not impaired in 2008 or 2007.
During 2008, we recorded $557 thousand
of expenses for supplies which represented almost no change from 2007. However,
during 2007, we incurred one-time expenditures for office supplies, letterhead
and promotional items that were redesigned to accommodate our new name and logo.
In 2006, we expensed $365 thousand for supplies compared to $558 thousand in
2007, an increase of $193 thousand, or 52.8%. The merger related expenditures
for supplies was $96 thousand in 2007. This expense was primarily for reprinting
and redesign of statements and promotional literature and was not incurred in
2008. The number of customer accounts increased by 30% to 35% in the merger
which caused supply expenses to increase in 2008 and 2007 as a result of
increased volume. Supplies expense for 2007 included six months of the combined
companies compared to twelve months in 2008. Therefore, we did reduce supplies
expense when viewed on an annual basis.
Other expenditures directly
related to the volume of customer accounts resulting from the First Haralson
merger and including them for twelve months of operations in 2008 as opposed to
six months of operations in 2007, are postage and data processing expense.
Postage expense increased by $69 thousand, or 18.4 %, from 2007 to 2008 and $103
thousand, or 38.0%, from 2006 to 2007. Technology expense increased by $72
thousand, or 20.4%, from 2007 to 2008 and $276 thousand, or 38.7%, comparing
2006 to 2007. Included in the 2007 increase is $20 thousand related to the
conversion of operating systems in connection with the merger which did not
recur in 2008.
Miscellaneous expense decreased by $136
thousand, or 31.5%, comparing 2007 to 2008. Miscellaneous expense increased by
$182 thousand, or 72.5%, from 2006 to 2007. Items included in miscellaneous
expense are customer and employee appreciation gifts and functions, amortization
of investment in tax credits, portfolio management fees, seasonal decorations
for facilities, employee health and community appreciation programs. Much of the
increase from 2006 to 2007 resulted from amortization of tax credits in the
amount of $129 thousand and $32 thousand in non-recurring expense for new
employee apparel reflecting the name change in the merger.
Income tax benefit/expense, expressed
as a percentage of earnings before income taxes (the effective tax rate), was
17.2% in 2008, 4.2% in 2007 and 29.3% in 2006. The effective tax rate over the
past three years has varied significantly. Comparing 2008 to 2007, the effective
tax rate increased. However, there are two primary differences in the
calculation of income tax benefit/expense from 2008 to 2007. First, the
impairment of goodwill has no tax implications. Therefore, $24.1 million of
expense recorded in 2008 is not deductible for tax purposes. Second, non-taxable
interest income on municipal securities and loans changed from 2007 to 2008.
Ignoring the goodwill impairment charge, the effective tax rate for 2008 was
49.1% compared to 4.2% in 2007. The amount of non-taxable interest income
increased by $906 thousand between 2007 and 2008 which further impacts the
increase in the effective tax rate from 2007 to 2008. The effective tax rate in
2007 appears low because of the impact of non-taxable interest income on pretax
income for book purposes as a ratio to the taxable income of the Company. The
effective tax rate for 2006 is more reflective of the Company’s historical
income tax impact than that realized in either 2008 or 2007.
BALANCE
SHEET OVERVIEW
For
the Years Ended December 31, 2008 and 2007
General
During
2008, average total assets increased $156.9 million, or 21.2%, average deposits
increased $134.9 million, or 22.7%, and average loans increased $72.2 million,
or 12.4%, from average balances recorded in 2007. During 2007, average total
assets increased $191.2 million, or 34.8%, average deposits increased $154.0
million, or 35.0%, and average loans increased $138.5 million, or 31.3%, from
amounts recorded in 2006. The 10 year average growth rates for our assets, loans
and deposits are 15.6%, 15.1% and 15.5%, respectively. The average asset growth
over the past two years is primarily attributable to the merger with First
Haralson. In an effort to maximize capital coverage in a slowing economic
environment, we significantly slowed balance sheet growth in 2008. Instead,
management focused on maintaining sufficient liquidity to meet the deposit needs
of our customers.
Total assets at December 31, 2008 were
$892.2 million, representing a $8.6 million, or 1.0%, increase from December 31,
2007. During 2008, cash and cash equivalents increased by $49.5 million, or
191.5%. Total loans decreased by $28.5 million, or 4.3%, and securities
available-for-sale decreased by $28.3 million, or 23.1%, comparing the year
ended December 31, 2008 to 2007. We increased total deposits by $55.3 million,
or 7.8%, paid-off securities sold under a repurchase agreement in the amount of
$20 million and reduced Federal Home Loan Bank advances by $2.5 million.
Additionally, we raised over $12 million in our Series A Preferred stock
offering in the third quarter of 2008. The offering increased our total
risk-based capital ratio to 10.7% as of December 31, 2008, compared to 10.2% as
of December 31, 2007.
We
increased deposits and sold securities available for sale in an effort to
increase liquidity in 2008. As of December 31, 2008, we held cash and cash
equivalents (liquidity) that exceeded uninsured deposits by 600%. During this
period of economic uncertainty and concern over the safety of deposits, we
intend to continue to maintain higher than historical amounts of available
liquidity.
The most notable development in the
balance sheet in 2008 apart from the increase in capital and liquidity was the
continued increase in the level of non-performing assets. Non-performing assets
include loans on non-accrual status, loans ninety days past due (impaired loans)
and foreclosed property. On June 30, 2007, non-performing assets were $6.6
million, or less than 1% of total assets. As of December 31, 2007,
non-performing assets were $57.9 million, or 6.5% of total assets and as of
December 31, 2008, non-performing assets were $122.0, or 13.7% of total assets
Thus, in an eighteen month period, non-performing assets grew by $115.4 million.
This increase in non-performing assets was indicative of the rapid and steep
decline in the residential real estate market for the entire metro-Atlanta
market area. Residential construction and development loans were most affected
by the slowdown. Management views this condition as its greatest priority and
sees the reduction of non-performing assets as imperative to our return to
profitability.
While
management intends to do all it can to reduce the level of non-performing
assets, we are dependent to a great extent on the improvement of the residential
real estate market. The residential real estate market in the last half of 2008
proved to be very difficult as values of homes and residential lots decreased at
an alarming rate and sales volume reached historic lows. The market has been
flooded with foreclosed homes as economic conditions continue to deteriorate.
Employment has decreased causing prime and subprime mortgage default rates to
accelerate. Therefore, values of homes have decreased and the inventory of
residential lots remains at historically high levels compared to our forecasted
absorption rate.
Investments
Our
available-for-sale investment portfolio of $94.4 million as of December 31, 2008
consisted primarily of debt securities, which provide us with a source of
liquidity, a stable source of income, and a vehicle to implement asset and
liability management strategies. The amount in the available-for-sale securities
portfolio decreased significantly when compared to December 31, 2007. The
investment portfolio decreased by $28.3 million, or 23.1%, from 2007 to 2008.
During 2007, we acquired $42.3 million of securities in the First Haralson
merger. Additionally, we increased the available-for-sale investment portfolio
by $16.1 million, or 25.0% in 2007. This was significant growth compared to
historical growth of the portfolio. In 2008, however, the banking environment
deteriorated as the subprime mortgage crisis impacted the largest banks
nationally and internationally. Bank capital rapidly diminished and several
large banks failed. This, understandably, caused a certain amount of concern
among some depositors. In response and in order to address concerns of our
depositors, we began to increase the amount of liquidity on our balance
sheet.
We
implemented our Contingency Funding Committee in 2008 and began a strategy of
selling securities, reducing loans and increasing liquidity. We sold $29.0
million of available-for-sale securities in 2008 for a total gain of $435
thousand. This compared to total sales of available-for-sale securities of $6.0
million in 2007 and no sales in 2006. We typically do not sell securities.
However, we strategically repositioned some of the acquired portfolio of First
Haralson in conjunction with the merger. Additionally, the falling rate
environment in 2008 offered us an opportunity to increase liquidity and
recognize a gain on the sale of available-for-sale securities.
We
believe our investment portfolio provides a balance to interest rate and credit
risk in other categories of the balance sheet. The portfolio also provides a
vehicle for the investment of available funds and supplying securities to pledge
as required collateral for certain public deposits. Securities reported as
available-for-sale are stated at fair value. These securities may be sold,
retained until maturity, or pledged as collateral for liquidity and borrowing in
response to changing interest rates, changes in prepayment risk and other
factors as part of our overall asset liability management strategy.
