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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|           |  |                                               
|---------- |  | ----------------------------------------------
|(Mark One)
|x          |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
|           |  | SECURITIES EXCHANGE ACT OF 1934:              

For the fiscal year ended December 31, 2003

|  |  |                                                   
|- |  | --------------------------------------------------
|o |  | TRANSITION REPORT UNDER 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
(State of incorporation) |  | 58-1640130
(I.R.S. Employer Identification No.)

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

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

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

Common Stock, $1.25 par value
(Title of Class)

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  o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes  o No x

The aggregate market value of the Registrants Common Stock held by
non-affiliates of the Registrant as of June 30, 2003 which is the last business
day of its most recently completed second fiscal quarter, was approximately
$51,623,740 based on a per share price of $28.00 (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 27, 2004, there were 3,307,123 shares of the Registrants
Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive Proxy Statement for the 2004
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Report.



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WGNB CORP. 2003 Form 10-K Annual Report TABLE OF CONTENTS Item Number
    
    
    
    Page orin Form 10-K
    
    Description
    
    LocationPART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5.
    
    Market for the Common Equity and Related Shareholder Matters
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    17Item 7.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 8.
    
    Financial Statements and Supplementary Data
    
    
    34Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    34Item 9A.
    
    Controls and Procedures
    
    
    34PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    36Item 11.
    
    Executive Compensation
    
    
    36Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
    
    
    36Item 13.
    
    Certain Relationships and Related Transactions
    
    
    36Item 14.
    
    Principal Accountant Fees and Services
    
    
    36PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    37Signatures
    
    
    40




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PART I Item 1. Business General WGNB Corp. is a $393 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 27, 2004, the Company had 3,307,123 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. 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 and conducts most of its lending transactions
from and within its primary service area encompassing Carroll County, Georgia
and the western portion of Douglas County, Georgia. The Banks main office is located in Carrollton, Georgia. The Bank
operates a total of seven branches and six additional 24-hour ATM sites,
located in Carroll and Douglas Counties in Georgia. The Bank operates two
additional branches in the city of Carrollton, two branches in Villa Rica, one
branch in Bowdon and one branch in Douglasville, Georgia. As a convenience to its customers, the Bank offers at most of its branch
locations Saturday banking hours, drive-thru teller windows and 24-hour
automated teller machines. The Bank is a member of Honor, 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 web site
located at www.wgnb.com. Information included on the Banks web site 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, 2003, the Bank had deposits of approximately $303
million, and approximately 27 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 be likely to 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, 2003. 1




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Deposit Mix At December 31, 2003Non-interesting bearing demand
    
    
    13
    %NOW accounts and money market
    
    
    46
    %Savings
    
    
    4
    %Time DepositsUnder $100,000
    
    
    27
    %$100,000 and over
    
    
    10
    %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, 2003, the Bank had approximately
$296 million in total loans outstanding, representing 75% of its total assets
of approximately $393 million. The loan portfolio is made up of both fixed and
adjustable rate loans. Approximately 66% of the Companys total loan portfolio
is fixed rate and 33% is adjustable rate as of December 31, 2003. No material
portion of the Banks loans is concentrated within a single industry or group
of related industries. 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 be likely to 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 $249
million, or 84%, of the Banks total loans as of December 31, 2003.
Approximately 64% of the real estate loans are fixed rate and 36% are
adjustable rate. Approximately 51% 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 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, 2003, commercial loans constituted
approximately $31 million, or 11% of the Banks total loans. Approximately 68%
of commercial loans are fixed rate while 32% 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, 2003, the Bank held
approximately $16 million of consumer loans, representing 6% of its total
loans. Consumer loans are primarily fixed rate in nature with 97% of this loan
category carrying fixed rates. These loans are typically collateralized by
personal automobiles, recreational vehicles or household items 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 who 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 2




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damage, loss or depreciation. In addition, consumer loan collections are
dependent on the borrowers continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws,
including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans. Commercial loans and loans secured by commercial and multi-family real
estate properties are generally larger and involve 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. 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 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 minimum 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 maximum target concentrations of loans by category as
a percentage of total loans: Single-payment loans
    
    
    25
    %Unsecured loans
    
    
    6
    %Loans secured by:Residential real estate
    
    
    30
    %Commercial real estate
    
    
    35
    %Convenience stores assets
    
    
    6
    %Hotels/motels
    
    
    5
    %Poultry facilities
    
    
    7
    %Acquisition & development/construction loans
    
    
    25
    %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. Although, in aggregate, it accounts for a large portion
of the loan portfolio, real estate lending has historically been the Companys
lowest loan loss category. 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 plus 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




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
    
    the amounts exceeding the limit are secured by readily marketable
securities, up to a limit of 25% of capital and reserves;
    
    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% (or 25% with the approval of a majority of the Board of Directors
subject to certain additional restrictions) 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% (or 25% with the approval of a majority of
the Board of Directors subject to certain additional restrictions) 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 that has not been proven. 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. Loans to value 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 $100,000, depending on
seniority. The OLC, which consists of the president, two executive vice
presidents, one senior vice president and other lenders, has a lending limit of
$300,000 for secured and $100,000 for unsecured loans. Loans between $300,000
and the Banks legal lending limit must be approved by an executive loan
committee, which is made up of the CEO of the Company, the President of the
Bank and six outside directors. Loan Review.The Bank has a comprehensive loan review process involving
an independent loan review officer and lending officers. The loan review
process is designed to promote early identification of credit quality problems.
All loan officers are charged with the responsibility of rating their loans.
According to the current bank loan policy, the scope of loan review activity is
to include a minimum of 90% of all commercial and business purpose loan
relationships greater than $500,000, with random sample checks on consumer
loans and other loans less than $500,000. Additionally, the loan review
officer monitors the loan rating system to ensure proper risk identification.
The Banks risk identification process is also reviewed by its regulators and
its independent auditors. Upgrades and credit risk grades require the
approval of the loan review officer. In the event of disagreement, the
executive loan committee makes the final decision. Market Area The following statistical data is based on information contained in a
report published by the State University of West Georgia Department of
Economics dated November 6, 2003 and information published by the FDIC on its
web site. 4




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The Banks primary market area includes all of Carroll County, Georgia and
the western portion of Douglas County, Georgia. Approximately 98% 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 Paulding, Douglas,
Heard, Haralson and Coweta, 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 29th among Georgias
159 counties in land area with 499 square miles and 21st (up from 23rd in 2000)
in population with a 2002 population of 94,907. Carroll Countys major
industries include manufacturing, wholesale trade, food processing, paper and
lumber products, construction and health services. The Banks main office is
located in Carrollton, which is the county seat for Carroll County. The State
University of West Georgia, which serves more than 9,000 students, and Tanner
Medical Center are also located in Carrollton. During the 1990s the Carroll County grew at an average annual rate of 2%,
down slightly from the 2.5% annual rate in the 1980s and slower than the State
of Georgia annual growth rate of 2.4%. Net migration accounted for 60% of the
1990 population growth, while 40% was due to natural increase. Carroll
Countys population growth has accelerated in recent years, growing at an
annual average rate of 3.8% from 2000-2002. This is almost double the Countys
growth rate in the 1990s. From April 2000 to July 2002, Carrolls population
grew 7,500 with net migration accounting for 83% of the change and most of the
growth occurring on the I-20 corridor near Villa Rica and Temple, Georgia. 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 compound annual growth rate
for deposits at financial institutions in Carroll County for the years
1993-2003 was 5.3%. The amount of total deposits in Carroll County was
approximately $1.19 billion as of June 30, 2003, compared to total deposits of
approximately $710 million as of June 30, 1993. Douglas County had the second
largest deposit base in our market area with $862 million in total deposits,
and Paulding County had the third largest base with $608 million in total
deposits, as of June 30, 2003. The Bank held a market share of 24.0% of total
deposits in Carroll County as of June 30, 2003, representing the largest
deposit market share for any financial institution located in Carroll County. The Bank established two branches in the Douglas County market over the
past four years. One branch is located on Highway 5 just south of I-20 and the
other is located in a developing are known as Mirror Lake located on Mirror
Lake Boulevard just north of I-20. The Bank is presently upgrading its Mirror
Lake temporary branch facility to a permanent facility located in front of The
Village at Mirror Lake Shopping Center. The Bank intends to serve the western
Douglas County market with these two locations. Douglas County ranks 139th out of 159 counties in land area, but 16th in
population in Georgia in 2002 with a population of 98,650. During the 90s,
Douglas grew at an annual rate of 2.6% with migration accounting for 65% of
that growth. From 2000 to 2002 that growth rate increased to an average annual
rate of 3.2% per year. Based on building permit activity, Douglas appears
poised to join Carroll, Coweta, and Paulding as one of the 100 fastest-growing
counties in the U.S. when the 2003 county population estimates are released in
March 2004. From April 2000 to July 2002, Douglas Countys population grew
6,344 with net migration accounting for almost 70% of that growth. All of the Companys market area has been affected by the downturn in both
the local and national economies. Even before terrorism became a continued
threat and foreign affairs impacted the national economy, evidence suggested a
rise in unemployment in all counties in the Companys market area. Retail
trade and business expansion is likely to be effected by the downturn.
Inventories of single-family homes are increasing with the upscale home market
experiencing particularly hard times. Retail sales were down in 2001 as
evidenced by a 15% reduction in sales tax collections in Georgia. All of these
factors may have an impact on the Companys business growth. 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 5




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(such as McIntosh Commercial Bank, First Georgia Community Bank, Community Bank
of West Georgia and Gainesville Bank & Trust) 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 SouthTrust 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
is the largest and oldest independent bank in Carroll County. McIntosh
Commercial Bank commenced operations in the fourth quarter of 2002, Community
Bank of West Georgia commenced operations in the second quarter of 2003, and
First Georgia Community Bank commenced operations in the third quarter of 2003
and a fourth de novo bank is in formation in Bremen, Georgia in north Carroll
County. The de novo banks are limited in their funding strategies because they
typically do not have access to wholesale funding. This has the effect of
running up 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,
investment and international banking, which the Bank does not offer, and have
greater financial resources or have substantially higher lending limits than do
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 and desire to forge banking relationships with locally
owned and managed institutions. The Bank offers many personalized services and attracts customers by being
responsive and sensitive to the needs of the community. The Bank relies not
only on the goodwill and referrals of satisfied customers, as well as
traditional media advertising to attract new customers, but also on individuals
who develop new relationships to build the customer base of the Bank. 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, 2003, the Bank had 145 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. 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 6




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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;
    
    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 7




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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. 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. Financial Services Modernization Act.On November 12, 1999, the President
signed into law the Gramm-Leach-Bliley Act of 1999, known as the Financial
Services Modernization Act of 1999, which repeals many of the restrictions on
the activities of banks and bank holding companies. The law establishes two
new structures  financial holding companies and financial subsidiaries -
that enable qualifying bank holding companies and banks to provide a wide
variety of financial services that formerly could be performed only by
insurance companies and securities firms. The law also permits bank
affiliations with insurance and securities firms. At this time, the Company
does not intend to seek qualification to enter into these additional financial
services areas. Source of Strength; Cross-Guarantee.Under Federal Reserve policy, a bank
holding company is expected to act as a source of financial strength to its
bank subsidiaries and to commit resources to support these subsidiaries. This
support may be required at times when, absent such policy, the bank holding
company might not otherwise provide such support. Under these provisions, a
bank holding company may be required to loan money to its subsidiary banks in
the form of capital notes or other instruments which qualify for capital under
regulatory rules. Under the BHCA, the Federal Reserve may require a bank
holding company to terminate any activity or relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserves determination that such activity or control constitutes a serious
risk to the financial soundness or stability of any subsidiary depository
institution of the bank holding company. Further, federal bank regulatory
authorities have additional discretion to require a bank holding company to
divest itself of any bank or nonbank subsidiary if the agency determines that
divestiture may aid the depository institutions financial condition. The Bank
may be required to indemnify, or cross-guarantee, the FDIC against losses it
incurs with respect to any other bank controlled by the Company, which in
effect makes the Companys equity investments in healthy bank subsidiaries
available to the FDIC to assist any failing or failed bank subsidiary of the
Company. State Regulation.Activities of the Company are subject to certain
provisions of The Financial Institutions Code of Georgia and regulations issued
pursuant to such code. These provisions are administered by The Georgia
Department of Banking & Finance, which has concurrent jurisdiction with the
Federal Reserve over the activities of the Company. The laws and regulations
administered by The Georgia Department of Banking & Finance are generally
consistent with, or supplemental to, those federal laws and regulations
discussed herein. The Bank As a national bank, the Bank is subject to the supervision and examination
by the Office of the Comptroller of the Currency (the OCC). Deposits in the
Bank are insured by the FDIC up to a maximum amount 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 8




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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 March
1997 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 Relieft
Act of 1940 governing the repayment terms of, and property rights underlying,
secured obligations of persons in military service, and the rules and
regulations of the various federal agencies charged with the responsibility of
implementing such federal laws. The deposit operations of the Bank also are
subject to the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the
Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to
implement that act, which governs automatic deposits to and withdrawals from
deposit accounts and customers rights and liabilities arising from the use of
automated teller machines and other electronic banking services. The Banks
commercial transactions are also subject to the provisions of the Uniform
Commercial Code and other provisions of The Georgia Code Annotated. Deposit Insurance The deposits of the Bank are currently insured to 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. 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 9




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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. SeeCapital 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 $2,216,818 to the Company during 2003. Under the OCC
guidelines, as of December 31, 2003, the Bank was permitted to pay the Company
dividends of up to $7,168,000 in addition to current earnings 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. 10




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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: Total Risk-
    
    Tier I Risk-
    
    Tier IClassification
    
    Based Capital
    
    Based Capital
    
    LeverageWell Capitalized (1)
    
    
    10
    %
    
    
    6
    %
    
    
    5
    %Adequately Capitalized (1)
    
    
    8
    %
    
    
    4
    %
    
    
    4
    %(2)Undercapitalized (3)
    
    
    <8
    %
    
    
    <4
    %
    
    
    <4
    %Significantly Undercapitalized (3)
    
    
    <6
    %
    
    
    <3
    %
    
    
    <3
    %Critically Undercapitalized (3)
    
    
    
    
    
    
    
    
    
    
    <2
    %
   (1)
    
    An institution must meet all three minimums.(2)
    
    3% for composite 1-rated institutions, subject to appropriate federal banking agency
guidelines.(3)
    
    An institution is classified as undercapitalized if it is below the specified capital
level for any of the three capital measures. A depository institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives a
less than satisfactory examination rating in any one of four categories. As a
depository institution moves downward through the capitalization categories,
the degree of regulatory scrutiny will 11




