**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-K**





**ANNUAL
      REPORT PURSUANT TO**


**SECTIONS
      13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**





**(Mark
      One)**


**x**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                THE**


**SECURITIES
                EXCHANGE ACT OF 1934: For the fiscal year ended December 31,
                2006**





** ̈**
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                THE**


**SECURITIES
                EXCHANGE ACT OF 1934: For the transition period from
                __________****to __________**





**Commission
      File No. 000-30805**





**WGNB
      CORP.**


**(Exact
      name of registrant as specified in its charter)**





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




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




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





**Title
                of Class**
            **Name
                of Exchange on Which Listed**Common
                Stock, $1.25 par value
            The
                NASDAQ Stock Market, LLC





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





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


Yes  ̈  No x




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


Yes  ̈  No x






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





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





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





Large
      Accelerated Filer  ̈    Accelerated
      Filer  ̈    Non-Accelerated
      Filer 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, 2006 which is the last business day of its
      most
      recently completed second fiscal quarter, was approximately $71,024,902 based
      on
      a per share price of $25.00 (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
      February 15, 2007, there were 5,000,613 shares of the Registrant’s Common Stock
      outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Registrant’s definitive Proxy Statement for the 2007 Annual Meeting of
      Shareholders are incorporated by reference into Part III of this Report.










**WGNB
      CORP.**




**2006
      Form 10-K Annual Report**




**TABLE
      OF CONTENTS**





**Item
                Number**
              **in
                Form 10-K**
            
            **Description**
            
            **Page
                or**
              **Location****PART
                I**Item
                1.
            
            Business
            
            1Item
                1A.
            
            Risk
                Factors
            
            16Item
                1B.
            
            Unresolved
                Staff Comments
            
            18Item
                2.
            
            Properties
            
            18Item
                3.
            
            Legal
                Proceedings
            
            18Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            18**PART
                II**Item
                5.
            
            Market
                for the Common Equity, Related Shareholder Matters and Issuer Purchases
                of
                Equity Securities
            
            19Item
                6.
            
            Selected
                Financial Data
            
            21Item
                7.
            
            Management’s
                Discussion and Analysis of FinancialCondition
                and Results of Operations
            
            22Item
                7A.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            38Item
                8.
            
            Financial
                Statements and Supplementary Data
            
            38Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            
            38Item
                9A.
            
            Controls
                and Procedures
            
            38Item
                9B.
            
            Other
                Information
            
            39**PART
                III**Item
                10.
            
            Directors,
                Executive Officers and Corporate Governance
            
            40Item
                11.
            
            Executive
                Compensation
            
            40Item
                12.
            
            Security
                Ownership of Certain Beneficial Ownersand
                Management and Related Shareholder Matters
            
            40Item
                13.
            
            Certain
                Relationships and Related Transactions, and Director
                Independence
            
            40Item
                14.
            
            Principal
                Accountant Fees and Services
            
            40**PART
                IV**Item
                15.
            
            Exhibits
                and Financial Statement Schedules
            
            41Signatures
            
            43







**PART
      I**





**Item
      1.**  **Business**





**General**





WGNB
      Corp. (the “Company”) is a $575 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. The Company
      conducts operations in western Georgia through its wholly-owned subsidiary,
      West
      Georgia National Bank (the “Bank”). The Bank was organized in 1946 as a national
      banking association under the federal banking laws of the United States. As
      of
      February 15, 2007, the Company had 5,000,613 issued and outstanding shares
      of
      common stock, $1.25 par value per share (the “Common Stock”), held by
      approximately 1,000 shareholders of record.





The
      Company conducts all of its business through the Bank. The executive offices
      of
      the Company and the main office of the Bank are located at 201 Maple Street,
      Carrollton, Georgia 30117. Access to the Company’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 the Company’s website, www.wgnb.com under
      the investor relations tab.





**The
      Bank**





The
      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. The Bank attracts most of
      its
      deposits from Carroll and Douglas Counties and conducts most of its lending
      transactions from an area encompassing Carroll, Douglas and Paulding Counties.





The
      Bank’s main office is located in Carrollton, Georgia. The Bank operates a total
      of nine branches and seven additional 24-hour ATM sites located in Carroll
      and
      Douglas Counties in Georgia. The Bank operates, in addition to its main office,
      three additional branches in the city of Carrollton one of which serves the
      Spanish speaking customers in Carroll County, two branches in Villa Rica, one
      branch in Bowdon and two branches in Douglasville, Georgia.





As
      a
      convenience to its customers, the Bank offers at all of its branch locations
      (except one Banco de Progreso location) drive-thru teller windows and 24-hour
      automated teller machines. All but one location has Saturday banking hours.
      The
      Bank is a member of Star, Cirrus and several other ATM networks of automated
      teller machines that permit Bank customers to perform monetary transactions
      in
      most cities throughout the southeast and other regions. The Bank also offers
      Internet banking services through its website located at www.wgnb.com .
      Information included on the Bank’s website is not a part of this
      Report.





*Deposit
      Services.* The 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 the Bank’s 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, the 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, 2006, the Bank had deposits of approximately $463 million, and
      approximately 31 thousand deposit accounts. No material portion of the Bank’s
      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, 2006.


1




Deposit
                MixAt
                December 31, 2006Non-interest
                bearing demand
            
            
            11
            %NOW
                accounts and money market
            
            
            32
            %Savings
            
            
            2
            %Time
                DepositsUnder
                $100,000
            
            
            26
            %$100,000
                and over
            
            
            29
            %100.00
            %





*Lending
      Services.* The
      Bank’s lending business consists principally of making consumer loans to
      individuals and commercial loans to small and medium-sized businesses and
      professional concerns. In addition, the Bank makes secured real estate loans,
      including residential and commercial construction loans, and first and second
      mortgage loans for the acquisition or improvement of personal residences. As
      of
      December 31, 2006, the Bank had approximately $474 million in total loans
      outstanding, representing 82% of its total assets of approximately $575 million.
      The loan portfolio is made up of both fixed and adjustable rate loans.
      Approximately 49% of the Company’s total loan portfolio is fixed rate and 51% is
      adjustable rate as of December 31, 2006. 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 the Bank.





*Real
      Estate Loans.* Loans
      secured by real estate make up the primary component of the Bank’s loan
      portfolio, constituting approximately $395 million, or 83%, of the Bank’s total
      loans as of December 31, 2006. Approximately 46% of the real estate loans are
      fixed rate and 54% are adjustable rate. Approximately 50% of the fixed rate
      real
      estate loans mature in one year or less and approximately 94% of the fixed
      rate
      real estate loans mature in five years or less. These 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 the Company’s
      primary and secondary market areas. The types of real estate that typically
      constitute collateral include primary and secondary residences for individuals,
      including multi-family projects, places of business, real estate for
      agricultural uses and undeveloped land.





*Commercial
      Loans, Other Than Commercial Loans Secured by Real Estate* .
      The
      Bank makes loans for commercial purposes in various industries resident to
      its
      market area. As of December 31, 2006, commercial loans constituted approximately
      $52 million, or 11% of the Bank’s total loans. Approximately 43% of commercial
      loans are fixed rate while 57% 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, 2006, the Bank held approximately $27 million
      of
      consumer loans, representing 6% of its total loans. Consumer loans are primarily
      fixed rate in nature with 96% 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.* The Bank
      also engages in secondary-market mortgage activities whereby the Bank 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 the Bank service third party
      loans.





*Risks
      Associated with Lending Activities.* Consumer
      and non-mortgage loans to individuals entail greater risk than do residential
      mortgage loans, 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.


2





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
      loans are generally considered to involve a higher degree of credit risk than
      residential mortgage loans. Risk of loss on a construction 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, the 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.





*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. The portfolio should be varied enough to
      obtain a balance of maximum yield and acceptable risk. The loan portfolio mix
      is
      reported and reviewed quarterly by the Board of Directors. Concentration targets
      are 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 loans:





Unsecured
                loans
            
            
            6
            %Loans
                secured by:Residential
                real estate
            
            
            30
            %Commercial
                real estate
            
            
            35
            %Convenience
                stores
            
            
            6
            %Hotels/motels
            
            
            5
            %Poultry
                facilities
            
            
            7
            %Acquisition
                & development/construction loans
            
            
            30
            %Commercial
                and industrial purpose loans
            
            
            20
            %Exceptions
                to primary and secondary trade area
            
            
            15
            %





While
      the
      loan policy includes a provision generally limiting all types of real estate
      loans to 85% of the total loan portfolio, 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 2006, 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 able to serve this market with low historical loan loss. We
      will continue to capture opportunities in these segments while actively seeking
      to diversify our portfolio into other business lines such as commercial and
      industrial loans as well as Small Business Administration loans.





*Legal
      Lending Limit* .
      The
      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;


3





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





·
            the
                amounts exceeding the limit are secured by a perfected first lien
                security
                interest in one-to-four family real estate in an amount that does
                not
                exceed 80% of the appraised value of the property and the outstanding
                indebtedness to the borrower does not exceed the lesser of 20% of
                capital
                and reserves, or $10 million; or





·
            the
                amounts exceeding the limit are for small business purposes and secured
                by
                non-farm nonresidential properties or are commercial or industrial
                loans,
                but in no event can the outstanding indebtedness exceed the lesser
                of 20%
                of capital and reserves, or $10
                million.





*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 most 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* .
      The
      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 President, one Executive Vice President, two Senior Vice
      Presidents and other lenders, has a lending limit of $500,000 for secured and
      $200,000 for unsecured loans. Loans between $500,000 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 CEO and President of the Bank and six outside
      directors.





*Loan
      Review.* During
      2006, the Bank’s loan review process was reestablished and strengthened
      significantly. The Chief Credit Officer reviewed and improved critical policies
      and procedures to adequately support the current portfolio as well as to set
      the
      stage for planned growth. A comprehensive credit administration process is
      imperative as portfolio size and complexity 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 grading their loans. Loan review may modify grades as part
      of
      the loan review process, with the Chief Credit Officers approval, to ensure
      proper risk identification. Loan reviews are presented to 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.


4





The
      Bank’s loan reviewer, added in December 2005, has developed an annual loan
      review schedule to meet annual review penetration goals. This added experience
      has also 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.





**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 November 9, 2006 and other information published by the FDIC
      on
      its website.





The
      Bank’s primary market area includes all of Carroll, Douglas and Paulding
      Counties in Georgia. Approximately 90% of the Bank’s deposit customers reside in
      Carroll County, although it attracts some loan business from neighboring Douglas
      and Paulding Counties. The Bank’s secondary market area includes the Georgia
      counties of Heard, Haralson, Coweta, Cobb and the southern portion of Fulton,
      and the Alabama counties of Clebourne and Randolph. Carroll County is located
      approximately 45 miles southwest of Atlanta and 90 miles east of Birmingham,
      Alabama. Carroll County ranks 29 th among
      Georgia’s 159 counties in land area and 18 th in
      population. Its major industries include manufacturing, wholesale and retail
      trade, food processing, accommodation and food services, construction and health
      services. The Bank’s main office is located in Carrollton, which is the county
      seat for Carroll County. The University of West Georgia, which serves more
      than
      10,000 students, Southwire Inc. and Tanner Medical Center are also located
      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, emerging
      as
      deposit growth areas. The amount of total deposits in Carroll County was
      approximately $1.81 billion as of June 30, 2006, compared to total deposits
      of
      approximately $1.57 billion as of June 30, 2005. Total deposits in Carroll
      County grew by 15.3% from June 30, 2005 to June 30, 2006 which exceeds the
      average annual growth rate over the last ten years of just over 5%. The Bank
      holds 22% of this market’s deposits and ranks number one in terms of market
      share for Carroll County. The number two, three and four banks have 17%, 13%
      and
      10% of the market area’s deposits, respectively. The top four banks (including
      West Georgia National Bank) held a total of 62% of the market share of deposits
      in Carroll County.





Douglas
      County (which has the largest population of the five county West Georgia region
      and ranks 15 th among
      all 159 Georgia counties) had the second largest deposit base in our market
      area
      with $1.40 billion in total deposits and a 21.7% deposit growth rate in 2006.
      The Bank held a market share of 2.9% of total deposits in Douglas County, or
      $40
      million, as of June 30, 2006, representing the 9 th largest
      deposit market share for any financial institution located in Douglas County.
      If
      one combines Carroll and Douglas County’s market share, the Bank holds the
      highest market share of total deposits in the combined counties at 13.9%. The
      bank holding the next highest market share for the combined counties holds
      10.4%
      and the top four institutions (including West Georgia National Bank) hold 42.8%
      of the deposits in this combined market area. Our third largest market in terms
      of deposit base was Paulding County, with the Bank having $972 million in total
      deposits and a 13.3% deposit growth rate in 2006 for this market.





The
      Bank
      established three branches in the Douglas County market over the past five
      years. One branch is located on Highway 5 just south of I-20, one branch is
      located on Chapel Hill Road near Arbor Place Mall just south of I-20 and the
      third is located in a rapidly developing area known as Mirror Lake located
      on
      Mirror Lake Boulevard just north of I-20. The Bank opened its branch on Chapel
      Hill Road in April 2006 and intends to serve its Douglas County market with
      these three locations. Total deposits in those three branches as of December
      31,
      2006 were $47.9 million, representing a 37.1% growth rate from December 31,
      2005. Total loans in those three branches were $135.8 million as of December
      31,
      2006, a growth rate of 13.3% when compared with December 31, 2005.





In
      addition to the Chapel Hill Branch, in July 2006 the Bank opened a new division
      of West Georgia National Bank called Banco De Progreso, “the Bank of Progress”,
      designed to serve the Spanish-speaking population in the Bank’s market area. The
      Bank had been serving the Latino population in its main office location for
      the
      previous 20 months with great success. The service that the Bank provided to
      that population was so popular that management opened a separate location in
      Carrollton located on Bankhead Highway next to a Big Lots Store in Lake Carroll
      Mall. Banco de Progreso is located near a Spanish-speaking real estate agency,
      a
      location that benefits both businesses. In just under six months, Banco de
      Progreso has grown its loan portfolio to $9.0 million with low delinquency
      and
      its deposits to $522,000.


5




**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 Community Bank, Community Bank of West Georgia, Peoples
      Community National Bank and Hometown Bank of Villa Rica) and larger institutions
      with branches in the Bank’s market area such as CB&T of West Georgia (a
      division of Synovus Bank), BB&T, Regions Bank, United Community Bank, Bank
      of America, SunTrust Bank and Wachovia Bank. Numerous mergers and consolidations
      involving banks in the Bank’s market area have occurred, requiring the Bank to
      compete with banks with greater resources. However, West Georgia National Bank
      enjoys the reputation of being the largest and oldest independent bank in
      Carroll County recently celebrating its 60 th year of
      service. 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 Community Bank commenced operations in the third quarter
      of 2003 and Peoples Community National Bank commenced operations in the third
      quarter of 2004. We believe these de novo banks are limited in their funding
      strategies because they typically have access to wholesale funding which is
      limited to a certain percentage of total deposits. Given the limited growth
      in
      total deposits in Carroll County, this has the effect of driving an increase
      in
      deposit rates as the new 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, 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. Management believes that the Bank has an
      opportunity to establish business ties with customers who have been displaced
      by
      the consolidations of other 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.





The
      Bank
      offers many personalized services and attracts customers by being responsive
      and
      sensitive to the needs of the community. A recent example of this strategy
      is
      the Bank’s entrée into its Spanish-speaking division. 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, 2006, the Bank had 182 full time equivalent employees, none of
      whom
      is a party to a collective bargaining agreement. Certain executive officers
      of
      the Bank also serve as the officers of the Company (which does not have
      compensated employees). The Company believes that the Bank enjoys satisfactory
      relations with its employees.


6





**Supervision
      and Regulation**





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





**The
      Company**





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





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





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





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





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





In
      addition, and subject to certain exceptions, the BHCA and the Change in Bank
      Control Act, together with regulations thereunder, require Federal Reserve
      approval (or, depending on the circumstances, no notice of disapproval) prior
      to
      any person or company acquiring “control” of a bank holding company, such as the
      Company. Control is conclusively presumed to exist if an individual or company
      acquires 25% or more of any class of voting securities of the bank holding
      company. Control is rebuttably presumed to exist if a person acquires 10% or
      more but less than 25% of any class of voting securities and either the Company
      has registered securities under Section 12 of the Exchange Act or no other
      person will own a greater percentage of that class of voting securities
      immediately after the transaction. The regulations provide a procedure for
      challenge of the rebuttable control presumption.





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





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





·
            making
                or servicing loans and certain leases;





·
            providing
                certain data processing services;


7





·
            acting
                as a fiduciary or investment or financial advisor;





·
            providing
                discount brokerage services;





·
            underwriting
                bank eligible securities; and





·
            making
                investments designed to promote community
                welfare.





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





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




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





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




·
                  providing
                      financial, investment, or economic advisory services, including
                      advising
                      an investment company;
 ·
                issuing
                    or selling instruments representing interests in pools of assets
                    permissible for a bank to hold directly; and





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





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





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





The
      Bank
      has 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.


8





*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 of $100,000 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 May 2003 and received a CRA rating of “outstanding.”





*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.


9





**Deposit
      Insurance**





The
      deposits of the Bank are currently insured to a maximum of $100,000 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.





**Federal
      Deposit Insurance Reform**





On
      February 8, 2006, President Bush signed the Federal Deposit Insurance Reform
      Act
      of 2005 (FDIRA). The FDIC was required to adopt rules implementing the various
      provisions of FDIRA by November 5, 2006. Among other things, FDIRA changes
      the
      Federal deposit insurance system by:





·
              raising
                  the coverage level for retirement accounts to
                  $250,000;





·
            indexing
                deposit insurance coverage levels for inflation beginning in
                2012;





·
            prohibiting
                undercapitalized financial institutions from accepting employee benefit
                plan deposits;





·
            merging
                the Bank Insurance Fund and Savings Association Insurance Fund into
                a new
                Deposit Insurance Fund (the DIF);
                and





·
            providing
                credits to financial institutions that capitalized the FDIC prior
                to 1996
                to offset future assessment
                premiums.





FDIRA
      also authorizes the FDIC to revise the current risk-based assessment system,
      subject to notice and comment and caps the amount of the DIF at 1.50% of
      domestic deposits. The FDIC must issue cash dividends, awarded on a historical
      basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the
      DIF
      exceeds 1.35% of domestic deposits at year-end, the FDIC must issue cash
      dividends, awarded on a historical basis, for half of the amount of the
      excess.




10





**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 limited by 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 $3,601,765 to the Company during 2006. Under the OCC
      guidelines, as of December 31, 2006 the Bank was permitted to pay the Company
      dividends of up to $11,626,000 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. If dividends should be declared
      in
      the future, the amount of such dividends presently cannot be estimated and
      it
      cannot be known whether such dividends would continue for future
      periods.





**Capital
      Adequacy**





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





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





·
            account
                for off-balance sheet exposure; and





·
            minimize
                disincentives for holding liquid assets.





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





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


11





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





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





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





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





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





**Classification**
            
            **Total
                Risk-****Based
                Capital**
            
            **Tier
                I Risk-****Based
                Capital**
            
            **Tier
                I****Leverage******Well
                Capitalized (1)
            
            
            10
            %
            
            6
            %
            
            5
            %Adequately
                Capitalized (1)
            
            
            8
            %
            
            4
            %
            
            4
            %(2)Undercapitalized
                (3)
            
            
            <8
            %
            
            <4
            %
            
            <4
            %Significantly
                Undercapitalized (3)
            
            
            <6
            %
            
            <3
            %
            
            <3
            %Critically
                Undercapitalized (3)
            
            
            -
            
            
            -
            
            
            <2
            %





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




12





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 both considered to be well
      capitalized according to their regulatory capital requirements. See Note 9
      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;


13





·
            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;




14





·
            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.





**Proposed
      Legislation and Regulatory Action**





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.


15





**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.





**Other
      Developments**





On
      January 22, 2007, WGNB Corp entered into an agreement and plan of reorganization
      by and among WGNB Corp., West Georgia National Bank, First Haralson Corporation,
      and First National Bank of Georgia whereby First Haralson Corporation will
      be
      merged with and into WGNB Corp. and, concurrently, First National Bank of
      Georgia will be merged into West Georgia National Bank. The consummation of
      the
      transaction is subject to approval by shareholders and is anticipated to close
      in the second quarter of 2007. First
      Haralson Corporation is headquartered in Buchanan, Georgia and operates five
      branches in Haralson County and two branches in Carroll County. As of December
      31, 2006, First Haralson Corporation held $215.4 million in total assets, $139.9
      million in total loans, $176.9 million in total deposits and $25.7 million
      of
      shareholders’ equity. For the fiscal year ended December 31, 2006, First
      Haralson Corporation recorded net income of $2.4 million.




Under
      the
      terms of the merger agreement, First Haralson Corporation’s shareholders may
      elect to receive cash, WGNB Corp. common stock, or a combination of the two
      for
      $46,250,000 in the aggregate. The shareholder election is subject to limits
      of a
      minimum of $11,562,500 and a maximum of $18,500,000 of cash consideration being
      issued in the merger. In addition, the terms of the merger agreement allow
      First
      Haralson Corporation to pay a one-time, special dividend not to exceed
      $7,250,000 in the aggregate, or approximately $35.67 per share, for each First
      Haralson Corporation share to First Haralson Corporation shareholders prior
      to
      the closing of the proposed transaction. The transaction has been unanimously
      approved by the boards of directors of both companies and is subject to
      shareholder and regulatory approvals, as well as other customary conditions
      of
      closing.





**Item
      1A. Risk Factors**





Like
      all
      other banking and financial services companies, our business and results of
      operations are subject to a number of risks, many of which are outside of our
      control. In addition to the other information in this Report, readers should
      carefully consider that the following important factors, among others, could
      materially impact our business and future results of operations. When we use
      terms such as “we,” “our”, and “us,” we are referring to WGNB Corp. which
      conducts business through its wholly-owned subsidiary, West Georgia National
      Bank.





*Our
      success depends on our ability to compete effectively in the competitive
      financial services industry -* We
      encounter strong competition for deposits, loans, and other financial services
      in all of our lines of business. Our principal competitors include other
      commercial banks, savings banks, credit unions and savings and loan
      associations. Many of our competitors are significantly larger than us and
      have
      greater access to capital and other resources. In recent years, there has been
      substantial consolidation among companies in the financial services industry.
      Such consolidation may increase competition because consolidation creates larger
      entities who may be able to offer additional services that we are unable to
      offer, have greater financial resources or have substantially higher lending
      limits with which to compete. Further, our ability to compete effectively is
      dependent on our ability to adapt successfully to technological and other
      changes within the banking and financial services industry.