Investment
securities held-to-maturity are stated at amortized cost and totaled $7.6
million at December 31, 2008, an decrease of $279 thousand, or 3.5%, when
compared to the year ended 2007. This portfolio consists of banking industry
issued trust preferred securities from various issuers across the United States
and, particularly, the Southeast. During 2008, the estimated fair value of the
held-to-maturity securities decreased significantly as the perceived risk of
holding the securities increased in response to the difficulties faced in the
banking industry and the increased default rate in the securities. We have the
intent and ability to hold these securities until maturity and consider this
decrease in estimated fair value to be temporary.
The
following table shows the carrying value of our securities, by security type, as
of December 31, 2008, 2007 and 2006:
Table
3
Securities
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
US
Government sponsored enterprises
|
|
$
|
—
|
|
|
$
|
2,030
|
|
|
$
|
9,937
|
|
State,
county and municipal
|
|
|
57,279
|
|
|
|
70,466
|
|
|
|
33,459
|
|
Mortgage-backed
securities
|
|
|
33,175
|
|
|
|
45,573
|
|
|
|
15,818
|
|
Corporate
bonds
|
|
|
3,916
|
|
|
|
4,624
|
|
|
|
5,037
|
|
Total available for
sale
|
|
$
|
94,370
|
|
|
$
|
122,693
|
|
|
$
|
64,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
Preferred Securities
|
|
$
|
7,622
|
|
|
$
|
7,902
|
|
|
$
|
7,837
|
|
The following table presents the
expected maturity of the amortized cost of securities by maturity date and
average yields based on amortized cost (for all obligations on a fully taxable
basis, assuming a 34% marginal tax rate) at December 31, 2008. The composition
and maturity/re-pricing distribution of the securities portfolio is subject to
change depending on rate sensitivity, capital and liquidity needs.
Table
4
Expected
Maturity of Securities
(in
thousands)
Maturities
at December
31,
2008
|
|
State,
County
& Municipals
|
|
|
Wtd.
Avg.
Yld.
|
|
|
Mortgage
Backed
Securities
|
|
|
Wtd.
Avg.
Yld.
|
|
|
Corporate
Bonds
|
|
|
Wtd.
Avg.
Yld.
|
|
|
Trust
Preferred
|
|
|
Wtd.
Avg.
Yld.
|
|
Within
1 year
|
|
$
|
350
|
|
|
|
4.15
|
%
|
|
$
|
2,924
|
|
|
|
4.68
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
After
1 through 5 years
|
|
|
2,599
|
|
|
|
6.01
|
%
|
|
|
11,603
|
|
|
|
4.90
|
%
|
|
|
3,786
|
|
|
|
5.54
|
%
|
|
|
—
|
|
|
|
—
|
%
|
After
5 through 10 years
|
|
|
12,040
|
|
|
|
6.64
|
%
|
|
|
13,993
|
|
|
|
5.82
|
%
|
|
|
—
|
|
|
|
—
|
%
|
|
|
—
|
|
|
|
—
|
%
|
After
10 years
|
|
|
44,342
|
|
|
|
6.40
|
%
|
|
|
4,068
|
|
|
|
5.58
|
%
|
|
|
557
|
|
|
|
—
|
%
|
|
|
7,622
|
|
|
|
5.42
|
%
|
Total
|
|
$
|
59,331
|
|
|
|
6.42
|
%
|
|
$
|
32,588
|
|
|
|
5.36
|
%
|
|
$
|
4,343
|
|
|
|
4.83
|
%
|
|
$
|
7,622
|
|
|
|
5.42
|
%
|
Fair
Value
|
|
$
|
57,279
|
|
|
|
|
|
|
$
|
33,175
|
|
|
|
|
|
|
$
|
3,916
|
|
|
|
|
|
|
$
|
2,853
|
|
|
|
|
|
Mortgage-backed securities are included
in the maturities categories in which they are anticipated to be repaid based on
average maturities. The actual cash flow of mortgage-backed securities differs
with this assumption. Yields on tax-exempt securities are calculated on a tax
equivalent basis.
Loans
Loan concentrations are defined as
aggregate credits extended to a number of borrowers engaged in similar
activities or resident in the same geographic region, which would cause them to
be similarly affected by economic or other conditions. On a routine basis we
evaluate these concentrations for purposes of policing our concentrations and
making necessary adjustments in our lending practices to reflect current
economic conditions and industry trends.
The
primary types of loans in our portfolio are residential mortgages and home
equity, construction and development, commercial real estate, commercial and
consumer installment loans. Generally, we underwrite loans based upon the
borrower’s debt service capacity or cash flow, a consideration of past
performance on loans from other creditors as well as an evaluation of the
collateral securing the loan. Our general policy is to employ relatively
conservative underwriting policies, primarily in the analysis of borrowers’ debt
service coverage capabilities for commercial and commercial real estate loans,
while limiting gross debt ratios for consumer loans and loan-to-value ratios for
all types of real estate loans with some exceptions, Given the localized nature
of our lending activities, the primary risk factor affecting the portfolio as a
whole is the health of the local economy in the West Georgia area and its
effects on the value of local real estate and the incomes of local professionals
and business firms.
Loans to
directors, executive officers and principal shareholders of WGNB and to
directors and officers of First National Bank are subject to limitations of the
Federal Reserve, the principal effect of which is to require that extensions of
credit by us to executive officers, directors, and ten percent shareholders
satisfy certain standards. We routinely make loans in the ordinary course of
business to certain directors and executive officers of WGNB and First National
Bank, their associates, and members of their immediate families. In accordance
with Federal Reserve guidelines, these loans are made on substantially the same
terms, including interest rates and collateral, as those prevailing for
comparable transactions with others and do not involve more than normal risk of
collectibility or present other unfavorable features. As of December 31, 2008,
loans outstanding to directors and executive officers of WGNB and First National
Bank, their associates and members of their immediate families totaled $9.9
million, which represented approximately 1.56% of total loans as of that date.
As of December 31, 2008, none of these loans outstanding to related parties were
non-accrual, past due or restructured.
The
following table presents loans by type on the dates indicated:
Table
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial & agricultural
|
|
$
|
64,434
|
|
|
$
|
61,540
|
|
|
$
|
52,334
|
|
|
$
|
51,555
|
|
|
$
|
50,528
|
|
Real
estate – construction
|
|
|
182,878
|
|
|
|
242,216
|
|
|
|
175,024
|
|
|
|
153,511
|
|
|
|
114,657
|
|
Real
estate – mortgage
|
|
|
349,612
|
|
|
|
315,335
|
|
|
|
219,563
|
|
|
|
196,383
|
|
|
|
173,110
|
|
Consumer
|
|
|
34,576
|
|
|
|
40,873
|
|
|
|
27,398
|
|
|
|
22,271
|
|
|
|
18,614
|
|
|
|
|
631,500
|
|
|
|
659,964
|
|
|
|
474,319
|
|
|
|
423,720
|
|
|
|
356,909
|
|
Less: Unearned
interest and fees
|
|
|
(1,338
|
)
|
|
|
(1,803
|
)
|
|
|
(818
|
)
|
|
|
(841
|
)
|
|
|
(581
|
)
|
Allowance for
loan losses
|
|
|
(11,240
|
)
|
|
|
(12,422
|
)
|
|
|
(5,748
|
)
|
|
|
(5,327
|
)
|
|
|
(4,080
|
)
|
Loans, net
|
|
$
|
618,922
|
|
|
$
|
645,739
|
|
|
$
|
467,753
|
|
|
$
|
417,552
|
|
|
$
|
352,248
|
|
The following table sets forth the
maturity distribution (based upon contractual dates) and interest rate
sensitivity of commercial, financial and agricultural loans, real estate
construction loans (which includes non-performing loans), mortgage loans and
consumer loans as of December 31, 2008:
Table
6
Loan
Portfolio Maturity
(
in thousands)
|
|
One
Year
Or Less
|
|
|
Wtd.
Avg.
Yld.
|
|
|
Over
One
to
Five
Years
|
|
|
Wtd.
Avg.
Yld.
|
|
|
Over
Five
Years
|
|
|
Wtd.
Avg.
Yld.
|
|
|
Total
|
|
|
Wtd.
Avg.