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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 Footnote 9 of the Notes to Financial Statements for
additional details. Interstate Banking and Branching Restrictions Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the Riegle-Neal Act), effective September 29, 1995, 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 also provides that, beginning on June 1, 1997, banks
with different home states may merge, unless a particular state opts out of the
statute. Consistent with the Riegle-Neal Act, Georgia adopted legislation in
1996 which has permitted interstate bank mergers since June 1, 1997. In addition, beginning June 1, 1997, the Riegle-Neal Act has permitted
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. Anti-Terrorism Legislation In the wake of the tragic events of September 11th, on October 26, 2001,
the President signed the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT)
Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to
prohibitions against specified financial transactions and account relationships
as well as enhanced due diligence and know your 12




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customer standards in their dealings with foreign financial institutions and
foreign customers. For example, the enhanced due diligence policies,
procedures, and controls generally require financial institutions to take
reasonable steps   
    
    to conduct enhanced scrutiny of account relationships
to guard against money laundering and report any suspicious
transaction;
    
    to ascertain the identity of the nominal and beneficial
owners of, and the source of funds deposited into, each account
as needed to guard against money laundering and report any
suspicious transactions;
    
    to ascertain for any foreign bank, the shares of which
are not publicly traded, the identity of the owners of the
foreign bank, and the nature and extent of the ownership interest
of each such owner; and
    
    to ascertain whether any foreign bank provides
correspondent accounts to other foreign banks and, if so, the
identity of those foreign banks and related due diligence
information. Under the USA PATRIOT Act, financial institutions are required to
establish anti-money laundering programs. The USA PATRIOT Act sets forth
minimum standards for these programs, including:  
    
    the development of internal policies, procedures, and controls;
    
    the designation of a compliance officer;
    
    an ongoing employee training program; and
    
    an independent audit function to test the programs. In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury
to adopt rules increasing the cooperation and information sharing between
financial institutions, regulators, and law enforcement authorities regarding
individuals, entities and organizations engaged in, or reasonably suspected
based on credible evidence of engaging in, terrorist acts or money laundering
activities. Any financial institution complying with these rules will not be
deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act,
as discussed above. The Bank currently has policies and procedures in place
designed to comply with the USA PATRIOT Act. 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. 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. 13




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Business Risks Like all other banking and financial services companies, the Companys
business and results of operations are subject to a number of risks, many of
which are outside of the Companys control. In addition to the other
information in this report, readers should carefully consider that the
following important factors, among others, could materially impact the
Companys business and future results of operations. The Companys success depends on its ability to compete effectively in the
competitive financial services industry  -The Company and the Bank encounter
strong competition for deposits, loans, and other financial services in all of
their lines of business. The Companys principal competitors include other
commercial banks, savings banks, credit unions and savings and loan
associations. Many of the Companys competitors are significantly larger 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 the
Company is unable to offer, have greater financial resources or have
substantially higher lending limits to compete with. Further, the Companys
ability to compete effectively is dependent on its ability to adapt
successfully to technological and other changes within the banking and
financial services industry. The Companys business may be adversely affected by the highly regulated
environment in which it operates- The Company is 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 the Companys costs of doing
business, restrict its access to new products or markets, or otherwise
adversely affect its operations or the manner in which it conducts its business
and, on the whole, adversely affect the profitability of its business. The Company may be adversely affected by a general deterioration in
economic conditions- The risks associated with the Companys 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, the Companys servicing
costs, collection costs and credit losses may also increase in periods of
economic slow down or recessions. The Company is subject to credit risk inherent in the Banks loan
portfolios- In the financial services industry, there is always a risk that
certain borrowers may not repay borrowings. The Bank maintains a reserve for
loan losses to absorb the level of losses that it estimates to be probable in
its portfolios. However, its reserve for loan losses may not be sufficient to
cover the loan losses that it may actually incur. If the Bank experiences
defaults by borrowers in any of its businesses, the Companys earnings could be
negatively affected. Changes in local economic conditions could adversely
affect credit quality in its loan portfolio. In addition, federal and state
regulators periodically review the Banks loan portfolio and may require it 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 the
Bank. Any increase in the allowance for loan losses or charge-offs as required
by these regulatory agencies could have a negative effect on the Companys
operating results. The Company may be adversely affected by interest rate changes- The Bank
realizes 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 the Companys 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 the Banks
customers also impact the rates it collects on loans and the rates it pays on
deposits. As interest rates change, the Company expects that it will
periodically experience gaps in the interest rate sensitivities of the Banks
assets and liabilities, meaning that either its interest-bearing liabilities
will be more sensitive to changes in market interest rates than its
interest-earning assets, or vice versa. In either event, if market interest
rates should move contrary to the Banks position, this gap may work against
it, and the Companys earnings may be negatively affected. Although the Bank
actively manages its interest rate sensitivity, such management is not an exact
science. Rapid increases or decreases in interest rates could adversely affect
its net interest margin if changes in its cost of funds do not 14




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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 the Companys results of
operations. The Company 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, the Company
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 the Company. The Company is 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 the
financial condition or results of operation of the Company. Loss of the Companys senior executive officers or other key employees
could impair its relationship with customers and adversely affect its business
- The Company has assembled a senior management team which has a substantial
background and experience in banking and financial services in the western
Georgia market. Loss of these key personnel could negatively impact the
Companys earnings because of their skills, customer relationships and/or the
potential difficulty of promptly replacing them. 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 two other locations
within the city limits of Carrollton. The First Tuesday Mall office is located
at 1004 Bankhead Highway and the Motor office is located at 314 Newnan Street.
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. 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. As to its Douglas
County locations, the Mirror Lake office is currently a modular branch which
will serve as a temporary site until a permanent structure is built. The Bank
owns a 1.5 acre parcel on the Corner of Mirror Lake Boulevard and Conner Road
in front of the Village at Mirror Lake shopping center on which it plans to
construct a permanent facility in 2004. A second Douglas County branch is
located at 9557 Georgia Highway 5 in Douglasville. 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 and the Mirror Lake office which are
approximately 700 and 1200 square feet, respectively) are typical of other
banking facilities and are approximately 5,000 square feet in size. Each
branch location has an ATM machine that is either walk-up or drive-up. The
Motor office, Mirror Lake, and Douglasville offices are leased facilities. All
of the other office facilities are owned. The Bank also operates six
additional ATM machines on leased properties located throughout the Carrollton
and Villa Rica area. 15




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##### 



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. 16




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##### 



PART II Item 5. Market for the Common Equity and Related Shareholder Matters Market Information The Companys Common Stock is traded on the NASDAQ SmallCap Market System
under trading symbol WGNB. Approximately 1000 shareholders of record held the
Common Stock as of February 27, 2004. Set forth below are the high and low bid
prices for each full quarterly period during 2002 and 2003 and the dividends
declared and paid per share of Common Stock for those periods. Price Range Per Share
    
    DividendsLow
    
    High
    
    Paid Per Share2002:First Quarter
    
    $
    23.51
    
    
    $
    28.75
    
    
    $
    0.145Second Quarter
    
    
    23.90
    
    
    
    28.00
    
    
    
    0.147Third Quarter
    
    
    23.25
    
    
    
    26.00
    
    
    
    0.150Fourth Quarter
    
    
    20.00
    
    
    
    25.61
    
    
    
    0.1552003:First Quarter
    
    $
    24.52
    
    
    $
    28.75
    
    
    $
    0.160Second Quarter
    
    
    25.25
    
    
    
    37.25
    
    
    
    0.165Third Quarter
    
    
    25.50
    
    
    
    27.10
    
    
    
    0.170Fourth Quarter
    
    
    26.27
    
    
    
    31.17
    
    
    
    0.175
 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 Supervision and Regulation  Dividends. Recent Sales of Unregistered Securities The Company issued the following securities during the year ended December
31, 2003 without registering the securities under the Securities Act: Directors
may elect to receive compensation for their services to the Company and the
Bank in shares of Common Stock or cash. During 2003, a director of the Bank
received 915 shares in payment of deferred director compensation for an
aggregate consideration owed to them by the Bank of $28,915. The sale of the
shares was exempt from registration under the Securities Act, pursuant to
Section 4(2) thereof, as a transaction not involving a public offering. Uses of Proceeds from Registered Securities The Company has previously reported the completion of a registered public
offering pursuant to which it sold 200,000 shares of its Common Stock at a
purchase price of $24.00 per share. The net proceeds from the offering (which
was completed in April 2002) of $4,766,454 have not yet been used by the
Company but continue to remain invested in corporate bonds and federal funds. 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,
2003 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. 17




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##### 



Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(In thousands, except per share data)For the Year:Total Interest Income
    
    $
    23,542
    
    
    $
    24,296
    
    
    $
    26,548
    
    
    $
    24,049
    
    
    $
    19,883Total Interest Expense
    
    
    7,527
    
    
    
    8,724
    
    
    
    12,069
    
    
    
    10,356
    
    
    
    7,968Net Interest Income
    
    
    16,015
    
    
    
    15,572
    
    
    
    14,479
    
    
    
    13,692
    
    
    
    11,916Provision for Loan Losses
    
    
    350
    
    
    
    483
    
    
    
    910
    
    
    
    509
    
    
    
    303Net Interest Income After Provision for Loan
Losses
    
    
    15,665
    
    
    
    15,089
    
    
    
    13,569
    
    
    
    13,184
    
    
    
    11,612Total Other Income
    
    
    5,554
    
    
    
    5,251
    
    
    
    4,550
    
    
    
    2,991
    
    
    
    1,931Total Other Expense
    
    
    12,752
    
    
    
    12,127
    
    
    
    10,859
    
    
    
    9,283
    
    
    
    7,993Earnings Before Income Taxes
    
    
    8,467
    
    
    
    8,213
    
    
    
    7,260
    
    
    
    6,892
    
    
    
    5,551Income Taxes
    
    
    2,680
    
    
    
    2,668
    
    
    
    2,471
    
    
    
    2,487
    
    
    
    1,995Net earnings
    
    
    5,787
    
    
    
    5,545
    
    
    
    4,789
    
    
    
    4,404
    
    
    
    3,556Per Share Data:Net earnings
    
    
    1.75
    
    
    
    1.71
    
    
    
    1.55
    
    
    
    1.42
    
    
    
    1.14Diluted net earnings
    
    
    1.72
    
    
    
    1.69
    
    
    
    1.52
    
    
    
    1.41
    
    
    
    1.13Cash dividends declared
    
    
    .67
    
    
    
    .60
    
    
    
    .55
    
    
    
    .48
    
    
    
    .42Book value
    
    
    12.72
    
    
    
    11.65
    
    
    
    9.42
    
    
    
    8.30
    
    
    
    7.08Tangible book value
    
    
    12.72
    
    
    
    11.65
    
    
    
    9.42
    
    
    
    8.30
    
    
    
    7.08At Year End:Total loans
    
    
    296,498
    
    
    
    273,471
    
    
    
    253,805
    
    
    
    228,467
    
    
    
    184,795Earning assets
    
    
    367,694
    
    
    
    360,226
    
    
    
    331,690
    
    
    
    272,512
    
    
    
    233,950Assets
    
    
    393,216
    
    
    
    385,121
    
    
    
    350,222
    
    
    
    289,112
    
    
    
    254,035Total deposits
    
    
    303,316
    
    
    
    298,726
    
    
    
    280,531
    
    
    
    233,811
    
    
    
    214,805Stockholders equity
    
    
    42,089
    
    
    
    38,520
    
    
    
    29,204
    
    
    
    25,687
    
    
    
    21,923Common shares outstanding
    
    
    3,306,452
    
    
    
    3,306,733
    
    
    
    3,100,355
    
    
    
    3,095,455
    
    
    
    3,105,394Average Balances:Total loans
    
    
    287,861
    
    
    
    262,781
    
    
    
    248,863
    
    
    
    210,127
    
    
    
    172,628Earning assets
    
    
    357,468
    
    
    
    337,583
    
    
    
    310,027
    
    
    
    259,736
    
    
    
    223,091Assets
    
    
    384,395
    
    
    
    357,418
    
    
    
    326,653
    
    
    
    276,719
    
    
    
    240,154Deposits
    
    
    296,723
    
    
    
    279,483
    
    
    
    263,668
    
    
    
    224,220
    
    
    
    206,497Stockholders equity
    
    
    40,708
    
    
    
    35,640
    
    
    
    27,986
    
    
    
    23,700
    
    
    
    21,850Weighted average shares
outstanding
    
    
    3,308,087
    
    
    
    3,243,849
    
    
    
    3,098,067
    
    
    
    3,098,419
    
    
    
    3,113,014Key Performance Ratios:Return on average
assets
    
    
    1.51
    %
    
    
    1.55
    %
    
    
    1.47
    %
    
    
    1.59
    %
    
    
    1.48
    %Return on average
equity
    
    
    14.22
    %
    
    
    15.56
    %
    
    
    17.11
    %
    
    
    18.58
    %
    
    
    16.27
    %Net interest margin, taxable
equivalent
    
    
    4.65
    %
    
    
    4.76
    %
    
    
    4.84
    %
    
    
    5.44
    %
    
    
    5.49
    %Dividend payout
ratio
    
    
    38.29
    %
    
    
    34.94
    %
    
    
    35.48
    %
    
    
    33.80
    %
    
    
    36.33
    %Average equity to average
assets
    
    
    10.59
    %
    
    
    9.97
    %
    
    
    8.57
    %
    
    
    8.56
    %
    
    
    9.10
    %Average loans to average
deposits
    
    
    97.01
    %
    
    
    94.02
    %
    
    
    94.39
    %
    
    
    93.71
    %
    
    
    83.60
    %Overhead
ratio
    
    
    59.12
    %
    
    
    58.24
    %
    
    
    57.07
    %
    
    
    55.64
    %
    
    
    57.72
    %
 18




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##### 



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 WGNB Corp. (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 1, Business - Business Risks. The Company cautions that the foregoing list of important factors is not
exclusive. The Company undertakes no obligation to publicly update or revise
any forward-looking statements. CRITICAL ACCOUNTING POLICIES The Company has established various accounting policies which govern the
application of accounting principles generally accepted in the United States 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 19