*Our
      business may be adversely affected by the highly regulated environment in which
      we operate* - We are
      highly regulated by state and federal agencies. Recently enacted and future
      legislation and regulations may have significant impact on the banking and
      financial services industries. Regulatory or legislative changes could increase
      our cost of doing business, restrict our access to new products or markets,
      or
      otherwise adversely affect our operations or the manner in which we conduct
      our
      business and, on the whole, adversely affect the profitability of our
      business.


16





*We
      may be adversely affected by a general deterioration in economic
      conditions* - The
      risks associated with our business are greater in periods of a slowing economy
      or recession. Economic declines may be accompanied by a decrease in demand
      for
      consumer or commercial credit and declining real estate and other asset values.
      Declining real estate and other asset values may reduce the ability of borrowers
      to use such equity to support borrowings. Delinquencies, foreclosures and losses
      generally increase during economic slow downs or recessions. Additionally,
      our
      servicing costs, collection costs and credit losses may also increase in periods
      of economic slow down or recessions.





*We
      are subject to credit risk inherent in our loan portfolio* - In the
      financial services industry, there is always a risk that certain borrowers
      may
      not repay borrowings. We maintain a reserve for loan losses to absorb the level
      of losses that we estimate to be probable in our portfolio. However, our reserve
      for loan losses may not be sufficient to cover the loan losses that we may
      actually incur. If we experience defaults by borrowers in any of our businesses,
      our earnings could be negatively affected. Changes in local economic conditions
      could adversely affect credit quality in our loan portfolio. In addition,
      federal and state regulators periodically review our loan portfolio and may
      require us to increase the provision for loan losses or recognize loan
      charge-offs. Their conclusions about the quality of the loan portfolio may
      be
      different from ours. Any increase in the allowance for loan losses or
      charge-offs as required by these regulatory agencies could have a negative
      effect on our operating results.





*We
      may be adversely affected by interest rate changes* - We
      realize income primarily from the difference between interest earned on loans
      and investments and interest paid on deposits and other borrowings. Interest
      rate fluctuations are caused by many factors which, for the most part, are
      not
      under our direct control. For example, national monetary policy plays a
      significant role in the determination of interest rates. Additionally,
      competitor pricing and the resulting negotiations that occur with our customers
      also impact the rates we collect on loans and the rates we pay on deposits.
      As
      interest rates change, we expect that we will periodically experience “gaps” in
      the interest rate sensitivities of our assets and liabilities, meaning that
      either our interest-bearing liabilities will be more sensitive to changes in
      market interest rates than our interest-earning assets, or vice versa. In either
      event, if market interest rates should move contrary to our position, this
“gap”
may work against us, and our earnings may be negatively affected. Although
      we
      actively manage our interest rate sensitivity, such management is not an exact
      science. Rapid increases or decreases in interest rates could adversely affect
      our net interest margin if changes in our cost of funds do not correspond to
      changes in income yields. An increase in interest rates that adversely affects
      the ability of borrowers to pay the principal or interest on loans may lead
      to
      an increase in nonperforming assets and a reduction of interest accrued into
      income, which could have a material adverse affect on our results of
      operations.





*We
      could be held responsible for environmental liabilities of properties acquired
      through foreclosure* -
      Environmentally related hazards have become a source of high risk and
      potentially unlimited liability for financial institutions relative to their
      loans. Environmentally contaminated properties owned by an institution’s
      borrowers may result in a drastic reduction in the value of the collateral
      securing the institution’s loans to such borrowers, high environmental clean up
      costs to the borrower affecting its ability to repay the loans, the
      subordination of any lien in favor of the institution to a state or federal
      lien
      securing clean up costs, and liability to the institution for clean up costs
      if
      it forecloses on the contaminated property or becomes involved in the management
      of the borrower. To minimize this risk, we may require an environmental
      examination of, and report with respect to, the property of any borrower or
      prospective borrower if circumstances affecting the property indicate a
      potential for contamination, taking into consideration the potential loss to
      the
      institution in relation to the burdens to the borrower. Such examination must
      be
      performed by an engineering firm experienced in environmental risk studies
      and
      acceptable to the institution, and the costs of such examinations and reports
      are the responsibility of the borrower. These costs may be substantial and
      may
      deter a prospective borrower from entering into a loan transaction with us.
      We
      are not aware of any borrower who is currently subject to any environmental
      investigation or clean up proceeding which is likely to have a material adverse
      affect on our financial condition or results of operation.





*Loss
      of our senior executive officers or other key employees could impair our
      relationship with customers and adversely affect our business* - We
      have assembled a senior management team which has substantial background and
      experience in banking and financial services in the western Georgia market.
      Loss
      of these key personnel could negatively impact our earnings because of their
      skills, customer relationships and/or the potential difficulty of promptly
      replacing them.


17





**Item
      1B. Unresolved Staff Comments.** Not
      applicable.





**Item
      2.**  **Properties**





The
      Company and the Bank’s main office is located at 201 Maple Street in Carrollton,
      Georgia near the city’s downtown square at the intersection of Georgia Highway
      16 and U.S. Highway 27. The Bank has three other locations within the city
      limits of Carrollton including Banco de Progreso. The First Tuesday Mall office
      is located at 1004 Bankhead Highway and the Motor office is located at 314
      Newnan Street. The Banco De Progreso office is located at 1111 Bankhead Highway.
      In addition, the Bank has two other locations in Carroll County, one located
      at
      725 Bankhead Highway, Villa Rica, Georgia and another located at 205 East
      College Street, Bowdon, Georgia.





As
      to its
      Douglas County locations, the Mirror Lake branch is located on the northeast
      corner of Mirror Lake Boulevard and Conner Road in front of the Village at
      Mirror Lake shopping center. The Bank owns a second Douglas County branch which
      is located at 9557 Georgia Highway 5 in Douglasville. In April of 2006, the
      Bank
      opened its third location in Douglas County, which is located at 9360 The
      Landing Drive on Chapel Hill Road adjacent to Arbor Place Mall in Douglasville.





All
      locations are typical of branch banking facilities located throughout the United
      States and all locations, except the Motor office, are full service locations.
      The Motor office provides primarily teller and ATM transactions and does 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 (with
      the exception of the Motor office which is approximately 700 square feet) are
      typical of other banking facilities and are approximately 5,000 square feet
      in
      size. The Mirror Lake and Chapel Hill branches provide 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. Each branch location has an ATM that
      is
      either walk-up or drive-up. The Motor office and Highway 5 Douglasville offices
      are leased facilities. All of the other office facilities are owned. The Bank
      also operates seven additional ATMs on leased properties located throughout
      the
      Carrollton and Villa Rica areas.





**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.


18


**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 1,000 shareholders of record held the
      Common Stock as of February 15, 2007. Set forth below are the high and low
      sales
      prices for each full quarterly period during 2005 and 2006 and the dividends
      declared and paid per share of Common Stock for those periods.





On
      September 12, 2006, the Company’s board of directors declared a three-for-two
      stock split, in the form of a stock dividend, for all shareholders of record
      as
      of October 16, 2006. The stock dividends were paid on November 15, 2006. All
      share and per share amounts have been restated to reflect the effects of the
      stock split at the beginning of the period.





**Price
                Range Per Share**
            
            **Dividends**
              **Paid
                Per****Low**
            
            **High**
            
            **Share**2005:First
                Quarter
            
            $
            19.23
            
            $
            20.33
            
            $
            0.143Second
                Quarter
            
            
            19.50
            
            
            20.33
            
            
            0.150Third
                Quarter
            
            
            20.00
            
            
            21.67
            
            
            0.157Fourth
                Quarter
            
            
            22.91
            
            
            25.33
            
            
            0.1632006:First
                Quarter
            
            $
            24.00
            
            $
            25.81
            
            $
            0.170Second
                Quarter
            
            
            24.73
            
            
            26.00
            
            
            0.177Third
                Quarter
            
            
            24.27
            
            
            28.17
            
            
            0.183Fourth
                Quarter
            
            
            25.51
            
            
            31.47
            
            
            0.190





19




**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. *See
      “Business - Supervision and Regulation - Dividends.”*





**Recent
      Sales of Unregistered Securities**





The
      Company did not issue any securities during the year ended December 31, 2006
      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
      2006.


20


**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, 2006
      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,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(In
                thousands, except share and per share data)**For
                the Year:Total
                Interest Income
            
            $
            42,093
            
            $
            32,546
            
            $
            25,268
            
            $
            23,542
            
            $
            24,296Total
                Interest Expense
            
            
            18,727
            
            
            12,583
            
            
            7,570
            
            
            7,527
            
            
            8,724Net
                Interest Income
            
            
            23,366
            
            
            19,963
            
            
            17,698
            
            
            16,015
            
            
            15,572Provision
                for Loan Losses
            
            
            1,465
            
            
            1,550
            
            
            925
            
            
            350
            
            
            483Net
                Interest Income After Provision for Loan Losses
            
            
            21,901
            
            
            18,413
            
            
            16,773
            
            
            15,665
            
            
            15,089Total
                Other Income
            
            
            6,404
            
            
            6,008
            
            
            5,637
            
            
            5,554
            
            
            5,251Total
                Other Expense
            
            
            16,519
            
            
            14,464
            
            
            13,664
            
            
            12,752
            
            
            12,127Earnings
                Before Income Taxes
            
            
            11,786
            
            
            9,957
            
            
            8,746
            
            
            8,467
            
            
            8,213Income
                Taxes
            
            
            3,458
            
            
            2,889
            
            
            2,682
            
            
            2,680
            
            
            2,668Net
                earnings
            
            
            8,327
            
            
            7,067
            
            
            6,064
            
            
            5,787
            
            
            5,545Per
                Share Data:Net
                earnings
            
            
            1.67
            
            
            1.42
            
            
            1.22
            
            
            1.17
            
            
            1.14Diluted
                net earnings
            
            
            1.66
            
            
            1.41
            
            
            1.21
            
            
            1.15
            
            
            1.13Cash
                dividends declared
            
            
            .72
            
            
            .61
            
            
            .52
            
            
            .45
            
            
            .40Book
                value
            
            
            10.50
            
            
            9.61
            
            
            9.01
            
            
            8.49
            
            
            7.77Tangible
                book value
            
            
            10.50
            
            
            9.61
            
            
            9.01
            
            
            8.49
            
            
            7.77At
                Year End:Total
                loans
            
            
            474,319
            
            
            423,720
            
            
            356,909
            
            
            296,498
            
            
            273,471Earning
                assets
            
            
            550,466
            
            
            503,275
            
            
            425,062
            
            
            367,694
            
            
            360,226Assets
            
            
            575,329
            
            
            523,643
            
            
            441,929
            
            
            393,216
            
            
            385,121Total
                deposits
            
            
            462,813
            
            
            429,049
            
            
            338,398
            
            
            303,316
            
            
            298,726Stockholders’
                equity
            
            
            52,496
            
            
            47,952
            
            
            44,962
            
            
            42,089
            
            
            38,520Common
                shares outstanding
            
            
            5,000,613
            
            
            4,987,794
            
            
            4,988,661
            
            
            4,959,678
            
            
            4,960,100Average
                Balances:Total
                loans
            
            
            441,883
            
            
            395,943
            
            
            330,159
            
            
            287,861
            
            
            262,781Earning
                assets
            
            
            522,703
            
            
            473,480
            
            
            404,121
            
            
            357,468
            
            
            337,583Assets
            
            
            549,691
            
            
            501,191
            
            
            428,637
            
            
            384,395
            
            
            357,418Deposits
            
            
            440,560
            
            
            393,851
            
            
            325,991
            
            
            296,723
            
            
            279,483Stockholders’
                equity
            
            
            50,358
            
            
            46,857
            
            
            43,742
            
            
            40,708
            
            
            35,640Weighted
                average shares outstanding
            
            
            4,998,103
            
            
            4,986,930
            
            
            4,958,604
            
            
            4,962,131
            
            
            4,865,774Key
                Performance Ratios:Return
                on average assets
            
            
            1.51
            %
            
            1.41
            %
            
            1.41
            %
            
            1.51
            %
            
            1.55
            %Return
                on average equity
            
            
            16.54
            %
            
            15.08
            %
            
            13.86
            %
            
            14.22
            %
            
            15.56
            %Net
                interest margin, taxable equivalent
            
            
            4.60
            %
            
            4.37
            %
            
            4.55
            %
            
            4.65
            %
            
            4.76
            %Dividend
                payout ratio
            
            
            43.11
            %
            
            43.19
            %
            
            42.62
            %
            
            38.29
            %
            
            34.94
            %Average
                equity to average assets
            
            
            9.16
            %
            
            9.35
            %
            
            10.20
            %
            
            10.59
            %
            
            9.97
            %Average
                loans to average deposits
            
            
            100.30
            %
            
            100.53
            %
            
            101.28
            %
            
            97.01
            %
            
            94.02
            %Overhead
                ratio
            
            
            55.49
            %
            
            55.69
            %
            
            58.56
            %
            
            59.12
            %
            
            58.24
            %




21




**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 the
      financial condition and results of operations of the Company 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 the Company’s consolidated
      financial statements and accompanying footnotes.





**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 the actual
      results, performance or achievements of the Company to differ materially from
      historical results or from any results expressed or implied by such
      forward-looking statements. The Company cautions readers that the following
      important factors, among others, could cause the Company’s 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 the Company or the Bank
                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 the Company’s organization, compensation and benefit
                plans;





·
            the
                effect on the Company’s competitive position within its 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 changes in the business cycle and downturns in local, regional
                or national economies;





·
            the
                matters described under Part I, Item 1A. - Risk Factors.





The
      Company cautions that the foregoing list of important factors is not exclusive
      of other factors which may impact the operations of the Company.





**CRITICAL
      ACCOUNTING POLICIES**





The
      Company has established various accounting policies which govern the application
      of accounting principles generally accepted in the United States of America
      in
      the preparation of its 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 assets and
      liabilities and the results of operations of the Company. 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
      the
      Company’s financial performance is recorded and reported.




22





The
      Company believes the allowance for loan losses is a critical accounting policy
      that requires the most significant judgments and estimates used in the
      preparation of the Company’s 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 3 to the Company’s consolidated financial statements for a
      detailed description of the Company’s estimation processes and methodology
      related to the allowance for loan losses.





**EARNINGS
      OVERVIEW**





*For
      the Years Ended December 31, 2006, 2005 and 2004*





The
      net
      earnings of the Company were $8.3 million in 2006, $7.1 million in 2005 and
      $6.1
      million in 2004, representing an increase of 17.8% between fiscal years 2005
      and
      2006 and an increase of 16.5% between fiscal years 2004 and 2005. Net earnings
      per share on a fully diluted basis were $1.66 for 2006, $1.41 for 2005 and
      $1.20
      for 2004, representing an increase of 17.7% between fiscal years 2005 and 2006
      and 17.5% between fiscal years 2004 and 2005. Return on average assets and
      return on average shareholders’ equity for 2006 were 1.51% and 16.54%,
      respectively, compared with 1.41% and 15.08%, respectively, for 2005, and 1.41%
      and 13.86%, respectively, for 2004. Over the past ten years, the Company’s
      return on average assets has averaged 1.52% and its return on average equity
      has
      been 16.0%.





In
      2006,
      the Company experienced loan growth of $50.6 million, or 11.9%, compared to
      $66.8 million, or 18.7%, in 2005 and $60.4 million, or 20.4%, in 2004. The
      average loan growth rate over the past ten years has been 14.0%. The Company’s
      ability to grow loans in both quality and quantity is important to its ability
      to grow earnings. The Company’s core business is lending and management
      maintains underwriting and pricing policies and procedures to grow revenues
      and
      not significantly increase its credit or interest rate risk exposure. Much
      of
      the loan growth that the Company experienced in 2006 took place in the fourth
      quarter. Total loans grew by $25.9 million or 5.8% (23.2% annualized) in the
      fourth quarter of 2006.





Our
      net
      interest margin increased substantially in 2006. Since the Company recorded
      less
      then average loan growth, the increase in the net interest margin was crucial
      to
      earnings growth in 2006. Market interest rates as measured by the discount
      rate
      increased 100 basis points since December 31, 2005. Because the Company is
      slightly asset sensitive, increased market interest rates has the impact of
      increasing the net interest margin. The net interest margin for 2006 was 4.60%
      compared to 4.37% in 2005 and 4.55% in 2004. As rates stabilize, the expected
      impact to the Company’s net interest margin is to stabilize as
      well.





There
      were two significant financial occurrences in the fourth quarter of 2006 that
      impacted net earnings in a positive manner. The Company realized a gain on
      other
      real estate owned in the amount of $232 thousand in the fourth quarter of 2006.
      The Company had negotiated for almost six years the release of the property
      for
      foreclosure. During 2005, the Company successfully foreclosed on the property
      and, during 2006, completed a sale of the property. This gain is non-recurring
      in nature. Secondly, in the fourth quarter of 2006, the Company earned federal
      tax credits in the approximate amount of $144,000 to be recognized on a low
      to
      moderate income housing project in which it is a partner. The tax credits are
      recurring in nature and will be of benefit to the Company over the next ten
      years.





Finally,
      management continually seeks to increase revenues while controlling costs.
      In
      2006, the overhead ratio (non-interest expense/net interest income plus
      non-interest income) was 55.5% compared to 55.7% in 2005 and 58.6% in 2004.
      The
      Company managed to decrease its overhead ratio despite opening three new
      branches in the last 24 months. Improved overhead ratio is, in essence, evidence
      of improved efficiency with the use of the Company’s resources. Described below
      are details of the major components of the Company’s improved earnings
      performance.




23





**Net
      Interest Income**





The
      Company’s operational results primarily depend on the earnings of the Bank. The
      Bank’s earnings depend, to a large degree, on its ability to generate net
      interest income. Net interest income represented 78.5%, 76.9% and 75.8% of
      net
      interest income plus other income in 2006, 2005 and 2004, 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. The net interest margin 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.





Net
      interest income for the Company increased by $3.4 million, or 17.0%, in 2006
      from 2005, and by $2.3 million, or 12.8%, in 2005 from 2004. Net interest income
      at December 31, 2006 was $23.4 million compared to $20.0 million at December
      31,
      2005 and $17.7 million at December 31, 2004. The net interest margin on interest
      earning assets was 4.60% in 2006, 4.37% in 2005 and 4.55% in 2004 on a tax
      equivalent basis. Beginning in early 2001 through the end of 2003, short term
      interest rates dropped 550 basis points. Through 2006, however, short term
      interest rates have rebounded 575 basis points. This broad fluctuation can
      have
      a significant impact on the Company without robust interest rate risk
      management. The Company seeks to manage its interest rate risk such that
      fluctuations in market rates do not have a significant negative impact on
      earnings.





The
      Bank’s net interest margin increased by 23 basis points when comparing 2006 to
      2005. Measuring the last three years, the Bank’s interest margin increased 5
      basis points from what it was in 2004. We believe management’s interest rate
      risk strategies helped to mitigate the effects of rapidly declining and then
      rapidly increasing interest rates. While banks are able to more easily maintain
      a steady interest margin in flat rate environments, without diligent interest
      rate risk management banks are susceptible to declining interest margins and
      earnings in rapidly changing interest rate environments.





The
      Bank’s average yield on earning assets in 2006 on a tax equivalent basis was
      8.18%, an increase of 115 basis points over 2005. Its average cost of funds
      was
      4.27% in 2006, an increase of 109 basis points from 2005. Net interest income
      increased steadily over the last three years particularly in 2006 as interest
      rates continued to rise and then stabilized in the last half of 2006. This
      is a
      result of two things: 1) the increase in the Bank’s volume of earning assets and
      2) the Bank’s slight asset sensitivity. The average balance of interest earning
      assets increased by $49.2 million, or 10.4%, in 2006 compared to $69.4 million,
      or 17.2%, for 2005 and $46.7 million, or 13.1%, for 2004.





The
      Bank’s balance sheet has traditionally been slightly liability sensitive, but as
      2004, 2005 and 2006 progressed, management sought to become more evenly matched
      and perhaps slightly asset sensitive. That is, management sought to shift to
      a
      scenario where assets re-price faster than liabilities. Therefore, in a rising
      rate environment, the Bank’s interest margin will tend to increase. When market
      interest rates fall rapidly, as they did in 2002 and 2003, and subsequently
      increase rapidly, as they did in 2005 and 2006, the interest margin needs time
      to respond to the rate changes. Now that rates have stabilized, we believe
      the
      Bank’s interest margin may compress slightly as slower repricing deposits cause
      the Bank’s cost of funds to increase. The ability of management to accomplish
      its objective of managing interest rate risk is largely dependent on its ability
      to manage the cost of funds in a competitive deposit gathering
      market.





Since
      the
      Bank is slightly asset sensitive, the impact of a falling rate environment
      could
      have a negative impact on net interest margin. However, management has chosen
      to
      hedge its fixed rate borrowings with the $30 million notional amount swap
      contract. In addition, because this swap matures in five months, management
      hedged a portion of its fixed rate brokered certificates of deposit with a
      series of fifteen interest rate swaps in September of 2006. Each swap hedges
      a
      specific CD maturity, but in total there is a $41 million notional amount of
      the
      hedge. Each swap is described in Note 1 and Note 7 to the consolidated financial
      statements contained elsewhere in this Report. The $30 million swap contract
      decreased interest expense in 2005 by $31 thousand. However, during 2006, the
      combined swap contracts increased interest expense $489 thousand since short
      term rates had risen above the 3.40% and 4.51% (weighted average) fixed rates
      on
      the $30 million and $41 million swap contracts, respectively. Of course, if
      short term rates continue to increase, the cost of the swaps will increase,
      but
      not as much as the expected yield on interest bearing assets. Conversely, if
      rates decrease the Bank has immediate protection with the swaps that are in
      place.