Yld.
|
|
Commercial,
financial & agricultural
|
$
|
44,448
|
|
|
|
5.20
|
%
|
|
$
|
16,215
|
|
|
|
5.69
|
%
|
|
$
|
3,771
|
|
|
|
6.41
|
%
|
|
$
|
64,434
|
|
|
|
5.39
|
%
|
Real
estate – construction
|
|
|
169,165
|
|
|
|
2.54
|
%
|
|
|
12,988
|
|
|
|
5.90
|
%
|
|
|
725
|
|
|
|
7.32
|
%
|
|
|
182,878
|
|
|
|
2.80
|
%
|
Real
estate – mortgage
|
|
|
81,237
|
|
|
|
5.77
|
%
|
|
|
215,188
|
|
|
|
6.66
|
%
|
|
|
53,187
|
|
|
|
6.10
|
%
|
|
|
349,612
|
|
|
|
6.37
|
%
|
Consumer
|
|
|
16,943
|
|
|
|
8.97
|
%
|
|
|
17,412
|
|
|
|
8.63
|
%
|
|
|
221
|
|
|
|
6.88
|
%
|
|
|
34,576
|
|
|
|
8.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
311,793
|
|
|
|
4.11
|
%
|
|
$
|
261,803
|
|
|
|
6.69
|
%
|
|
$
|
57,904
|
|
|
|
6.14
|
%
|
|
$
|
631,500
|
|
|
|
5.37
|
%
|
Variable/Fixed
Rate Mix
|
|
Variable
Interest
Rates
|
|
|
Wtd
Avg
Yld
|
|
|
Fixed
Interest
Rates
|
|
|
Wtd
Avg
Yld
|
|
Commercial,
financial and agricultural
|
|
$
|
23,747
|
|
|
|
3.65
|
%
|
|
$
|
40,686
|
|
|
|
6.41
|
%
|
Real
estate – construction
|
|
|
109,518
|
|
|
|
2.26
|
%
|
|
|
73,360
|
|
|
|
3.59
|
%
|
Real
estate – mortgage
|
|
|
132,506
|
|
|
|
4.75
|
%
|
|
|
217,107
|
|
|
|
7.35
|
%
|
Consumer
|
|
|
1,558
|
|
|
|
6.29
|
%
|
|
|
33,018
|
|
|
|
8.90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
267,329
|
|
|
|
3.64
|
%
|
|
$
|
364,171
|
|
|
|
7.83
|
%
|
Provision
and Allowance for Possible Loan and Lease Losses
Our
provision for loan losses in 2008 was $14.9 million, compared to $10.2 million
in 2007 and $1.5 million in 2006. The increase in the provision for loan losses
reflects a higher level of non-performing assets and criticized and classified
loans recognized in the last half of 2007 which continued through 2008. The
allowance for loan losses represented 1.78%, 1.88% and 1.21% of total loans
outstanding at December 31, 2008, 2007 and 2006, respectively. Management has
taken an aggressive approach to identification and recognition of potential
problem loans in its impairment process. In addition, management is recognizing
impairment of a loan and continuously analyzing and evaluating current market
values for collateral on impaired loans.
We have an independent loan review
function. The loan officer is responsible for initially placing loans in loan
grade categories which are consistent with those used by our regulators. Target
loans are scheduled for review by the loan review personnel for credit quality,
consistency and grading accuracy. Through the grading process, we seek to assure
the timely recognition of credit risks. In general, as credit risk increases,
the level of the allowance for loan loss will also increase. However in 2008,
management charged-off loans in recognition of decreased market values from
collateral dependent properties, which reduced the overall allowance
balance.
While uncertainty and rapid change is
prevailing in assessing loan quality, an allowance for loan loss appropriateness
test is performed at each quarter end. Specific amounts of loss are estimated on
problem loans and historical loss percentages are applied to the balance of the
portfolio using certain portfolio stratifications. The evaluation takes into
consideration such factors as changes in the nature and volume of the loan
portfolio, current economic conditions, regulatory examination results, and the
existence of loan concentrations. Additionally, a monthly analysis is performed
to determine if further provision is appropriate.
Management’s judgment in determining
the appropriateness of the allowance is based on evaluations of the
collectibility of loans. These evaluations take into consideration such factors
as changes in the nature and volume of the loan portfolio, current economic
conditions that may affect the borrower’s ability to pay, overall portfolio
quality, and review of specific problem loans. In determining the
appropriateness of the allowance for loan losses, management uses a loan grading
system that rates loans in nine different categories. Grades six through nine,
which represent criticized or classified loans, are assigned allocations of loss
based on management’s estimate of potential loss that is generally based on
historical losses and/or collateral deficiencies. Loans graded one through five
are stratified by type and allocated loss ranges based on historical loss
experience for the strata. The combination of these results is compared monthly
to the recorded allowance for loan losses and material differences are adjusted
by increasing or decreasing the provision for loan losses. Loans deemed to be
impaired and certain types of classified loans are evaluated individually to
measure the probable loss, if any, in the credit. Management uses internal
credit personnel who are independent of the lending function to challenge and
corroborate the loan grading results and provide additional analysis in
determining the adequacy of the allowance for loan losses and the future
provisions for estimated loan losses.
Management believes that the allowance
for loan losses is adequate. Management uses available information to recognize
current risk of loss in the portfolio based on changes in economic conditions
and a change in the borrowers’ ability to repay. In addition, regulators, as an
integral part of their examination process, periodically review our allowance
for loan losses. Such regulators may require us to recognize additions to the
allowance based on their judgments of information available to them at the time
of their examination. In addition, we engaged an independent review of the
allowance for loan loss process by a third party. Management realizes the
importance of maintaining an appropriate allowance for loan losses. Through a
professional loan review function and effective loan officer identification
program, management believes that we are able to recognize weaknesses in the
loan portfolio in a timely manner. Early identification of deteriorating credit
attributes allows management to take a proactive role in documenting an
established plan to enhance our position and minimize the potential for
loss.
Through a regular problem loan
identification program outlined above, management is able to identify those
loans that exhibit weakness and classify them on a classified and criticized
loan list. Management has elected to meet with lenders and credit staff more
often and in greater detail than it may have in a more stable credit quality
period. Special attention is given to construction and development loans in
order to accurately evaluate the exposure to loan loss of this portfolio. The
migration analysis assigns historical loss amounts to pools of loans according
to classifications of risk ratings to calculate a general allowance to the
overall portfolio. A specific reserve may be assigned to a loan as a result of
fair value analysis. We also evaluate the risks associated with concentrations
in credit.
The following table presents a summary
of changes in the allowance for loan losses for the years
indicated:
Table
7
|
Allowance
for Loan Losses
|
(in
thousands)
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance
at beginning of year
|
|
$
|
12,422
|
|
|
$
|
5,748
|
|
|
$
|
5,327
|
|
|
$
|
4,080
|
|
|
$
|
3,479
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural
|
|
|
440
|
|
|
|
146
|
|
|
|
47
|
|
|
|
24
|
|
|
|
59
|
|
Real estate –
construction
|
|
|
14,453
|
|
|
|
3,930
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate –
mortgage
|
|
|
1,035
|
|
|
|
772
|
|
|
|
910
|
|
|
|
235
|
|
|
|
215
|
|
Consumer loans
|
|
|
502
|
|
|
|
395
|
|
|
|
155
|
|
|
|
129
|
|
|
|
123
|
|
Total charge-offs
|
|
|
16,430
|
|
|
|
5,243
|
|
|
|
1,112
|
|
|
|
388
|
|
|
|
397
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and
agricultural
|
|
|
3
|
|
|
|
7
|
|
|
|
11
|
|
|
|
16
|
|
|
|
16
|
|
Real estate –
construction
|
|
|
203
|
|
|
|
25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Real estate –
mortgage
|
|
|
12
|
|
|
|
74
|
|
|
|
—
|
|
|
|
18
|
|
|
|
13
|
|
Consumer loans
|
|
|
130
|
|
|
|
78
|
|
|
|
57
|
|
|
|
51
|
|
|
|
44
|
|
Total recoveries
|
|
|
348
|
|
|
|
184
|
|
|
|
68
|
|
|
|
85
|
|
|
|
73
|
|
Net
(charge-offs) recoveries
|
|
|
(16,082
|
)
|
|
|
(5,059
|
)
|
|
|
(1,044
|
)
|
|
|
(303
|
)
|
|
|
(324
|
)
|
Allowance
attributable to First Haralson loans
|
|
|
—
|
|
|
|
1,527
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Provision
for loan losses
|
|
|
14,900
|
|
|
|
10,206
|
|
|
|
1,465
|
|
|
|
1,550
|
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at end of year
|
|
$
|
11,240
|
|
|
$
|
12,422
|
|
|
$
|
5,748
|
|
|
$
|
5,327
|
|
|
$
|
4,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of net charge-offs during the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period to average loans
outstanding
|
|
|
2.46
|
%
|
|
|
.87
|
%
|
|
|
.24
|
%
|
|
|
.08
|
%
|
|
|
.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of allowance to total loans
|
|
|
1.78
|
%
|
|
|
1.88
|
%
|
|
|
1.21
|
%
|
|
|
1.26
|
%
|
|
|
1.14
|
%
|
Non-Performing
Assets and Past Due Loans
Non-performing assets at December 31,
2008 were $122.0 million, or 19.32%, of total loans compared to $58.3 million,
or 8.93%, of total loans at December 31, 2007 and $4.3 million, or 0.91%, of
total loans at December 31, 2006. The levels of non-performing loans are at a
historic high for us. The primary cause of the increase in non-performing asset
levels is the decline in the residential real estate market in the metro-Atlanta
area. Over the past five years, our market area has become more connected with
the growth of metro-Atlanta. Residential real estate growth became a leading
industry in our market area and over those five years, residential construction
and development loans averaged 33% of our loan portfolio.