---



##### 



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. 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, 2003, 2002 and 2001 The Company reported net earnings of $5.8 million in 2003, $5.5 million in
2002 and $4.8 million in 2001, representing an increase of 4.4% between fiscal
years 2002 and 2003 and an increase of 15.8% between fiscal years 2001 and
2002. The increases over the three fiscal years are primarily attributable to
the Banks continued loan growth, higher non-interest income and lower
increases in non-interest expense. Net earnings per share on a fully diluted
basis were $1.72 for 2003, $1.69 for 2002 and $1.52 for 2001, representing an
increase of 1.8% between fiscal years 2003 and 2002 and 11.2% between fiscal
years 2002 and 2001. The net earnings per share for 2003 for the entire year
and 2002 for a partial year were affected by the previously described Common
Stock offering completed in April, 2002 which increased the weighted average
number of shares outstanding. Return on average assets and return on average
shareholders equity for 2003 was 1.51% and 14.22%, respectively, compared with
1.55% and 15.56%, respectively, for 2002, and 1.47% and 17.11%, respectively,
for 2001. The reduction of return on average equity was primarily due to a
large increase in equity in 2003 and 2002. The increases over the past two
years were comprised of the Common Stock offering ($4.8 million), an increase
in retained earnings ($7.2 million) and an increase in other comprehensive
income ($1.0 million). These items had the effect of increasing the average
balance of shareholders equity by $12.7 million in the last two years. 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 net interest income.
Net interest income is defined as the difference between the interest income
received from its investments (such as loans, investment securities, federal
funds sold, etc.) and the interest expense on deposits and other borrowings.
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 and the average
rate paid on interest bearing liabilities. 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 $442 thousand (2.8%) in
2003 from 2002, and by $1.1 million (or 7.6%) in 2002 from 2001. Net interest
income at December 31, 2003, was $16.0 million compared to $15.6 million at
December 31, 2002 and $14.5 million at December 31, 2001. The net interest
margin on interest earning assets was 4.65% in 2003, 4.76% in 2002 and 4.84% in
2001. Beginning in early 2001 through the end of 2003, short term interest
rates have dropped 550 basis points. Comparing the interest margin in 2003 to
that in 2002, the Banks interest margin has declined by 11 basis points.
Measuring the last three years, the Banks interest margin has decreased 19
basis points. Managements interest rate risk strategies helped to mitigate
the effects of rapidly declining interest rates. The average yield on assets
in 2003 on a tax equivalent basis was 6.75% down 60 basis points from 2002
while the cost of funds was 2.52%, down 60 basis points from 2002. Likewise,
during 2002, 20




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##### 



the Banks yield on earning assets declined 139 points while its cost of funds
was reduced by 147 basis points . The asset repricing point has caught up
with the immediate repricing of the interest-bearing transaction account
liabilities in each of the past three years of rapid rate decline. Those benchmark rates declined 475 basis points in ten months during a ten
month period ending in 2002. The Banks balance sheet has traditionally been
slightly liability sensitive, but as 2003 progressed, management sought to
become more evenly matched and perhaps slightly asset sensitive. That is, its
assets re-price faster than its liabilities because of its high percentage of
transaction accounts and increasing amounts of adjustable rate assets.
Therefore, in a rising rate environment the Banks interest margin will tend to
widen whereas in a falling rate environment the Banks interest margin tends to
narrow. However, when rates fall rapidly (as in the past three years), the
Banks cost of funds hit an economic floor while its asset yields flatten out
and become slightly more variable. The net result is that management has been
attempting to poise the Banks interest margin to increase as interest rates
rise. The cost of interest-bearing liabilities was 2.52% for 2003, 3.12% for
2002 and 4.59% for 2001, representing a decrease of 60 basis points between
fiscal 2003 and 2002 and a decrease of 147 basis points between fiscal 2002 and
2001. The borrowings from the Federal Home Loan Bank (FHLB) which are fixed
rate have kept the Banks cost of funds from decreasing more rapidly in 2003.
Management anticipates that the Banks cost of funds will be positively
impacted over the next eighteen months as $20 million of FHLB borrowings mature
and those borrowings can be replaced with lower cost funds. If one considers the yield on interest-bearing assets of 6.75% for 2003,
7.35% for 2002 and 8.74% for 2001, the impact of decreasing rates on asset
yields was more pronounced in 2002 than in 2003 suggesting that the Bank may
have reached a range bound plateau in its net interest margin. However, the
longer market interest rates remain low the more solidified asset yields will
become and in an increasing rate environment, the margin will be slower to
react positively. This trend supports managements strategy of increasing
asset sensitivity and adding interest rate floors to adjustable rate loans in
order to create upside with increasing market rates. Prolonged low rates will
have the impact of lowering the Companys net interest margin. 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%: 21




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##### 



Table 1Average Consolidated Balance Sheets and Net Interest Analysis(in thousands) For the Years Ended December 31,2003
    
    2002
    
    2001Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateAssets:Interest earnings assets:Investments:Federal funds sold
    
    $
    17,363
    
    
    
    187
    
    
    
    1.08
    %
    
    $
    15,761
    
    
    
    249
    
    
    
    1.58
    %
    
    $
    13,349
    
    
    
    490
    
    
    
    3.67
    %Taxable
    
    
    30,249
    
    
    
    1,878
    
    
    
    6.21
    %
    
    
    40,416
    
    
    
    2,333
    
    
    
    5.77
    %
    
    
    30,326
    
    
    
    1,923
    
    
    
    6.34
    %Tax exempt
    
    
    21,995
    
    
    
    1,559
    
    
    
    7.09
    %
    
    
    18,625
    
    
    
    1,290
    
    
    
    6.93
    %
    
    
    17,489
    
    
    
    1,389
    
    
    
    7.94
    %Total Investments
    
    
    69,607
    
    
    
    3,624
    
    
    
    5.21
    %
    
    
    74,802
    
    
    
    3,872
    
    
    
    5.18
    %
    
    
    61,164
    
    
    
    3,802
    
    
    
    6.22
    %Loans (including loan fees):Taxable
    
    
    286,055
    
    
    
    20,329
    
    
    
    7.11
    %
    
    
    260,982
    
    
    
    20,739
    
    
    
    7.95
    %
    
    
    247,155
    
    
    
    23,096
    
    
    
    9.34
    %Tax Exempt
    
    
    1,806
    
    
    
    181
    
    
    
    10.03
    %
    
    
    1,799
    
    
    
    188
    
    
    
    10.45
    %
    
    
    1,708
    
    
    
    185
    
    
    
    10.83
    %Total Loans
    
    
    287,861
    
    
    
    20,510
    
    
    
    7.12
    %
    
    
    262,781
    
    
    
    20,927
    
    
    
    7.96
    %
    
    
    248,863
    
    
    
    23,281
    
    
    
    9.35
    %Total interest earning assets
    
    
    357,468
    
    
    
    24,134
    
    
    
    6.75
    %
    
    
    337,583
    
    
    
    24,799
    
    
    
    7.35
    %
    
    
    310,027
    
    
    
    27,083
    
    
    
    8.74
    %Other non-interest earnings assets
    
    
    26,927
    
    
    
    
    
    
    
    
    
    
    
    19,835
    
    
    
    
    
    
    
    
    
    
    
    16,626Total assets
    
    $
    384,395
    
    
    
    
    
    
    
    
    
    
    $
    357,418
    
    
    
    
    
    
    
    
    
    
    $
    326,653Liabilities and shareholders equity:Interest-bearing liabilities:Deposits:Demand
    
    $
    112,438
    
    
    
    954
    
    
    
    .85
    %
    
    $
    106,570
    
    
    
    1,487
    
    
    
    1.40
    %
    
    $
    94,952
    
    
    
    2,399
    
    
    
    2.53
    %Savings
    
    
    15,915
    
    
    
    54
    
    
    
    .34
    %
    
    
    13,314
    
    
    
    95
    
    
    
    .71
    %
    
    
    11,955
    
    
    
    228
    
    
    
    1.90
    %Time
    
    
    124,863
    
    
    
    3,993
    
    
    
    3.20
    %
    
    
    121,558
    
    
    
    5,094
    
    
    
    4.19
    %
    
    
    123,513
    
    
    
    7,489
    
    
    
    6.06
    %FHLB advances
& other borrowings
    
    
    45,000
    
    
    
    2,527
    
    
    
    5.62
    %
    
    
    38,574
    
    
    
    2,048
    
    
    
    5.31
    %
    
    
    32,288
    
    
    
    1,953
    
    
    
    6.05
    %Total interest-bearing liabilities
    
    
    298,216
    
    
    
    7,528
    
    
    
    2.52
    %
    
    
    280,016
    
    
    
    8,724
    
    
    
    3.12
    %
    
    
    262,708
    
    
    
    12,069
    
    
    
    4.59
    %Non-interest bearing deposits
    
    
    43,507
    
    
    
    
    
    
    
    
    
    
    
    38,041
    
    
    
    
    
    
    
    
    
    
    
    33,248Other liabilities
    
    
    1,964
    
    
    
    
    
    
    
    
    
    
    
    3,721
    
    
    
    
    
    
    
    
    
    
    
    2,711Shareholders equity
    
    
    40,708
    
    
    
    
    
    
    
    
    
    
    
    35,640
    
    
    
    
    
    
    
    
    
    
    
    27,986Total liabilities and
Shareholders equity
    
    $
    388,395
    
    
    
    
    
    
    
    
    
    
    $
    357,418
    
    
    
    
    
    
    
    
    
    
    $
    326,653Excess of interest-earning assets
over interest-bearing liabilities
    
    $
    59,252
    
    
    
    
    
    
    
    
    
    
    $
    57,567
    
    
    
    
    
    
    
    
    
    
    $
    47,319Ratio of interest-earning assets to
Interest-bearing liabilities
    
    
    119.87
    %
    
    
    
    
    
    
    
    
    
    
    120.55
    %
    
    
    
    
    
    
    
    
    
    
    118.01
    %Net interest income tax equivalent
    
    
    
    
    
    
    16,606
    
    
    
    
    
    
    
    
    
    
    
    16,075
    
    
    
    
    
    
    
    
    
    
    
    15,014Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.23
    %
    
    
    
    
    
    
    
    
    
    
    4.23
    %
    
    
    
    
    
    
    
    
    
    
    4.15
    %Net interest margin on interest earning assets
    
    
    
    
    
    
    
    
    
    
    4.65
    %
    
    
    
    
    
    
    
    
    
    
    4.76
    %
    
    
    
    
    
    
    
    
    
    
    4.84
    %Taxable Adjustments:Investments
    
    
    
    
    
    
    (530
    )
    
    
    
    
    
    
    
    
    
    
    (439
    )
    
    
    
    
    
    
    
    
    
    
    (472
    )Loans
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (63
    )
    
    
    
    
    
    
    
    
    
    
    (63
    )Net interest income
    
    
    
    
    
    $
    16,015
    
    
    
    
    
    
    
    
    
    
    $
    15,573
    
    
    
    
    
    
    
    
    
    
    $
    14,479
 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.
Tax-exempt interest income is calculated on a tax equivalent basis. 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. 22




---



##### 



Table 2Changes in Interest Income and Expense on a Tax Equivalent Basis(in thousands) Increase (decrease) due to changes in:2003 over 2002
    
    2002 over 2001Volume
    
    Rate
    
    Total
    
    Volume
    
    Rate
    
    TotalInterest income on:Federal funds sold
    
    $
    17
    
    
    
    (79
    )
    
    
    (62
    )
    
    $
    38
    
    
    
    (279
    )
    
    
    (241
    )Taxable investments
    
    
    (631
    )
    
    
    176
    
    
    
    (455
    )
    
    
    582
    
    
    
    (173
    )
    
    
    409Non-taxable investments
    
    
    239
    
    
    
    30
    
    
    
    269
    
    
    
    79
    
    
    
    (177
    )
    
    
    (98
    )Taxable loans
    
    
    1,781
    
    
    
    (2,191
    )
    
    
    (410
    )
    
    
    1,099
    
    
    
    (3,456
    )
    
    
    (2,357
    )Non-taxable loans
    
    
    1
    
    
    
    (8
    )
    
    
    (7
    )
    
    
    10
    
    
    
    (6
    )
    
    
    4Total Interest Income
    
    
    1,407
    
    
    
    (2,072
    )
    
    
    (665
    )
    
    
    1,808
    
    
    
    (4,091
    )
    
    
    2,283Interest expense on:Deposits:Demand
    
    
    50
    
    
    
    (583
    )
    
    
    (533
    )
    
    
    162
    
    
    
    (1,074
    )
    
    
    (912
    )Savings
    
    
    9
    
    
    
    (50
    )
    
    
    (41
    )
    
    
    10
    
    
    
    (143
    )
    
    
    (133
    )Time
    
    
    106
    
    
    
    (1,207
    )
    
    
    (1,101
    )
    
    
    (82
    )
    
    
    (2,313
    )
    
    
    (2,395
    )FHLB advances & other borrowings
    
    
    361
    
    
    
    118
    
    
    
    479
    
    
    
    334
    
    
    
    (238
    )
    
    
    96Total Interest Expense
    
    
    526
    
    
    
    (1,722
    )
    
    
    (1,196
    )
    
    
    424
    
    
    
    (3,768
    )
    
    
    (3,344
    )Increase (decrease) in net interest income
    
    $
    881
    
    
    
    (350
    )
    
    
    531
    
    
    $
    1,384
    
    
    
    (323
    )
    
    
    1,061
 Other Income and Expense Other income in 2003 was $5.6 million, compared to $5.3 million in 2002
and $4.6 million in 2001. This represents an increase of $302 thousand, or
5.8%, from fiscal 2002 to fiscal 2003 and an increase of $701 thousand, or
15.4%, from fiscal 2001 to fiscal 2002. These increases are primarily due to
an increase in the volume of service charges on deposit accounts. Service
charges on deposit accounts have increased an average of 12.6% over the last
two years and most of that increase is due to insufficient funds charges and
service charges on increased new account activity. Mortgage origination fees
have decreased a little less than 1% from 2002 to 2003 after an increase of 14%
from 2001 to 2002 primarily because during the last half of 2003 the Bank
experienced a slow down in mortgage refinance activity. It appears that the
refinance boom, which took place the last three years, may be subsiding.
However, continued low rates and increased housing have maintained new home
financing in the Banks market area. Miscellaneous income between 2003 and
2002 decreased $149 thousand or 13.4% and increased by $326 thousand or 41.6%
between 2002 and 2001. The primary reason for the spike of miscellaneous
income in 2002 was that the Bank settled its interest rate swap position
accounted for as a fair value hedge in August 2002, recognizing a gain of
$252,950 which is included in miscellaneous income for 2002. This income is
non-recurring in nature as the Bank has no other hedge positions currently in
place. Other expenses increased by $625 thousand, or 5.2%, in 2003 over 2002 and
by $1.3 million, or 11.7%, in 2002 over 2001. The increase between 2003 and
2002 was due primarily to an increase in salaries and employee benefits of $439
thousand, or 6.1%, and an increase in occupancy expense of $163 thousand, or
9.9%. The increase between 2002 and 2001 was due to an increase in salaries
and employee benefits of $682, or 10.5%, an increase in occupancy expense of
$91 thousand and an increase in other operating expense of $495, or 17.7%. The increase in salaries and employee benefits for the years ended 2003
and 2002 is attributable to the following factors: (i) increased number of full
time equivalent employees; (ii) increased costs of health insurance; and (iii)
annual raises and increased profit sharing bonuses due to higher profitability.
The Company had only two more full time equivalent employees at the end of
2003 than it did at the end of 2002. The increase in salaries and benefits
between 2002 and 2001 was more pronounced amounting to an increase of $682
thousand, or 10.5%. The increase in salaries and employee benefits for the
years ended 2002 and 2001 is attributable to the following factors (i)
increased number of full time equivalent employees; (ii) increase commission on
mortgage origination, (iii) increased costs of health insurance; and (iv)
annual raises and increased profit sharing bonuses due to higher profitability.
The Company had ten more full time equivalent employees at the end of 2002
than it did in 2001 which was primarily due to branch expansion in 2002. 23