24





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 31,2006
            
            2005
            
            2004Average
                Balance
            
            Interest
            
            Yield/
                Rate
            
            Average
                Balance
            
            Interest
            
            Yield/
              Rate
            
            Average
                Balance
            
            Interest
            
            Yield/
              RateAssets:Interest
                earnings assets:Federal
                funds
                sold
            
            $
            12,133
            
            
            641
            
            
            5.28
            %
            $
            11,331
            
            
            394
            
            
            3.48
            %
            $
            12,155
            
            
            151
            
            
            1.24
            %Investments:Taxable
            
            
            40,528
            
            
            2,491
            
            
            6.15
            %
            
            35,687
            
            
            2,109
            
            
            5.91
            %
            
            35,342
            
            
            1,903
            
            
            5.38
            %Tax
                exempt
            
            
            28,159
            
            
            1,825
            
            
            6.48
            %
            
            30,520
            
            
            1,997
            
            
            6.54
            %
            
            26,465
            
            
            1,821
            
            
            6.88
            %Total
                Investments
            
            
            80,820
            
            
            4,957
            
            
            6.13
            %
            
            66,207
            
            
            4,106
            
            
            6.20
            %
            
            61,807
            
            
            3,724
            
            
            6.03
            %Loans
                (including loan
                fees):Taxable
            
            
            440,939
            
            
            37,695
            
            
            8.55
            %
            
            394,209
            
            
            28,631
            
            
            7.26
            %
            
            328,279
            
            
            21,894
            
            
            6.67
            %Tax
                Exempt
            
            
            944
            
            
            94
            
            
            9.96
            %
            
            1,734
            
            
            143
            
            
            8.25
            %
            
            1,880
            
            
            178
            
            
            9.46
            %Total
                Loans
            
            
            441,883
            
            
            37,789
            
            
            8.55
            %
            
            395,943
            
            
            28,774
            
            
            7.27
            %
            
            330,159
            
            
            22,072
            
            
            6.69
            %Total
                interest earning assets
            
            
            522,703
            
            
            42,746
            
            
            8.18
            %
            
            473,481
            
            
            33,274
            
            
            7.03
            %
            
            404,121
            
            
            25,947
            
            
            6.42
            %Other
                non-interest earnings assets
            
            
            26,988
            
            
            
            
            
            
            
            
            27,710
            
            
            
            
            
            
            
            
            24,516Total
                assets
            
            $
            549,691
            
            
            
            
            
            
            
            $
            501,191
            
            
            
            
            
            
            
            $
            428,637Liabilities
                and shareholders’ equity:Interest-bearing
                liabilities:Deposits:Demand
            
            $
            137,747
            
            
            4,995
            
            
            3.63
            %
            $
            136,248
            
            
            3,183
            
            
            2.34
            %
            $
            127,754
            
            
            1,181
            
            
            .92
            %Savings
            
            
            16,908
            
            
            185
            
            
            1.09
            %
            
            18,011
            
            
            100
            
            
            .56
            %
            
            17,368
            
            
            43
            
            
            .25
            %Time
            
            
            232,143
            
            
            10,776
            
            
            4.64
            %
            
            189,368
            
            
            6,974
            
            
            3.68
            %
            
            133,997
            
            
            3,916
            
            
            2.92
            %FHLB
                advances&
other
                borrowings
            
            
            51,985
            
            
            2,771
            
            
            5.33
            %
            
            52,407
            
            
            2,326
            
            
            4.44
            %
            
            54,081
            
            
            2,430
            
            
            4.49
            %Total
                interest-bearing
                liabilities
            
            
            438,783
            
            
            18,727
            
            
            4.27
            %
            
            396,034
            
            
            12,583
            
            
            3.18
            %
            
            333,200
            
            
            7,570
            
            
            2.27
            %Non-interest
                bearing deposits
            
            
            53,762
            
            
            
            
            
            
            
            
            50,224
            
            
            
            
            
            
            
            
            46,872Other
                liabilities
            
            
            6,787
            
            
            
            
            
            
            
            
            8,076
            
            
            
            
            
            
            
            
            4,823Shareholders’
                equity
            
            
            50,359
            
            
            
            
            
            
            
            
            46,857
            
            
            
            
            
            
            
            
            43,742Total
                liabilities
                andShareholders’
                equity
            
            $
            549,691
            
            
            
            
            
            
            
            $
            501,191
            
            
            
            
            
            
            
            $
            428,637Excess
                of interest-earning assetsover
                interest-bearing
                liabilities
            
            $
            83,920
            
            
            
            
            
            
            
            $
            77,447
            
            
            
            
            
            
            
            $
            70,921Ratio
                of interest-earning assets tointerest-bearing
                liabilities
            
            
            119.13
            %
            
            
            
            
            
            
            
            119.56
            %
            
            
            
            
            
            
            
            121.28
            %Net
                interest income tax equivalent
            
            
            
            
            
            24,019
            
            
            
            
            
            
            
            
            20,691
            
            
            
            
            
            
            
            
            18,377Net
                interest spread
            
            
            
            
            
            
            
            
            3.91
            %
            
            
            
            
            
            
            
            3.85
            %
            
            
            
            
            
            
            
            4.15
            %Net
                interest margin on interest earning assets
            
            
            
            
            
            
            
            
            4.60
            %
            
            
            
            
            
            
            
            4.37
            %
            
            
            
            
            
            
            
            4.55
            %Tax
                Equivalent Adjustments:Investments
            
            
            
            
            
            (621
            )
            
            
            
            
            
            
            
            (679
            )
            
            
            
            
            
            
            
            (619
            )Loans
            
            
            
            
            
            (32
            )
            
            
            
            
            
            
            
            (49
            )
            
            
            
            
            
            
            
            (60
            )Net
                interest income
            
            
            
            
            $
            23,366
            
            
            
            
            
            
            
            $
            19,963
            
            
            
            
            
            
            
            $
            17,698




Non-accrual
      loans and the interest income that was recorded 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 the
      Bank
      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.




25





**Table
      2**


**Changes
      in Interest Income and Expense on a Tax Equivalent Basis**


**(in
      thousands)**




Increase
                (decrease) due to changes in:2006
                over 2005
            
            2005
                over 2004Volume
            
            Rate
            
            Total
            
            Volume
            
            Rate
            
            TotalInterest
                income on:Federal
                funds sold
            
            $
            42
            
            
            205
            
            
            247
            
            $
            (29
            )
            
            272
            
            
            243Taxable
                investments
            
            
            297
            
            
            84
            
            
            381
            
            
            20
            
            
            187
            
            
            207Non-taxable
                investments
            
            
            (153
            )
            
            (19
            )
            
            (172
            )
            
            266
            
            
            (91
            )
            
            175Taxable
                loans
            
            
            3,995
            
            
            5,070
            
            
            9,065
            
            
            4,788
            
            
            1,949
            
            
            6,737Non-taxable
                loans
            
            
            (78
            )
            
            29
            
            
            (49
            )
            
            (12
            )
            
            (23
            )
            
            (35
            )Total
                Interest Income
            
            
            4,103
            
            
            5,369
            
            
            9,472
            
            
            5,033
            
            
            2,294
            
            
            7,327Interest
                expense on:Deposits:Demand
            
            
            54
            
            
            1,757
            
            
            1,811
            
            
            198
            
            
            1,805
            
            
            2,003Savings
            
            
            (12
            )
            
            98
            
            
            86
            
            
            4
            
            
            53
            
            
            57Time
            
            
            1,985
            
            
            1,817
            
            
            3,802
            
            
            2,039
            
            
            1,019
            
            
            3,058FHLB
                advances & other borrowings
            
            
            (22
            )
            
            467
            
            
            445
            
            
            (74
            )
            
            (30
            )
            
            (104
            )Total
                Interest Expense
            
            
            2,005
            
            
            4,139
            
            
            6,144
            
            
            2,167
            
            
            2,847
            
            
            5,014Increase
                (decrease) in net interest income
            
            $
            2,098
            
            
            1,230
            
            
            3,328
            
            $
            2,866
            
            
            (553
            )
            
            2,313








**Other
      Income and Expense**





Other
      income in 2006 was $6.4 m illion,
      an increase of $396 thousand, or 6.6%, from 2005. The increase in other income
      from 2004 to 2005 was $371 thousand, or 6.6%. During both 2006 and 2005, the
      Company realized non-recurring gains. In the fourth quarter of 2006 as mentioned
      previously in this report, the Company recognized a gain on the sale of other
      real estate owned in the amount of $232 thousand. The Company does not expect
      that it will realize such gains frequently. However, the sale of foreclosed
      real
      estate is in the normal coarse of collecting on impaired loans. In 2005, the
      company recognized a gain on investment securities available for sale in the
      amount of $228 thousand. Management rarely elects to sell investment securities.
      However, this particular sale strategy allowed the Bank to reposition its
      portfolio for rising rates, recognize the gain associated with the sale of
      the
      investment securities and accomplish both by selling $3.8 million of bonds,
      or
      approximately 5% of the portfolio.





Service
      charges on deposit accounts have stabilized and actually declined from 2005
      to
      2006 after having increased over the previous three years. The Bank instituted
      a
      free checking program which reduced service charges on deposit accounts, but
      increased the balance in non-interest bearing checking accounts as customers
      changed from interest bearing now accounts to service charge free accounts.





Mortgage
      origination fees declined by $9 thousand, or 2.3%, comparing 2006 to 2005.
      Mortgage origination fees declined $112 thousand, or 21.7% comparing 2005 to
      2004 and $419 thousand, or 44.9%, comparing 2004 to 2003. Throughout 2002,
      part
      of 2003 and again in 2004, the Bank experienced refinancing activity in its
      mortgage department. The refinancing activity has slowed significantly. The
      volume of mortgage origination fees that the Bank is presently experiencing
      is
      attributable to new and resale home financing activity in the Bank’s market
      area. As such, 2006 and 2005 represent normal mortgage origination volume for
      the Company.





ATM
      network fees increased by $275 thousand, or 54.8%. This increase is attributable
      to increased foreign (not our customers) usage of the Bank’s expanding ATM
      network.


Miscellaneous
        income between 2005 and 2006 increased $129 thousand, or 16.2%. The increase
        in
        miscellaneous income from 2005 to 2006 is attributable to fee income generated
        from two sources. On
        August
        23, 2006, the Company entered into tri-party agreement with a registered
        principal and Raymond James Financial Services, Inc. to provide investment
        advisory and brokerage services to its customer base. In the past, the Company
        had a relationship with a brokerage firm whereby it provided rental space
        on
        premises to an investment advisor who was an employee of the brokerage firm.
        After recognizing that brokerage services would be beneficial to the Company’s
        overall customer base, management implemented a business plan with a well
        known
        registered principal in the west Georgia area that ultimately culminated
        in the
        Company purchasing this individual’s book of business and hiring him to serve as
        the Company’s registered principal broker. The Company has also hired an
        additional financial advisor and two sales assistants. The gross fees earned
        in
        brokerage services in 2006 were $130 thousand. The Company did not have
        significant fee income for brokerage services in 2005.




26





Over
      the
      past year, management has developed an emphasis on producing Small Business
      Administration (“SBA”) loans in the west Georgia market. The loans are made
      primarily to small or start-up business owners. The Company has a core
      competency of serving small business owners. However, it is difficult for the
      Company to bear the credit risk associated with start up businesses. The SBA
      provides the Company with credit stability by providing its guarantee on a
      portion of the loan. The loans then meet the credit standards of the Company,
      which allows it to hold the SBA loan in its portfolio with reduced risk. The
      guaranteed portion of the SBA loan also has a market value which can be packaged
      with other loans and sold in the secondary market. The Company intends to
      originate, underwrite and sell or hold SBA loans in an attempt to spread its
      credit risk from primarily real estate lending to other lending lines and to
      enhance its non-interest income. A gain on sale of SBA loans is generated when
      the guaranteed portion of the loan is sold. The Company sold the guaranteed
      portion of two SBA loans in 2006, resulting in gains totaling $84
      thousand.





Miscellaneous
      income increased $106 thousand, or 15.4% between 2004 and 2005. The increase
      in
      miscellaneous income from 2004 to 2005 is attributable to a number of income
      line items, none of which are particularly notable. The increases are generally
      attributable to volume increases in miscellaneous fees due to the loan and
      deposit growth of the Bank.





Other
      expenses increased by $2.1 million, or 14.2%, in 2006 over 2005 and by $800
      thousand, or 5.9%, in 2005 over 2004. Increased salaries and employee benefits
      made up for more than half of the increase in other expenses in 2006, 2005
      and
      2004. Salaries and employee benefits increased $1.2 million, or 14.0%, from
      2005
      to 2006 and $577 thousand, or 7.1%, from 2004 to 2005.





The
      increase of salaries and benefits from 2005 to 2006 can be broken down as
      follows: Salaries and related payroll taxes increased $805 thousand, or 13.1%;
      profit sharing, 401k and officer bonuses increased $146 thousand, or 7.9%;
      employee benefits which primarily include employee health and life insurance
      expense increased $144 thousand, or 20.0% and stock-based compensation expense
      recognized in 2006 was $128 thousand. The Company recognized no stock-based
      compensation expense in 2005. Stock-based compensation expense methodology
      is
      described in detail in Note 1 to the consolidated financial statements *“Stock
      Compensation Plans”* .





During
      2006, the Bank opened two new branches as described elsewhere in this document.
      The impact of adding staff to the new branches and additions to the lending
      and
      credit administration departments caused the Bank to significantly increase
      its
      fulltime equivalent employee count and its salary and benefits expense. Anytime
      that our employee count increases in a significant manner, salaries and benefits
      increase at a greater percentage than that caused by normal increases for
      officer and staff annual raises. The fulltime equivalent employee count as
      of
      December 31, 2006 was 182 compared to 154 as of December 31, 2005, an increase
      of 18.2%. Salaries and related payroll taxes increased by 13.1% in 2006 compared
      to 2005, not by the 18.2% full time equivalent employee count. Additionally,
      not
      all the new employees participate in the 401k plan or all bonus plans. Thus,
      the
      increase in 401k and bonus plans was also less than 18.2%. During 2006, the
      Company experienced an increase in medical insurance premiums of approximately
      13% per employee as well an increase in the number of employees covered by
      the
      plan. Therefore, the increase in benefits expense related to employee health
      and
      life insurance increased by 20.0%




Comparing
      2005 to 2004, the Bank experienced increased salary costs in the amount of
      $395
      thousand, or 7.5%. The increase was attributable to annual raises for officers
      and staff which averaged about 4.5%. Additionally, the full time equivalent
      number of employees increased from 144 as of December 31, 2004 to 154 as of
      December 31, 2005. The primary reason for the increase in full time equivalent
      employees was personnel added when the Mirror Lake office opened, increased
      support staff in the lending and compliance departments necessitated by a need
      to manage the rapid loan growth of the Bank, and increased staffing for two
      new
      branches that were scheduled to open in spring of 2006. Profit sharing and
      bonus
      costs increased $182 thousand, or 10.9%. Profit sharing and officer and employee
      bonuses, which are largely performance based, increased as a result of the
      Bank’s increased profitability.





27


Occupancy
      expense increased by $268 thousand, or 12.6%, in 2006 when compared to 2005.
      This too, is primarily related to the branch expansion which included the
      addition of the Chapel Hill branch in Douglasville and the Banco de Progreso
      branch in Carrollton in 2006. In addition, the Company seeks to maintain its
      operating technology at a high level which includes capital purchases of
      personal computers, operating equipment and software. Many of those capital
      items have shorter depreciable lives and, therefore, impact depreciation expense
      more dramatically than longer-lived assets. Occupancy expense of the branches
      and administrative and operations offices include six major components:
      depreciation, utilities, property tax, operating leases, repairs and maintenance
      expense. Depreciation expense in 2006 increased by $ 86 thousand, or 8.2%
      compared to 2005. Likewise, utilities expense including telephone increased
      $87
      thousand, or 22.2% comparing 2006 to 2005. All other occupancy expense including
      property taxes, repairs and maintenance increased by $95 thousand, or 13.2%.




Occupancy
      expense increased by $190 thousand, or 9.7%, from 2004 to 2005. Comparing 2003
      to 2004, occupancy expense increased $135 thousand, or 7.5%. The increase in
      occupancy expense in 2005 as compared to 2004 was primarily attributable to
      an
      increase in depreciation expense of $130 thousand, or 14.1%. This increase
      in
      depreciation expense is due to the Mirror Lake branch facility that was placed
      in service in February of 2005. The remainder of the increase was attributable
      to the addition of utilities, telephone and other occupancy costs for the Mirror
      Lake branch.





Other
      operating expenses increased by $565 thousand, or 15.6%, from 2005 to 2006.
      Other operating expense includes professional, accounting and regulatory fees,
      ATM network fees, advertising, chartable contributions and a number of other
      expenses. In analyzing other operating expense no single expense stands out
      as
      increasing a significant amount. However, all of them, because they are mostly
      volume related, have increased enough to amount to the $565 thousand increase
      indicated above. Because the volume of deposit and loan statements have
      increased, costs such as such as supplies and postage where up in 2006. Total
      postage cost increased by $20 thousand in 2006 (from $250 thousand in 2005
      to
      $270 thousand in 2006) and supplies expense increased $62 thousand (from $303
      thousand in 2005 to $365 thousand in 2006). Another example of a volume related
      expense is ATM network fees. ATM network fees were $295 thousand in 2006, an
      increased of $34 thousand, or 13.2%, from 2005. Software maintenance and
      consulting, which are also volume related, was $238 thousand in 2006, an
      increase of $34 thousand, or 14.2%, compared to 2005. Charitable contributions
      increased by $38 thousand, or 34.3%, comparing 2005 to 2006.





The
      single largest expense in this classification is legal and accounting fees.
      Total legal and accounting fees for 2006 were $663 thousand, up 2.9% or $18
      thousand when compared to 2005. The compliance costs of being a public company
      have been increasing each year and are expected to increase at a more rapid
      pace
      in 2007 as the Company is anticipated to become an accelerated filer with the
      Securities and Exchange Commission after the measurement date on June 30, 2007.
      Finally, miscellaneous expense which includes annual report and proxy printing,
      annual meeting costs, employee functions and employment fees increase by $51
      thousand, or 25.6% from 2005 due to increased volume of annual reports and
      increased employee count.





Total
      other operating expense increased by $33 thousand, or 0.9%, from 2004 to 2005.
      Again, no single line item stood out in 2005.




Income
      taxes, expressed as a percentage of earnings before income taxes (the effective
      tax rate), was 29.3% in 2006, 29.0% in 2005 and 30.7% in 2004. The effective
      tax
      rate over the past three years remained steady. However, the purchase of tax
      credits and other tax advantaged instruments such as municipal securities by
      the
      Bank will have less of an impact on the effective tax rate in the future as
      the
      earnings of the Company grow at a more rapid pace than the continued investment
      in such instruments.




28




**BALANCE
      SHEET OVERVIEW**





*For
      the Years Ended December 31, 2006 and 2005*





**General**





During
      2006, average total assets increased $48.5 million, or 9.7%, average deposits
      increased $46.7 million, or 11.9%, and average loans increased $45.9 million,
      or
      11.6%, from average balances recorded in 2005. During 2005, average total assets
      increased $72.6 million, or 16.9%, average deposits increased $67.9 million,
      or
      20.8%, and average loans increased $65.8 million, or 19.9%, from amounts
      recorded in 2004. The 2006 and 2005 percentage growth are more representative
      of
      the Bank’s historical growth rate. The 10 year average growth rate for the
      Bank’s assets, loans and deposits is 12.7%, 14.0% and 11.7%, respectively. The
      earnings and asset growth over the past two years is attributable to robust
      commercial and residential growth in the Bank’s market area. The Company has
      experienced significant loan growth in its recent history which has provided
      it
      with the ability to expand into new markets.





Total
      assets at December 31, 2006 were $575 million, representing a $51.7 million,
      or
      9.9%, increase from December 31, 2005. Total loans increased $50.6 million,
      or
      11.9%, during 2006 which was less than 2005, but more in line with average
      growth rates. Total deposits increased $33.8 million, or 7.9%, from 2005 to
      2006. By growing loans at a more rapid pace than deposits, management used
      some
      excess liquidity on the balance sheet in 2006. Loan demand rebounded in the
      last
      half of 2006 as loan pay-offs hampered loan growth in the early part of the
      year. In fact, total loans grew by $26.8 million in the fourth quarter alone.




The
      increase in deposits in 2006 was attributable to an increase in non-interest
      bearing demand accounts of $4.5 million, or 9.3%, a decrease in interest bearing
      demand of $7.0 million, or 4.5%, and an increase in time deposit accounts of
      $37.5 million, or 17.7%. Much of the deposit growth ($19.5 million) came from
      growth in time deposit accounts in excess of $100,000 and some of that growth
      ($7.1 million) was attributable to brokered time deposits, which were priced
      lower than local market time deposits. In 2006, the Bank funded its loan growth
      with deposit growth and the use of liquidity on the balance sheet. The Bank
      was
      able to gather time deposits in 2005 and 2006 with two, three and four year
      maturities (to match the maturities of the loans) for lower than the cost of
      more traditional one year time deposits.





During
      2003 and 2004, five de novo banks began their operations in, or contiguous
      to,
      our primary service area. Since that time, competition for funding increased
      significantly as loan growth outpaced deposit growth in Carroll and Douglas
      Counties. The funding landscape has changed and, along with it, the Bank’s
      deposit strategy. In its almost 60 year history, the Bank has relied on “in
      market” deposits to fund its balance sheet growth. Because of the continued
      development of metropolitan Atlanta and its movement westward, loan demand
      has
      preceded the actual movement of deposits. Management expects that this dynamic
      will continue and intends to expand its deposit gathering strategy towards
      greater use of wholesale, or out of market, funding sources as loan demand
      remains high while maintaining “in market” deposits from customers with
      relationship loyalty.





**Investments**





The
      Company’s available-for-sale investment portfolio of $64.3 million as of
      December 31, 2006 consisted primarily of debt securities, which provide the
      Company 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 remained flat when compared to December
      31, 2005. The Company believes its 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 the Company’s overall asset
      liability management strategy.




Investment
        securities held-to-maturity are stated at amortized cost and totaled $7.8
        million at December 31, 2006, an increase of $1.1 million, or 16.3%, when
        compared to the year ended 2005. The increase is attributable to the purchase
        of
        banking industry issued trust preferred securities from various issuers across
        the United States and particularly the Southeast. The Company has the intent
        and
        ability to hold these securities until maturity.


29


The
      following table shows the carrying value of the Company’s securities, by
      security type, as of December 31, 2006, 2005 and 2004:





**Table
      3**


**Securities**


**(in
        thousands)**




Available
                for Sale
            
            2006
            
            2005
            
            2004United
                States agencies
            
            $
            9,937
            
            $
            8,942
            
            $
            5,505State,
                county and municipal
            
            
            33,459
            
            
            33,264
            
            
            36,989Mortgage-backed
                securities
            
            
            15,818
            
            
            18,124
            
            
            16,667Corporate
                bonds
            
            
            5,037
            
            
            4,028
            
            
            1,707Total
                available for sale
            
            $
            64,251
            
            $
            64,360
            
            $
            60,868Held
                to MaturityTrust
                Preferred Securities
            
            $
            7,837
            
            $
            6,737
            
            $
            4,835





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, 2006. 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, 2006
            
            United
                States Treasury & Agencies
            
            Wtd.
                Avg. Yld.
            