In recognition of the potential impact
of a downturn, in 2004 management began to raise the credit standards for those
borrowers. Management was, however, surprised by both the suddenness and the
severity with which the downturn came. Many in the market did not realize the
impact that subprime mortgage lending had on the absorption rate of home sales
in the market area. When subprime lenders began to experience credit quality
problems related to increased rates in the adjustable subprime market, that type
of lending ceased. Further, as homes that were built to meet the subprime and
conforming mortgage demand came to market, not only had the subprime demand
decreased sharply, but homes which were subject to subprime lending began
emerging back on the market in foreclosure. This trend continued at an
increasing rate in 2008 and resulted in a (by some estimates) 48 to 60 month
supply of homes for sale in the market and a ten to fifteen year supply of
developed lots based on recent absorption rates.
The excess supply of homes and
developed residential lots has had a negative impact on our residential
construction and development borrowers. The borrowers continue to experience
much longer than expected sales time and, therefore, the holding period and
expense of the homes or residential lots was much higher than expected. As time
passes, the borrowers have been paying the interest and ownership carry on the
properties, but have diminished their financial capacity to continue to hold the
property. Thus, we have been experiencing an increased number of past due loans
which has lead to impairment of the loan and, at an increasing rate, foreclosure
for some borrowers. In addition, some borrowers may file for protection under
bankruptcy laws which can further lengthen the collection period of the loan.
Approximately 80% of the total amount of non-performing assets as of December
31, 2008 is made up of twenty-six loan relationships with balances of $2 million
to $7 million per relationship.
Management has performed impairment
analyses on each troubled loan relationship and continues to focus on the credit
quality of its residential construction and development loan portfolio. The
impairment analysis entails evaluating the fair value of the properties which
were held as collateral for the loans. The properties are re-appraised when
appropriate and those updated appraisals are evaluated by management. Generally,
there is greater uncertainty in real estate values in times of a market
downturn. As expected, updated values are often less than the earlier
appraisals. Therefore, if fair value analysis is below the recorded loan amount,
management generally suspends the accrual of interest and, in certain instances,
charges-down the balance of the impaired loans as dictated by collateral values
in our fair value assessment. As part of our ongoing evaluation of the
collectibility of the impaired asset, management must continue to make value
judgments on the properties or loans through updated appraisals and our
knowledge of the market. There can be no assurance that residential real estate
values will not continue to decline or that more loans will become impaired,
thereby causing more potential suspension of accrued interest or further
charge-down of loans.
Management’s most critical priority is
disposing of and maximizing the net realizable value of the non-performing
assets. Management considers multiple avenues to reduce non-performing assets.
The holding period of non-performing assets must be minimized as these assets
bear a cost to carry for us in both interest carry and maintenance and real
estate taxes. We believe that the ultimate outcome of this cycle of economic
downturn is the largest uncertainty management faces over the next twelve
months. We are in a market that has high historical and projected population and
income growth potential. While the current downturn has had a significant impact
on asset quality and, therefore, earnings, we believe our long term growth and
earnings outlook for the Company remains positive.
The following table summarizes loans 90
days or greater past due, non-accrual loans and real estate taken in settlement
of foreclosure for the years indicated.
(in
thousands)
|
|
|
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Foreclosed
property
|
|
$
|
45,798
|
|
|
$
|
10,313
|
|
|
$
|
1,318
|
|
|
$
|
567
|
|
|
$
|
686
|
|
Non-accrual
loans
|
|
|
71,600
|
|
|
|
46,352
|
|
|
|
1,212
|
|
|
|
2,382
|
|
|
|
536
|
|
Loans
90 days past due still accruing
|
|
|
4,597
|
|
|
|
1,204
|
|
|
|
1,781
|
|
|
|
673
|
|
|
|
567
|
|
Total
|
|
$
|
121,995
|
|
|
$
|
57,869
|
|
|
$
|
4,311
|
|
|
$
|
3,622
|
|
|
$
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
assets as % of total loans
|
|
|
19.32
|
%
|
|
|
8.77
|
%
|
|
|
.91
|
%
|
|
|
.85
|
%
|
|
|
.50
|
%
|
While
there may be additional loans in our portfolio that may become non-performing as
conditions dictate, management is not aware of any non-performing loans that are
not disclosed in the table above. As a result of management’s ongoing review of
the loan portfolio, loans are classified as non-accrual generally when they are
past due in principal or interest payments for more than 90 days or it is
otherwise not reasonable to expect collection of principal and interest due on
the loan. Exceptions may be allowed for 90 day past due loans when such loans
are well secured and in process of collection. Generally, payments received on
non-accrual loans are applied directly to principal.
Our loan review function also monitors
selected performing loans for which general economic conditions or changes
within a particular industry could cause the borrowers financial difficulties.
The loan review function identifies loans with high degrees of credit or other
risks. The focus of loan review and management is to maintain a low level of
non-performing assets and return current non-performing assets to earning
status. Management is unaware of any known trends, events or uncertainties that
will have or that are reasonably likely to have a material effect on our
liquidity, capital resources or operations other than the factors discussed
throughout this Report.
Deposits
Time deposits of $100 thousand and
greater totaled $260.0 million at December 31, 2008, compared with $229.4
million at year-end 2007. The growth in time deposits of $100 thousand and
greater was $30.7 million, or 13.4%, from December 31, 2007 to December 31,
2008. The growth in this category of deposits was attributable to an increase in
brokered time deposits of $100 thousand and greater of $46.5 million and a
decrease resulting from time deposits within our market area of $16.1
million.
The
following table sets forth the scheduled maturities of time deposits of $100
thousand and greater at December 31, 2008.
Table
9
Maturity
of Time Deposits of $100,000 and Greater
(in
thousands)
|
|
|
|
Within
3 months
|
|
$
|
30,347
|
|
After
3 through 6 months
|
|
|
52,180
|
|
After
6 through 12 months
|
|
|
48,273
|
|
After
12 months
|
|
|
129,244
|
|
Total
|
|
$
|
260,044
|
|
Liquidity
We must maintain and manage, on a daily
basis, sufficient funds to cover the withdrawals from depositors’ accounts and
to supply potential borrowers with funds. To meet these obligations, we keep
cash on hand, maintain account balances with correspondent banks, and purchase
and sell federal funds and other short-term investments such as certificates of
deposit in other banks. Asset and liability maturities are monitored in an
attempt to match these variables to meet liquidity needs. In response to
concerns with regard to the safety of bank deposits which surfaced in 2008, we
have increased our focus on the management of liquidity.
We
formalized our Contingency Funding Committee, which met frequently in 2008, to
respond to liquidity management needs. The Committee makes judgments on
“headline risk” in the banking industry and locally. Headline risk results when
the media reports on the decreased earnings, increased non-performing assets and
decreased capital of banks. This creates concern among depositors as to the
safety of their funds and, therefore, may cause depositors to make larger than
normal withdrawals. We have, to date, been relatively unaffected by headline
risk. However, it is our policy to monitor liquidity to meet regulatory
requirements, safe and sound banking practices and local funding needs.
Management believes that our current level of liquidity is adequate to meet
these needs.