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##### 



The increase in occupancy expense in 2003 over 2002 was primarily
attributable to the increase in depreciation expense of $118 thousand, or
15.8%, attributable to capital expenditures for updated bank technology, and a
refurbishment of our main office and selective branches to update their
appearance. The increase in occupancy expense in 2002 as compared to 2001 was
primarily attributable to a full year of operations in our Douglasville branch
in addition to increased depreciation expense due to additional office space
and investment in bank technology. The increase in other operating expense between 2003 and 2002 was not
significant. However the increase in other operating expense between 2002 and
2001 of $495 thousand, or 17.7%, is due to increases in legal, accounting, and
annual fees associated with compliance with SEC regulations and listing
requirements for NASDAQ. Additionally, the Bank paid increased software fees
associated with its bounce protection program which was commensurate with the
increased fee income. Income taxes, expressed as a percentage of earnings before income taxes,
declined to 31.7% in 2003, from 32.5% in 2002 and 34.0% in 2001. The decline
in marginal tax rate over the past three years is primarily attributable to tax
credits purchased by the Bank in 2001 having a full effect in 2002 and 2003.
In addition, in October 2002 the Bank formed WGNB Investments, Inc., a Nevada
corporation, to manage, hold and trade cash, securities and loans of the Bank
which had the effect of reducing its state income tax liability slightly in
2002 and more significantly in 2003. BALANCE SHEET OVERVIEW For the Years Ended December 31, 2003 and 2002 General Loan and deposit growth in 2003 was slightly more than 2002. During 2003,
average total assets increased $27.0 million (7.5%), average deposits increased
$17.2 million (6.2%) and average loans increased $25.1 million (9.5%) from
amounts recorded in 2002. During 2002, average total assets increased $30.8
million (9.4%), average deposits increased $15.8 million (6.0%) and average
loans increased $13.9 million (5.6%) from amounts recorded in 2001. The Banks
growth rate in 2003 increased slightly when compared to 2002 but did not reach
the levels experienced in 2001 and 2000. Loan demand rebounded in the later
half of 2003 after a decline in the early part of the year. As in past years,
management allows loan growth to drive balance sheet growth and, thus, a
slowdown in loan growth is typically reflected on the balance sheet. Total assets at December 31, 2003, were $393 million, representing an $8.1
million (2.1%) increase from December 31, 2002. Total deposits increased $4.6
million (1.5%) from 2002 to 2003 while total loans increased $23.0 million
(8.4%) during 2003 as management attempted to employ excess liquidity into
loans. During 2003, Federal funds sold decreased $19.0 million while total
loans increased $23.0 million and investments available for sale and held to
maturity increased $3.9 million. The Federal funds sold decrease and the
deposit increase basically funded the loan and investment portfolio growth. The increase in deposits in 2003 is attributable to an increase in
non-interest bearing demand accounts of $2.1 million (5.6%), an increase in
interest-bearing demand accounts of $14.5 million (11.7%) and a decrease in
time deposit accounts of $14.2 million (11.1%). Interest-bearing demand
accounts accounted for the vast majority of deposit increases in 2003. We
attribute both the interest-bearing and non-interest-bearing demand deposit
growth to three events that occurred in 2003. First, the only three
independent competing community banks that remained in Carroll County merged
with regional banks in 2002. This displacement has led to new checking account
customers for the Bank. Second, because the time deposit rates continue to be
low, some customers have moved their funds to money market accounts and NOW
accounts in hopes that longer term CD rates will increase in the immediate
future or that the stock market would be a viable investment alternative.
Third, the Bank has deposit relationships with numerous county and municipal
authorities. These deposit relationships in the banking industry are known as
public funds. At the end of 2003, certain public entities had collected tax
revenue in the amount of $7 million, subsequently deposited with the Bank,
causing the Banks liquidity to increase. This amount was on deposit with the
Bank at year end 2003, but typically is disbursed in the first quarter of the
following year. 24




---



##### 



As the local and regional economy softened beginning in 2001, loan demand
fell off in the last half of 2001 and that trend continued throughout 2002 and
through the first half of 2003. The Bank had grown its loan portfolio by $43.7
million (23.6%) in 2000, by $25.3 million (11.1%) in 2001, by $19.7 million
(7.7%) in 2002, and by 23.0 (8.4%) in 2003. The loans during those periods were
funded principally with increased demand deposit accounts, a lower cost funding
source and FHLB borrowings, typically lower than comparable certificates of
deposit rates and terms. Total assets at December 31, 2002, were $385 million, representing a $34.9
million (10.0%) increase from December 31, 2001. Total deposits increased
$18.2 million (6.5%) from 2001 to 2002 while total loans increased $19.7
million (7.7%) during 2002. Demand deposit accounts accounted for the vast
majority of deposit increases in 2002. The loan production in 2002 was funded
principally with deposit growth. Liquidity in 2003 and 2002 was abundant as
the local competition was acquired by regional banks and the stock market
languished. Investments The Companys available-for-sale investment portfolio of $55.3 million as
of December 31, 2003 consisted primarily of debt securities, which provide the
Company with a source of liquidity, a stable source of income and serve as a
vehicle to implement asset and liability management strategies. This
represented an increase of $3.1 million (6.0%) over the $52.1 million held at
December 31, 2002. The Company believes the investment portfolio provides a
balance to interest rate and credit risk in other categories of the balance
sheet while providing a vehicle for the investment of available funds and
supplying securities to pledge as required collateral for certain public
deposits. Investment securities in the available-for-sale category 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 $4.25 million at December 31, 2003, an increase of $750 thousand
(21.4%) when compared to the prior year. 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. The following table shows the carrying value of the Companys securities,
by security type, as of December 31, 2003, 2002 and 2001: Table 3Investment Portfolio(in thousands) 2003
    
    2002
    
    2001Available
for SaleUnited States agencies
    
    $
    7,080
    
    
    $
    3,608
    
    
    $
    3,899State, county and municipal
    
    
    29,575
    
    
    
    25,214
    
    
    
    23,476Mortgage-backed securities
    
    
    16,843
    
    
    
    21,583
    
    
    
    26,508Corporate bonds
    
    
    1,779
    
    
    
    1,727
    
    
    
    1,051Total available for sale
    
    $
    55,277
    
    
    $
    52,132
    
    
    $
    54,934Held to MaturityTrust Preferred Securities
    
    $
    4,250
    
    
    $
    3,500
    
    
    $
    2,000
 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, 2003. The composition and maturity/re-pricing distribution of the
securities portfolio is subject to change depending on rate sensitivity,
capital and liquidity needs. 25




---



##### 



Table 4Expected Maturity of Securities(in thousands) UnitedStatesTreasury
    
    Wtd.
    
    State,
    
    Wtd.
    
    Mortgage
    
    Wtd.
    
    
    
    
    
    Wtd.
    
    
    
    
    
    Wtd.&
    
    Avg.
    
    County &
    
    Avg.
    
    Back
    
    Avg.
    
    Corporate
    
    Avg.
    
    Trust
    
    Avg.Maturities at December 31, 2003
    
    Agencies
    
    Yld.
    
    Municipals
    
    Yld.
    
    Securities
    
    Yld.
    
    Bonds
    
    Yld.
    
    Preferred
    
    Yld.Within 1 year
    
    
    2,002
    
    
    
    2.16
    %
    
    
    743
    
    
    
    7.17
    %
    
    
    661
    
    
    
    6.52
    %
    
    
    
    
    
    
    0.00
    %
    
    
    After 1 through 5
years
    
    
    2,998
    
    
    
    3.37
    %
    
    
    2,815
    
    
    
    6.30
    %
    
    
    11,283
    
    
    
    5.74
    %
    
    
    1,658
    
    
    
    5.62
    %
    
    
    After 5 through 10
years
    
    
    2,027
    
    
    
    4.07
    %
    
    
    6,649
    
    
    
    6.50
    %
    
    
    2,604
    
    
    
    4.26
    %
    
    
    
    
    
    
    7.00
    %
    
    
    After 10 years
    
    
    
    
    
    
    0.00
    %
    
    
    17,883
    
    
    
    7.15
    %
    
    
    1,850
    
    
    
    6.00
    %
    
    
    
    
    
    
    0.00
    %
    
    
    4,250
    
    
    
    9.56
    %Total
    
    
    7,027
    
    
    
    3.23
    %
    
    
    28,090
    
    
    
    6.91
    %
    
    
    16,398
    
    
    
    5.57
    %
    
    
    1,658
    
    
    
    5.62
    %
    
    
    4,250
    
    
    
    9.56
    %Fair Value
    
    
    7,080
    
    
    
    
    
    
    
    29,575
    
    
    
    
    
    
    
    16,843
    
    
    
    
    
    
    
    1,779
    
    
    
    
    
    
    
    4,273
 Mortgage backed securities are included in the maturities categories in
which they are anticipated to be repaid based on scheduled maturities. The
actual cash flow of mortgage backed securities differs with this assumption.
Additionally, some agency securities in the portfolio have call features. The
above analysis assumes that callable agencies will mature on their final
maturity date. The actual cash flow of agency securities may differ from 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. The primary types of loans in the Banks portfolio are residential
mortgages and home equity loans, commercial real estate loans, commercial
loans, 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 require 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, 2003, loans and commitments outstanding to directors and
executive officers of the Company and the Bank, their associates and members of
their immediate families totaled $4.7 million (net of participations sold to
other banks on a non-recourse basis), which represented approximately 1.6% of
total loans as of that date. As of December 31, 2003, none of these loans
outstanding from 26




---



##### 



the Bank to related parties were on 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 5Loan Portfolio(in thousands) December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial, financial & agricultural
    
    $
    31,219
    
    
    $
    34,821
    
    
    $
    26,162
    
    
    $
    26,547
    
    
    $
    24,144Real estate - construction
    
    
    68,207
    
    
    
    68,818
    
    
    
    60,785
    
    
    
    46,052
    
    
    
    34,769Real estate - mortgage
    
    
    180,992
    
    
    
    153,572
    
    
    
    147,705
    
    
    
    135,750
    
    
    
    108,137Consumer loans
    
    
    16,080
    
    
    
    16,260
    
    
    
    19,153
    
    
    
    20,118
    
    
    
    17,745296,498
    
    
    
    273,471
    
    
    
    253,805
    
    
    
    228,467
    
    
    
    184,795Less: Unearned interest and fees
    
    
    (454
    )
    
    
    (487
    )
    
    
    (525
    )
    
    
    (561
    )
    
    
    (467
    )Allowance for loan losses
    
    
    (3,479
    )
    
    
    (3,771
    )
    
    
    (3,720
    )
    
    
    (2,920
    )
    
    
    (2,281
    )Loans, net
    
    $
    292,565
    
    
    $
    269,213
    
    
    $
    249,560
    
    
    $
    224,986
    
    
    $
    182,047
 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, 2003: Table 6Loan Portfolio Maturity(in thousands) OverOne
    
    Wtd.
    
    One to
    
    Wtd.
    
    Over
    
    Wtd.
    
    
    
    
    
    Wtd.Year
    
    Avg.
    
    Five
    
    Avg.
    
    Five
    
    Avg.
    
    
    
    
    
    Avg.or Less
    
    Yld.
    
    Years
    
    Yld.
    
    Years
    
    Yld.
    
    Total
    
    Yld.Commercial, financial & agricultural
    
    $
    19,064
    
    
    
    5.59
    %
    
    $
    9,808
    
    
    
    6.55
    %
    
    $
    2,347
    
    
    
    6.46
    %
    
    $
    31,219
    
    
    
    5.95
    %Real estate - construction
    
    
    62,334
    
    
    
    5.78
    %
    
    
    4,010
    
    
    
    6.70
    %
    
    
    1,863
    
    
    
    6.21
    %
    
    
    68,207
    
    
    
    5.84
    %Real estate - mortgage
    
    
    58,208
    
    
    
    5.99
    %
    
    
    91,368
    
    
    
    6.37
    %
    
    
    31,416
    
    
    
    6.02
    %
    
    
    180,992
    
    
    
    6.19
    %Consumer
    
    
    8,360
    
    
    
    8.65
    %
    
    
    7,656
    
    
    
    7.93
    %
    
    
    64
    
    
    
    5.71
    %
    
    
    16,080
    
    
    
    8.30
    %Total
    
    $
    147,966
    
    
    
    6.00
    %
    
    $
    112,842
    
    
    
    6.50
    %
    
    $
    35,690
    
    
    
    6.53
    %
    
    $
    296,498
    
    
    
    6.20
    %
 Variable/Fixed Rate Mix Variable
    
    Wtd
    
    Fixed
    
    WtdInterest
    
    Avg
    
    Interest
    
    AvgRates
    
    Yld
    
    Rates
    
    YldCommercial, financial and agricultural
    
    $
    9,880
    
    
    
    4.91
    %
    
    $
    21,339
    
    
    
    6.44
    %Real estate - construction
    
    
    23,033
    
    
    
    5.21
    %
    
    
    45,174
    
    
    
    6.17
    %Real estate - mortgage
    
    
    67,116
    
    
    
    5.21
    %
    
    
    113,876
    
    
    
    6.76
    %Consumer
    
    
    760
    
    
    
    7.33
    %
    
    
    15,320
    
    
    
    8.34
    %Total
    
    $
    100,789
    
    
    
    5.20
    %
    
    $
    195,709
    
    
    
    6.71
    %
 Provision and Allowance for Possible Loan and Lease Losses The provision for loan losses for the Company in 2003 was $350 thousand
compared to $483 thousand in 2002 and $911 thousand in 2001. The decrease in
the provision for loan losses reflects the slower loan growth and lower level
of nonperforming and adversely rated loans in 2003, expressed as a percentage
of total loans, as compared to 2001 and 2002. The Companys methodology
described below for measuring the adequacy of the allowance for loan loss
continues to indicate sufficient reserve for expected losses in the portfolio. The allowance for loan losses represented 1.17%, 1.38% and 1.47% of total
loans outstanding at December 31, 2003, 2002 and 2001, respectively. Total
charge-offs were $790 thousand, $695 thousand and $200 thousand 27




---



##### 



compared to recoveries of $147 thousand, $263 thousand and $90 thousand
during 2003, 2002 and 2001, 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 assures 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 month
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 though 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 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. Management 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 is recognizing 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. 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 loans 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. During the first quarter of 2003, the Bank accepted cash in the work-out
of nine classified loans that amounted to $3.3 million and recorded a
charge-off in the amount of $337 thousand. 28