            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
            
            
            8,971
            
            
            5.21
            %
            
            2,203
            
            
            6.90
            %
            
            887
            
            
            7.21
            %
            
            -
            
            
            0.00
            %
            
            -
            
            
            -After
                1 through 5 years
            
            
            999
            
            
            4.02
            %
            
            3,751
            
            
            6.03
            %
            
            11,859
            
            
            4.78
            %
            
            5,035
            
            
            5.70
            %
            
            -
            
            
            -After
                5 through 10 years
            
            
            -
            
            
            -
            %
            
            8,994
            
            
            6.69
            %
            
            1,629
            
            
            6.21
            %
            
            -
            
            
            -
            %
            
            -
            
            
            -After
                10 years
            
            
            -
            
            
            -
            %
            
            18,068
            
            
            6.52
            %
            
            1,749
            
            
            6.55
            %
            
            -
            
            
            -
            %
            
            7,837
            
            
            9.34
            %Total
            
            
            9,970
            
            
            5.09
            %
            
            33,016
            
            
            6.53
            %
            
            16,124
            
            
            5.25
            %
            
            5,035
            
            
            5.70
            %
            
            7,837
            
            
            9.34
            %Fair
                Value
            
            
            9,937
            
            
            
            
            
            33,459
            
            
            
            
            
            15,818
            
            
            
            
            
            5,037
            
            
            
            
            
            7,837




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. The Bank, on a routine basis, evaluates these concentrations for
      purposes of policing its concentrations and making necessary adjustments in
      its
      lending practices to reflect current economic conditions, loan-to-deposit
      ratios, and industry trends.




30





The
      primary types of loans in the Bank’s portfolio are residential mortgages and
      home equity, construction, commercial real estate, commercial and consumer
      installment loans. Generally, the Bank underwrites 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. With some exceptions, the Bank’s 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 emphasizing lower gross debt ratios for
      consumer loans and lower loan-to-value ratios for all types of real estate
      loans. Given the localized nature of the Bank’s 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 the Company and
      to
      directors and officers of the Bank are subject to limitations of the Federal
      Reserve, the principal effect of which is to require that extensions of credit
      by the Bank to executive officers, directors, and ten percent shareholders
      satisfy certain standards. The Bank routinely makes loans in the ordinary course
      of business to certain directors and executive officers of the Company and
      the
      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, 2006,
      loans outstanding to directors and executive officers of the Company and the
      Bank, their associates and members of their immediate families totaled $3.4
      million, which represented approximately 0.7% of total loans as of that date.
      As
      of December 31, 2006, none of these loans outstanding from the Bank to related
      parties were non-accrual, past due, restructured or considered by management
      to
      be a potential problem loan.





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





**Table
                5**
                **Loan
                  Portfolio**
                  **(in
                    thousands)**




December
                31,2006
            
            2005
            
            2004
            
            2003
            
            2002Commercial,
                financial & agricultural
            
            $
            52,334
            
            $
            51,555
            
            $
            50,528
            
            $
            31,219
            
            $
            34,821Real
                estate - construction
            
            
            175,024
            
            
            153,511
            
            
            114,657
            
            
            68,207
            
            
            68,818Real
                estate - mortgage
            
            
            219,563
            
            
            196,383
            
            
            173,110
            
            
            180,992
            
            
            153,572Consumer
                loans
            
            
            27,398
            
            
            22,271
            
            
            18,614
            
            
            16,080
            
            
            16,260474,319
            
            
            423,720
            
            
            356,909
            
            
            296,498
            
            
            273,471Less:  
                Unearned interest and fees
            
            
            (818
            )
            
            (841
            )
            
            (581
            )
            
            (454
            )
            
            (487
            )Allowance
                for loan losses
            
            
            (5,748
            )
            
            (5,327
            )
            
            (4,080
            )
            
            (3,479
            )
            
            (3,771
            )Loans,
                net
            
            $
            467,753
            
            $
            417,552
            
            $
            352,248
            
            $
            292,565
            
            $
            269,213





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 and mortgage loans and consumer loans as of
      December 31, 2006:





**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
            
            $
            37,837
            
            
            8.44
            %
            $
            10,789
            
            
            8.10
            %
            $
            3,708
            
            
            7.81
            %
            $
            52,334
            
            
            8.32
            %Real
                estate - construction
            
            
            150,457
            
            
            8.75
            %
            
            23,480
            
            
            9.13
            %
            
            1,087
            
            
            6.32
            %
            
            175,024
            
            
            8.79
            %Real
                estate - mortgage
            
            
            72,216
            
            
            8.27
            %
            
            112,191
            
            
            7.96
            %
            
            35,156
            
            
            8.25
            %
            
            219,563
            
            
            8.11
            %Consumer
            
            
            12,434
            
            
            9.22
            %
            
            14,741
            
            
            8.87
            %
            
            223
            
            
            8.80
            %
            
            27,398
            
            
            9.02
            %Total
            
            $
            272,944
            
            
            8.60
            %
            $
            161,201
            
            
            8.22
            %
            $
            40,174
            
            
            8.16
            %
            $
            474,319
            
            
            8.43
            %





31


**Variable/Fixed
      Rate Mix**




Variable
              Interest
              Rates
            
            Wtd
              Avg
              Yld
            
            Fixed
              Interest
              Rates
            
            Wtd
              Avg
              YldCommercial,
                financial and agricultural
            
            $
            29,569
            
            
            8.37
            %
            $
            22,765
            
            
            8.26
            %Real
                estate - construction
            
            
            122,177
            
            
            8.80
            %
            
            52,847
            
            
            8.75
            %Real
                estate - mortgage
            
            
            91,187
            
            
            8.59
            %
            
            128,376
            
            
            7.76
            %Consumer
            
            
            993
            
            
            9.89
            %
            
            26,405
            
            
            8.99
            %Total
            
            $
            243,926
            
            
            8.67
            %
            $
            230,393
            
            
            8.18
            %





**Provision
      and Allowance for Possible Loan and Lease Losses**





The
      provision for loan losses for the Company in 2006 was $1.47 million, compared
      to
      $1.55 million in 2005 and $925 thousand in 2004. The decrease in the provision
      for loan losses reflects a lower level of loan growth in 2006. The allowance
      for
      loan losses represented 1.21%, 1.26% and 1.14% of total loans outstanding at
      December 31, 2006, 2005 and 2004, respectively. The percentage of the allowance
      for loan losses expressed as a percentage of total loans decreased from 2005
      and
      2006, taking into account a the recognition of the charge-off of one credit
      relationship and the amount of measurable loss in the portfolio in 2006. Net
      charge-offs were $1.0 million, $303 thousand and $324 thousand during 2006,
      2005
      and 2004, respectively.





The
      Company has an independent loan review function. All loans are placed in loan
      grade categories which are consistent with those used by the Bank’s regulators.
      All loans are constantly monitored by the loan officer and the loan review
      function for credit quality, consistency and
      accuracy. Through this grading process, the Bank seeks 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.





A
      formal
      allowance for loan loss adequacy 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. Additionally, 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.





Management’s
      judgment in determining the adequacy of the allowance is based on evaluations
      of
      the collectability 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
      adequacy of the allowance for loan losses, management uses a loan grading system
      that rates loans in eight different categories. Grades five through eight,
      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 four 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 are evaluated individually to measure the probable loss, if any, in
      the
      credit. Management uses an internal loan reviewer (at times, supplemented by
      third party service providers) who is independent of the lending function to
      challenge and corroborate the loan grading system 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. However, management
      uses available information to recognize losses on loans, future additions to
      the
      allowance may be necessary 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 the Company’s allowance for
      loan losses. Such regulators may require the Company to recognize additions
      to
      the allowance based on their judgments of information available to them at
      the
      time of their examination. M anagement
      of the Company realizes the importance of maintaining an adequate allowance
      for
      loan losses. Through a professional loan review function and effective loan
      officer identification program, management believes it is 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 the Company’s position and minimize
      the potential for loss.




32





Through
      the 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. The Company’s 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. In cases where
      significant weaknesses exist in a specific loan, a specific reserve is assigned
      to such loan in addition to the general allowance. The Company also evaluates
      the risks associated with concentrations in credit. If it is necessary to assign
      an allowance related to concentrations of credit, the Company adds a specific
      reserve related to such risks.





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
                31,2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Balance
                at beginning of year
            
            $
            5,327
            
            $
            4,080
            
            $
            3,479
            
            $
            3,772
            
            $
            3,720Charge-offs:Commercial,
                financial and
                agricultural
            
            
            47
            
            
            24
            
            
            59
            
            
            55
            
            
            288Real
                estate -
                construction
            
            
            -
            
            
            -
            
            
            -
            
            
            2
            
            
            -Real
                estate -
                mortgage
            
            
            910
            
            
            235
            
            
            215
            
            
            581
            
            
            165Consumer
                loans
            
            
            155
            
            
            129
            
            
            123
            
            
            152
            
            
            242Total
                charge-offs
            
            
            1,112
            
            
            388
            
            
            397
            
            
            790
            
            
            695Recoveries:Commercial,
                financial and
                agricultural
            
            
            11
            
            
            16
            
            
            16
            
            
            31
            
            
            59Real
                estate -
                construction
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Real
                estate -
                mortgage
            
            
            -
            
            
            18
            
            
            13
            
            
            67
            
            
            158Consumer
                loans
            
            
            57
            
            
            51
            
            
            44
            
            
            49
            
            
            47Total
                recoveries
            
            
            68
            
            
            85
            
            
            73
            
            
            147
            
            
            264Net
                (charge-offs) recoveries
            
            
            (1,044
            )
            
            (303
            )
            
            (324
            )
            
            (643
            )
            
            (431
            )Provision
                for loan losses
            
            
            1,465
            
            
            1,550
            
            
            925
            
            
            350
            
            
            483Balance
                at end of year
            
            $
            5,748
            
            $
            5,327
            
            $
            4,080
            
            $
            3,479
            
            $
            3,772Ratio
                of net charge-offs during thePeriod
                to average loans
                outstanding
            
            
            .24
            %
            
            .08
            %
            
            .10
            %
            
            .22
            %
            
            .16
            %Ratio
                of allowance to total loans
            
            
            1.21
            %
            
            1.26
            %
            
            1.14
            %
            
            1.17
            %
            
            1.38
            %




**Non-Performing
      Assets and Past Due Loans**





Non-performing
      assets at December 31, 2006 were $4.3 million, or .91%, of total loans and
      other
      real estate owned compared to $3.6 million, or .85%, of total loans and other
      real estate owned at December 31, 2005 and $1.8 million, or .50%, of total
      loans
      and other real estate owned at December 31, 2004. The levels of non-performing
      loans remain relatively low compared to the Bank’s peer group. The percentage of
      non-performing assets to total loans has steadily decreased from its peak in
      2001. The increase of non-performing loans from 2005 to 2006 was attributable
      to
      a few credit relationships for which management created a proper specific
      reserve.





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





**Table
                8****Non-Performing
                Assets****(in
                thousands)**




December
                31,2006
            
            
            2005
            
            
            2004
            
            
            2003
            
            
            2002Other
                real estate and repossessions
            
            $
            1,318
            
            $
            567
            
            $
            686
            
            $
            977
            
            $
            488Non-accrual
                loans
            
            
            1,212
            
            
            2,382
            
            
            536
            
            
            499
            
            
            943Loans
                90 days past due still accruing
            
            
            1,781
            
            
            673
            
            
            567
            
            
            745
            
            
            1,335Total
            
            $
            4,311
            
            $
            3,622
            
            $
            1,789
            
            $
            2,221
            
            $
            2,766Non-performing
                assets as % of total loans
            
            
            .91
            %
            
            .85
            %
            
            .50
            %
            
            .75
            %
            
            1.03
            %





33





While
      there may be additional loans in the Bank’s portfolio that may become classified
      as conditions indicate, management is not aware of any potential problem 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 under the original terms. Exceptions
      are 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.





The
      Bank’s loan review function monitors selected accruing loans for which general
      economic conditions or changes within a particular industry could cause the
      borrowers financial difficulties. The loan review function also 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 the Company’s liquidity, capital resources
      or operations.





**Deposits**





Time
      deposits of $100 thousand and greater totaled $145.4 million at December 31,
      2006, compared with $120.8 million at year-end 2005. The following table sets
      forth the scheduled maturities of time deposits of $100 thousand and greater
      at
      December 31, 2006.





**Table
      9**


**Maturity
      of Time Deposits of $100,000 and Greater**


**(in
      thousands)**




Within
                3 months
            
            $
            26,334After
                3 through 6 months
            
            
            17,940After
                6 through 12 months
            
            
            25,703After
                12 months
            
            
            75,423Total
            
            $
            145,400





**Liquidity**





The
      Bank
      must maintain, on a daily basis, sufficient funds to cover the withdrawals
      from
      depositors' accounts and to supply potential borrowers with funds. To meet
      these
      obligations, the Bank keeps cash on hand, maintains account balances with its
      correspondent banks, and purchases and sells federal funds and other short-term
      investments. Asset and liability maturities are monitored in an attempt to
      match
      these variables to meet liquidity needs. It is the policy of the Bank to monitor
      its liquidity to meet regulatory requirements and local funding requirements.
      Management believes that the Bank’s current level of liquidity is adequate to
      meet its needs.





The
      Bank
      maintains relationships with correspondent banks including the Federal Home
      Loan
      Bank (FHLB) that can provide funds to it on short notice, if needed. The Bank
      has arrangements with correspondent and commercial banks for short term
      unsecured advances up to $20.8 million. As of December 31, 2006, the Bank had
      drawn on the available facilities in the amount of $2.5 million. In addition,
      subject to collateral availability, the Bank has a line of credit with the
      FHLB
      from which the Bank had drawn $52 million as of December 31, 2006. For
      additional details on the line of credit with the FHLB see Note 6 of the
      consolidated financial statements.





The
      Company’s 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 $13.2 million at
      December 31, 2006, which represented a decrease of $3.0 million from December
      31, 2005. Net cash provided by operating activities was 10.1 million. Net cash
      provided by operating activities was attributable primarily to net earnings
      of
      8.3 million with add-backs attributable to non-cash items such as depreciation,
      amortization, accretion and provision for loan losses totaling $2.6 million.
      Net
      cash used by investing activities of $55.6 million consisted primarily of a
      net
      increase in loans of $52.8 million and net increase in securities available
      for
      sale, securities available for sale and other securities of $2.6 million. Net
      cash provided by financing activities totaled $42.5 million which was primarily
      attributable to a net increase in deposits of $33.8 million, an increase in
      Federal Home Loan Bank advances in the amount of $10.0 million and an advance
      on
      the Company’s federal funds line of credit in the amount of $2.5 million.




34





In
      2006,
      management concentrated on investing the liquidity that was on the Bank’s
      balance sheet. Cash and cash equivalents (liquidity) on the balance sheet was
      high for most of 2006. The average balance of federal funds sold during the
      year
      was $12.1 million which exceeds managements target balance by approximately
      $7.0
      million. However, most of that liquidity was used in the fourth quarter to
      fund
      loans. As previously mentioned, total loans grew by $26.8 million in the fourth
      quarter This caused the Bank to be in federal funds purchased at year end until
      more permanent funding is obtained.





**Capital
      Resources**





Total
      shareholders’ equity as of December 31, 2006 was $52.5 million, an increase of
      $4.5 million over 2005. The change in equity was due to $8.3 million in net
      income, less $3.6 million in dividends and a decrease in unrealized holding
      gain
      on securities available for sale of $56 thousand, net of tax. The exercise
      of
      stock options increased equity by $711 thousand, but the retirement of shares
      under the repurchase plan and the swapping of stock to exercise options
      decreased equity by $965 thousand.





The
      OCC
      has established certain minimum risk-based capital standards that apply to
      national banks, and the Company is subject to certain capital requirements
      imposed by the Federal Reserve. At December 31, 2006, the Bank exceeded all
      applicable regulatory capital requirements for classification as a “well
      capitalized” bank, and the Company satisfied all applicable regulatory
      requirements imposed on it by the Federal Reserve. The following tables present
      the Company's regulatory capital position at December 31, 2006:




**Table
                  10****Capital
                  Ratio**
  Actual
                  as of December 31, 2006Tier
                  1 Capital (to risk weighted assets)
              
              
              11
              %Tier
                  1 Capital minimum requirement
              
              
              4
              %Excess
              
              
              7
              %Total
                  Capital (to risk weighted assets)
              
              
              12
              %Total
                  Capital minimum requirement
              
              
              8
              %Excess
              
              
              4
              %
 **Leverage
          Ratio**
 Actual
                  as of December 31, 2006Tier
                  1 Capital to average assets(“Leverage
                  Ratio”)
              
              
              9
              %Minimum
                  leverage requirement
              
              
              4
              %Excess
              
              
              5
              %




For
      a
      more complete discussion of the actual and required ratios of the Company and
      its subsidiaries, see Note 9 to the consolidated financial statements. Average
      equity to average assets was 9.16% in 2006 and 9.35% in 2005. The ratio of
      dividends declared to net earnings was 43.3 % during 2006, compared with 43.3%
      in 2005.





**Contractual
      Obligations**





In
      the
      ordinary course of operations, the Company enters into certain contractual
      obligations. The following table summarizes the Company’s significant fixed and
      determinable contractual obligations, by payment date, at December 31, 2006
      (dollars in thousands). With regard to the Federal Home Loan Bank 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 6 to the financial
      statements “ *Lines
      of Credit* ”.




35




Obligation
            
            Total
            
            Less
                  than
                1
                  year
            
            1-3
                years
            
            3-5
                years
            
            More
                  than
                5
                  yearsDeposits
                without stated maturity
            
            $
            213,414
            
            $
            213,414
            
            $
            -
            
            $
            -
            
            $
            -Certificates
                of deposit
            
            
            249,400
            
            
            141,847
            
            
            64,525
            
            
            43,028
            
            
            -Federal
                Home Loan Bank advances
            
            
            52,000
            
            
            -
            
            
            5,000
            
            
            17,000
            
            
            30,000Federal
                Funds Purchased
            
            
            2,475
            
            
            2,475
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            517,289
            
            $
            357,736
            
            $
            69,525
            
            $
            60,028
            
            $
            30,000





**Off
      Balance Sheet Risk**





Through
      the operations of the Bank, the Company has made contractual commitments to
      extend credit in the ordinary course of its business activities. These
      commitments are legally binding agreements to lend money to the Bank’s customers
      at predetermined interest rates for a specified period of time. At December
      31,
      2006, the Bank had issued commitments to extend credit of $97.2 million through
      various types of commercial lending arrangements and additional commitments
      through standby letters of credit of $5.9 million. The Company evaluates each
      customer’s creditworthiness on a case-by-case basis. The amount of collateral
      obtained, if deemed necessary by the Company upon extension of credit, is based
      on its credit evaluation of the borrower. Collateral varies but may include
      accounts receivable, inventory, property, plant and equipment, commercial and
      residential real estate. The Company manages 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, the Company has 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 the
      Company's 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 the Company’s 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, the Company also employs
      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 the
      Company’s loan and investment portfolios, which can significantly impact the
      Company’s 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 2006, the estimated impact of an immediate increase in interest rates
      of 100 basis points would have resulted in an increase in net interest income
      over a 12-month period of 0.05%, with a comparable decrease in interest rates
      resulting in a increase in net interest income of 0.36%. 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.





36


The
      following table summarizes the amounts of interest-earning assets and
      interest-bearing liabilities outstanding at December 31, 2006 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. The Company's 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, 2006
              Maturing
                or Repricing inOne
                Year
              or
                Less
            
            Over
                1
              Year
                Thru
              2
                Years
            
            Over
                2
              Years
                Thru
              5
                Years
            
            Over
                5Years
            
            TotalInterest-earning
                assets:Interest-bearing
                deposits withOther
                banks
            
            $
            1,078
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            1,078Securities
                (at cost)
            
            
            12,061
            
            
            3,682
            
            
            17,962
            
            
            38,277
            
            
            71,982Loans
            
            
            359,313
            
            
            38,644
            
            
            62,052
            
            
            14,711
            
            
            474,720Total
                interest-earning assets
            
            
            372,452
            
            
            42,326
            
            
            80,014
            
            
            52,988
            
            
            547,780Interest-bearing
                liabilities:Deposits:Demand
            
            
            149,765
            
            
            -
            
            
            -
            
            
            -
            
            
            149,765Savings
            
            
            10,967
            
            
            -
            
            
            -
            
            
            -
            
            
            10,967Time
                deposits
            
            
            141,847
            
            
            43,793
            
            
            63,760
            
            
            -
            
            
            249,400FHLB
                advances
            
            
            -
            
            
            5,000
            
            
            17,000
            
            
            30,000
            
            
            52,000Federal
                funds purchased
            
            
            2,475
            
            
            -
            
            
            -
            
            
            -
            
            
            2,475Total
                interest-bearing liabilities
            
            
            305,054
            
            
            48,793
            
            
            80,760
            
            
            30,000
            
            
            464,607per
                period
            
            
            67,398
            
            
            (6,467
            )
            
            (746
            )
            
            22,988
            
            
            83,173Cumulative
                interest sensitivityDifference
            
            $
            67,398
            
            $
            60,931
            
            $
            60,185
            
            $
            83,173Cumulative
                difference to totalAssets
            
            
            11.71
            %
            
            10.59
            %
            
            10.46
            %
            
            14.46
            %





At
      December 31, 2006, the difference between the Company's assets and liabilities
      repricing or maturing within one year was $67.4 million. The above chart
      indicates an excess of assets repricing or maturing within one year, thus a
      rise
      in interest rates would theoretically cause the Company's net interest income
      to
      increase. 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.




37


**Impact
      of Inflation, Changing Prices and Monetary Policies**





The
      primary effect of inflation on the Company’s 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 the control of the Company, 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 the Company and its results of
      operations are not predictable.





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





For
      information regarding the market risk of the Company’s financial instruments,
      see “Management’s Discussion and Analysis of Financial Condition and Results of
      Operation - Asset/Liability Management.” The Company’s 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 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, 2006 and 2005.