We maintain collateralized short and
long term borrowing relationships with correspondent banks including the Federal
Home Loan Bank (FHLB) and the Federal Reserve Bank of Atlanta (“FRB”) that can
provide funds to us on short notice, if needed. Our line of credit with the FHLB
is up to 20% to total assets, but is dependent on available collateral and the
financial performance of the Bank. We have arrangements with correspondent and
commercial banks for short term secured advances up to $15.8 million. As of
December 31, 2008, we had not drawn on the available facilities. In addition,
subject to collateral availability, we have a line of credit with the FHLB from
which we had drawn $52.0 million as of December 31, 2008. For additional details
on the lines of credit with the FHLB, FRB and a correspondent bank see Note 8,
“Lines of Credit”,
to
the consolidated financial statements.
Our cash flows are composed of three
classifications: cash flows from operating activities, cash flows from investing
activities, and cash flows from financing activities. Cash and cash equivalents
amounted to $75.4 million at December 31, 2008, which represented an increase of
$49.5 million from December 31, 2007 and reflective of our desire to maintain
increased liquidity during times of uncertainty. Net cash provided by operating
activities was $7.0 million for 2008. Net cash provided by operating activities
was not impacted by the impairment of goodwill in the amount of $24.1 million or
the provision for loan loss in the amount of $14.9 million. Both items are
non-cash in nature and, therefore, are added-back to our net loss for 2008 to
compute cash provided by operating activities. We recognized other add-backs
attributable to non-cash items such as depreciation, amortization and accretion
and stock -based employee compensation expense totaling $2.1
million.
Net cash
provided by investing activities of $1.2 million consisted primarily of a net
increase in loans of $29.3 million and net decrease in securities
available-for-sale of $26.0 million. Net cash provided by financing activities
totaled $41.3 million which was primarily attributable to a net increase in
deposits of $55.3 million, a decrease in borrowings such as FHLB advances and
securities sold under a repurchase agreement in the net amount of $22.5 million
and proceeds net of stock issuance cost from the Series A Preferred offering in
the amount of $11.9 million.
Capital
Resources
Total shareholders’ equity as of
December 31, 2008 was $56.9 million, a decrease of $23.2 million from 2007. The
change in equity was due to a net loss in 2008 in the amount of $30.8 million.
As discussed elsewhere in this Report, $24.1 million of the net loss was
attributable to the impairment of goodwill which impacted total shareholders’
equity, but did not impact the amount of tangible shareholders’ equity or
regulatory capital. Ignoring the impact of goodwill impairment, the net loss for
2008 was $6.6 million.
In June 2008, the Company filed a Form
S-1 with the Securities and Exchange Commission to register 3,750,000 shares of
its Series A Preferred for sale to the Company’s shareholders under a rights
offering that was completed September 22, 2008. A total of 1,153,508 shares of
the Series A Preferred were sold to shareholders in the rights offering. The
remaining registered shares are subject to an ongoing public offering which is
expected to be completed in April 2009. As of December 31, 2008, a total of
1,509,100 shares of Series A Preferred have been sold (including those sold in
the rights offering). The total proceeds of the offering net of stock issuance
cost was $11.9 million as of December 31, 2008.
In
addition, in May 2008, the Company filed a Form S-3 with the Securities and
Exchange Commission to register 500,000 shares of its Common Stock for its
Direct Stock Purchase and Dividend Reinvestment Plan. The plan offers holders of
the Company’s Common Stock and new investors the opportunity to reinvest their
dividends into the Company’s Common Stock or purchase Common Stock with optional
cash payments of $250 to $10,000 per month without the payment of brokerage
commissions or service charges. The plan was amended by the Company’s board of
directors in October 2008 in order to permit holders of the Series A Preferred
to reinvest dividends paid on the Series A Preferred into shares of the
Company’s Common Stock. As of December 31, 2008, 413 shares had been purchased
under the plan.
The Company paid dividends on its
Common Stock in the amount of $1.9 million in the first half of 2008 and $253
thousand on its Series A Preferred in the fourth quarter of 2008. The Board of
Directors has suspended the dividends on the Common Stock. Other changes to
shareholders’ equity from 2007 to 2008 included a decrease in other
comprehensive income in the amount of $2.4 million and an increase in common
equity in the amount of $175 thousand attributable to stock option
expense.
The OCC
has established certain minimum risk-based capital standards that apply to
national banks, and we are subject to certain capital requirements imposed by
the Federal Reserve. At December 31, 2008, First National Bank exceeded all
applicable regulatory capital requirements for classification as a “well
capitalized” bank, and WGNB satisfied all applicable regulatory requirements
imposed on it by the Federal Reserve. The following tables present our
consolidated regulatory capital position at December 31, 2008:
Table
10
Capital
Ratio
|
|
|
|
Actual
as of December 31, 2008
|
|
|
Tier
1 Capital (to risk weighted assets)
|
|
|
9
|
%
|
|
Tier
1 Capital minimum requirement
|
|
|
4
|
%
|
|
|
|
|
|
|
|
Excess
|
|
|
5
|
%
|
|
|
|
|
|
|
|
Total
Capital (to risk weighted assets)
|
|
|
11
|
%
|
|
Total
Capital minimum requirement
|
|
|
8
|
%
|
|
Excess
|
|
|
3
|
%
|
|
|
|
|
|
|
Leverage
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
as of December 31, 2008
|
|
|
Tier
1 Capital to average assets
|
|
|
|
|
|
(“Leverage
Ratio”)
|
|
|
7
|
%
|
|
Minimum
leverage requirement
|
|
|
4
|
%
|
|
|
|
|
|
|
|
Excess
|
|
|
3
|
%
|
For a more complete discussion of the
actual and required ratios of us and our subsidiary, including requests we have
received from the OCC, see Note 13 to the consolidated financial
statements.
Contractual
Obligations
In the ordinary course of operations,
we enter into certain contractual obligations. The following table summarizes
our significant fixed and determinable contractual obligations, by payment date,
at December 31, 2008 (dollars in thousands). With regard to the FHLB advances,
the obligations contain call dates at the option of the issuer. Therefore, the
advances may be called prior to their maturity date. See Note 8 to the financial
statements “
Lines of
Credit”.
Obligation
|
|
Total
|
|
|
Less
than 1
year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
More
than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
without stated maturity
|
|
$
|
279,192
|
|
|
$
|
279,192
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Certificates
of deposit
|
|
|
482,502
|
|
|
|
270,391
|
|
|
|
177,513
|
|
|
|
33,588
|
|
|
|
1,010
|
|
FHLB
advances
|
|
|
52,000
|
|
|
|
—
|
|
|
|
12,000
|
|
|
|
30,000
|
|
|
|
10,000
|
|
Junior
subordinated debentures
|
|
|
10,825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,825
|
|
Total
|
|
$
|
824,519
|
|
|
$
|
549,583
|
|
|
$
|
189,513
|
|
|
$
|
63,588
|
|
|
$
|
21,835
|
|
Off
Balance Sheet Risk
Through
the operations of First National Bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At December 31,
2008, we had issued commitments to extend credit of $64.3 million through
various types of commercial lending arrangements and additional commitments
through standby letters of credit of $7.4 million. We evaluate each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by us upon extension of credit, is based on our credit
evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and residential
real estate. We manage the credit risk on these commitments by subjecting them
to normal underwriting and risk management processes. Because these commitments
generally have fixed expiration dates and many will expire without being drawn
upon, the total commitment level does not necessarily represent future cash
requirements. If needed to fund these outstanding commitments, we have the
ability to liquidate federal funds sold or securities available-for-sale or on a
short term basis to borrow and purchase federal funds from other financial
institutions until more permanent funding can be obtained.
Asset/Liability
Management
It is our
objective to manage assets and liabilities to provide a satisfactory, consistent
level of profitability within the framework of established cash, loan,
investment, borrowing and capital policies. Certain officers are charged with
the responsibility for monitoring policies and procedures that are designed to
ensure acceptable composition of the asset/liability mix. It is the overall
philosophy of management to support asset growth primarily through growth of
deposits and borrowing strategies, which minimize our exposure to interest rate
risk. The objective of the policy is to control interest sensitive assets and
liabilities so as to minimize the impact of substantial movements in interest
rates on earnings.
The asset/liability mix is monitored on
a regular basis. A report reflecting the interest sensitive assets and interest
sensitive liabilities is prepared and presented to management and the
asset/liability management committee on at least a quarterly basis. One method
to measure a bank’s interest rate exposure is through its repricing gap. The gap
is calculated by taking all assets that reprice or mature within a given time
frame and subtracting all liabilities that reprice or mature within that time
frame. The difference between these two amounts is called the “gap”, the amount
of either liabilities or assets that will reprice without a corresponding asset
or liability repricing. A negative gap (more liabilities repricing than assets)
generally indicates that the bank’s net interest income will decrease if
interest rates rise and will increase if interest rates fall. A positive gap
generally indicates that the bank’s net interest income will decrease if rates
fall and will increase if rates rise.