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##### 



The following table presents a summary of changes in the allowance for
loan losses for the years indicated: Table 7Allowance for Loan Losses(in thousands) December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Balance at beginning of year
    
    $
    3,772
    
    
    $
    3,720
    
    
    $
    2,920
    
    
    $
    2,281
    
    
    $
    2,019Charge-offs:Commercial, financial and agricultural
    
    
    55
    
    
    
    288
    
    
    
    118
    
    
    
    12
    
    
    
    32Real estate - construction
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate - mortgage
    
    
    581
    
    
    
    165
    
    
    
    3
    
    
    
    3
    
    
    
    18Consumer loans
    
    
    152
    
    
    
    242
    
    
    
    79
    
    
    
    62
    
    
    
    80Total charge-offs
    
    
    790
    
    
    
    695
    
    
    
    200
    
    
    
    77
    
    
    
    130Recoveries:Commercial, financial and agricultural
    
    
    31
    
    
    
    59
    
    
    
    30
    
    
    
    56
    
    
    
    14Real estate - construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate - mortgage
    
    
    67
    
    
    
    158
    
    
    
    13
    
    
    
    56
    
    
    
    6Consumer loans
    
    
    49
    
    
    
    47
    
    
    
    46
    
    
    
    96
    
    
    
    69Total recoveries
    
    
    147
    
    
    
    264
    
    
    
    89
    
    
    
    208
    
    
    
    89Net (charge-offs) recoveries
    
    
    (643
    )
    
    
    (431
    )
    
    
    (111
    )
    
    
    131
    
    
    
    (41
    )Provision for loan losses
    
    
    350
    
    
    
    483
    
    
    
    911
    
    
    
    508
    
    
    
    303Balance at end of year
    
    $
    3,479
    
    
    $
    3,772
    
    
    $
    3,720
    
    
    $
    2,920
    
    
    $
    2,281Ratio of net charge-offs (recoveries)
during the
period to average loans outstanding
    
    
    .22
    %
    
    
    .16
    %
    
    
    .04
    %
    
    
    (.06
    )%
    
    
    .02
    %Ratio of allowance to average total loans
    
    
    1.21
    %
    
    
    1.44
    %
    
    
    1.49
    %
    
    
    1.39
    %
    
    
    1.32
    %
 Non-Performing Assets and Past Due Loans Non-performing assets at December 31, 2003, were $2.2 million, or .75%, of
total loans and other real estate owned compared to $2.8 million, or 1.03%, of
total loans and other real estate owned at December 31, 2002 and $3.9 million,
or 1.55%, of total loans and other real estate owned at December 31, 2001. The
levels of non-performing loans remain relatively low compared to the Banks
peer group and its historical level. The percentage of non-performing assets
to total loans has decreased from its peak in 2001. The decrease of
non-performing loans from 2002 to 2003 was attributable to repayment of loans
on non-accrual or the removal of loans from non-accrual status in the amount of
$444 thousand and a reduction of loans ninety days past due in the amount of
$590 thousand. The Bank sold $171 thousand of other real estate owned at a
loss of $16 thousand during 2003. However, the Bank also settled loans in
foreclosure in 2003 in the amount of $660 thousand. 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 8Non-Performing Assets(in thousands) December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Other real estate and repossessions
    
    $
    977
    
    
    $
    488
    
    
    $
    4357
    
    
    $
    702
    
    
    $
    Non-accrual loans
    
    
    499
    
    
    
    943
    
    
    
    1,620
    
    
    
    504
    
    
    
    370Loans 90 days past due still accruing
    
    
    745
    
    
    
    1,335
    
    
    
    1,885
    
    
    
    205
    
    
    
    48Total
    
    $
    2,221
    
    
    $
    2,766
    
    
    $
    3,862
    
    
    $
    1,411
    
    
    $
    418Non-performing assets as % of total loans
    
    
    .75
    %
    
    
    1.03
    %
    
    
    1.55
    %
    
    
    .63
    %
    
    
    .23
    %
 While there may be additional loans in the 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 29




---



##### 



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 continually monitors selected accruing
loans for which general economic conditions or changes within a particular
industry that 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 $31.0 million at
December 31, 2003, compared with $41.1 million at year-end 2002 and $41.5
million at year-end 2001. The following table sets forth the scheduled
maturities of time deposits of $100 thousand and greater at December 31, 2003. Table 9Deposits(in thousands) Within 3 months
    
    $
    8,826After 3 through 6 months
    
    
    7,410After 6 through 12 months
    
    
    7,335After 12 months
    
    
    7,472Total
    
    $
    31,043
 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 their 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 (the 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 $11.0 million. As of December
31, 2003, the Bank had not drawn on the available facilities. In addition, the
Bank has a line of credit with the FHLB in the amount of $56.7 million of which
the Bank had drawn $45 million at December 31, 2003. The lines of credit have
varying terms and maturities that are disclosed in detail in the notes to the
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 decreased $20.4
million for a total $27.2 million at December 31, 2003, compared with $47.7
million at December 31, 2002. The decrease was primarily attributable to net
cash used by investing activities of $30.0 million made up of $24.5 million of
increased loans and a $4.0 million net increase in investment securities.
These cash flow uses were offset by net cash provided by financing activities
which was primarily attributable to a net increase in deposits of $4.6 million.
Cash inflows from operations totaled $7.3 million in 2003. Cash inflows from operations totaled $5.1 million in 2002, while inflows
from financing activities totaled $30.0 million, most of which was net deposit
increases during 2002 of $18.2 million and FHLB advances of $10 million.
Investing activities used $18.4 million of cash and cash equivalents,
principally composed of net changes in loans of $20.5 million during 2002. The
Company also completed a common stock offering in April 2002 that generated net
cash proceeds of $4.8 million. 30




---



##### 



Capital Resources Total shareholders equity as of December 31, 2003 was $42.1 million, an
increase of $3.6 million over 2002. The increase in equity was due to $5.8
million in net income less $2.2 million in dividends and an increase in
unrealized holding gain on securities available for sale of $79 thousand net of
tax. 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, 2003, 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, 2002: Table 10Capital Ratio Actual as of December 31, 2003Tier 1 Capital (to risk weighted assets)
    
    
    13
    %Tier 1 Capital minimum requirement
    
    
    4
    %Excess
    
    
    9
    %Total Capital (to risk weighted assets)
    
    
    14
    %Total Capital minimum requirement
    
    
    8
    %Excess
    
    
    6
    %
 Leverage Ratio Actual as of December 31, 2003Tier 1 Capital to average assets
(Leverage Ratio)
    
    
    10
    %Minimum leverage requirement
    
    
    4
    %Excess
    
    
    6
    %
 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 10.59% in 2003 and 9.97% in
2002. The ratio of dividends declared to net earnings was 38.3 % during 2003,
compared with 35.1% in 2002. 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, 2003 (dollars in thousands). Less than 1
    
    
    
    
    
    
    
    
    
    More than 5Obligation
    
    Total
    
    year
    
    1-3 years
    
    3-5 years
    
    yearsDeposits without
stated maturity
    
    
    189,736
    
    
    
    189,736
    
    
    
    
    
    
    
    
    
    
    
    Certificates of deposit
    
    
    113,581
    
    
    
    68,349
    
    
    
    18,171
    
    
    
    27,061
    
    
    
    Federal Home Loan Bank
advances
    
    
    45,000
    
    
    
    5,000
    
    
    
    15,000
    
    
    
    25,000
    
    
    
    Operating leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    348,317
    
    
    
    263,085
    
    
    
    33,171
    
    
    
    52,061
    
    
    
    
 31




---



##### 



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, 2003, the Bank had issued commitments to extend credit of
$51,587,000 through various types of commercial lending arrangements and
additional commitments through standby letters of credit of $2,402,000. 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. 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. The Company has adopted the objective of achieving and maintaining a
one-year cumulative gap, as a percent of total assets, of between plus 20% and
minus 20%. On a consolidated basis, the Companys one-year cumulative gap was
a negative 3.78% of total assets at December 31, 2003. This position indicated
that the Company was exposed to the potential for decreased earnings if
interest rates were to continue to decline in the next twelve months. 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 2003, the estimated impact of an immediate increase in
interest rates of 100 basis points would have resulted in a decrease in net
interest income over a 12-month period of 2.8%, with a comparable decrease in
interest rates resulting in a decrease in net interest income of 2.9%.
Management finds the above methodologies meaningful for evaluating market risk
sensitivity; however, other factors can affect net interest income, such as
levels of non-earning assets and changes in portfolio composition and volume. The following table summarizes the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2003 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 32




---



##### 



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 subject to managements control. Table 11Interest Rate Gap Sensitivity(in thousands) At December 31, 2003Maturing or Repricing inOver 1
    
    Over 3One Year
    
    Year Thru
    
    Years Thruor Less
    
    3 Years
    
    5 Years
    
    Over 5 Years
    
    TotalInterest-earning assets:Interest-bearing deposits with
Other banks
    
    $
    239
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    239Federal funds sold
    
    
    11,671
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,671Investment securities
    
    
    3,405
    
    
    
    10,930
    
    
    
    6,660
    
    
    
    36,427
    
    
    
    57,422Loans: Fixed rate
    
    
    97,981
    
    
    
    65,001
    
    
    
    18,163
    
    
    
    14,565
    
    
    
    195,710Variable rate
    
    
    94,747
    
    
    
    6,041
    
    
    
    
    
    
    
    
    
    
    
    100,788Total interest-earning assets
    
    
    208,043
    
    
    
    81,972
    
    
    
    24,823
    
    
    
    50,992
    
    
    
    365,830Interest-bearing liabilities:Deposits:Demand
    
    $
    138,338
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    138,338Savings
    
    
    11,216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,216Time deposits
    
    
    68,349
    
    
    
    18,171
    
    
    
    27,061
    
    
    
    
    
    
    
    113,581FHLB advances
    
    
    5,000
    
    
    
    15,000
    
    
    
    25,000
    
    
    
    
    
    
    
    45,000Total interest-bearing liabilities
    
    
    222,903
    
    
    
    33,171
    
    
    
    52,061
    
    
    
    
    
    
    
    308,135per period
    
    
    (14,860
    )
    
    
    48,801
    
    
    
    (27,238
    )
    
    
    50,992
    
    
    
    57,695Cumulative interest sensitivity
Difference
    
    $
    (14,860
    )
    
    $
    33,941
    
    
    $
    6,703
    
    
    $
    57,695Cumulative difference to total
Assets
    
    
    (3.78
    )%
    
    
    8.63
    %
    
    
    1.70
    %
    
    
    14.67
    %
 At December 31, 2003, the difference between the Companys liabilities and
assets repricing or maturing within one year was $14.9 million. The above chart
indicates an excess of liabilities repricing or maturing within one year, thus
a rise in interest rates would cause the Companys net interest income to
decline. 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 accounts, which are disclosed
in the one year or less category. Those liabilities do not necessarily reprice
as quickly or to the same degree as rates in general. Additionally, certain
assets, such as adjustable-rate mortgages, have features that restrict changes
in interest rates, both on a short-term basis and over the life of the asset.
Changes in interest rates, prepayment rates, early withdrawal levels and the
ability of borrowers to service their debt, among other factors, may change
significantly from the assumptions made in the table. Impact of Inflation, Changing Prices and Monetary Policies The primary effect of inflation on 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 33




---



##### 



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 and are incorporated herein by reference. Presented below is a summary of the unaudited consolidated quarterly
financial data for the years ended December 31, 2003 and 2002. Quarterly Financial Information(Unaudited  in thousands, except per share data) 2003
    Quarters
    2002
    QuartersFirst
    
    Second
    
    Third
    
    Fourth
    
    First
    
    Second
    
    Third
    
    FourthInterest income
    
    
    5,908
    
    
    
    5,903
    
    
    
    5,953
    
    
    
    5,778
    
    
    
    6,096
    
    
    
    6,025
    
    
    
    6,112
    
    
    
    6,064Net interest income
    
    
    3,902
    
    
    
    3,982
    
    
    
    4,136
    
    
    
    3,995
    
    
    
    2,379
    
    
    
    2,133
    
    
    
    2,055
    
    
    
    2,157Provision for loan losses
    
    
    75
    
    
    
    75
    
    
    
    75
    
    
    
    125
    
    
    
    75
    
    
    
    75
    
    
    
    75
    
    
    
    258Income before income taxes
    
    
    1,959
    
    
    
    2,203
    
    
    
    2,161
    
    
    
    2,144
    
    
    
    1,839
    
    
    
    1,992
    
    
    
    2,539
    
    
    
    1,843Net income
    
    
    1,355
    
    
    
    1,514
    
    
    
    1,439
    
    
    
    1,479
    
    
    
    1,221
    
    
    
    1,315
    
    
    
    1,666
    
    
    
    1,343Earnings per
share - basic
    
    
    0.41
    
    
    
    0.46
    
    
    
    0.44
    
    
    
    0.44
    
    
    
    0.39
    
    
    
    0.40
    
    
    
    0.50
    
    
    
    0.42Earnings per
share - diluted
    
    
    0.40
    
    
    
    0.45
    
    
    
    0.43
    
    
    
    0.44
    
    
    
    0.39
    
    
    
    0.40
    
    
    
    0.50
    
    
    
    0.40Weighted average common
shares outstanding - basic
    
    
    3,307,296
    
    
    
    3,310,496
    
    
    
    3,307,827
    
    
    
    3,306,729
    
    
    
    3,103,096
    
    
    
    3,258,381
    
    
    
    3,306,733
    
    
    
    3,306,733Weighted average common
shares outstanding -
diluted
    
    
    3,351,533
    
    
    
    3,354,733
    
    
    
    3,352,064
    
    
    
    3,350,966
    
    
    
    3,130,376
    
    
    
    3,284,351
    
    
    
    3,332,703
    
    
    
    3,397,378
 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. 34




---



##### 



There were no changes in the Companys internal control over financial
reporting during the Companys fiscal quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially effect, the
Companys internal control over financial reporting. 35




---



##### 



PART III Item 10. Directors and Executive Officers of the Registrant The information appearing under the headings Nomination and Election of
Directors and Compliance With Section 16(a) of the Securities Exchange Act of
1934 in the Proxy Statement (the 2004 Proxy Statement) relating to the 2004
Annual Meeting of Shareholders of the Company, currently scheduled to be held
on April 13, 2004, is incorporated herein by reference. Item 11. Executive Compensation The information appearing under the heading Executive Compensation in
the 2004 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 2004 Proxy Statement is
incorporated herein by reference. Securities Authorized for Issuance Under Equity Compensation Plans The following table gives information as of December 31, 2003, about WGNB
Corp. Common Stock that may be issued upon the exercise of options, warrants
and rights under the Companys 1994 and 2003 Incentive Stock Plans, which are
the Companys only outstanding equity compensation plan. The Company does not
have any equity compensation plans that were not approved by its shareholders.
The 1994 Incentive Stock Plan was approved by the Companys Board of Directors
and its shareholders in 1994. The 2003 Incentive Stock Plan was approved by
the Companys Board of Directors and its shareholders in 2003. Number of securities remainingNumber of securities to
    