**Quarterly
      Financial Information**


*(Unaudited
      - in thousands, except per share data)*





2006
                Quarters
            
            2005
                QuartersFirst
            
            Second
            
            Third
            
            Fourth
            
            First
            
            Second
            
            Third
            
            FourthInterest
                income
            
            $
            9,464
            
            
            10,227
            
            
            10,913
            
            
            11,489
            
            
            7,075
            
            
            7,874
            
            
            8,521
            
            
            9,076Net
                interest income
            
            
            5,432
            
            
            5,783
            
            
            6,024
            
            
            6,127
            
            
            4,703
            
            
            4,931
            
            
            5,061
            
            
            5,268Provision
                for loan losses
            
            
            300
            
            
            415
            
            
            375
            
            
            375
            
            
            300
            
            
            500
            
            
            450
            
            
            300Income
                before income taxes
            
            
            2,663
            
            
            2,828
            
            
            2,949
            
            
            3,346
            
            
            2,234
            
            
            2,316
            
            
            2,620
            
            
            2,787Net
                income
            
            
            1,815
            
            
            1,991
            
            
            2,096
            
            
            2,425
            
            
            1,614
            
            
            1,647
            
            
            1,857
            
            
            1,949Earnings
                per share - basic
            
            
            0.37
            
            
            0.40
            
            
            0.42
            
            
            0.48
            
            
            0.33
            
            
            0.33
            
            
            0.37
            
            
            0.39Earnings
                per share - diluted
            
            $
            0.36
            
            
            0.40
            
            
            0.42
            
            
            0.48
            
            
            0.32
            
            
            0.33
            
            
            0.37
            
            
            0.39Weighted
                average common shares outstanding - basic
            
            
            4,990,613
            
            
            4,998,105
            
            
            5,000,219
            
            
            5,003,475
            
            
            4,986,641
            
            
            4,986,485
            
            
            4,987,508
            
            
            4,987,650Weighted
                average common shares outstanding -diluted
            
            
            5,013,821
            
            
            5,025,743
            
            
            5,020,427
            
            
            5,038,681
            
            
            5,014,623
            
            
            5,014,467
            
            
            5,015,490
            
            
            5,025,149





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





Not
      applicable.





**Item
      9A.**  **Controls
      and Procedures**





The
      Company maintains disclosure controls and procedures, as defined in Rule
      13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
      Act”), that are designed to ensure that information required to be disclosed in
      the reports that the Company files or submits under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in the rules and forms of the Securities and Exchange Commission and that such
      information is accumulated and communicated to the Company’s management,
      including its chief executive and chief financial officers, as appropriate,
      to
      allow timely decisions regarding required disclosure. The Company carried out
      an
      evaluation, under the supervision and with the participation of its management,
      including its chief executive and chief financial officers, of the effectiveness
      of the design and operation of its disclosure controls and procedures as of
      the
      end of the period covered by this Report. Based on the evaluation of these
      disclosure controls and procedures, the chief executive and chief financial
      officers of the Company concluded that the Company’s disclosure controls and
      procedures were effective as of the end of the period covered by this
      Report.




38





There
      were no changes in the Company’s internal control over financial reporting
      during the Company’s fiscal quarter ended December 31, 2006 that have materially
      affected, or are reasonably likely to materially effect, the Company’s internal
      control over financial reporting.





**Item
      9B. Other Information**





Not
      applicable.




39


**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 “2007 Proxy Statement”)
      relating to the 2007 Annual Meeting of Shareholders of the Company, which is
      currently scheduled to be held on July 10, 2007, 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 2007 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 2007 Proxy Statement is incorporated
      herein by reference.





*Securities
      Authorized for Issuance Under Equity Compensation Plans*





The
      following table gives information as of December 31, 2006, 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*
              
              130,236
              
              $19.44
              
              920,997**Equity
                  compensation plans not approved by security holders*
              
              N/A
              
              N/A
              
              N/A*Total*
              
              130,236
              
              $19.44
              
              920,997*




*
            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 2007 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
      2007 Proxy Statement is incorporated herein by reference.




40




**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, 2006 and 2005





Consolidated
      Statements of Earnings for the Years Ended December 31, 2006, 2005 and
      2004





Consolidated
      Statements of Comprehensive Income for the Years Ended December 31,
      2006,


2005
      and
      2004





Consolidated
      Statements of Changes in Stockholders’ Equity for the Years Ended


December
      31, 2006, 2005 and 2004





Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and
      2004





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
                  Amended
                      and Restated Bylaws (Incorporated by reference to Exhibit 3.2
                      to the Form
                      10-SB)





4.1
                  See
                      exhibits 3.1 and 3.2 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
                  Rights
                      Agreement dated as of February 12, 1997 between the Company
                      and SunTrust
                      Bank, Atlanta (Incorporated by reference to Exhibit 4.3 to
                      the Form
                      10-SB)





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 Form 8-K dated July 11,
                  2006)





10.2*
            Bonus
                and Stock Option Agreement dated as of September 23, 1998 between
                the
                Company andH.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 andW. 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 andSteven
                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 Exhibit10.10
                to the Form 10-SB)




41




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 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 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 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 (Incorporatedby
                    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 Form 10-K for the year ended
                                                    December 31,
                                                    2005)


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.




42





**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.Date: February
              14, 2007
            By:
            /s/
              H.B.
              Lipham, IIIH.B
                Lipham, III, Chief Executive
                Officer





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:
              February 14,
              2007H.B.
                Lipham, III, President, Chief
              Executive
                Officer and Director
              [Principal
                Executive Officer]/s/ Steven J. Haack
            
            
            Date: February 14, 2007Steven
              J. Haack, Secretary and Treasurer
              [Principal
                Financial and Accounting Officer]/s/ W. T. Green
            
            
            Date:
                February 15, 2007W.
              T. Green, Chairman of the BoardWanda
              W. Calhoun, Director
            
            
            Date:
              February __, 2007/s/ Grady W. Cole
            
            
            Date: February 15, 2007Grady
              W. Cole, Director/s/ Richard A. Duncan
            
            
            Date:
                February 15, 2007Richard
                A. Duncan, Directer/s/ R. David Perry
            
            
            Date:
                February 15, 2007R.
              David Perry, Director/s/ L. Richard Plunkett
            
            
            Date: February 15, 2007L.
                Richard Plunkett, DirectorThomas
              E. Reeve, III, M.D., Director
            
            
            Date:
              February ___, 2007




43




/s/ Thomas T. Richards
            
            
            Date: February 14, 2007Thomas
              T. Richards, DirectorOscar
              W. Roberts, III, Director
            
            
            Date:
              February ___, 2007/s/ Frank T. Thomasson, III
            
            
            Date: February 15, 2007Frank
              T. Thomasson, III, Director/s/ J. Thomas Vance
            
            
            Date: February 15, 2007J.
                Thomas Vance, DirectorCharles
                M. Willis, Sr., Director
            
            
            Date: February ___,
              2007




44




**WGNB
        CORP.**
 
 **Consolidated
        Financial Statements**
 
 **December
        31, 2006 and 2005**
 
 **(with
        Report of Independent Registered Public Accounting
        Firm)**
 
 F-1
  
  **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Stockholders
 WGNB
        Corp. and Subsidiary
 
 We
        have
        audited the accompanying consolidated balance sheets of WGNB Corp. and
        subsidiary as of December 31, 2006 and 2005, and the related consolidated
        statements of earnings, comprehensive income, changes in stockholders’ equity
        and cash flows for each of the three years in the period ended December 31,
        2006. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of WGNB Corp. and subsidiary
        as
        of December 31, 2006 and 2005, and the results of their operations and their
        cash flows for each of the three years in the period ended December 31, 2006,
        in
        conformity with accounting principles generally accepted in the United States
        of
        America.
   
  Atlanta,
        Georgia
 February
        5, 2007
  Certified
        Public Accountants
 
 Suite
        1800 Ÿ 235
        Peachtree Street NE Ÿ Atlanta,
        Georgia 30303 Ÿ Phone
        404-588-4200 Ÿ Fax
        404-588-4222 Ÿ www.pkm.com
  F-2
  **WGNB
        CORP.**
 
 **Consolidated
        Balance Sheets**
 
 **December
        31, 2006 and 2005**
 
 
 2006
              
              2005AssetsCash
                  and due from banks, including reserve requirementsof
                  $346,000 and $594,000, respectively
              
              $
              12,579,309
              
              
              10,673,541Interest-bearing
                  funds in other banks
              
              
              654,139
              
              
              815,348Federal
                  funds sold
              
              
              -
              
              
              4,733,000Cash
                  and cash equivalents
              
              
              13,233,448
              
              
              16,221,889Securities
                  available-for-sale
              
              
              64,251,234
              
              
              64,359,833Securities
                  held-to-maturity, estimated fair valuesof
                  $7,837,389 and $6,839,552
              
              
              7,837,389
              
              
              6,736,552Loans,
                  net
              
              
              467,752,885
              
              
              417,551,614Premises
                  and equipment, net
              
              
              8,989,589
              
              
              9,134,245Accrued
                  interest receivable
              
              
              3,772,818
              
              
              2,881,206Other
                  assets
              
              
              9,491,228
              
              
              6,758,048$
              575,328,591
              
              
              523,643,387Liabilities
                  and Stockholders’ EquityDeposits:Demand
              
              $
              52,681,900
              
              
              48,178,654Interest
                  bearing demand
              
              
              149,765,104
              
              
              156,804,968Savings
              
              
              10,966,576
              
              
              12,160,203Time
              
              
              103,999,579
              
              
              91,397,475Time,
                  over $100,000
              
              
              145,400,277
              
              
              120,508,145Total
                  deposits
              
              
              462,813,436
              
              
              429,049,445Federal
                  Home Loan Bank advances
              
              
              52,000,000
              
              
              42,000,000Federal
                  funds purchased
              
              
              2,475,000
              
              
              -Accrued
                  interest payable
              
              
              2,881,943
              
              
              2,133,858Other
                  liabilities
              
              
              2,661,718
              
              
              2,508,051Total
                  liabilities
              
              
              522,832,097
              
              
              475,691,354Commitments
                  and contingenciesStockholders’
                  equity:Common
                  stock, $1.25 par value, 10,000,000 shares authorized;5,000,613
                  and 4,987,794 shares issued and outstanding
              
              
              6,250,766
              
              
              6,234,743Additional
                  paid-in capital
              
              
              2,662,306
              
              
              2,803,480Retained
                  earnings
              
              
              43,513,370
              
              
              38,787,699Accumulated
                  other comprehensive income
              
              
              70,052
              
              
              126,111Total
                  stockholders’ equity
              
              
              52,496,494
              
              
              47,952,033$
              575,328,591
              
              
              523,643,387
 
 See
        accompanying notes to consolidated financial statements.
  F-3
  **WGNB
        CORP.**
 
 **Consolidated
        Statements of Earnings**
 
 **For
        the Years Ended December 31, 2006, 2005 and 2004**
  2006
              
              2005
              
              2004Interest
                  income:Interest
                  and fees on loans
              
              $
              37,757,482
              
              
              28,725,171
              
              
              22,011,568Interest
                  on federal funds sold
              
              
              640,956
              
              
              393,955
              
              
              151,063Interest
                  on investment securities:U.S.
                  Government agencies
              
              
              1,032,728
              
              
              1,009,760
              
              
              975,354State,
                  county and municipal
              
              
              1,455,708
              
              
              1,597,744
              
              
              1,489,111Other
              
              
              1,205,881
              
              
              819,549
              
              
              640,644Total
                  interest income
              
              
              42,092,755
              
              
              32,546,179
              
              
              25,267,740Interest
                  expense:Interest
                  on deposits:Demand
              
              
              4,994,332
              
              
              3,183,385
              
              
              1,180,420Savings
              
              
              185,168
              
              
              99,612
              
              
              43,309Time
              
              
              10,776,290
              
              
              6,973,958
              
              
              3,915,778Interest
                  on FHLB and other borrowings
              
              
              2,771,190
              
              
              2,326,566
              
              
              2,430,288Total
                  interest expense
              
              
              18,726,980
              
              
              12,583,521
              
              
              7,569,795Net
                  interest income
              
              
              23,365,775
              
              
              19,962,658
              
              
              17,697,945Provision
                  for loan losses
              
              
              1,465,000
              
              
              1,550,000
              
              
              925,000Net
                  interest income after provision for loan losses
              
              
              21,900,775
              
              
              18,412,658
              
              
              16,772,945Other
                  income:Service
                  charges on deposit accounts
              
              
              4,061,892
              
              
              4,080,734
              
              
              4,000,420Mortgage
                  origination fees
              
              
              393,375
              
              
              402,468
              
              
              514,011ATM
                  network fees
              
              
              777,299
              
              
              502,092
              
              
              434,203Gain
                  on sale of securities available-for-sale
              
              
              -
              
              
              227,863
              
              
              -Gain
                  (loss) on sale of other real estate owned
              
              
              243,153
              
              
              (4,125
              )
              
              (52,312
              )Miscellaneous
              
              
              928,585
              
              
              798,858
              
              
              740,907Total
                  other income
              
              
              6,404,304
              
              
              6,007,890
              
              
              5,637,229Other
                  expenses:Salaries
                  and employee benefits
              
              
              9,924,742
              
              
              8,702,150
              
              
              8,125,097Occupancy
              
              
              2,402,303
              
              
              2,134,379
              
              
              1,944,875Other
                  operating
              
              
              4,192,074
              
              
              3,627,107
              
              
              3,593,949Total
                  other expenses
              
              
              16,519,119
              
              
              14,463,636
              
              
              13,663,921Earnings
                  before income taxes
              
              
              11,785,960
              
              
              9,956,912
              
              
              8,746,253Income
                  taxes
              
              
              3,458,524
              
              
              2,889,425
              
              
              2,682,088Net
                  earnings
              
              $
              8,327,436
              
              
              7,067,487
              
              
              6,064,165Basic
                  earnings per share
              
              $
              1.67
              
              
              1.42
              
              
              1.22Diluted
                  earnings per share
              
              $
              1.66
              
              
              1.41
              
              
              1.20Dividends
                  per share
              
              $
              0.72
              
              
              0.61
              
              
              0.52
  See
        accompanying notes to consolidated financial statements.
  F-4
  **WGNB
        CORP.**
 
 **Consolidated
        Statements of Comprehensive Income**
 
 **For
        the Years Ended December 31, 2006, 2005 and 2004**
  2006
              
              2005
              
              2004Net
                  earnings
              
              $
              8,327,436
              
              
              7,067,487
              
              
              6,064,165Other
                  comprehensive income (loss), net of tax:Unrealized
                  gains (losses) on investmentsecurities
                  available-for-sale:Unrealized
                  gains (losses) arising during the period
              
              
              (84,938
              )
              
              (1,283,774
              )
              
              (401,838
              )Associated
                  (taxes) benefit
              
              
              28,879
              
              
              436,483
              
              
              136,625Reclassification adjustment for gain realized
              
              
              -
              
              
              (227,863
              )
              
              -Associated
                  taxes
              
              
              -
              
              
              77,473
              
              
              -Other
                  comprehensive income (loss)
              
              
              (56,059
              )
              
              (997,681
              )
              
              (265,213
              )Comprehensive
                  income
              
              $
              8,271,377
              
              
              6,069,806
              
              
              5,798,952
  See
        accompanying notes to consolidated financial statements.
  F-5
  **WGNB
        CORP.**
 
 **Consolidated
        Statements of Changes in Stockholders’ Equity**
 
 **For
        the Years Ended December 31, 2006, 2005 and 2004**
 AccumulatedAdditional
                
                
                
                OtherCommon Stock
                
                Paid-in
                
                Retained
                
                ComprehensiveShares
                
                Amount
                
                Capital
                
                Earnings
                
                Income
                
                TotalBalance,
                    December 31, 2003
                
                
                4,959,678
                
                $
                6,199,598
                
                
                3,221,414
                
                
                31,279,245
                
                
                1,389,005
                
                
                42,089,262Cash
                    dividends ($.52 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,564,479
                )
                
                -
                
                
                (2,564,479
                )Retirement
                    of common stock
                
                
                (48,129
                )
                
                (60,161
                )
                
                (904,081
                )
                
                -
                
                
                -
                
                
                (964,242
                )Exercise
                    of stock options
                
                
                76,470
                
                
                95,588
                
                
                494,389
                
                
                -
                
                
                -
                
                
                589,977Issuance
                    of common stock in lieu of directors’ fees
                
                
                642
                
                
                802
                
                
                12,038
                
                
                -
                
                
                -
                
                
                12,840Change
                    in unrealized holding gain onsecurities
                    available-for-sale, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (265,213
                )
                
                (265,213
                )Net
                    earnings
                
                
                -
                
                
                -
                
                
                -
                
                
                6,064,165
                
                
                -
                
                
                6,064,165Balance,
                    December 31, 2004
                
                
                4,988,661
                
                
                6,235,827
                
                
                2,823,760
                
                
                34,778,931
                
                
                1,123,792
                
                
                44,962,310Cash
                    dividends ($.61 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,058,719
                )
                
                -
                
                
                (3,058,719
                )Retirement
                    of common stock
                
                
                (2,655
                )
                
                (3,319
                )
                
                (49,027
                )
                
                -
                
                
                
                
                
                (52,346
                )Exercise
                    of stock options
                
                
                1,070
                
                
                1,338
                
                
                15,398
                
                
                -
                
                
                -
                
                
                16,736Issuance
                    of common stock in lieu of directors’ fees
                
                
                718
                
                
                897
                
                
                13,349
                
                
                -
                
                
                -
                
                
                14,246Change
                    in unrealized holding gain onsecurities
                    available-for-sale, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (997,681
                )
                
                (997,681
                )Net
                    earnings
                
                
                -
                
                
                -
                
                
                -
                
                
                7,067,487
                
                
                -
                
                
                7,067,487Balance,
                    December 31, 2005
                
                
                4,987,794
                
                
                6,234,743
                
                
                2,803,480
                
                
                38,787,699
                
                
                126,111
                
                
                47,952,033Cash
                    dividends ($.72 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,601,765
                )
                
                -
                
                
                (3,601,765
                )Retirement
                    of common stock
                
                
                (38,202
                )
                
                (47,753
                )
                
                (916,895
                )
                
                -
                
                
                
                
                
                (964,648
                )Exercise
                    of stock options
                
                
                51,021
                
                
                63,776
                
                
                647,471
                
                
                -
                
                
                -
                
                
                711,247Stock
                    option expense
                
                
                
                
                
                
                
                
                128,250
                
                
                
                
                
                
                
                
                128,250Change
                    in unrealized holding gain onsecurities
                    available-for-sale, net of tax
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (56,059
                )
                
                (56,059
                )Net
                    earnings
                
                
                -
                
                
                -
                
                
                -
                
                
                8,327,436
                
                
                -
                
                
                8,327,436Balance,
                    December 31, 2006
                
                
                5,000,613
                
                $
                6,250,766
                
                
                2,662,306
                
                
                43,513,370
                
                
                70,052
                
                
                52,496,494
 
 See
        accompanying notes to consolidated financial statements .
  F-6
 
 **WGNB
        CORP.**
 
 **Consolidated
        Statements of Cash Flows**
 
 **For
        the Years Ended December 31, 2006, 2005 and 2004**
  2006
              
              2005
              
              2004Cash
                  flows from operating activities:Net
                  earnings
              
              $
              8,327,436
              
              
              7,067,487
              
              
              6,064,165Adjustments
                  to reconcile net earnings to net cashprovided
                  by operating activities:Depreciation,
                  amortization and accretion
              
              
              1,099,739
              
              
              1,086,505
              
              
              1,105,857Provision
                  for loan losses
              
              
              1,465,000
              
              
              1,550,000
              
              
              925,000Stock
                  option expense
              
              
              128,250
              
              
              -
              
              
              -Provision
                  for deferred income taxes (benefit)
              
              
              (188,645
              )
              
              (663,238
              )
              
              28,896Gain
                  on sale of securities available-for-sale
              
              
              -
              
              
              (227,863
              )
              
              -Loss
                  (gain) on sale of premises and equipment
              
              
              4,327
              
              
              75,393
              
              
              (5,430
              )(Gain)
                  loss on sale of other real estate
              
              
              (243,153
              )
              
              4,125
              
              
              52,312Change
                  in:Other
                  assets
              
              
              (1,283,102
              )
              
              (303,232
              )
              
              (535,421
              )Other
                  liabilities
              
              
              795,470
              
              
              950,423
              
              
              397,864Net
                  cash provided by operating activities
              
              
              10,105,322
              
              
              9,539,600
              
              
              8,033,243Cash
                  flows from investing activities:Proceeds
                  from sales of securities available-for-sale
              
              
              -
              
              
              3,789,185
              
              
              -Proceeds
                  from maturities, calls and paydowns of securitiesavailable-for-sale
              
              
              21,321,435
              
              
              12,686,014
              
              
              11,192,131Proceeds
                  from maturities, calls and paydowns of securitiesheld-to-maturity
              
              
              1,403,882
              
              
              204,941
              
              
              1,019,121Purchases
                  of securities available-for-sale
              
              
              (21,263,737
              )
              
              (21,289,748
              )
              
              (17,371,254
              )Purchase
                  of securities held-to-maturity
              
              
              (2,503,750
              )
              
              (2,105,990
              )
              
              (1,604,000
              )Purchase
                  of other securities
              
              
              (1,534,019
              )
              
              -
              
              
              (500,000
              )Net
                  change in loans
              
              
              (52,893,590
              )
              
              (67,394,063
              )
              
              (61,402,267
              )Proceeds
                  from sales of premises and equipment
              
              
              -
              
              
              88,497
              
              
              5,430Purchases
                  of premises and equipment
              
              
              (994,417
              )
              
              (2,702,122
              )
              
              (1,801,137
              )Capital
                  expenditures for other real estate
              
              
              -
              
              
              (99,293
              )
              
              -Proceeds
                  from sales of other real estate
              
              
              851,446
              
              
              754,440
              
              
              1,002,312Net
                  cash used by investing activities
              
              
              (55,612,750
              )
              
              (76,068,139
              )
              
              (69,459,664
              )Cash
                  flows from financing activities:Net
                  change in deposits
              
              
              33,763,991
              
              
              90,651,406
              
              
              35,081,859Proceeds
                  from Federal Home Loan Bank advances
              
              
              10,000,000
              
              
              -
              
              
              15,000,000Repayment
                  of Federal Home Loan Bank advances
              
              
              -
              
              
              (13,000,000
              )
              
              (5,000,000
              )Net
                  change in federal funds purchased
              
              
              2,475,000
              
              
              -
              
              
              -Dividends
                  paid
              
              
              (3,466,603
              )
              
              (2,921,611
              )
              
              (2,460,728
              )Exercise
                  of stock options
              
              
              711,247
              
              
              16,736
              
              
              589,977Retirement
                  of common stock
              
              
              (964,648
              )
              
              (52,346
              )
              
              (964,242
              )Net
                  cash provided by financing activities
              
              
              42,518,987
              
              
              74,694,185
              
              
              42,246,866Change
                  in cash and cash equivalents
              
              
              (2,988,441
              )
              
              8,165,646
              
              
              (19,179,555
              )Cash
                  and cash equivalents at beginning of year
              
              
              16,221,889
              
              
              8,056,243
              
              
              27,235,798Cash
                  and cash equivalents at end of year
              
              $
              13,233,448
              
              
              16,221,889
              
              
              8,056,243
  F-7
  **WGNB
        CORP.**
 
 **Consolidated
        Statements of Cash Flows, continued**
 
 **For
        the Years Ended December 31, 2006, 2005 and 2004**
  2006
              
              2005
              
              2003Supplemental
                  disclosure of cash flow information:Cash
                  paid during the year for:Interest
              
              $
              17,978,895
              
              
              11,875,795
              
              
              7,171,932Income
                  taxes
              
              $
              3,688,500
              
              
              3,501,000
              
              
              2,184,700Non-cash
                  investing and financing activities:Transfer
                  of loans to other real estate
              
              $
              1,227,319
              
              
              579,105
              
              
              794,398Loans
                  to facilitate sales of other real estate
              
              $
              -
              
              
              39,028
              
              
              -Change
                  in unrealized gains onsecurities
                  available-for-sale, net of tax
              
              $
              (56,059
              )
              
              (997,681
              )
              
              (265,213
              )Change
                  in dividends payable
              
              $
              135,162
              
              
              137,108
              
              
              103,751Issuance
                  of common stock to directors in lieu of directors’ fees
              
              $
              -
              
              
              14,246
              
              
              12,840
  See
        accompanying notes to consolidated financial statements.
  F-8
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements**
 
 **(1)**
              **Summary of Significant Accounting
                Policies**  ***Basis
                  of Presentation***
 The
                  consolidated financial statements of WGNB Corp. (the “Company”) include
                  the financial statements of its wholly owned subsidiary, West Georgia
                  National Bank (the “Bank”). All significant intercompany accounts and
                  transactions have been eliminated in
                  consolidation.
 The
                  Bank commenced business in 1946 upon receipt of its banking charter
                  from
                  the Office of the Comptroller of the Currency (the “OCC”). The Bank is
                  primarily regulated by the OCC and undergoes periodic examinations
                  by this
                  regulatory agency. The Company is regulated by the Federal Reserve
                  and is
                  also subject to periodic examinations. The Bank provides a full
                  range of
                  commercial and consumer banking services principally in Carroll,
                  Paulding
                  and Douglas Counties, Georgia.
 