Due to inherent limitations in
traditional gap analysis, we also employ more sophisticated modeling techniques
to monitor potential changes in net interest income, net income and the market
value of portfolio equity under various interest rate scenarios. Market risk is
the risk of loss from adverse changes in market prices and rates, arising
primarily from interest rate risk in our loan and investment portfolios, which
can significantly impact our profitability. Net interest income can be adversely
impacted where assets and liabilities do not react the same to changes in
interest rates. At year-end 2008, the estimated impact of an immediate increase
in interest rates of 100 basis points would have resulted in a decrease in net
interest income over a 12-month period of 0.35%, with a comparable decrease in
interest rates resulting in a increase in net interest income of 2.47%.
Management finds the above methodologies meaningful for evaluating market risk
sensitivity; however, other factors can affect net interest income, such as
levels of non-earning assets and changes in portfolio composition and
volume.
The following table summarizes the
amounts of interest-earning assets and interest-bearing liabilities outstanding
at December 31, 2008 that are expected to mature, prepay or reprice in each of
the future time periods shown. Except as stated below, the amount of assets or
liabilities that mature or reprice during a particular period was determined in
accordance with the contractual terms of the asset or liability. Adjustable rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in the period in which they are due, and fixed rate loans and
mortgage-backed securities are included in the periods in which they are
anticipated to be repaid based on scheduled maturities, although the cash flows
received often differ from scheduled maturities. Our savings accounts and
interest-bearing demand accounts (NOW and money market deposit accounts), which
are generally subject to immediate withdrawal, are included in the “One Year or
Less” category, although historical experience has proven these deposits to be
less interest rate sensitive over the course of a year and are more subject to
management’s control.
Table
11
Interest
Rate Gap Sensitivity
(in
thousands)
|
|
At
December 31, 2008
Maturing or Repricing in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
or Less
|
|
|
Over
1
Year
Thru
2 Years
|
|
|
Over
2
Years
Thru
5 Years
|
|
|
Over
5
Years
|
|
|
Total
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
banks
|
|
$
|
12,575
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,575
|
|
Federal
funds sold
|
|
|
45,839
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,839
|
|
Securities
(at cost)
|
|
|
3,274
|
|
|
|
3,531
|
|
|
|
14,456
|
|
|
|
82,623
|
|
|
|
103,884
|
|
Loans
|
|
|
311,792
|
|
|
|
185,474
|
|
|
|
76,330
|
|
|
|
57,904
|
|
|
|
631,500
|
|
Total
interest-earning assets
|
|
|
373,480
|
|
|
|
189,005
|
|
|
|
90,786
|
|
|
|
140,527
|
|
|
|
793,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
194,241
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
194,241
|
|
Savings
|
|
|
18,654
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,654
|
|
Time
deposits
|
|
|
270,391
|
|
|
|
177,513
|
|
|
|
33,588
|
|
|
|
1,010
|
|
|
|
482,502
|
|
FHLB
advances
|
|
|
—
|
|
|
|
12,000
|
|
|
|
30,000
|
|
|
|
10,000
|
|
|
|
52,000
|
|
Junior
subordinated debenture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,825
|
|
|
|
10,825
|
|
Total
interest-bearing liabilities
|
|
|
483,286
|
|
|
|
189,513
|
|
|
|
63,588
|
|
|
|
21,835
|
|
|
|
758,222
|
|
Excess
(deficiency) of interest-earning assets over interest-bearing
liabilities
|
|
|
(
109,806
|
)
|
|
|
(508
|
)
|
|
|
27,198
|
|
|
|
118,692
|
|
|
$
|
3
5,576
|
|
Cumulative
interest sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
$
|
(
109,806
|
)
|
|
$
|
(
110,314
|
)
|
|
$
|
(
83,116
|
)
|
|
$
|
35,576
|
|
|
|
|
|
Cumulative
difference to total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
earning assets
|
|
|
(
13.83
|
)%
|
|
|
(
13.90
|
)%
|
|
|
(
10.47
|
)%
|
|
|
4.48
|
%
|
|
|
|
|
At
December 31, 2008, the difference between our assets and liabilities repricing
or maturing within one year was $ 109.8 million. The above chart indicates an
excess of liabilities repricing or maturing within one year; thus, a rise in
interest rates would theoretically cause our net interest income to decrease.
However, certain shortcomings are inherent in the method of analysis presented
in the foregoing table. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees or at different points in time to changes in market interest rates. Such
is the case in analyzing NOW demand, money market and savings accounts, which
are disclosed in the one year or less category. Those liabilities do not
necessarily reprice as quickly or to the same degree as rates in general.
Additionally, certain assets, such as adjustable rate mortgages, have features
that restrict changes in interest rates, both on a short-term basis and over the
life of the asset. Changes in interest rates, prepayment rates, early withdrawal
levels and the ability of borrowers to service their debt, among other factors,
may change significantly from the assumptions made in the table.
Impact
of Inflation, Changing Prices and Monetary Policies
The
primary effect of inflation on our operations is reflected in increased
operating costs. Unlike industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond our
control, including the influence of domestic and foreign economic conditions and
the monetary and fiscal policies of the United States government and federal
agencies, particularly the Federal Reserve. The Federal Reserve implements a
national monetary policy such as seeking to curb inflation and combat recession
by its open market operations in United States government securities, control of
the discount rate applicable to borrowing by banks, and establishment of reserve
requirements against bank deposits. The actions of the Federal Reserve in these
areas influence the growth of bank loans, investments and deposits, and affect
the interest rates charged on loans and paid on deposits. The nature, timing and
impact of any future changes in federal monetary and fiscal policies on us and
our operations are not predictable.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
For information regarding the market
risk of our financial instruments, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operation – Asset/Liability Management.” Our
principal market risk exposure is to interest rates.
Item
8. Financial Statements and Supplementary Data
The consolidated financial statements
of the Company, including notes thereto, and the report of our independent
auditors are included in this Report beginning at page F-1.
Presented below is a summary of the
unaudited consolidated quarterly financial data for the years ended December 31,
2008 and 2007.
Quarterly
Financial Information
(Unaudited
– in thousands, except per share data)
|
|
|
|
|
2008
|
|
|
Quarters
|
|
|
|
|
|
|
|
|
2007
|
|
|
Quarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
14,131
|
|
|
|
11,633
|
|
|
|
11,802
|
|
|
|
10,547
|
|
|
$
|
11,892
|
|
|
|
12,324
|
|
|
|
16,388
|
|
|
|
15,224
|
|
Net
interest income
|
|
|
7,312
|
|
|
|
5,352
|
|
|
|
5,476
|
|
|
|
4,362
|
|
|
|
6,272
|
|
|
|
6,598
|
|
|
|
8,546
|
|
|
|
7,231
|
|
Provision
for loan losses
|
|
|
750
|
|
|
|
8,100
|
|
|
|
1,400
|
|
|
|
4,650
|
|
|
|
375
|
|
|
|
375
|
|
|
|
750
|
|
|
|
8,706
|
|
Earnings
(loss) before income taxes
|
|
|
2,416
|
|
|
|
(7,160
|
)
|
|
|
(1,797
|
)
|
|
|
(30,602
|
)
|
|
|
2,934
|
|
|
|
3,304
|
|
|
|
3,445
|
|
|
|
(6,515
|
)
|
Net
(loss) earnings
|
|
|
1,831
|
|
|
|
(4,294
|
)
|
|
|
(855
|
)
|
|
|
(27,432
|
)
|
|
|
1,980
|
|
|
|
2,254
|
|
|
|
2,330
|
|
|
|
(3,530
|
)
|
Earnings
per share – basic
|
|
|
0.30
|
|
|
|
(0.71
|
)
|
|
|
(0.14
|
)
|
|
|
(4.57
|
)
|
|
|
0.40
|
|
|
|
0.45
|
|
|
|
0.38
|
|
|
|
(0.68
|
)
|
Earnings
per share – diluted
|
|
|
0.30
|
|
|
|
(0.71
|
)
|
|
|
(0.14
|
)
|
|
|
(4.57
|
)
|
|
|
0.39
|
|
|
|
0.45
|
|
|
|
0.38
|
|
|
|
(0.68
|
)
|
Weighted
average common shares outstanding – basic
|
|
|
6,057,594
|
|
|
|
6,057,594
|
|
|
|
6,057,594
|
|
|
|
6.057,670
|
|
|
|
5,001,286
|
|
|
|
5,003,790
|
|
|
|
6,058,939
|
|
|
|
6.057,594
|
|
Weighted
average common shares outstanding – diluted
|
|
|
6,061,161
|
|
|
|
6,057,594
|
|
|
|
6,057,594
|
|
|
|
6,057,670
|
|
|
|
5,041,575
|
|
|
|
5,045,067
|
|
|
|
6,077,268
|
|
|
|
6,057,594
|
|
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Item
9A(T). Controls and Procedures
Management’s
Report on Internal Control Over Financial Reporting
Management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. The Company’s internal control over financial reporting is a
process designed under the supervision of the Company’s Chief Executive Officer
and Chief Financial Officer to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the Company’s
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management has made a comprehensive
review, evaluation, and assessment of the Company’s internal control over
financial reporting as of December 31, 2008. In making its assessment of
internal control over financial reporting, management used the criteria issued
by the Committee of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated
Framework
. Based on that assessment, management concluded that, as of
December 31, 2008, the Company’s internal control over financial reporting is
effective.