    
    
    
    
    available for future issuancebe issued upon exercise
    
    Weighted-average exercise
    
    under equity compensation plansof outstanding options,
    
    price of outstanding
    
    (excluding securitieswarrants and rights
    
    options, warrants and rights
    
    reflected in column (a))Plan
Category
    
    (a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    134,003
    
    
    $
    18.51
    
    
    
    660,000
    *Equity compensation
plans not approved
by security holders
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/ATotal
    
    
    134,003
    
    
    $
    18.51
    
    
    
    660,000
    *
 * 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. Item 13. Certain Relationships and Related Transactions The information appearing under the caption Nomination and Election of
Directors  Certain Relationships and Related Transactions in the 2004 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 2004 Proxy Statement is incorporated herein by reference. 36




---



##### 



Item 15. Exhibits and Reports on Form 8-K  (a)(1) Financial Statements The following financial statements are filed with this Report: Independent Auditors Report of Porter Keadle Moore, LLP Consolidated Balance Sheets as of December 31, 2003 and 2002 Consolidated Statements of Earnings for the Years Ended December 31, 2003, 2002 and 2001 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2003,
2002 and 2001 Consolidated Statements of Changes in Stockholders Equity for the Years Ended
December 31, 2003, 2002 and 2001 Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001 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 September 10, 1996 between the Company and L. Leighton Alston (Incorporated by reference
to Exhibit 10.1 to the Form 10-SB).10.2
    
    *
    
    Incentive Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the Form 10-SB).10.3
    
    *
    
    Bonus and Stock Option
Agreement dated as of May 11, 1993 between the Company and L. Leighton Alston (Incorporated by reference to
Exhibit 10.3 to the Form 10-SB).10.4
    
    *
    
    First
Amendment to Bonus and Stock Option Agreement dated as of June 14, 1994 between the Company and L. Leighton
Alston (Incorporated by reference to Exhibit 10.4 to the Form 10-SB).10.5
    
    *
    
    Bonus and
Stock Option Agreement dated as of June 14, 1994 between the Company and Richard A. Duncan (Incorporated by
reference to Exhibit 10.5 to the Form 10-SB).10.6
    
    *
    
    Bonus and
Stock Option Agreement dated as of September 23, 1998 between the Company and H.B. Lipham, III (Incorporated by
reference to Exhibit 10.6 to the Form 10-SB).
 37




---



##### 



10.7
    
    *
    
    Bonus and
Stock Option Agreement dated as of September 23, 1998 between the Company and W. Galen Hobbs, Jr. (Incorporated
by reference to Exhibit 10.7 to the Form 10-SB).10.8
    
    *
    
    Bonus and
Stock Option Agreement dated as of September 23, 1998 between the Company and Steven J. Haack (Incorporated by
reference to Exhibit 10.8 to the Form 10-SB).10.9
    
    *
    
    Form of Election for
Payment of Director Meeting Fees (Incorporated by reference to Exhibit 10.10 to the Form 10-SB).10.10
    
    *
    
    Employment Agreement dated August 30, 2000 between the Company and Richard A. Duncan (Incorporated by reference
to Exhibit 10.11 to the Companys Annual Report on Form 10-KSB filed February 21, 2001 (the 2000 Form 10-KSB)10.11
    
    *
    
    Employment Agreement dated August 31, 2000 between the Company and Steven J. Haack
(Incorporated by reference to Exhibit 10.13 to the 2000 Form 10-KSB)10.12
    
    *
    
    Employment Agreement dated August 31, 2000 between the Company and H.B. Lipham, III
(Incorporated by reference to Exhibit 10.14 to the 2000 Form 10-KSB)10.13
    
    *
    
    Employment Agreement dated August 31, 2000 between the Company and W. Galen Hobbs, Jr.
(Incorporated by reference to Exhibit 10.15 to the 2000 Form 10-KSB)10.14
    
    *
    
    Amendment to Employment Agreement dated May 30, 2002 between the Company and L. Leighton Alston (Incorporated
by reference to Exhibit 10.1 to the Companys Annual report on Form 10-Q filed August 13, 2002 (the 6/30/02
Form 10-Q)10.15
    
    *
    
    Amendment to Bonus and Stock Option Agreement dated June 17, 2002 between the Company and L. Leighton Alston
(Incorporated by reference to Exhibit 10.2 to the 6/30/02 Form 10-Q)10.16
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and L. Leighton Alston (Incorporated
by reference to Exhibit 10.3 to the 6/30/02 Form 10-Q)10.17.
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and Richard A. Duncan (Incorporated
by reference to Exhibit 10.4 to the 6/30/02 Form 10-Q)10.18
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and Richard A. Duncan (Incorporated
by reference to Exhibit 10.5 to the 6/30/02 Form 10-Q)10.19
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and H.B. Lipham, III (Incorporated
by reference to Exhibit 10.6 to the 6/30/02 Form 10-Q)10.20
    
    *
    
    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 6/30/02 Form 10-Q)10.21
    
    *
    
    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)10.22
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and W. Galen Hobbs, Jr.
(Incorporated by reference to Exhibit 10.9 to the 6/30/02 Form 10-Q)10.23
    
    *
    
    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)10.24
    
    *
    
    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)
 38




---



##### 



10.25
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and Steven J. Haack (Incorporated by
reference to Exhibit 10.12 to the 6/30/02 Form 10-Q)10.26
    
    *
    
    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)10.27
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and Steven J. Haack
(Incorporated by reference to Exhibit 10.14 to the 6/30/02 Form 10-Q)10/28
    
    *
    
    2003 Stock Incentive Plan (Incorporated by reference to Appendix A to 2004 Proxy Statement)21
    
    
    
    Subsidiary of WGNB Corp.31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes Oxley Act of 200232.1
    
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes Oxley Act of 2002
   *
    
    Indicates management contract or compensatory plan or arrangement.  (b)
    
    Reports on Form 8-K On October 7, 2003, the Company furnished a current report on Form 8-K to
disclose under Item 12 the issuance of its press release announcing the
Companys results of operations for the quarterly period ended September 30,
2003. 39




---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized. WGNB CORP.By:
    
    /s/ L. Leighton AlstonL. Leighton Alston, Chief Executive OfficerDate: March 4, 2004
 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/ L. Leighton Alston
L. Leighton Alston, President, Chief
Executive Officer and Director
[Principal Executive Officer]
    
    Date: March 4, 2004/s/ Steven J. Haack
Steven J. Haack, Secretary and Treasurer
[Principal Financial and Accounting Officer]
    
    Date: March 4, 2004/s/ W. T. Green
W. T. Green, Chairman of the Board
    
    Date: March 4, 2004Wanda W. Calhoun, Director
    
    Date: March    , 2004/s/ Grady W. Cole
Grady W. Cole, Director
    
    Date: March 4, 2004/s/ Richard A. Duncan
Richard A. Duncan, Director
    
    Date: March 4, 2004L.G. (Jack) Joyner, Director
    
    Date: March __, 2004R. David Perry, Director
    
    Date: March __, 2004/s/ L. Richard Plunkett
L. Richard Plunkett, Director
    
    Date: March 4, 2004
 40




---



##### 



Thomas E. Reeve, III, M.D., Director
    
    Date: March __, 2004/s/ Thomas T. Richards
Thomas T. Richards, Director
    
    Date: March 4, 2004Oscar W. Roberts, III, Director
    
    Date: March __, 2004Frank T. Thomasson, III, Director
    
    Date: March __, 2004/s/ J. Thomas Vance
J. Thomas Vance, Director
    
    Date: March 4, 2004/s/ Charles M. Willis, Sr.
Charles M. Willis, Sr., Director
    
    Date: March 4, 2004
 41




---



##### 



WGNB CORP. Consolidated Financial Statements December 31, 2003 and 2002 (with Independent Accountants Report thereon) F-1




---



##### 



(PKM LOGO) Porter Keadle Moore, LLP REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders
WGNB Corp. and Subsidiaries We have audited the accompanying consolidated balance sheets of WGNB Corp. and
subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of earnings, comprehensive income, changes in stockholders equity
and cash flows for each of the three years ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America. 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
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years ended December 31,
2003, in conformity with auditing standards generally accepted in the United
States of America. -s- Porter Keadle Moore, LLPAtlanta, GeorgiaJanuary 30, 2004
 Certified Public
AccountantsSuite
1800  235 Peachtree Street
NE  Atlanta, Georgia 30303  Phone 404-588-4200  Fax
404-588-4222  ww.pkm.com F-2




---



##### 



WGNB CORP. Consolidated Balance Sheets December 31, 2003 and 2002 2003
    
    2002AssetsCash and due from banks, including reserve requirements
of $100,000 each year
    
    $
    15,564,312
    
    
    
    16,963,822Federal funds sold
    
    
    11,671,486
    
    
    
    30,703,388Cash and cash equivalents
    
    
    27,235,798
    
    
    
    47,667,210Securities available for sale
    
    
    55,276,742
    
    
    
    52,131,793Securities held to maturity
    
    
    4,250,000
    
    
    
    3,500,000Loans, net
    
    
    292,564,759
    
    
    
    269,212,860Premises and equipment, net
    
    
    6,762,895
    
    
    
    5,959,767Accrued interest receivable
    
    
    1,939,028
    
    
    
    2,027,228Other assets
    
    
    5,186,689
    
    
    
    4,622,304$
    393,215,911
    
    
    
    385,121,162Liabilities and Stockholders EquityDeposits:Demand
    
    $
    40,181,696
    
    
    
    38,039,880Interest bearing demand
    
    
    138,337,540
    
    
    
    123,831,459Savings
    
    
    11,215,937
    
    
    
    9,031,153Time
    
    
    82,537,712
    
    
    
    86,680,351Time, over $100,000
    
    
    31,043,295
    
    
    
    41,143,025Total deposits
    
    
    303,316,180
    
    
    
    298,725,868Federal Home Loan Bank advances
    
    
    45,000,000
    
    
    
    45,000,000Accrued interest payable
    
    
    1,028,269
    
    
    
    1,210,424Other liabilities
    
    
    1,782,200
    
    
    
    1,664,919Total liabilities
    
    
    351,126,649
    
    
    
    346,601,211CommitmentsStockholders equity:Common stock, $1.25 par value, 10,000,000 shares authorized;
3,306,452 and 3,306,733 shares issued and outstanding
    
    
    4,133,065
    
    
    
    4,133,416Additional paid-in capital
    
    
    5,287,947
    
    
    
    5,367,172Retained earnings
    
    
    31,279,245
    
    
    
    27,709,213Accumulated comprehensive income
    
    
    1,389,005
    
    
    
    1,310,150Total stockholders equity
    
    
    42,089,262
    
    
    
    38,519,951$
    393,215,911
    
    
    
    385,121,162
 See accompanying notes to consolidated financial statements. F-3




---



##### 



WGNB CORP. Consolidated Statements of Earnings For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Interest income:Interest and fees on loans
    
    $
    20,448,355
    
    
    
    20,863,583
    
    
    
    23,218,171Interest on federal funds sold
    
    
    186,752
    
    
    
    249,061
    
    
    
    490,114Interest on investment securities:U.S. Government agencies
    
    
    1,073,225
    
    
    
    1,560,529
    
    
    
    1,661,092State, county and municipal
    
    
    1,319,700
    
    
    
    1,159,393
    
    
    
    916,520Other
    
    
    514,357
    
    
    
    464,123
    
    
    
    262,426Total interest income
    
    
    23,542,389
    
    
    
    24,296,689
    
    
    
    26,548,323Interest expense:Interest on deposits:Demand
    
    
    954,060
    
    
    
    1,487,148
    
    
    
    2,398,878Savings
    
    
    53,579
    
    
    
    94,811
    
    
    
    227,721Time
    
    
    3,993,126
    
    
    
    5,094,063
    
    
    
    7,488,778Interest on FHLB and other borrowings
    
    
    2,526,780
    
    
    
    2,048,130
    
    
    
    1,953,643Total interest expense
    
    
    7,527,545
    
    
    
    8,724,152
    
    
    
    12,069,020Net interest income
    
    
    16,014,844
    
    
    
    15,572,537
    
    
    
    14,479,303Provision for loan losses
    
    
    350,000
    
    
    
    483,340
    
    
    
    910,500Net interest income after provision for loan losses
    
    
    15,664,844
    
    
    
    15,089,197
    
    
    
    13,568,803Other income:Service charges on deposit accounts
    
    
    3,659,098
    
    
    
    3,195,766
    
    
    
    2,921,445Mortgage origination fees
    
    
    933,053
    
    
    
    938,439
    
    
    
    823,363Gain on sale of securities available for sale
    
    
    
    
    
    
    6,705
    
    
    
    21,381Miscellaneous
    
    
    961,371
    
    
    
    1,110,170
    
    
    
    784,185Total other income
    
    
    5,553,522
    
    
    
    5,251,080
    
    
    
    4,550,374Other expenses:Salaries and employee benefits
    
    
    7,625,750
    
    
    
    7,186,935
    
    
    
    6,504,486Occupancy
    
    
    1,809,859
    
    
    
    1,646,537
    
    
    
    1,555,737Other operating
    
    
    3,316,083
    
    
    
    3,293,841
    
    
    
    2,799,169Total other expenses
    
    
    12,751,692
    
    
    
    12,127,313
    
    
    
    10,859,392Earnings before income taxes
    
    
    8,466,674
    
    
    
    8,212,964
    
    
    
    7,259,785Income taxes
    
    
    2,679,824
    
    
    
    2,668,299
    
    
    
    2,470,664Net earnings
    
    $
    5,786,850
    
    
    
    5,544,665
    
    
    
    4,789,121Net earnings per share
    
    $
    1.75
    
    
    
    1.71
    
    
    
    1.55Diluted net earnings per share
    
    $
    1.72
    
    
    
    1.69
    
    
    
    1.52
 See accompanying notes to consolidated financial statements. F-4




---



##### 



WGNB CORP. Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Net earnings
    
    $
    5,786,850
    
    
    
    5,544,665
    
    
    
    4,789,121Other comprehensive income, net of tax:Unrealized gains on investment
securities available for sale:Unrealized gains arising during the period
    
    
    119,477
    
    
    
    1,403,646
    
    
    
    692,076Associated taxes
    
    
    (40,622
    )
    
    
    (477,240
    )
    
    
    (262,712
    )Reclassification adjustment for gain realized
    
    
    
    
    
    
    (6,705
    )
    
    
    (21,381
    )Associated taxes
    
    
    
    
    
    
    2,213
    
    
    
    8,116Other comprehensive income
    
    
    78,855
    
    
    