 The
                  accounting and reporting policies of the Company, and the methods
                  of
                  applying these principles, conform with accounting principles generally
                  accepted in the United States of America (GAAP) and with general
                  practices
                  within the banking industry. In preparing the financial statements,
                  management is required to make estimates and assumptions that affect
                  the
                  reported amounts of assets and liabilities as of the date of the
                  balance
                  sheet and income and expenses for the year. Actual results could
                  differ
                  significantly from those estimates. Material estimates common to
                  the
                  banking industry that are particularly susceptible to significant
                  change
                  in an operating cycle of one year include, but are not limited
                  to, the
                  determination of the allowance for loan losses, the valuation of
                  any real
                  estate acquired in connection with foreclosures or in satisfaction
                  of
                  loans and valuation allowances associated with the realization
                  of deferred
                  tax assets which are based on future taxable
                  income.
 
 ***Cash
        and Cash Equivalents***
  For
                  purposes of reporting cash flows, cash and cash equivalents include
                  cash
                  and due from banks and federal funds
                  sold.
 
 ***Securities***
  The
                  Company classifies its securities in one of three categories: trading,
                  available-for-sale, or held-to-maturity. Trading securities are
                  bought and
                  held principally for the purpose of selling them in the near term.
                  Held-to-maturity securities are those securities for which the
                  Company has
                  the ability and intent to hold the security until maturity. All
                  other
                  securities not included in trading or held-to-maturity are classified
                  as
                  available-for-sale.
 
 Trading
                  and available-for-sale securities are recorded at fair value.
                  Held-to-maturity securities are recorded at amortized cost, adjusted
                  for
                  the amortization of premiums and accretion of discounts. Unrealized
                  holding gains and losses, net of the related tax effect, on securities
                  available-for-sale are excluded from earnings and are reported
                  as a
                  separate component of accumulated other comprehensive income in
                  stockholders’ equity until realized. Transfers of securities between
                  categories are recorded at fair value at the date of transfer.
 
 A
                  decline in the market value of any available-for-sale or held-to-maturity
                  investment below cost that is deemed other than temporary is charged
                  to
                  earnings and establishes a new cost basis for the
                  security.
 
 Premiums
                  and discounts are amortized or accreted over the life of the related
                  security as an adjustment to the yield. Realized gains and losses
                  for
                  securities classified as available-for-sale are included in earnings
                  and
                  are derived using the specific identification method for determining
                  the
                  cost of securities sold.
 
 ***Loans
                  and Allowance for Loan
                  Losses***
 Loans
                  are stated at the principal amount outstanding, net of unearned
                  interest
                  and the allowance for loan losses. Interest income on loans is
                  recognized
                  in a manner that results in a level yield on the principal amount
                  outstanding. Nonrefundable loan fees are deferred, net of certain
                  direct
                  origination costs, and amortized into income over the life of the
                  related
                  loan.
  F-9
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 
 **(1)**
              **Summary of Significant Accounting
                Policies,
                continued**  ***Loans
                  and Allowance for Loan Losses*****,
                  continued**
 Accrual
                  of interest is discontinued on a loan when management believes,
                  after
                  considering economic and business conditions and collection efforts
                  that
                  the borrower’s financial condition is such that collection of interest is
                  doubtful.
  The
                  allowance for loan losses is established through a provision for
                  loan
                  losses charged to expense. Loans are charged against the allowance
                  for
                  loan losses when management believes that the collectibility of
                  the
                  principal is unlikely. The allowance represents an amount which,
                  in
                  management’s judgment based on historical losses and on current economic
                  environment, will be adequate to absorb probable losses on existing
                  loans
                  that may become uncollectible. Loans deemed uncollectible are charged-off
                  and deducted from the allowance and recoveries on loans previously
                  charged-off are added back to the
                  allowance.
  Management’s
                  judgment in determining the adequacy 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 adequacy of the allowance for loan losses,
                  management uses a loan grading system that rates loans in eight
                  different
                  categories. Grades are assigned allocations of loss based on peer
                  group
                  loss experience and regulatory guidelines. 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.
  Management
                  believes that the allowance for loan losses is adequate. While
                  management
                  uses available information to recognize losses on loans, future
                  additions
                  to the allowance may be necessary based on changes in economic
                  conditions.
                  In addition, various regulatory agencies, as an integral part of
                  their
                  examination process, periodically review the Company’s allowance for loan
                  losses. Such agencies may require the Company to recognize additions
                  to
                  the allowance based on their judgments of information available
                  to them at
                  the time of their examination.
  ***Premises
                  and Equipment***
 Premises
                  and equipment are carried at cost less accumulated depreciation.
                  Depreciation is computed using the straight-line method over the
                  estimated
                  useful lives of the related assets. When assets are retired or
                  otherwise
                  disposed, the cost and related accumulated depreciation are removed
                  from
                  the accounts, and any resulting gain or loss is reflected in earnings
                  for
                  the period. The cost of maintenance and repairs that do not improve
                  or
                  extend the useful life of the respective asset is charged to income
                  as
                  incurred, whereas significant renewals and improvements are capitalized.
                  The range of estimated useful lives for premises and equipment
                  are:
  Buildings and improvements
              15 - 39 yearsFurniture and equipment
              3 - 10 years
  ***Other
                  Investments***
 Other
                  investments include Federal Home Loan Bank (“FHLB”) stock, Federal Reserve
                  Bank stock, investments in federal and state income tax credit
                  partnerships and other equity securities. The investments have
                  no readily
                  determinable fair value and are carried at
                  cost.
  ***Other
                  Real Estate***
 Properties
                  acquired through foreclosure are carried at the lower of cost (defined
                  as
                  fair value at foreclosure) or fair value less estimated costs to
                  dispose.
                  Fair value is defined as the amount that is expected to be received
                  in a
                  current sale between a willing buyer and seller other than in a
                  forced or
                  liquidation sale. Fair values at foreclosure are based on appraisals.
                  Losses arising from the acquisition of foreclosed properties are
                  charged
                  against the allowance for loan losses. Subsequent write-downs are
                  provided
                  by a charge to income through the allowance for losses on other
                  real
                  estate in the period in which the need
                  arises.
  ***Income
        Taxes***
  The
        Company accounts for income taxes under the liability method. Accordingly,
        deferred tax assets and liabilities are recognized for the future tax
        consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases and operating loss and tax credit carryforwards. Deferred tax assets
        and
        liabilities are measured using enacted tax rates expected to apply to taxable
        income in the years in which those temporary differences are expected to
        be
        recovered or settled. The effect on deferred tax assets and liabilities of
        a
        change in tax rates is recognized in income in the period that includes the
        enactment date.
  F-10
  **WGNB
        CORP.**
  **Notes
        to Consolidated Financial Statements, continued**
 
 **(1)**
              **Summary
                  of Significant Accounting Policies****,
                  continued**
 
 ***Income
        Taxes,*** **continued**
  In
        the
        event the future tax consequences of differences between the financial reporting
        bases and the tax bases of the assets and liabilities results in deferred
        tax
        assets, an evaluation of the probability of being able to realize the future
        benefits indicated by such asset is required. A valuation allowance is provided
        for a portion of the deferred tax asset when it is more likely than not that
        some portion or all of the deferred tax asset will not be realized. In assessing
        the realizability of the deferred tax assets, management considers the scheduled
        reversals of deferred tax liabilities, projected future taxable income, and
        tax
        planning strategies.
 
 ***Derivative
        Instruments and Hedging Activities***
  The
        Company recognizes the fair value of derivatives as assets or liabilities
        in the
        financial statements. Accounting for the changes in the fair value of a
        derivative depends on the intended use of the derivative instrument at
        inception. The change in fair value of instruments used as fair value hedges
        is
        accounted for in the earnings of the period simultaneous with accounting
        for the
        fair value change of the item being hedged. The change in fair value of the
        effective portion of cash flow hedges is accounted for in comprehensive income
        rather than earnings. The change in fair value of derivative instruments
        that
        are not intended as a hedge is accounted for in the earnings of the period
        of
        the change. When a swap contract is terminated, the cumulative change in
        the
        fair value is amortized into income over the original hedge period. If the
        underlying hedged instrument is sold or settled, the Company immediately
        recognizes the cumulative change in the derivative’s value in the component of
        earnings.
 
 ***Stock
        Compensation Plans***
  Statement
        of Financial Accounting Standards No. 123 (revised 2004) (SFAS No.123 (R))
        “Share-Based Payment” was adopted by the Company on the required effective date,
        January 1, 2006, using the modified prospective transition method provided
        for
        under the standard. SFAS No. 123 (R) addresses the accounting for share-based
        payment transactions in which the Company receives employee services in exchange
        for equity instruments of the Company. SFAS No. 123 (R) requires the Company
        to
        recognize as compensation expense the “grant date fair value” of stock options
        granted to employees in the statement of earnings using the fair-value-based
        method. Prior to the adoption of SFAS 123 (R), the Company utilized the
        recognition and measurement principles that were previously permissible under
        Accounting Principles Board Opinion No. 25 (APB 25) “Accounting for Stock Issued
        to Employees” and related interpretations. Under APB 25, no compensation expense
        was recognized in the statement of earnings, since the exercise price on
        the
        grant date was equal to the market value of the underlying stock.
  The
        following table presents the effect on net earnings and earnings per common
        share for the years ended December 31, 2005 and 2004 had the fair-value-based
        method as required under SFAS 123(R) been applied for those
        periods:
  2005
              
              2004Net
                  earnings
              
              
              As
                  reported
              
              $
              7,067,487
              
              
              6,064,165Proforma
              
              $
              6,911,381
              
              
              5,930,258Basic
                  earnings per share
              
              
              As
                  reported
              
              $
              1.42
              
              
              1.22Proforma
              
              $
              1.39
              
              
              1.20Diluted
                  earnings per share
              
              
              As
                  reported
              
              $
              1.41
              
              
              1.21Proforma
              
              $
              1.38
              
              
              1.18
 
 The
        Company recognized $128,250 of stock-based employee compensation expense
        during
        the year ended December 31, 2006, associated with its stock option grants.
        The
        Company is recognizing the compensation expense for stock option grants with
        graded vesting schedules on a straight-line basis over the requisite service
        period of the award as required by SFAS No. 123 (R). As of December 31, 2006,
        there was $279,901 of unrecognized compensation cost related to stock option
        grants. The cost is expected to be recognized over the vesting period of
        approximately five years.
  F-11
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(1)**
              **Summary
                  of Significant Accounting Policies****,
                  continued**
  ***Stock
        Compensation Plans*** ***,*** **continued**
  The
        grant-date fair value of each option granted during 2006, 2005 and 2004 was
        $4.47, $2.96 and $6.12, respectively. The fair value of each option is estimated
        on the date of grant using the Black-Scholes Model. The following weighted
        average assumptions were used for grants in 2006, 2005 and 2004:
 
 2006
              
              2005
              
              2004Dividend
                  yield
              
              
              2.85
              %
              
              2.86
              %
              
              2.40
              %Expected
                  volatility
              
              
              13
              %
              
              11
              %
              
              29
              %Risk-free
                  interest rate
              
              
              4.54
              %
              
              4.09
              %
              
              4.27
              %Expected
                  term
              
              
              10
                  years
              
              
              10
                  years
              
              
              10
                  years
 
 ***Earnings
        Per Share***
  Basic
          e arnings
          per share are based on the weighted average number of common shares outstanding
          during the period. The effects of potential common shares outstanding during
          the
          period are included in diluted earnings per share. Stock
          options, which are described in note 10, are granted to key management
          personnel.
   Common
              
              Per
                  Share**For
                  the Year Ended December 31, 2006**
              
              Net
                  Earnings
              
              Shares
              
              AmountBasic
                  earnings per share
              
              $
              8,327,436
              
              
              4,998,103
              
              $
              1.67Effect
                  of dilutive stock options
              
              
              -
              
              
              26,565
              
              
              (.01
              )Diluted
                  earnings per share
              
              $
              8,327,436
              
              
              5,024,668
              
              $
              1.66
 
 Common
              
              Per
                  Share**For
                  the Year Ended December 31, 2005**
              
              Net
                  Earnings
              
              Shares
              
              AmountBasic
                  earnings per share
              
              $
              7,067,487
              
              
              4,986,930
              
              $
              1.42Effect
                  of dilutive stock options
              
              
              -
              
              
              37,499
              
              
              (.01
              )Diluted
                  earnings per share
              
              $
              7,067,487
              
              
              5,024,429
              
              $
              1.41
  Common
              
              Per
                  Share**For
                  the Year Ended December 31, 2004**
              
              Net
                  Earnings
              
              Shares
              
              AmountBasic
                  earnings per share
              
              $
              6,064,165
              
              
              4,958,604
              
              $
              1.22Effect
                  of dilutive stock options
              
              
              -
              
              
              75,891
              
              
              (.02
              )Diluted
                  earnings per share
              
              $
              6,064,165
              
              
              5,034,495
              
              $
              1.20
 
 ***Recent
        Accounting Pronouncements***
  **Accounting
        for Conditional Asset Retirement Obligations**
  In
        March
        2005, the Financial Accounting Standards Board issued FASB Interpretation
        No.
        47, “ *Accounting
        for Conditional Asset Retirement Obligations”* (“FIN
        47”). This Interpretation clarifies the term “conditional asset retirement
        obligation” as used in SFAS 143, “ *Accounting
        for Asset Retirement Obligations,* ”
refers
        to a legal obligation to perform an asset retirement activity in which the
        timing and (or) method of settlement are conditional on a future event that
        may
        or may not be within the control of the entity. According to FIN 47, an entity
        is required to recognize a liability for the fair value of a conditional
        asset
        retirement obligation when incurred if the liability’s fair value can be
        reasonably estimated. The provisions of FIN47 are effective for the fiscal
        years
        ending after December 15, 2005. The implementation of FIN 47 did not affect
        the
        Company’s consolidated financial position, results of operations or cash flows.
  F-12
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(1)**
              **Summary
                  of Significant Accounting Policies****,
                  continued**
 
 ***Recent
        Accounting Pronouncements,*** **continued**
  **Accounting
        for Uncertainty in Income Taxes**
  In
        June
        2006, the FASB issued FASB Interpretation No. 48 *Accounting
        for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
        109* (“FIN
        48”). This interpretation clarifies that management is expected to evaluate
        an
        income tax position taken or expected to be taken for likelihood of realization
        before recording any amounts for such position in the financial statements.
        FIN
        48 also requires expanded disclosure with respect to income tax positions
        taken
        that are not certain to be realized. This interpretation is effective for
        fiscal
        years beginning after December 15, 2006, and will require management to evaluate
        every open tax position that exists in every jurisdiction on the date of
        initial
        adoption. The Company has completed an assessment of the impact and has
        determined that no adjustment to the Company’s tax reserve is
        necessary.
 
 **Fair
        Value Measurements**
  In
        September 2006, the FASB issued SFAS No. 157 *Fair
        Value Measurements* .
        SFAS
        No. 157 does not require any new fair value measurements, but rather, it
        provides enhanced guidance to other pronouncements that require or permit
        assets
        or liabilities to be measured at fair value. However, the application of
        this
        Statement may change how fair value is determined. The Statement is effective
        for financial statements issued for fiscal years beginning after November
        15,
        2007 and interim periods within those fiscal years. The financial statement
        impact is not expected to be material to the Company’s financial position,
        results of operations or disclosures.
 
 Other
        accounting standards that have been issued or proposed by the FASB and other
        standard setting entities that do not require adoption until a future date
        are
        not expected to have a material impact on the Company’s consolidated financial
        statements upon adoption.
  ***Reclassifications***
  Certain
        reclassifications have been made in the prior years consolidated statements
        to
        conform to the presentation used in 2006.
 
 **(2)**
                  **Securities**  Securities
                      available-for-sale and held-to-maturity at December 31, 2006
                      and 2005 are
                      summarized as follows:
  December 31, 2006Gross
              
              Gross
              
              EstimatedAmortized
              
              Unrealized
              
              Unrealized
              
              Fair**Available-for-Sale**
              
              Cost
              
              Gains
              
              Losses
              
              ValueU.S.
                  Government agencies
              
              $
              9,970,285
              
              
              -
              
              
              33,685
              
              
              9,936,600Mortgage-backed
                  securities
              
              
              16,124,094
              
              
              73,330
              
              
              379,800
              
              
              15,817,624State,
                  county and municipals
              
              
              33,015,526
              
              
              528,180
              
              
              83,777
              
              
              33,459,929Corporate
                  bonds
              
              
              5,035,191
              
              
              12,991
              
              
              11,101
              
              
              5,037,081$
              64,145,096
              
              
              614,501
              
              
              508,363
              
              
              64,251,234
 
 December 31, 2005Gross
              
              Gross
              
              EstimatedAmortized
              
              Unrealized
              
              Unrealized
              
              FairCost
              
              Gains
              
              Losses
              
              ValueU.S.
                  Government agencies
              
              $
              8,964,018
              
              
              -
              
              
              21,599
              
              
              8,942,419Mortgage-backed
                  securities
              
              
              18,294,070
              
              
              128,395
              
              
              297,557
              
              
              18,124,908State,
                  county and municipals
              
              
              32,867,044
              
              
              542,847
              
              
              145,354
              
              
              33,264,537Corporate
                  bonds
              
              
              4,043,624
              
              
              22,929
              
              
              38,584
              
              
              4,027,969$
              64,168,756
              
              
              694,171
              
              
              503,094
              
              
              64,359,833
  F-13
 
 **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(2)**
                      **Securities****,
                          continued**
   December 31, 2006Gross
              
              Gross
              
              EstimatedAmortized
              
              Unrealized
              
              Unrealized
              
              Fair**Held-to-Maturity**
              
              Cost
              
              Gains
              
              Losses
              
              ValueTrust
                  preferred securities
              
              $
              7,837,389
              
              
              -
              
              
              -
              
              
              7,837,389
  December 31, 2005Gross
              
              Gross
              
              EstimatedAmortized
              
              Unrealized
              
              Unrealized
              
              FairCost
              
              Gains
              
              Losses
              
              ValueTrust
                  preferred securities
              
              $
              6,736,552
              
              
              103,000
              
              
              -
              
              
              6,839,552
  The
            amortized cost and estimated fair value of investment securities
            available-for-sale and held-to-maturity at December 31, 2006, by contractual
            maturity are shown below. Expected maturities will differ from average
            life
            contractual maturities because borrowers have the right to call or prepay
            certain obligations with or without call or prepayment
            penalties.
 