This Report does not include an
attestation report of the Company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this Report.
Evaluation
of Disclosure Controls and Procedures
The Company conducted an evaluation,
with the participation of its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company’s disclosure controls and
procedures as of December 31, 2008. The Company’s disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported on a
timely basis.
Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded, as of December 31,
2008, that the Company’s disclosure control and procedures were effective in
recording, processing, summarizing, and reporting information required to be
disclosed by the Company, within the time periods specified in the SEC’s rules
and forms, and such information is accumulated and communicated to management to
allow timely decisions regarding required disclosures.
Changes
in Internal Control Over Financial Reporting
Management of the Company has
evaluated, with the participation of the Company’s Chief Executive Officer and
Chief Financial Officer, changes in the Company’s internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange
Act) during the quarter ended December 31, 2008. Based upon that evaluation,
management has determined that there have been no changes to the Company’s
internal control over financial reporting that occurred since the beginning of
the Company’s fourth quarter of 2008 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item
9B. Other Information
Not applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance
The information appearing under the
headings “Nomination and Election of Directors,” “Compliance With Section 16(a)
of the Securities Exchange Act of 1934” and “Corporate Governance” in the Proxy
Statement (the “2009 Proxy Statement”) relating to the 2009 Annual Meeting of
Shareholders of the Company, which is currently scheduled to be held on June 9,
2009, is incorporated herein by reference.
Item
11.
Executive
Compensation
The information appearing under the
headings “Executive Compensation,” “Compensation Committee Interlocks and
Insider Participation,” “Compensation Discussion and Analysis” and “Compensation
Committee Report” in the 2009 Proxy Statement is incorporated herein by
reference.
Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters
The information appearing under the
headings “Security Ownership of Certain Beneficial Owners and Management” in the
2009 Proxy Statement is incorporated herein by reference.
Securities
Authorized for Issuance Under Equity Compensation Plans
The following table gives information
as of December 31, 2008, about WGNB Corp. Common Stock that may be issued upon
the exercise of options, warrants and rights under the Company’s 2003 Incentive
Stock Plan, which is the Company’s only outstanding equity compensation plan.
The Company’s previous 1994 Incentive Stock Plan has since expired in accordance
with its terms. The Company does not have any equity compensation plans that
were not approved by its shareholders. The 2003 Incentive Stock Plan was
approved by the Company’s Board of Directors and its shareholders in
2003.
Plan
Category
|
Number
of securities to
be
issued upon exercise
of
outstanding options,
warrants
and rights
(a)
|
Weighted-average
exercise
price
of outstanding
options,
warrants and
rights
(b)
|
Number
of securities remaining
available
for future issuance
under
equity compensation plans
(excluding
securities reflected in
column
(a))
(c)
|
Equity
compensation plans approved by security holders
|
238,916
|
$21.08
|
812,317*
|
Equity
compensation plans not approved by security holders
|
N/A
|
N/A
|
N/A
|
Total
|
238,916
|
$21.08
|
812,317*
|
* The
only securities remaining available for future issuance are those under the 2003
Incentive Stock Plan. There are no additional securities available for future
issuance under the 1994 Incentive Stock Plan which has expired.
Item
13.
Certain
Relationships and Related Transactions, and Director
Independence
The information appearing under the
caption “Nomination and Election of Directors – Transactions with Related
Persons” and “Corporate Governance” in the 2009 Proxy Statement is incorporated
herein by reference.
Item
14. Principal Accountant Fees and Services
The information appearing under the
caption “Independent Public Accountants” in the 2009 Proxy Statement is
incorporated herein by reference.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)(1)
|
Financial
Statements
|
|
|
|
|
The
following financial statements are filed with this
Report:
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
|
|
|
|
|
Consolidated
Statements of Operations for the Years Ended December 31, 2008, 2007 and
2006
|
|
|
|
|
|
Consolidated
Statements of Comprehensive Income (Loss) for the Years Ended December 31,
2008, 2007 and 2006
|
|
|
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended December
31, 2008, 2007 and 2006
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
(2)
|
Financial
Statement Schedules
|
|
|
|
Financial
statement schedules have been omitted because they are not applicable or
the required information has been incorporated in the consolidated
financial statements and related notes.
|
|
|
|
(3)
|
The
following exhibits are filed with this Report:
|
|
|
|
3.1
|
|
Amended
and Restated Articles of Incorporation (Incorporated by reference to
Exhibit 3.1 to the Company’s Registration Statement on Form 10-SB filed
June 14, 2000 (the “Form 10-SB”))
|
3.2
|
|
Articles
of Amendment to Amended and Restated Articles of Incorporation
(Incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K
filed June 19, 2008)
|
|
|
|
3.3
|
|
Second
Articles of Amendment to Amended and Restated Articles of Incorporation
(Regarding Designations, Preferences and Rights of Series A Convertible
Preferred Stock) (Incorporated by reference to Exhibit 3.1 to Current
Report on Form 8-K filed June 26, 2008)
|
|
|
|
3.4
|
|
Third
Articles of Amendment to Amended and Restated Articles of Incorporation
(Regarding restatement of Designations, Preferences and Rights of Series A
Convertible Preferred Stock) (Incorporated by reference to Exhibit 3.1 to
Current Report on Form 8-K filed July 22, 2008)
|
|
|
|
3.5
|
|
Amended
and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Form
10-SB)
|
|
|
|
4.1
|
|
See
exhibits 3.1 through 3.5 for provisions of Company’s Articles of
Incorporation and Bylaws Defining the Rights of
Shareholders
|
|
|
|
4.2
|
|
Specimen
certificate representing shares of Common Stock (Incorporated by reference
to Exhibit 4.2 to the Form 10-SB)
|
|
|
|
4.3
|
|
Specimen
certificate representing shares of Series A Convertible Preferred Stock
(Incoprorated by reference to Exhibit 4.3 to Registration Statement on
Form S-1 (Registration No. 333-151820) filed June 20,
2008)
|
|
|
|
4.4
|
|
Amended
and Restated Trust Agreement dated July 2, 2007 (Incorporated by reference
to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed July 6,
2007 (the “July 2007 Form 8-K”)
|
|
|
|
4.5
|
|
Indenture,
dated July 2, 2007, by and between WGNB Corp. and Wilmington Trust Company
(Incorporated by reference to Exhibit 4.2 to the July 2007 Form
8-K)
|
|
|
|
4.6
|
|
Guarantee
Agreement, dated July 2, 2007, by and between WGNB Corp. and Wilmington
Trust Company (Incorporated by reference to Exhibit 4.3 to the July 2007
Form 8-K)
|
|
|
|
4.7
|
|
WGNB
Corp. Direct Stock Purchase and Dividend Reinvestment Plan (Incorporated
by reference to Form S-3 filed May 20, 2008 as amended November 6,
2008)
|
|
|
|
10.1*
|
|
Employment
Agreement dated as of July 11, 2006 between H.B. Lipham, III, WGNB Corp.
and West Georgia National Bank (Incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K dated July 11,
2006)
|
|
|
|
10.2*
|
|
Bonus
and Stock Option Agreement dated as of September 23, 1998 between the
Company and H.B. Lipham, III (Incorporated by reference to Exhibit 10.6 to
the Form 10-SB)
|
|
|
|
10.3*
|
|
Bonus
and Stock Option Agreement dated as of September 23, 1998 between the
Company and W. Galen Hobbs, Jr. (Incorporated by reference to Exhibit
10.7 to the Form 10-SB)
|
|
|
|
10.4*
|
|
Bonus
and Stock Option Agreement dated as of September 23, 1998 between the
Company and Steven J. Haack (Incorporated by reference to Exhibit 10.8 to
the Form 10-SB)
|
|
|
|
10.5*
|
|
Form
of Election for Payment of Director Meeting Fees (Incorporated by
reference to Exhibit 10.10 to the Form 10-SB)
|
|
|
|
10.6*
|
|
Employment
Agreement dated August 8, 2005 among WGNB Corp., West Georgia National
Bank and Steven J. Haack (Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated August 8,
2005)
|
|
|
|
10.7*
|
|
Employment
Agreement dated July 11, 2005 between West Georgia National Bank and W.