    921,914
    
    
    
    416,099Comprehensive income
    
    $
    5,865,705
    
    
    
    6,466,579
    
    
    
    5,205,220
 See accompanying notes to consolidated financial statements. F-5




---



##### 



WGNB CORP. Consolidated Statements of Changes in Stockholders Equity For the Years Ended December 31, 2003, 2002 and 2001 Common Stock
    
    Additional
    
    
    
    
    
    AccumulatedPaid-in
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    TotalBalance, December 31, 2000
    
    
    3,095,455
    
    
    
    3,869,319
    
    
    
    817,864
    
    
    
    21,027,693
    
    
    
    (27,863
    )
    
    
    25,687,013Cash dividends ($.55 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,705,491
    )
    
    
    
    
    
    
    (1,705,491
    )Retirement of common stock
    
    
    (2,466
    )
    
    
    (3,083
    )
    
    
    (52,282
    )
    
    
    
    
    
    
    
    
    
    
    (55,365
    )Exercise of stock options
    
    
    6,260
    
    
    
    7,825
    
    
    
    39,687
    
    
    
    
    
    
    
    
    
    
    
    47,512Issuance of common stock in lieu of directors fees
    
    
    1,106
    
    
    
    1,383
    
    
    
    24,055
    
    
    
    
    
    
    
    
    
    
    
    25,438Change in unrealized holding gain on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416,099
    
    
    
    416,099Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,789,121
    
    
    
    
    
    
    
    4,789,121Balance, December 31, 2001
    
    
    3,100,355
    
    
    
    3,875,444
    
    
    
    829,324
    
    
    
    24,111,323
    
    
    
    388,236
    
    
    
    29,204,327Cash dividends ($.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,946,775
    )
    
    
    
    
    
    
    (1,946,775
    )Retirement of common stock
    
    
    (2,345
    )
    
    
    (2,932
    )
    
    
    (62,350
    )
    
    
    
    
    
    
    
    
    
    
    (65,282
    )Exercise of stock options
    
    
    7,512
    
    
    
    9,390
    
    
    
    55,892
    
    
    
    
    
    
    
    
    
    
    
    65,282Common stock offering at $24 per share, net of
offering
cost of $33,546
    
    
    200,000
    
    
    
    250,000
    
    
    
    4,516,454
    
    
    
    
    
    
    
    
    
    
    
    4,766,454Issuance of common stock in lieu of directors fees
    
    
    1,211
    
    
    
    1,514
    
    
    
    27,852
    
    
    
    
    
    
    
    
    
    
    
    29,366Change in unrealized holding gain on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    921,914
    
    
    
    921,914Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,544,665
    
    
    
    
    
    
    
    5,544,665Balance, December 31, 2002
    
    
    3,306,733
    
    
    $
    4,133,416
    
    
    
    5,367,172
    
    
    
    27,709,213
    
    
    
    1,310,150
    
    
    
    38,519,951Cash dividends ($.67 per share)
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    (2,216,818
    )
    
    
    
    
    
    
    (2,216,818
    )Retirement of common stock
    
    
    (5,847
    )
    
    
    (7,309
    )
    
    
    (147,224
    )
    
    
    
    
    
    
    
    
    
    
    (154,533
    )Exercise of stock options
    
    
    4,651
    
    
    
    5,814
    
    
    
    40,228
    
    
    
    
    
    
    
    
    
    
    
    46,042Issuance of common stock in lieu of directors fees
    
    
    915
    
    
    
    1,144
    
    
    
    27,771
    
    
    
    
    
    
    
    
    
    
    
    28,915Change in unrealized holding gain on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,855
    
    
    
    78,855Net earnings
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    5,786,850
    
    
    
    
    
    
    
    5,786,850Balance, December 31, 2003
    
    
    3,306,452
    
    
    $
    4,133,065
    
    
    
    5,287,947
    
    
    
    31,279,245
    
    
    
    1,389,005
    
    
    
    42,089,262
 See accompanying notes to consolidated financial statements. F-6




---



##### 



WGNB CORP. Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings
    
    $
    5,786,850
    
    
    
    5,544,665
    
    
    
    4,789,121Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation, amortization and accretion
    
    
    1,078,280
    
    
    
    1,060,285
    
    
    
    778,023Provision for loan losses
    
    
    350,000
    
    
    
    483,340
    
    
    
    910,500Change in deferred income taxes
    
    
    86,768
    
    
    
    (163,472
    )
    
    
    (341,386
    )Loss on sale of securities available for sale
    
    
    
    
    
    
    (6,705
    )
    
    
    (21,381
    )(Gain) loss on sale of premises and equipment
    
    
    (13,997
    )
    
    
    7,851
    
    
    
    (3,481
    )Gain on settlement of interest rate swap
    
    
    
    
    
    
    (252,950
    )
    
    
    Loss (gain) on sale of other real estate
    
    
    86,205
    
    
    
    9,710
    
    
    
    (15,286
    )Change in:Other assets
    
    
    15,973
    
    
    
    (254,145
    )
    
    
    (1,111,019
    )Other liabilities
    
    
    (120,087
    )
    
    
    (1,355,021
    )
    
    
    1,461,519Net cash provided by operating activities
    
    
    7,269,992
    
    
    
    5,073,558
    
    
    
    6,446,610Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    
    
    
    
    6,498,385
    
    
    
    1,080,000Proceeds from maturities, calls and paydowns of securities
available for sale
    
    
    15,424,516
    
    
    
    11,480,591
    
    
    
    17,210,115Purchases of securities available for sale
    
    
    (18,664,899
    )
    
    
    (14,135,073
    )
    
    
    (32,675,694
    )Purchase of securities held to maturity
    
    
    (750,000
    )
    
    
    (1,500,000
    )
    
    
    (1,000,000
    )Net change in loans
    
    
    (24,547,649
    )
    
    
    (20,526,228
    )
    
    
    (25,484,898
    )Proceeds from sales of premises and equipment
    
    
    46,047
    
    
    
    17,048
    
    
    
    11,342Purchases of premises and equipment
    
    
    (1,698,547
    )
    
    
    (426,370
    )
    
    
    (1,321,684
    )Capital expenditures for other real estate
    
    
    
    
    
    
    (11,843
    )
    
    
    (136,702
    )Proceeds from sales of other real estate
    
    
    155,250
    
    
    
    157,730
    
    
    
    489,283Net cash used by investing activities
    
    
    (30,035,282
    )
    
    
    (18,445,760
    )
    
    
    (41,828,238
    )Cash flows from financing activities:Net change in deposits
    
    
    4,590,312
    
    
    
    18,194,740
    
    
    
    46,720,265Federal Home Loan Bank advances
    
    
    
    
    
    
    10,000,000
    
    
    
    10,000,000Proceeds from other borrowings
    
    
    
    
    
    
    
    
    
    
    372,000Repayment of other borrowings
    
    
    
    
    
    
    (1,282,000
    )
    
    
    (390,000
    )Proceeds from settlement of interest rate swap
    
    
    
    
    
    
    252,950
    
    
    
    Change in federal funds purchased
    
    
    
    
    
    
    
    
    
    
    (600,000
    )Offering proceeds, net of offering cost
    
    
    
    
    
    
    4,766,454
    
    
    
    Dividends paid
    
    
    (2,147,943
    )
    
    
    (1,891,627
    )
    
    
    (1,651,553
    )Exercise of stock options
    
    
    46,042
    
    
    
    65,282
    
    
    
    47,512Retirement of common stock
    
    
    (154,533
    )
    
    
    (65,282
    )
    
    
    (55,365
    )Net cash provided by financing activities
    
    
    2,333,878
    
    
    
    30,040,517
    
    
    
    54,442,859Change in cash and cash equivalents
    
    
    (20,431,412
    )
    
    
    16,668,315
    
    
    
    19,061,231Cash and cash equivalents at beginning of year
    
    
    47,667,210
    
    
    
    30,998,895
    
    
    
    11,937,664Cash and cash equivalents at end of year
    
    $
    27,235,798
    
    
    
    47,667,210
    
    
    
    30,998,895
 F-7




---



##### 



WGNB CORP. Consolidated Statements of Cash Flows, continued For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    7,709,700
    
    
    
    9,409,115
    
    
    
    11,932,926Income taxes
    
    $
    2,322,000
    
    
    
    3,357,950
    
    
    
    2,154,962Non-cash investing and financing activities:Transfer of loans to other real estate
    
    $
    845,750
    
    
    
    390,397
    
    
    
    Change in unrealized gains on
securities available for sale, net of tax
    
    $
    78,855
    
    
    
    921,914
    
    
    
    416,099Change in dividends payable
    
    $
    (68,875
    )
    
    
    (55,148
    )
    
    
    (53,938
    )Issuance of common stock to directors in
lieu of directors fees Issuan
    
    $
    28,915
    
    
    
    29,366
    
    
    
    25,438
 See accompanying notes to consolidated financial statements. F-8




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements  (1)
    
    Summary of Significant Accounting PoliciesThe following is a summary of the significant policies and procedures.Basis of PresentationThe 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.In 2002, the Company completed a public offering of 200,000 shares of its
common stock at a purchase price of $24.00 per share, or an aggregate
amount of $4,800,000. The offering was conducted through the Companys
officers and directors on a best-efforts basis without compensation. The
Company received net proceeds from the offering of $4,766,654, representing
total offering proceeds of $4,800,000, less offering expenses of $33,346.During 2002, the Company merged the operation of WGCS into the Bank and the
Company. Additionally, the Company has ceased offering non-traditional
consumer financing. WGCS had operated under the name Mortgage & Loan
Solutions and commenced operations in 1997 serving Paulding, Douglas and
Carroll Counties.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 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 EquivalentsFor purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold.SecuritiesThe 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 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 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. F-9




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (1)
    
    Summary of Significant Accounting Policies, continuedLoans and Allowance for Loan LossesLoans 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.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 reserve.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.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 EquipmentPremises 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: Building and improvements
    
    15 - 39 yearsFurniture and equipment
    
    3 - 10 years
  Other Real EstateProperties acquired through foreclosure are carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated costs
to dispose. Accounting literature defines fair value 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 TaxesThe 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, continuedIncome Taxes, continuedIn 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 the 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 ActivitiesThe Company recognizes the fair value of derivatives as assets or
liabilities in the financial statements. Changes in the fair value of a
derivative depend 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 settled
or terminated, the cumulative change in the fair value is amortized into
income over the original hedge period. If the underlying hedged instrument
is sold, the Company immediately recognizes the cumulative change in the
derivatives value in the component of earnings.As of December 31, 2003 and 2002, the Company did not hold an interest rate
swap position. As of December 31, 2001, the Company held an interest rate
swap, which was entered into as a means of managing its interest rate risk
and accounted for the hedge instrument as a fair value hedge. The interest
rate swap contract, with a notional amount of $20,000,000, was used to
hedge the Banks fixed rate interest risk related to its borrowing with the
Federal Home Loan Bank. Under the interest swap contract, the Company
received a fixed rate of 3.45% and paid at a rate of 90 day LIBOR which was
1.89% at December 31, 2001. During 2002, the Company recognized $252,950
in gains related to the settlement of the interest rate swap, which was
reported as a component of other income.Stock Compensation PlansStatement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, encourages all entities to adopt a fair
value based method of accounting for employee stock compensation plans,
whereby compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, whereby compensation cost
is the excess, if any, of the quoted market price of the stock at the grant
date (or other measurement date) over the amount an employee must pay to
acquire the stock. Stock options issued under the Companys stock option
plan have no intrinsic value at the grant date, and under Opinion No. 25 no
compensation cost is recognized for them. The Company has elected to
continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net income and earnings per
share and other disclosures, as if the fair value based method of
accounting had been applied.Had compensation cost for the plan been determined based upon the fair
value of the options at the grant dates, the Companys net earnings and net
earnings per share would have been reduced to the proforma amounts
indicated below: 2003
    
    2002
    
    2001Net earnings
    
    As reported
    
    $
    5,786,850
    
    
    
    5,544,665
    
    
    
    4,789,121Proforma
    
    $
    5,573,908
    
    
    
    5,465,894
    
    
    
    4,748,635Net earnings per share
    
    As reported
    
    $
    1.75
    
    
    
    1.71
    
    
    
    1.55Proforma
    
    $
    1.68
    
    
    
    1.69
    
    
    
    1.53Diluted earnings per share
    
    As reported
    
    $
    1.72
    
    
    
    1.69
    
    
    
    1.52Proforma
    
    $
    1.66
    
    
    
    1.66
    
    
    
    1.51
 F-11




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (1)
    
    Summary of Significant Accounting Policies, continuedStock Compensation Plans, continuedThe fair value of each option is estimated on the date of grant using the
Black-Scholes Model for 2003 and 2002 and the Minimum Value Model for 2001.
The following weighted average assumptions used for grants in 2003, 2002
and 2001, respectively: dividend yield of 2.40%, 2.40% and 2.00%, risk free
interest rates of 4.27%, 4.14% and 5.00%, respectively, and an expected
life of 10 years. Related to 2002 and 2001, we applied price volatilities
of 29% and 25%, respectively. For disclosure purposes, the Company
immediately recognized the expense associated with the option grants
assuming that all awards will vest. The compensation expense included in
the proforma results was determined based on the fair value of the option
at the time of grant multiplied by the number of options granted net of tax
effect.Net Comprehensive IncomeGAAP generally requires that recognized revenues, expenses, gains and
losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of
the consolidated balance sheets, such items along with net income, are
components of comprehensive income. The Company presents comprehensive
income in a separate consolidated statement of comprehensive incomeEarnings Per ShareEarnings per common 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 ShareFor the Year Ended December 31, 2003
    
    Net Earnings
    
    Shares
    
    AmountEarnings per common share
    
    $
    5,786,850
    
    
    
    3,308,087
    
    
    $
    1.75Effect of dilutive stock options
    
    
    
    
    
    
    48,893
    
    
    
    (.03
    )Diluted earnings per common share
    
    $
    5,786,850
    
    
    
    3,356,980
    
    
    $
    1.72
 Common
    
    Per ShareFor the Year Ended December 31, 2002
    
    Net Earnings
    
    Shares
    
    AmountEarnings per common share
    
    $
    5,544,665
    
    
    
    3,243,849
    
    
    $
    1.71Effect of dilutive stock options
    
    
    
    
    
    
    42,353
    
    
    
    (.02
    )Diluted earnings per common share
    
    $
    5,544,665
    
    
    
    3,286,202
    
    
    $
    1.69
 Common
    
    Per ShareFor the Year Ended December 31, 2001
    
    Net Earnings
    
    Shares
    
    AmountEarnings per common share
    
    $
    4,789,121
    
    
    
    3,098,067
    
    
    $
    1.55Effect of dilutive stock options
    
    
    
    
    
    
    45,986
    
    
    
    (.03
    )Diluted earnings per common share
    
    $
    4,789,121
    
    
    