 Amortized
              
              EstimatedCost
              
              Fair
                  Value**Available-for-Sale**U.S.
                  Government agencies, state, countyand
                  municipals and corporate bonds:Within
                  1 year
              
              $
              11,173,870
              
              
              11,170,1811
                  to 5 years
              
              
              9,785,887
              
              
              9,797,4335
                  to 10 years
              
              
              8,993,938
              
              
              9,195,276After
                  10 years
              
              
              18,067,307
              
              
              18,270,720Mortgage-backed
                  securities
              
              
              16,124,094
              
              
              15,817,624$
              64,145,096
              
              
              64,251,234**Held-to-Maturity**Trust
                  preferred securities:After
                  10 years
              
              $
              7,837,389
              
              
              7,837,389
 
 The
                  following is a summary of the fair values of securities that have
                  unrealized losses as of December 31, 2006 and 2005.
   December
                  31, 2006Less Than 12 Months
              
              12
                  Months or MoreFair
              
              Unrealized
              
              Fair
              
              UnrealizedValue
              
              Losses
              
              Value
              
              LossesU.S.
                  Government agencies
              
              $
              8,955,000
              
              
              15,675
              
              
              981,600
              
              
              18,010Mortgage-backed
                  securities
              
              
              2,078,463
              
              
              29,940
              
              
              9,847,410
              
              
              349,860State,
                  county and municipals
              
              
              3,101,129
              
              
              23,281
              
              
              3,944,420
              
              
              60,496Corporate
                  bonds
              
              
              -
              
              
              -
              
              
              784,829
              
              
              11,101$
              14,134,592
              
              
              68,896
              
              
              15,558,259
              
              
              439,467
  F-14
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(2)**
              **Securities****,
                  continued**
  December
                  31, 2005Less
                  Than 12 Months
              
              12
                  Months or MoreFair
              
              Unrealized
              
              Fair
              
              UnrealizedValue
              
              Losses
              
              Value
              
              LossesU.S.
                  Government agencies
              
              $
              999,399
              
              
              21,599
              
              
              -
              
              
              -Mortgage-backed
                  securities
              
              
              10,205,739
              
              
              194,224
              
              
              2,980,921
              
              
              103,333State,
                  county and municipals
              
              
              8,246,350
              
              
              108,821
              
              
              1,447,617
              
              
              36,533Corporate
                  bonds
              
              
              2,874,273
              
              
              38,584
              
              
              -
              
              
              -$
              22,325,761
              
              
              363,228
              
              
              4,428,538
              
              
              139,866
 
 At
        December 31, 2006, all unrealized losses in the investment securities portfolio
        related to debt securities. The unrealized losses on these debt securities
        arose
        due to changing interest rates and are considered to be temporary. From the
        December 31, 2006 tables above, 19 securities out of 59 securities issued
        by
        U.S. Government agencies, and Government sponsored corporations including
        mortgage backed securities contained unrealized losses, 22 out of 93 securities
        issued by state and political subdivisions contained unrealized losses and
        one
        out of five securities issued by corporations contained unrealized losses.
        These
        unrealized losses are considered temporary because of acceptable investment
        grades on each security and the repayment sources of principal and interest
        are
        largely government backed.
  At
                  December 31, 2005, all unrealized losses in the investment securities
                  portfolio related to debt securities. The unrealized losses on
                  these debt
                  securities arose due to changing interest rates and are considered
                  to be
                  temporary. From the December 31, 2005 tables above, 22 out of 60
                  securities issued by U.S. Government agencies, Government sponsored
                  corporations, including mortgage-backed securities, contained unrealized
                  losses and 30 out of 85 securities issued by state and political
                  subdivisions contained unrealized losses and twoout of five securities issued by corporations contained unrealized
                  losses..
                  These unrealized losses are considered temporary because of acceptable
                  investment grades on each security and the repayment sources of
                  principal
                  and interest are largely government backed.
 
 Proceeds
                  from sales of securities available-for-sale during 2005 were $3,789,185
                  with gross gains of $227,863 and no gross losses recognized. There
                  were no
                  sales of securities available-for-sale during 2006 or
                  2004.
  Investment
                  securities with a fair value of approximately $60,360,000 and $61,904,000
                  as of December 31, 2006 and 2005, respectively, were pledged to
                  secure
                  public deposits, as required by law, and for other
                  purposes.
 
 **(3)**
              **Loans**
 Major
                  classifications of loans at December 31, 2006 and 2005 are summarized
                  as
                  follows:
 
 2006
              
              2005Commercial,
                  financial and agricultural
              
              $
              52,333,704
              
              
              51,555,201Real
                  estate - mortgage
              
              
              219,563,340
              
              
              196,382,365Real
                  estate - construction
              
              
              175,024,051
              
              
              153,511,262Consumer
              
              
              27,397,551
              
              
              22,271,301474,318,646
              
              
              423,720,129Less:
                  Unearned interest
              
              
              817,406
              
              
              841,109Allowance for loan losses
              
              
              5,748,355
              
              
              5,327,406$
              467,752,885
              
              
              417,551,614
  F-15
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(3)**
              **Loans****,
                  continued**
  The
                  Company grants loans and extensions of credit to individuals and
                  a variety
                  of businesses and corporations primarily located in its general
                  trade area
                  of Carroll, Paulding and Douglas Counties, Georgia. Although the
                  Bank has
                  a diversified loan portfolio, a substantial portion of the loan
                  portfolio
                  is collateralized by improved and unimproved real estate and is
                  dependent
                  upon the real estate market.
 
 Under
                  the line of credit agreement with the Federal Home Loan Bank (see
                  Note 6),
                  the Bank pledges acceptable loans under a blanket lien as collateral
                  for
                  its borrowings. As of December 31, 2006 and 2005, loans totaling
                  $79,604,000 and $89,632,000, respectively, were pledged to secure
                  Federal
                  Home Loan Bank advances.
 
 Changes
                  in the allowance for loan losses for the years ended December 31,
                  2006,
                  2005 and 2004 are as follows:
 
 2006
              
              2005
              
              2004Balance,
                  beginning of year
              
              $
              5,327,406
              
              
              4,080,148
              
              
              3,479,366Provision
                  for loan losses
              
              
              1,465,000
              
              
              1,550,000
              
              
              925,000Loans
                  charged off
              
              
              (1,112,201
              )
              
              (387,811
              )
              
              (397,095
              )Recoveries
              
              
              68,150
              
              
              85,069
              
              
              72,877Balance,
                  end of year
              
              $
              5,748,355
              
              
              5,327,406
              
              
              4,080,148
   **(4)**
              **Premises
                  and Equipment**
 Major
                  classifications of premises and equipment at December 31, 2006
                  and 2005
                  are summarized as follows:
  2006
              
              2005Land
              
              $
              1,460,255
              
              
              1,444,265Buildings
                  and improvements
              
              
              9,313,796
              
              
              9,046,004Furniture
                  and equipment
              
              
              7,229,272
              
              
              6,528,20918,003,323
              
              
              17,018,478Less:
                  Accumulated depreciation
              
              
              9,013,734
              
              
              7,884,233$
              8,989,589
              
              
              9,134,245
  Depreciation
        expense amounted to $1,134,746, $1,048,866 and $919,153 in 2006, 2005 and
        2004,
        respectively.
 
 **(5)**
              **Deposits**
  At
        December 31, 2006 the scheduled maturities of time deposits are as
        follows:
 2007
                
                $
                141,847,1822008
                
                
                43,792,5172009
                
                
                20,732,8402010
                
                
                24,116,4892011
                
                
                18,910,828$
                249,399,856
 
 The
        Bank
        held $62,713,161 and $55,577,610 in certificates of deposit obtained through
        the
        efforts of third party brokers at December 31, 2006 and 2005, respectively.
        The
        weighted average interest rate on the deposits at December 31, 2006 and 2005
        was
        5.05% and 3.93%, respectively. The deposits outstanding at December 31, 2006
        mature as follows:
 2007
                
                $
                20,498,0002008
                
                
                18,165,0002009
                
                
                10,844,4372010
                
                
                13,205,724$
                62,713,161
  **(6)**
                  **Lines
                      of Credit**
 The
                        Bank has lines of credit for overnight borrowings of $20,800,000
                        at
                        December 31, 2006 and 2005 of which, $2,475,000 was outstanding
                        as of
                        December 31, 2006. The Bank also has a line of credit with
                        the Federal
                        HomeLoan Bank of Atlanta (FHLB) with credit availability
                        totaling $139,230,000 at December 31, 2006. The FHLB advances
                        are secured
                        by the Bank’s stock in the FHLB, it’s qualifying 1-4 family first mortgage
                        loans and qualified commercial loans.****In
                        addition, the FHLB accepts certain investment securities
                        as collateral.****Advances
                        on the FHLB line of credit are subject to available collateral
                        of the
                        Bank. At December 31, 2006 and 2005, the Bank had advances
                        outstanding
                        from the FHLB amounting to $52,000,000 and $42,000,000, respectively.
                        The
                        Bank had adequate collateral available at December 31, 2006
                        for borrowing.
                        An early conversion option allows the FHLB to convert the
                        advances to a
                        variable interest rate upon notification to the Bank. The
                        following
                        advances require quarterly interest
                        payments:
 F-16
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
  **(6)**
                **Lines
                      of Credit,****continued**
 December
        31, 2006
  Advance
              
              Interest
                  Basis
              
              Current
                  Rate
              
              Maturity
              
              Call
                  Date
              
              Early
                  Conversion Option$
              10,000,000
              
              
              Fixed
                  Hybrid
              
              
              5.49
              %
              
              May
                  2011
              
              
              -
              
              
              -$
              7,000,000
              
              
              Fixed
                  Hybrid
              
              
              4.24
              %
              
              June
                  2010
              
              
              -
              
              
              -$
              5,000,000
              
              
              Fixed
              
              
              5.44
              %
              
              February
                  2008
              
              
              -
              
              
              -$
              10,000,000
              
              
              Fixed
              
              
              3.37
              %
              
              September
                  2012
              
              
              September
                  2007
              
              
              September
                  2007,
                3
                  month LIBOR$
              10,000,000
              
              
              Fixed
              
              
              3.225
              %
              
              February
                  2014
              
              
              February
                  2009
              
              
              February
                  2009,
                3
                  month LIBOR$
              10,000,000
              
              
              Fixed
              
              
              4.39
              %
              
              January
                  2016
              
              
              January
                  2011
              
              
              January
                        2011
                      3
                        month LIBOR
 
 **** December
        31, 2005
  Advance
              
              Interest
                  Basis
              
              Current
                  Rate
              
              Maturity
              
              Call
                  Date
              
              Early
                  Conversion Option$
              10,000,000
              
              
              Fixed
                  Hybrid
              
              
              5.49
              %
              
              May
                  2011
              
              
              May
                  2006
              
              
              May
                  2006,
                3
                  month LIBOR$
              7,000,000
              
              
              Fixed
                  Hybrid
              
              
              4.24
              %
              
              June
                  2010
              
              
              -
              
              
              -$
              5,000,000
              
              
              Fixed
              
              
              5.44
              %
              
              February
                  2008
              
              
              -
              
              
              -$
              10,000,000
              
              
              Fixed
              
              
              3.37
              %
              
              September
                  2012
              
              
              September
                  2007
              
              
              September
                  2007,
                3
                  month LIBOR$
              10,000,000
              
              
              Fixed
              
              
              3.225
              %
              
              February
                  2014
              
              
              February
                  2009
              
              
              February
                  2009,
                3
                  month LIBOR
 
 **(7)**
              **Commitments
                  and Contingencies**
 ***Off
                  Balance Sheet
                  Commitments***
 The
                  Company is a party to financial instruments with off balance sheet
                  risk in
                  the normal course of business to meet the financing needs of its
                  customers. These financial instruments include commitments to extend
                  credit and standby letters of credit. Those instruments involve,
                  to
                  varying degrees, elements of credit risk in excess of the amount
                  recognized in the balance sheet. The contractual amounts of those
                  instruments reflect the extent of involvement the Company has in
                  particular classes of financial
                  instruments.
 
 The
                  Company’s exposure to credit loss in the event of non-performance by the
                  other party to the financial instrument for commitments to extend
                  credit
                  and standby letters of credit is represented by the contractual
                  amount of
                  those instruments. The Company uses the same credit policies in
                  making
                  commitments and conditional obligations as it does for on balance
                  sheet
                  instruments.
  In
                  most cases, the Company requires collateral to support financial
                  instruments with credit risk. The following table summarizes the
                  off
                  balance sheet financial instruments as of December 31, 2006 and
                  2005:
 ApproximateContractual
                    Amount2006
                
                2005Financial
                    instruments whose contract amountsrepresent
                    credit risk:Commitments
                    to extend credit
                
                $
                97,196,000
                
                
                98,678,000Standby
                    letters of credit
                
                $
                5,903,000
                
                
                13,222,000
  F-17
 
 **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(7)**
              **Commitments
                  and Contingencies****,
                  continued**
 ***Off
                  Balance Sheet Commitments******,
                  continued***
 Commitments
        to extend credit are agreements to lend to a customer as long as there is
        no
        violation of any condition established in the contract. Commitments generally
        have fixed expiration dates or other termination clauses and may require
        payment
        of a fee. Since many of the commitments may expire without being drawn upon,
        the
        total commitment amounts do not necessarily represent future cash requirements.
        The Company evaluates each customer’s creditworthiness on a case-by-case basis.
        The amount of collateral obtained, if deemed necessary by the Company, upon
        extension of credit is based on management’s credit evaluation. Collateral held
        varies, but may include unimproved and improved real estate, certificates
        of
        deposit or personal property.  Standby
        letters of credit are conditional commitments issued by the Company to guarantee
        the performance of a customer to a third party. The credit risk involved
        in
        issuing letters of credit is essentially the same as that involved in extending
        loans.
  ***Derivative
        Instruments and Hedging Activities***
  As
                  of December 31, 2006, the Company held sixteen interest rate swap
                  positions. The Company entered into a swap on May 24, 2004 which
                  matures
                  May 24, 2007. The interest rate swap contract has a notional amount
                  of
                  $30,000,000 and the Company receives a fixed rate of 3.40% and
                  pays a rate
                  of 90 day LIBOR floating quarterly. The 90 day LIBOR was 5.36%
                  at December
                  31, 2006 and 4.39% at December 31, 2005.
 
 The
        Company entered into a series fifteen of interest rate swap agreements with
        a
        total notional amount of $41,156,509 on September 19, 2006 related to its
        issuance of brokered certificates of deposit. The interest rate swap contracts
        have various notional amounts, maturity dates, receive fixed rates and pay
        floating rates stated in terms of basis points plus or minus 1 month LIBOR
        rate
        as follows:
  NotionalAmount
              
              Maturity
                Date
              
              ReceiveFixed
                  Rate
              
              Pay
                  Floating
                1
                  Month LIBOR
                +/(-)
                  bp$
              4,056,033
              
              
              1/31/08
              
              
              3.75
              %
              
              (137.65
              )3,000,000
              
              
              4/27/08
              
              
              4.15
              %
              
              (94.65
              )1,710,000
              
              
              6/30/08
              
              
              4.00
              %
              
              (105.65
              )2,945,000
              
              
              6/30/08
              
              
              4.10
              %
              
              (96.65
              )5,761,000
              
              
              6/30/08
              
              
              5.44
              %
              
              35.351,500,000
              
              
              2/2/09
              
              
              3.90
              %
              
              (110.65
              )1,602,992
              
              
              6/17/09
              
              
              4.10
              %
              
              (89.65
              )2,942,847
              
              
              6/30/09
              
              
              4.20
              %
              
              (79.65
              )2,000,000
              
              
              6/30/09
              
              
              4.25
              %
              
              (74.65
              )2,357,702
              
              
              8/5/09
              
              
              4.36
              %
              
              (64.65
              )3,550,000
              
              
              2/1/10
              
              
              4.00
              %
              
              (98.65
              )2,986,006
              
              
              4/27/10
              
              
              4.50
              %
              
              (49.65
              )2,002,985
              
              
              6/17/10
              
              
              4.25
              %
              
              (73.65
              )1,984,944
              
              
              6/30/10
              
              
              4.45
              %
              
              (59.65
              )$
              41,156,509
 
 The
        1
        month LIBOR rate at the initiation of the contracts was 5.33%, but the pay
        floating rate changes each month on the monthly reset date of each contract
        at
        the spread indicated above which remains constant. The 1 month LIBOR rate
        of the
        contract was 5.35% and the total notional amount of the contracts remained
        $41,156,509 on December 31, 2006.
 
 The
        objective of the swap agreements is to decrease the Company’s interest rate risk
        exposure. Being asset sensitive, the Company was (and remains) susceptible
        to
        interest rate risk in a downward rate environment. This was, in part,
        attributable to the fixed rate nature of the Company’s brokered certificates of
        deposit and Federal Home Loan Bank borrowings. The Company is using these
        swap
        agreements to convert the fixed rate brokered certificates of deposit and
        borrowings into floating rate instruments. Consequently, the interest rate
        swap
        contracts allow the Company to hedge changes in the fair value of its brokered
        certificates of deposit and borrowings that result from changes in benchmark
        interest rates. The benchmark interest rate is defined as the 1 month LIBOR
        rate. In order to achieve this hedge objective, the Company has agreed to
        pay a
        floating rate of interest in exchange for receiving a fixed rate of interest
        on
        hedge instruments that is equal to the fixed rate coupon on the certificates
        of
        deposit and borrowings.
 
 F-18
 
 **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(7)**
              **Commitments
                  and Contingencies****,
                  continued**
  ***Derivative
        Instruments and Hedging Activities*** , **continued**
  The
        Company uses the long haul method afforded under SFAS No. 133 “Accounting for
        Derivative Instruments and Hedging Activities” to assess the effectiveness of
        its current hedging activity and accounted for the hedge instruments as fair
        value hedges. The Company assesses the effectiveness of the hedge contracts
        by
        regressing the market price, including any premium paid, of the brokered
        certificates of deposit and borrowings (the dependent variables) with the
        market
        price of the interest rate swap (the independent variable) on a quarterly
        basis
        until all the contracts have matured. Each regression analysis will include
        in
        its data set values from a retrospective (realized historical prices) and
        prospective (shocked scenario analysis) basis. The hedge is considered effective
        if the correlation coefficient is within the “80-120” rule, where the R square
        is highly correlative to the value of 1 and the F-stat is large signifying
        high
        explanatory power.
 
 The
        Company has designated these swap contracts as fair value hedges and,
        accordingly, is recording the fair value of the derivative as well as the
        fair
        value of the item being hedged on the balance sheet. Changes in the fair
        value
        of the swap contracts and the items being hedged are recorded in current
        period
        earnings.
 
 ***Contingencies***
  Various
        legal actions and proceedings are pending or are threatened against the Company
        and its subsidiary, some of which seek relief or damages in amounts that
        are
        substantial. These actions and proceedings arise in the ordinary course of
        the
        Company’s business. After consultation with legal counsel, management believes
        that the aggregate liability, if any, resulting from such pending and threatened
        actions and proceedings will not have a material adverse effect on the Company’s
        financial condition.
 
 **(8)**
              **Stock
                  Repurchase Plan**
 Beginning
                  in 1996, the Board of Directors approved a Stock Repurchase Plan
                  of up to
                  $2,000,000 of the Company’s common stock currently outstanding. During
                  2001, the Board of Directors approved an additional $1,000,000,
                  to be used
                  for the Stock Repurchase Plan. The Company retired 12,000, 2,655
                  and
                  48,129 shares of common stock during 2006, 2005 and 2004, respectively.
                  At
                  December 31, 2006, the Company had $588,482 remaining to reacquire
                  shares
                  under the Stock Repurchase Plan.
 
 **(9)**
              **Regulatory
                  Matters**
  The
                  Company and the Bank are subject to various regulatory capital
                  requirements administered by the federal banking agencies. Failure
                  to meet
                  minimum capital requirements can initiate certain mandatory and
                  possibly
                  additional discretionary actions by regulators that, if undertaken,
                  could
                  have a direct material effect on the Company’s and the Bank’s financial
                  statements. Under certain adequacy guidelines and the regulatory
                  framework
                  for prompt corrective action, the Company and the Bank must meet
                  specific
                  capital guidelines that involve quantitative measures of the assets,
                  liabilities, and certain off-balance-sheet items as calculated
                  under
                  regulatory accounting practices. The capital amounts and classification
                  are also subject to qualitative judgments by the regulators about
                  components, risk weightings, and other
                  factors.
 
 Quantitative
                  measures established by regulation to ensure capital adequacy require
                  the
                  Company and the Bank to maintain minimum amounts and ratios of
                  total and
                  Tier I capital to risk-weighted assets and of Tier I capital to
                  average
                  assets. Management believes, as of December 31, 2006 and 2005,
                  that the
                  Company and the Bank met all capital adequacy requirements to which
                  it is
                  subject.
 As
                  of December 31, 2006 and 2005, the most recent notification from
                  the
                  Federal Deposit Insurance Corporation categorized the Bank as well
                  capitalized under the regulatory framework for prompt corrective
                  action.
                  To be categorized as well capitalized the Bank must maintain minimum
                  total
                  risk-based, Tier I risk-based and Tier I leverage ratios as set
                  forth in
                  the table. There are no conditions or events since that notification
                  that
                  management believes have changed the institution’s category. Presented
                  below are the Company’s and the Bank’s actual capital amounts and ratios.
 
 F-19
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(9)**
              **Regulatory
                  Matters****,
                  continued**
   To
                  Be Well CapitalizedFor
                  Capital
              
              Under
                  Prompt CorrectiveActual
              
              Adequacy
                  Purposes
              
              Action
                  ProvisionsAmount
              
              Ratio
              
              Amount
              
              Ratio
              
              Amount
              
              Ratio*(in
                  000’s)*
              
              
              
              *(in
                  000’s)*
              
              
              
              *(in
                  000’s)***As
                  of December 31, 2006**:Total
                  Capital (to RiskWeighted
                  Assets)Consolidated
              
              $
              58,175
              
              
              12
              %
              
              >$
                  39,786
              
              
              >8
              %
              
              N/A
              
              
              N/ABank
              
              $
              53,303
              
              
              11
              %
              
              >$
                  39,589
              
              
              >8
              %
              
              >$
                  49,487
              
              
              >10
              %Tier
                  I Capital(to
                  Risk Weighted Assets)Consolidated
              
              $
              52,426
              
              
              11
              %
              
              >$
                  19,893
              
              
              >4
              %
              
              N/A
              
              
              N/ABank
              
              $
              47,555
              
              
              10
              %
              
              >$
                  19,795
              
              
              >4
              %
              
              >$
                  29,692
              
              
              >6
              %Tier
                  I Capital(to
                  Average Assets)Consolidated
              
              $
              52,426
              
              
              9
              %
              
              >$
                  22,771
              
              
              >4
              %
              
              N/A
              
              
              N/ABank
              
              $
              47,555
              
              
              8
              %
              
              >$
                  22,738
              
              
              >4
              %
              
              >$
                  28,423
              
              
              >5
              %**As
                  of December 31, 2005****:**Total
                  Capital (to RiskWeighted
                  Assets)Consolidated
              
              $
              53,153
              
              
              12
              %
              
              >$
                  36,038
              
              
              >8
              %
              
              N/A
              
              
              N/ABank
              
              $
              48,223
              
              
              11
              %
              
              >$
                  35,774
              
              
              >8
              %
              
              >$
                  44,717
              
              
              >10
              %Tier
                  I Capital(to
                  Risk Weighted Assets)Consolidated
              
              $
              47,826
              
              
              11
              %
              
              >$
                  18,019
              
              
              >4
              %
              
              N/A
              
              
              N/ABank
              
              $
              42,899
              
              
              10
              %
              
              >$
                  17,887
              
              
              >4
              %
              
              >$
                  26,830
              
              
              >6
              %Tier
                  I Capital(to
                  Average Assets)Consolidated
              
              $
              47,286
              
              
              9
              %
              
              >$
                  20,965
              
              
              >4
              %
              
              N/A
              
              
              N/ABank
              
              $
              42,899
              
              
              8
              %
              
              >$
                  20,817
              
              
              >4
              %
              
              >$
                  26,022
              
              
              >5
              %
   Dividends
                  paid by the Bank are the primary source of funds available to the
                  Company.
                  Banking regulations limit the amount of dividends that may be paid
                  without
                  prior approval of the regulatory authorities. These restrictions
                  are based
                  on the level of regulatory classified assets, the prior years’ net
                  earnings, and the ratio of equity capital to total assets. At December
                  31,
                  2006, the Bank could pay approximately $11,626,000 in dividends
                  without
                  obtaining prior regulatory
                  approval.
  **(10)**
              **Incentive
                  Stock Option Plan**
  Under
                  the January 11, 1994 Incentive Stock Option Plan (the “1994 Plan”) the
                  Company may grant options to certain key officers to acquire shares
                  of
                  common stock of the Company at the then fair value, with the number
                  of
                  shares to be determined annually by agreed upon formulas. A total
                  of
                  240,000 shares of common stock were reserved for possible issuance
                  under
                  the 1994 plan. At December 31, 2003, the Company had distributed
                  all the
                  options available for awards under the 1994 Plan. The options may
                  not be
                  exercised prior to five years from the date of grant and are exercisable
                  no later than ten years from that date. Compensation cost in the
                  amount of
                  $86,000 has been recognized for the stock options as of and through
                  December 31, 2006 for this plan. The 1994 Plan has expired according
                  to
                  its terms. However, 61,233 options were unexercised as of December
                  31,
                  2006.
 