Galen Hobbs, Jr. (Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K dated July 11,
2005)
|
10.8*
|
|
Second
Amendment to Bonus and Stock Option Agreement dated June 17, 2002 between
the Company and H.B. Lipham, III (Incorporated by reference to Exhibit
10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002 (the “6/30/02 Form 10-Q)
|
|
|
|
10.9*
|
|
Incentive
Stock Option Agreement dated March 12, 2002 between the Company and H.B.
Lipham, III (Incorporated by reference to Exhibit 10.8 to the 6/30/02 Form
10-Q)
|
|
|
|
10.10*
|
|
Amendment
to Bonus and Stock Option Agreement dated May 30, 2002 between the Company
and W. Galen Hobbs, Jr. (Incorporated by reference to Exhibit 10.10 to the
6/30/02 Form 10-Q)
|
|
|
|
10.11*
|
|
Incentive
Stock Option Agreement dated March 12, 2002 between the Company and W.
Galen Hobbs, Jr. (Incorporated by reference to Exhibit 10.11 to the
6/30/02 Form 10-Q)
|
|
|
|
10.12*
|
|
Amendment
to Bonus and Stock Option Agreement dated April 26, 2002 between the
Company and Steven J. Haack (Incorporated by reference to Exhibit 10.13 to
the 6/30/02 Form 10-Q)
|
|
|
|
10.13*
|
|
Incentive
Stock Option Agreement dated March 12, 2002 between the Company and Steven
J. Haack (Incorporated by reference to Exhibit 10.14 to the 6/30/02 Form
10-Q)
|
|
|
|
10.14*
|
|
2003
Stock Incentive Plan (Incorporated by reference to Appendix A to the
Company’s Definitive Proxy Statement for its 2004 Annual
Meeting)
|
|
|
|
10.15*
|
|
Employment
Agreement dated December 31, 2002 between the Company and William R.
Whitaker (Incorporated by reference to Exhibit 10.31 to the Company Annual
Report on Form 10-K for year ended December 31, 2004 (the “2004 Form
10-K”))
|
|
|
|
10.16*
|
|
Bonus
and Stock Option Agreement dated December 27, 2004 between the Company and
William R. Whitaker (Incorporated by reference to Exhibit 10.32 to the
2004 Form 10-K)
|
|
|
|
10.17*
|
|
Separations
Agreement and Release dated February 14, 2006 between the Company, the
Bank and L. Leighton Alston (Incorporated by reference to Exhibit 10.23 to
the Company’s Annual Report on Form 10-K for the year ended December 31,
2005)
|
|
|
|
10.18*
|
|
Employment
Agreement, dated July 1, 2007 among WGNB Corp. West Georgia National Bank
and Randall F. Eaves (Incorporated by reference to Exhibit 10.1 to the
July 2007 Form 8-K)
|
|
|
|
10.19*
|
|
Employment
Agreement, dated July 1, 2007 among WGNB Corp. West Georgia National Bank
and Mary Covington (Incorporated by reference to Exhibit 10.2 to the July
2007 Form 8-K)
|
|
|
|
10.20*
|
|
Employment
Agreement dated January 2, 2007 between Robert M. Gordy, Jr. and West
Georgia National Bank (Incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2007)
|
|
|
|
10.21*
|
|
First
Amendment to Employment Agreement among H.B. Lipham, WGNB Corp. and First
National Bank of Georgia dated December 31, 2008 (Incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
dated December 31, 2008 (the “12/31/08 8-K”))
|
|
|
|
10.22*
|
|
First
Amendment to Employment Agreement among Randall F. Eaves, WGNB Corp. and
First National Bank of Georgia dated December 30, 2008 (Incorporated by
reference to Exhibit 10.2 to the 12/31/08 8-K)
|
|
|
|
10.23*
|
|
First
Amendment to Employment Agreement among Steven J. Haack, WGNB Corp. and
First National Bank of Georgia dated December 31, 2008 (Incorporated by
reference to Exhibit 10.3 to the 12/31/08 8-K)
|
|
|
|
10.24*
|
|
First
Amendment to Employment Agreement among Mary M. Covington, WGNB Corp. and
First National Bank of Georgia dated December 31, 2008 (Incorporated by
reference to Exhibit 10.4 to the 12/31/08
8-K)
|
10.25*
|
|
First
Amendment to Employment Agreement between W. Galen Hobbs, Jr., and First
National Bank of Georgia dated December 31, 2008 (Incorporated by
reference to Exhibit 10.5 to the 12/31/08 8-K)
|
|
|
|
10.26*
|
|
First
Amendment to Employment Agreement between Robert M. Gordy, Jr. and First
National Bank of Georgia dated December 31, 2008 (Incorporated by
reference to Exhibit 10.6 to the 12/31/08 8-K)
|
|
|
|
10.27
|
|
Agreement
between First National Bank of Georgia and The Comptroller of the Currency
dated November 12, 2008 (Incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2008)
|
|
|
|
21
|
|
Subsidiary
of WGNB Corp.
|
|
|
|
23
|
|
Consent
of Porter, Keadle, Moore LLP
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley
Act of 2002
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley
Act of 2002
|
|
|
*
|
Indicates
management contract or compensatory plan or
arrangement.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
WGNB
CORP.
|
|
|
|
By:
|
/s/
H.B. Lipham, III
|
|
|
|
H.B.
Lipham, III, Chief Executive Officer
|
Date:
March 10, 2009
Pursuant
to the requirements of the Exchange Act, this Report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
|
/s/
H.B. Lipham, III
|
|
Date:
March 10, 2009
|
H.B.
Lipham, III, Chief Executive Officer and Director
|
|
[Principal
Executive Officer]
|
|
|
|
/s/
Steven J. Haack
|
|
Date:
March 10, 2009
|
Steven
J. Haack, Secretary and Treasurer
|
|
[Principal
Financial and Accounting Officer]
|
|
|
|
/s/
W.T. Green
|
|
Date:
March 10, 2009
|
W.
T. Green, Chairman of the Board
|
|
|
|
/s/
Wanda W. Calhoun
|
|
Date:
March 10, 2009
|
Wanda
W. Calhoun, Director
|
|
|
|
/s/
Grady W. Cole
|
|
Date:
March 10, 2009
|
Grady
W. Cole, Director
|
|
|
|
/s/
Mary C. Covington
|
|
Date:
March 10, 2009
|
Mary
C. Covington, Executive Vice President and Director
|
|
|
|
/s/
Randall F. Easves
|
|
Date:
March 10, 2009
|
Randall
F. Eaves, President and Director
|
|
|
|
/s/
Loy M. Howard
|
|
Date:
March 10, 2009
|
Loy
M. Howard, Director
|
|
|
|
/s/
R. David Perry
|
|
Date:
March 10, 2009
|
R.
David Perry, Director
|
|
|
|
/s/
L. Richard Plunkett
|
|
Date:
March 10, 2009
|
L.
Richard Plunkett, Director
|
|
|
|
/s/
Donald C. Rhodes
|
|
Date:
March 10, 2009
|
Donald
C. Rhodes, Director
|
|
|
|
/s/
Thomas T. Richards
|
|
Date:
March 10, 2009
|
Thomas
T. Richards, Director
|
|
|
|
|
|
Date:
March __, 2009
|
William
W. Stone, Director
|
|
|
|
/s/
J. Thomas Vance
|
|
Date:
March 10, 2009
|
J.
Thomas Vance, Director
|
|
|
|
/s/
Gelon E. Wasdin
|
|
Date:
March 10, 2009
|
Gelon
E. Wasdin, Director
|
|