 On
                  April 8, 2003, the shareholders approved the WGNB Corp. 2003 Stock
                  Incentive Plan (the “2003 Plan”). Under the 2003 Plan, the Company may
                  grant options to certain key officers to acquire shares of common
                  stock of
                  the Company at the then fair value for incentive stock options
                  and no less
                  than 85% of the fair value for nonqualified stock options, with
                  the number
                  of shares to be determined annually by agreed upon formulas. A
                  total of
                  990,000 shares of common stock were reserved for possible issuance
                  under
                  the 2003 Plan with a maximum of 525,000 shares to be issued under
                  nonqualified stock option grants. During 2006, the Company distributed
                  33,470 of the options available for awards under the 2003 Plan.
                  The
                  options under the 2003 Plan were to be distributed commencing in
                  the 2004
                  fiscal year and will terminate February
                  14, 2015 unless previously terminated by the Board of Directors
                  or when
                  the options approved under the plan have been distributed. The
                  options may
                  be exercised by the participants under a vesting period of five
                  years
                  ratably at 20% per year. The options are exercisable no later than
                  ten
                  years after the date of grant. Compensation cost in the amount
                  of $42,250
                  has been recognized for the stock options as of and through December
                  31,
                  2006. Under the 2003 plan, 69,003 options were unexercised as of
                  December
                  31, 2006.
 
 F-20
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(10)**
              **Incentive
                  Stock Option Plan****,
                  continued**
  A
        summary
        status of the Company’s stock option plans as of December 31, 2006, 2005 and
        2004, and changes during the years ending on those dates, is presented
        below:
 
 2006
              
              2005
              
              2004Wtd.
                  Avg.
              
              
              
              Wtd.
                  Avg.
              
              
              
              Wtd.
                  Avg.Exercise
              
              
              
              Exercise
              
              
              
              ExerciseShares
              
              Price
              
              Shares
              
              Price
              
              Shares
              
              PriceOutstanding,
                  beginning of year
              
              
              184,676
              
              $
              16.53
              
              
              150,150
              
              $
              15.79
              
              
              203,162
              
              $
              12.35Awarded
                  during the year
              
              
              33,470
              
              $
              24.99
              
              
              35,596
              
              $
              19.62
              
              
              23,458
              
              $
              19.25Exercised
                  during the year
              
              
              (51,022
              )
              $
              13.94
              
              
              (1,070
              )
              $
              15.65
              
              
              (76,470
              )
              $
              7.71Forfeited
                  during year
              
              
              (36,888
              )
              $
              17.50
              
              
              -
              
              
              -
              
              
              -
              
              
              -Outstanding,
                  end of year
              
              
              130,236
              
              $
              19.44
              
              
              184,676
              
              $
              16.53
              
              
              150,150
              
              $
              15.79Options
                  exercisable at year end
              
              
              13,374
              
              $
              17.48
              
              
              35,783
              
              $
              13.01
              
              
              23,352
              
              $
              11.41
 
 The
        following information applies to all options outstanding at December 31,
        2006:
  Options
                  Outstanding
              
              Options
                  ExcersiableShares
              
              Range
              
              Wtd.
                  Avg.
                Exercise
                Price
              
              Wtd.
                  Avg.
                Remaining
                Life
                  (Years)
              
              Shares
              
              Wtd.
                  Avg.
                Exercise
                Price
              
              Intrinsic
                Value61,233
              
              $
              13.33
                  - 16.66
              
              $
              16.37
              
              
              5.48
              
              
              5,341
              
              $
              14.52
              
              $
              69,38069,003
              
              $
              19.25
                  - 24.99
              
              $
              22.17
              
              
              7.43
              
              
              8,033
              
              $
              19.45
              
              $
              64,746130,236
              
              $
              13.33
                  - 24.99
              
              $
              19.44
              
              
              6.08
              
              
              13,374
              
              $
              17.48
              
              $
              134,126
 
 The
        total
        intrinsic value of options of options **** exercised
        in 2006, 2005 and 2004 was $578,435, $6,013 and $959,350, respectively. The
        intrinsic value of exercisable options is based on a market price of $27.51
        as
        of December 31, 2006.
 
 **(11)**
              **Stock
                  Split**
  On
        September 12, 2006, The Company’s board of directors declared a three-for-two
        stock split for shareholders of record as of October 16, 2006, payable on
        November 15, 2006. All share and per share amounts have been restated to
        reflect
        the stock split as if it had occurred on January 1, 2004.
  **(12)**
              **Defined
                  Contribution Plan**
 The
                  Company began a qualified retirement plan pursuant to Internal
                  Revenue
                  Code Section 401(k) in 1996 covering substantially all employees
                  subject
                  to certain minimum age and service requirements. Contribution to
                  the plan
                  by employees is voluntary. During 2006, 2005 and 2004, the Company
                  matched
                  100% of the participants’ contributions up to 6% of the participants’
                  salaries, subject to the annual 401(k) contribution limits. The
                  Company
                  also made discretionary contributions to the plan in 2006, 2005
                  and 2004
                  of 5% of participants’ salaries. Contributions to the plan charged to
                  expense during 2006, 2005 and 2004 were $547,255, $491,265 and
                  $455,172,
                  respectively.
 
 F-21
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(13)**
              **Income
                  Taxes**
 The
                  components of the provision for income taxes in the consolidated
                  statements of earnings for the years ended December 31, 2006, 2005
                  and
                  2004 are as follows:
 
 2006
              
              2005
              
              2004Current:Federal
              
              $
              3,353,207
              
              
              3,266,346
              
              
              2,387,873State
              
              
              293,962
              
              
              286,317
              
              
              265,319Deferred:Federal
              
              
              (169,031
              )
              
              (594,280
              )
              
              26,006State
              
              
              (19,614
              )
              
              (68,958
              )
              
              2,890Total
              
              $
              3,458,524
              
              
              2,889,425
              
              
              2,682,088
 
 The
        differences between the provision for income taxes and the amount computed
        by
        applying the statutory federal income tax rate to earnings before income
        taxes
        are as follows:
 
 2006
              
              2005
              
              2004Pretax
                  income at statutory rates
              
              $
              4,007,226
              
              
              3,385,350
              
              
              2,973,726Add
                  (deduct):Tax-exempt
                  interest income
              
              
              (430,180
              )
              
              (479,991
              )
              
              (448,781
              )State
                  taxes, net of federal effect
              
              
              174,612
              
              
              68,924
              
              
              54,870Non-deductible
                  interest expense
              
              
              70,448
              
              
              17,885
              
              
              12,757Other
              
              
              (363,582
              )
              
              (102,743
              )
              
              89,516$
              3,458,524
              
              
              2,889,425
              
              
              2,682,088
 
 The
                  following summarizes the net deferred tax asset, which is included
                  as a
                  component of other assets, at December 31, 2006 and
                  2005.
 
 2006
              
              2005Deferred
                  income tax assets:Allowance
                  for loan losses
              
              $
              2,085,434
              
              
              1,971,467Other
                  real estate owned
              
              
              32,358
              
              
              183,706Other
              
              
              130,034
              
              
              9,407Total
                  gross deferred income tax assets
              
              
              2,247,826
              
              
              2,164,580Deferred
                  income tax liabilities:Low
                  income housing credits
              
              
              (220,663
              )
              
              (186,030
              )Premises
                  and equipment
              
              
              (173,449
              )
              
              (299,490
              )Net
                  unrealized gain on securities available-for-sale
              
              
              (36,086
              )
              
              (64,966
              )Other
              
              
              (1,747
              )
              
              (15,738
              )Total
                  gross deferred income tax liabilities
              
              
              (431,945
              )
              
              (566,224
              )Net
                  deferred income tax asset
              
              $
              1,815,881
              
              
              1,598,356
 
 F-22
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(14)**
              **Related
                  Party Transactions**
 The
                  Bank conducts transactions with directors and executive officers,
                  including companies in which they have beneficial interests, in
                  the normal
                  course of business. It is the Bank’s policy to comply with federal
                  regulations that require that loan transactions with directors
                  and
                  executive officers be made on substantially the same terms as those
                  prevailing at the time made for comparable loans to other persons.
                  The
                  following summary reflects activity for related party loans for
                  2006:
  Beginning
                  balance
              
              $
              3,461,593New
                  loans
              
              
              3,857,408Repayments
              
              
              (3,546,595
              )Change
                  in related parties
              
              
              (398,668
              )Ending
                  balance
              
              $
              3,373,738
 
 At
        December 31, 2006 and 2005, deposits from directors, executive officers,
        and
        their related interests totaled approximately $7,114,000 and $7,559,000,
        respectively.
 
 **(15)**
              **Other
                  Operating Expenses**
  Components
                  of other operating expenses which exceed 1% of total interest income
                  and
                  other income are as follows:
  2006
              
              2005
              
              2004Professional
                  fees
              
              $
              662,967
              
              
              644,479
              
              
              622,993Printing
                  and supplies
              
              $
              365,189
              
              
              303,452
              
              
              319,709
 
 **(16)**
              **Fair
                  Value of Financial
                  Instruments**
  The
                  Company is required to disclose fair value information about financial
                  instruments, whether or not recognized on the face of the balance
                  sheet,
                  for which it is practicable to estimate that value. The assumptions
                  used
                  in the estimation of the fair value of the Company’s financial instruments
                  are detailed below. Where quoted prices are not available, fair
                  values are
                  based on estimates using discounted cash flows and other valuation
                  techniques. The use of discounted cash flows can be significantly
                  affected
                  by the assumptions used, including the discount rate and estimates
                  of
                  future cash flows. The following disclosures should not be considered
                  a
                  surrogate of the liquidation value of the Company or its subsidiary,
                  but
                  rather a good-faith estimate of the increase or decrease in value
                  of
                  financial instruments held by the Company since purchase, origination,
                  or
                  issuance.
 
 Cash
        and Cash Equivalents
  For
                  cash, due from banks and federal funds sold, the carrying amount
                  is a
                  reasonable estimate of fair value.
 
 Securities
  The
                  fair values for investment securities are based on quoted market
                  prices.
 
 Loans
  The
                  fair value of fixed rate loans is estimated by discounting the
                  future cash
                  flows using the current rates at which similar loans would be made
                  to
                  borrowers with similar credit ratings. For variable rate loans,
                  the
                  carrying amount is a reasonable estimate of fair
                  value.
 
 Deposits
  The
                  fair value of demand deposits, savings accounts, NOW and certain
                  money
                  market deposits is the amount payable on demand at the reporting
                  date. The
                  fair value of fixed maturity certificates of deposit is estimated
                  by
                  discounting the future cash flows using the rates currently offered
                  for
                  deposits of similar remaining
                  maturities.
 
 Federal
        Funds Purchased
  For
        federal funds purchased, the carrying amount is a reasonable estimate of
        fair
        value.
 
 Federal
        Home Loan Bank Advances
  The
                  fair value of advances outstanding is based on the quoted value
                  provided
                  by the FHLB.
 
 F-23
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
  **(16)**
              **Fair
                  Value of Financial Instruments****,
                  continued**
  Derivative
        Instruments
  For
                  derivative instruments, fair value is estimated as the amount that
                  the
                  Company would receive or pay to terminate the contracts at the
                  reporting
                  date, taking into account the current unrealized gains or losses
                  on open
                  contracts.
 
 Commitments
        to Extend Credit, Standby Letters of Credit
  Off
                  balance sheet instruments (commitments to extend credit and standby
                  letters of credit) are generally short-term and at variable interest
                  rates. Therefore, both the carrying value and estimated fair value
                  associated with these instruments are
                  immaterial.
 
 Limitations
  Fair
                  value estimates are made at a specific point in time, based on
                  relevant
                  market information and information about the financial instrument.
                  These
                  estimates do not reflect any premium or discount that could result
                  from
                  offering for sale at one time the Company’s entire holdings of a
                  particular financial instrument. Because no market exists for a
                  significant portion of the Company’s financial instruments, fair value
                  estimates are based on many judgments. These estimates are subjective
                  in
                  nature and involve uncertainties and matters of significant judgment
                  and
                  therefore cannot be determined with precision. Changes in assumptions
                  could significantly affect the
                  estimates.
 
 Fair
                  value estimates are based on existing on and off balance sheet
                  financial
                  instruments without attempting to estimate the value of anticipated
                  future
                  business and the value of assets and liabilities that are not considered
                  financial instruments. Significant assets and liabilities that
                  are not
                  considered financial instruments include deferred income taxes
                  and
                  premises and equipment. In addition, the tax ramifications related
                  to the
                  realization of the unrealized gains and losses can have a significant
                  effect on fair value estimates and have not been considered in
                  the
                  estimates.
 
 The
        carrying amount and estimated fair values of the Company’s financial instruments
        at December 31, 2006 and 2005 are as follows:
  2006
              
              2005Carrying
              
              Estimated
              
              Carrying
              
              EstimatedAmount
              
              Fair
                  Value
              
              Amount
              
              Fair
                  ValueAssets:Cash
                  and cash equivalents
              
              $
              13,233,448
              
              
              13,233,448
              
              
              16,221,889
              
              
              16,221,889Securities
                  available-for-sale
              
              $
              64,251,234
              
              
              64,251,234
              
              
              64,359,833
              
              
              64,359,833Securities
                  held-to-maturity
              
              $
              7,837,389
              
              
              7,837,389
              
              
              6,736,552
              
              
              6,839,552Derivative
                  instruments
              
              $
              262,184
              
              
              262,184
              
              
              -
              
              
              -Loans,
                  net
              
              $
              467,752,885
              
              
              466,014,287
              
              
              417,551,614
              
              
              414,936,820Liabilities:Deposits
              
              $
              462,813,436
              
              
              461,776,410
              
              
              429,049,445
              
              
              427,101,659Federal
                  funds purchased
              
              $
              2,475,000
              
              
              2,475,000
              
              
              -
              
              
              -Federal
                  Home Loan Bank advances
              
              $
              52,000,000
              
              
              51,266,931
              
              
              42,000,000
              
              
              41,494,694Derivative
                  instruments
              
              $
              -
              
              
              -
              
              
              571,000
              
              
              571,000
  F-24
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(17)**
              **WGNB
                  Corp. (Parent Company Only) Financial
                  Information**
 
 Balance
        Sheets
 
 December
        31, 2006 and 2005
  2006
              
              2005AssetsCash
              
              $
              3,375,871
              
              
              2,573,339Investment
                  in Bank
              
              
              47,625,140
              
              
              43,025,166Securities
                  available-for-sale
              
              
              -
              
              
              606,240Securities
                  held-to-maturity
              
              
              2,275,243
              
              
              2,466,240Other
                  assets
              
              
              180,185
              
              
              105,831$
              53,456,439
              
              
              48,776,816Liabilities
                  and Stockholders’ EquityDividends
                  payable
              
              $
              959,945
              
              
              824,783Total
                  liabilities
              
              
              959,945
              
              
              824,783Stockholders’
                  equity
              
              
              52,496,494
              
              
              47,952,033$
              53,456,439
              
              
              48,776,816
 
 Statements
        of Earnings
 
 For
        the
        Years Ended December 31, 2006, 2005 and 2004
 
 2006
              
              2005
              
              2004Dividends
                  from Bank
              
              $
              3,601,555
              
              
              3,058,719
              
              
              2,564,479Other
                  income
              
              
              234,458
              
              
              310,101
              
              
              157,496Other
                  expense
              
              
              (36,085
              )
              
              (21,251
              )
              
              (36,083
              )Earnings
                  before equity in undistributedearnings
                  of Bank
              
              
              3,799,928
              
              
              3,347,569
              
              
              2,685,892Equity
                  in undistributed earnings of Bank
              
              
              4,527,508
              
              
              3,719,918
              
              
              3,378,273Net
                  earnings
              
              $
              8,327,436
              
              
              7,067,487
              
              
              6,064,165
  F-25
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(17)**
              **WGNB
                  Corp. (Parent Company Only) Financial Information****,
                  continued**
 
 Statements
        of Cash Flows
 
 For
        the
        Years Ended December 31, 2006, 2005 and 2004
 
 2006
              
              2005
              
              2004Cash
                  flows from operating activities:Net
                  earnings
              
              $
              8,327,436
              
              
              7,067,487
              
              
              6,064,165Adjustments
                  to reconcile net earnings to netcash
                  provided by operating activities:Amortization
                  and accretion
              
              
              5,019
              
              
              11,722
              
              
              11,846Loss
                  on sale of other real estate
              
              
              -
              
              
              -
              
              
              9,675Stock
                  option expense
              
              
              128,250
              
              
              -
              
              
              -Equity
                  in undistributed earnings of Bank
              
              
              (4,527,508
              )
              
              (3,719,918
              )
              
              (3,378,273
              )Change
                  in other assets
              
              
              (74,354
              )
              
              (48,691
              )
              
              (6,538
              )Change
                  in other liabilities
              
              
              (128,525
              )
              
              (56,305
              )
              
              2,348Net
                  cash provided by operating activities
              
              
              3,730,318
              
              
              3,254,295
              
              
              2,703,223Cash
                  flows from investing activities:Purchase
                  of securities held-to-maturity
              
              
              -
              
              
              (232,500
              )
              
              (1,604,000
              )Proceeds
                  from paydowns of securities available-for-sale
              
              
              599,887
              
              
              -
              
              
              -Proceeds
                  from paydowns of securities held-to-maturity
              
              
              192,331
              
              
              101,414
              
              
              -Proceeds
                  from sale of other real estate
              
              
              -
              
              
              -
              
              
              39,540Net
                  cash provided (used) by investing activities
              
              
              792,218
              
              
              (131,086
              )
              
              (1,564,460
              )Cash
                  flows from financing activities:Dividends
                  paid
              
              
              (3,466,603
              )
              
              (2,921,611
              )
              
              (2,460,728
              )Exercise
                  of stock options
              
              
              711,247
              
              
              16,736
              
              
              589,977Retirement
                  of common stock
              
              
              (964,648
              )
              
              (52,346
              )
              
              (964,242
              )Net
                  cash used by financing activities
              
              
              (3,720,004
              )
              
              (2,957,221
              )
              
              (2,834,993
              )Increase
                  (decrease) in cash
              
              
              802,532
              
              
              165,988
              
              
              (1,696,230
              )Cash
                  at beginning of year
              
              
              2,573,339
              
              
              2,407,351
              
              
              4,103,581Cash
                  at end of year
              
              $
              3,375,871
              
              
              2,573,339
              
              
              2,407,351Supplemental
                  disclosure of non-cash financing activities:Change
                  in dividends payable
              
              $
              135,162
              
              
              137,108
              
              
              103,751Changes
                  in unrealized gains on securitiesavailable-for-sale,
                  net of tax
              
              $
              (56,059
              )
              
              (997,681
              )
              
              (265,213
              )Issuance
                  of common stock to directors in lieu ofdirectors’
                  fees
              
              $
              -
              
              
              14,246
              
              
              12,840
 
 F-26
  **WGNB
        CORP.**
 
 **Notes
        to Consolidated Financial Statements, continued**
 
 **(18)**
              **Subsequent
                  Events (unaudited)**
  On
        January 22, 2007, WGNB Corp. entered into an agreement and plan of
        reorganization by and among WGNB Corp., West Georgia National Bank, First
        Haralson Corporation, and First National Bank of Georgia whereby First Haralson
        Corporation will be merged with and into WGNB Corp. and, concurrently, First
        National Bank of Georgia will be merged into West Georgia National Bank.
        The
        consummation of the transaction is subject to approval by both companies’
shareholders and is anticipated to close in the second quarter of
        2007. First
        Haralson Corporation is headquartered in Buchanan, Georgia and operates four
        branches in Haralson County and two branches in Carroll County. As of December
        31, 2006, First Haralson Corporation held $215.4 million in total assets,
        $139.9
        million in total loans, $176.9 million in total deposits and $25.7 million
        of
        shareholders’ equity. For the fiscal year ended December 31, 2006, First
        Haralson Corporation recorded net income of $2,400,000.
  Under
        the
        terms of the merger agreement, First Haralson Corporation’s shareholders may
        elect to receive cash, WGNB Corp. common stock, or a combination of the two
        for
        $46,250,000 in the aggregate. The shareholder election is subject to limits
        of a
        minimum of $11,562,500 and a maximum of $18,500,000 of cash consideration
        being
        issued in the merger. In addition, the terms of the merger agreement allow
        First
        Haralson Corporation to pay a one-time, special dividend not to exceed
        $7,250,000 in the aggregate, or approximately $35.67 per share, for each
        First
        Haralson Corporation share to First Haralson Corporation shareholders prior
        to
        the closing of the proposed transaction. The transaction has been unanimously
        approved by the boards of directors of both companies and is subject to
        shareholder and regulatory approvals, as well as other customary conditions
        of
        closing.
  F-27