    3,144,053
    
    
    $
    1.52
  New Accounting StandardsIn January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses
consolidation by business enterprises of variable interest entities. The
provisions of FIN 46 are effective immediately for all variable interest
entities created after January 31, 2003 and, for the first fiscal year or
interim period beginning after June 15, 2003, for variable interest
entities in which an enterprise holds variable interest in that it acquired
before February 1, 2003. The Company does not have an interest in a
variable interest entity and, therefore, the adoption of FIN 46 does not
have an impact on the Companys financial position or results of
operations. F-12




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (1)
    
    Summary of Significant Accounting Policies, continuedNew Accounting Standards, continuedIn May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity
(SFAS 150), which changes the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. SFAS 150, which is effective for interim periods beginning after
June 15, 2003, requires that those instruments be classified as liabilities
in statements of financial position. Since the Company has no such
instrument, the adoption of SFAS 150 did not have an impact on the
Companys financial position or results of operations.ReclassificationsCertain reclassifications have been made in the prior years consolidated
financial statements to conform to the presentation used in 2003.(2)
    
    Investment SecuritiesInvestment securities available for sale and held-to-maturity at December
31, 2003 and 2002 are summarized as follows: Available for Sale
    
    December 31, 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueU.S. Government agencies
    
    $
    7,026,625
    
    
    
    53,574
    
    
    
    
    
    
    
    7,080,199Mortgage-backed securities
    
    
    16,398,266
    
    
    
    492,122
    
    
    
    47,714
    
    
    
    16,842,674State, county and municipals
    
    
    28,089,647
    
    
    
    1,495,022
    
    
    
    9,583
    
    
    
    29,575,086Corporate bonds
    
    
    1,657,651
    
    
    
    121,132
    
    
    
    
    
    
    
    1,778,783$
    53,172,189
    
    
    
    2,161,850
    
    
    
    57,297
    
    
    
    55,276,742
 December 31, 2002Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueU.S. Government agencies
    
    $
    3,522,598
    
    
    
    85,752
    
    
    
    
    
    
    
    3,608,350Mortgage-backed securities
    
    
    20,811,410
    
    
    
    771,173
    
    
    
    
    
    
    
    21,582,583State, county and municipals
    
    
    24,161,148
    
    
    
    1,075,984
    
    
    
    22,820
    
    
    
    25,214,312Corporate bonds
    
    
    1,686,405
    
    
    
    40,143
    
    
    
    
    
    
    
    1,726,548$
    50,181,56161
    
    
    
    1,973,052
    
    
    
    22,820
    
    
    
    52,131,793793
 Held to Maturity
    
    December 31, 2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueTrust preferred securities
    
    $
    4,250,000
    
    
    
    22,800
    
    
    
    
    
    
    
    4,272,800
 December 31, 2002Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueTrust preferred securities
    
    $
    3,500,000
    
    
    
    101,400
    
    
    
    
    
    
    
    3,601,400
 F-13




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (2)
    
    Investment Securities, continuedThe amortized cost and estimated fair value of investment securities
available for sale and held to maturity at December 31, 2003, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers have the right to call or prepay
certain obligations with or without call or prepayment penalties. Amortized
    
    EstimatedCost
    
    Fair ValueAvailable for SaleU.S. Government agencies, state, county
and municipals and corporate bonds:Within 1 year
    
    $
    2,743,882
    
    
    
    2,763,7181 to 5 years
    
    
    7,470,917
    
    
    
    7,763,6915 to 10 years
    
    
    8,676,144
    
    
    
    9,015,080After 10 years
    
    
    17,882,980
    
    
    
    18,891,579Mortgage-backed securities
    
    
    16,398,266
    
    
    
    16,842,674$
    53,172,189
    
    
    
    55,276,742Held to MaturityTrust preferred securities:After 10 years
    
    $
    4,250,000
    
    
    
    4,272,800
  The following is a summary of the fair values of securities that have
market losses as of December 31, 2003. The Company has determined that the
decline in fair value below the amortized cost basis is temporary for
purposes promulgated by Statement of Financial Accounting Standards No. 115
 - Accounting for Certain Debt and Equity Securities since there are no
securities with losses for a twelve month period. December 31, 2003Less Than 12 Months
    
    12 Months or MoreFair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Losses
    
    Value
    
    LossesU.S. Government agencies
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    3,369,392
    
    
    
    47,714
    
    
    
    
    
    
    
    State, county and municipals
    
    
    1,285,300
    
    
    
    9,583
    
    
    
    
    
    
    
    Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,654,692
    
    
    
    57,297
    
    
    
    
    
    
    
    
  At December 31, 2003, 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, 2003 tables above, 4 out of 88 securities
issued by state and political subdivisions contained unrealized losses and
4 out of 71 securities issued by U.S. Government agencies and Government
sponsored corporations, including mortgage-backed securities, 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 government backed.  Proceeds from sales of securities available for sale during 2003, 2002 and
2001 were $0, $6,498,385 and $1,080,000, respectively, with the following
gains and losses recognized: 2003
    
    2002
    
    2001Gross gains
    
    $
    
    
    
    
    6,705
    
    
    
    21,831Gross losses
    
    $
    
    
    
    
    
    
    
    
    
 F-14




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (2)
    
    Investment Securities, continuedInvestment securities with a fair value of approximately $53,473,000 and
$47,217,000 as of December 31, 2003 and 2002, respectively, were pledged to
secure public deposits, as required by law, and for other purposes.  (3)
    
    LoansMajor classifications of loans at December 31, 2003 and 2002 are summarized
as follows: 2003
    
    2002Commercial, financial and agricultural
    
    $
    31,219,230
    
    
    
    34,821,174Real estate - mortgage
    
    
    180,991,556
    
    
    
    153,572,374Real estate - construction
    
    
    68,207,499
    
    
    
    68,817,967Consumer
    
    
    16,079,558
    
    
    
    16,259,910296,497,843
    
    
    
    273,471,425Less: Unearned interest
    
    
    453,718
    
    
    
    486,889Allowance for loan losses
    
    
    3,479,366
    
    
    
    3,771,676$
    292,564,759
    
    
    
    269,212,860
  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.  Changes in the allowance for loan losses for the years ended December 31,
2003, 2002 and 2001 are as follows: 2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    3,771,676
    
    
    
    3,720,206
    
    
    
    2,919,812Provision for loan losses
    
    
    350,000
    
    
    
    483,340
    
    
    
    910,500Loans charged off
    
    
    (789,544
    )
    
    
    (694,566
    )
    
    
    (199,720
    )Recoveries
    
    
    147,234
    
    
    
    262,696
    
    
    
    89,614Balance, end of year
    
    $
    3,479,366
    
    
    
    3,771,676
    
    
    
    3,720,206
  (4)
    
    Premises and EquipmentMajor classifications of premises and equipment at December 31, 2003 and
2002 are summarized as follows: 2003
    
    2002Land
    
    $
    1,188,765
    
    
    
    1,134,599Buildings and improvements
    
    
    6,350,989
    
    
    
    5,833,246Furniture and equipment
    
    
    5,842,829
    
    
    
    5,313,25213,382,583
    
    
    
    12,281,097Less: Accumulated depreciation
    
    
    (6,619,688
    )
    
    
    (6,321,330
    )$
    6,762,895
    
    
    
    5,959,767
  Depreciation expense amounted to $863,369, $748,049 and $700,825 in 2003,
2002 and 2001, respectively. F-15




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (5)
    
    Time DepositsAt December 31, 2003 the scheduled maturities of time deposits are
as follows: 2004
    
    $
    77,745,0872005
    
    
    16,168,1542006
    
    
    11,454,6282007
    
    
    4,944,9102008
    
    
    3,268,228$
    113,581,007
  (6)
    
    Lines of CreditThe Bank has lines of credit for overnight borrowings of $11,000,000 at
December 31, 2003 and 2002. The Bank also has a line of credit with the
Federal Home Loan Bank of Atlanta (FHLB) totaling $56,660,000 and
$53,940,000 at December 31, 2003 and 2002, respectively. Advances on the
FHLB line of credit are subject to available collateral of the Bank. At
December 31, 2003 and 2002, the Bank had advances outstanding from the FHLB
amounting to $45,000,000 representing the following advances requiring
quarterly interest payments: Interest
    
    Current
    
    
    
    
    
    Early ConversionAdvance
    
    Basis
    
    Rate
    
    Maturity
    
    Call Date
    
    OptionMay 2006,$10,000,000
    
    Fixed
    
    5.49%
    
    May 2011
    
    May 2006
    
    3 month LIBOR$  5,000,000
    
    Fixed
    
    6.14%
    
    December 2004
    
    
    
    
    $  5,000,000
    
    Fixed
    
    7.07%
    
    May 2005
    
    
    
    
    $10,000,000
    
    Fixed
    
    6.16%
    
    July 2005
    
    
    
    
    $  5,000,000
    
    Fixed
    
    5.44%
    
    February 2008
    
    
    
    
    September 2007,$10,000,000
    
    Fixed
    
    3.37%
    
    September 2012
    
    September 2007
    
    3 month LIBOR
  The early conversion option allows the FHLB to convert the advances to a
variable interest rate upon notification to the Bank. The FHLB advances
are secured by the Banks stock in the FHLB, its 1-4 family first mortgage
loans and qualified commercial loans.(7)
    
    CommitmentsThe 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. F-16




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (7)
    
    Commitments, continuedIn 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, 2003 and 2002: ApproximateContractual Amount2003
    
    2002Financial instruments whose contract amounts
represent credit risk:Commitments to extend credit
    
    $
    51,587,000
    
    
    
    40,842,000Standby letters of credit
    
    
    2,402,000
    
    
    
    1,658,000
  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.  (8)
    
    Stock Repurchase PlanIn 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 5,847 shares of common
stock during 2003. At December 31, 2003, the Company had $1,323,897
remaining to reacquire shares under the Stock Repurchase Plan.  (9)
    
    Regulatory MattersThe 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, 2003, that the
Company and the Bank met all capital adequacy requirements to which it is
subject. F-17




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (9)
    
    Regulatory Matters, continuedAs of December 31, 2003 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. 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, 2003:Total
Capital (to Risk Weighted Assets)Consolidated
    
    $
    43,280
    
    
    
    14
    %
    
    
    324,640
    
    
    
    38
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    39,280
    
    
    
    13
    %
    
    
    324,597
    
    
    
    38
    %
    
    
    330,747
    
    
    
    310
    %Tier I Capital
(to Risk Weighted Assets)Consolidated
    
    $
    39,801
    
    
    
    13
    %
    
    
    312,320
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    35,801
    
    
    
    12
    %
    
    
    312,299
    
    
    
    34
    %
    
    
    318,448
    
    
    
    36
    %Tier I Capital
(to Average Assets)Consolidated
    
    $
    39,801
    
    
    
    10
    %
    
    
    315,474
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    35,801
    
    
    
    9
    %
    
    
    315,414
    
    
    
    34
    %
    
    
    319,267
    
    
    
    35
    %As of December 31, 2002:Total Capital (to Risk
Weighted Assets)Consolidated
    
    $
    40,697
    
    
    
    14
    %
    
    
    322,889
    
    
    
    38
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    35,424
    
    
    
    13
    %
    
    
    322,812
    
    
    
    38
    %
    
    
    328,515
    
    
    
    310
    %Tier I Capital
(to Risk Weighted Assets)Consolidated
    
    $
    37,210
    
    
    
    13
    %
    
    
    311,445
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    31,949
    
    
    
    12
    %
    
    
    311,406
    
    
    
    34
    %
    
    
    317,109
    
    
    
    36
    %Tier I Capital
(to Average Assets)Consolidated
    
    $
    37,210
    
    
    
    9
    %
    
    
    315,149
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    31,949
    
    
    
    8
    %
    
    
    315,115
    
    
    
    34
    %
    
    
    318,894
    
    
    
    35
    %
  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, 2003 the Bank could pay approximately $7,168,000 in dividends without
obtaining prior regulatory approval.  (10)
    
    Incentive Stock Option PlanUnder 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
160,000 shares of common stock were reserved for possible issuance under
the 1994 plan. At December 31, 2003, the Company had distributed all the
remaining 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. No compensation cost
has been recognized for the stock options. F-18




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (10)
    
    Incentive Stock Option Plan, continuedOn 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
660,000 shares of common stock were reserved for possible issuance under
the 2003 Plan with a maximum of 350,000 shares to be issued under
nonqualified stock option grants. At December 31, 2003, the Company had
distributed none 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 11, 2013 unless previously
terminated by the Board of Directors or when the shares 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. No compensation cost has been recognized for the stock options.A summary status of the Companys stock option plan as of December 31,
2003, 2002 and 2001, and changes during the years ending on those dates, is
presented below:  2003
    
    2002
    
    2001Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.
    
    
    
    
    
    Wtd. Avg.Exercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding, beginning of year
    
    
    100,358
    
    
    $
    15.57
    
    
    
    96,279
    
    
    $
    13.75
    
    
    
    88,049
    
    
    $
    12.04Awarded during the year
    
    
    39,734
    
    
    $
    24.99
    
    
    
    17,272
    
    
    $
    24.00
    
    
    
    14,490
    
    
    $
    22.50Forfeited during the year
    
    
    
    
    
    
    
    
    
    
    (5,681
    )
    
    $
    19.59
    
    
    
    
    
    
    
    Exercised during the year
    
    
    (4,651
    )
    
    $
    9.90
    
    
    
    (7,512
    )
    
    $
    8.69
    
    
    
    (6,260
    )
    
    $
    7.59Outstanding, end of year
    
    
    135,442
    
    
    $
    18.53
    
    
    
    100,358
    
    
    $
    15.57
    
    
    
    96,279
    
    
    $
    13.75Options exercisable at year end
    
    
    48,739
    
    
    
    
    
    
    
    36,792
    
    
    
    
    
    
    
    23,220Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    8.12
    
    
    
    
    
    
    $
    6.91
    
    
    
    
    
    
    $
    4.40
 The following information applies to all options outstanding at December
31, 2003: Number of optionsRange of outstanding options
    
    Outstanding$7.22 - 7.25
    
    
    17,781$9.22 - 13.00
    
    
    30,958$20.00 - 24.99
    
    
    86,703135,442Weighted average remaining contractual life (years)
    
    
    6.06
  (11)
    
    Defined Contribution PlanThe 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 2003, 2002 and 2001, the Company matched
100% of the participants contributions up to 6% of the participants
salaries which is limited to the annual 401(k) contribution limits. The
Company also made discretionary contributions to the plan in 2003, 2002 and
2001 of 5% of participants salaries. Contributions to the plan charged to
expense during 2003, 2002 and 2001 were $433,505, $366,148 and $365,993,
respectively. F-19




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (12)
    
    Income TaxesThe components of the provision for income taxes in the consolidated
statements of earnings for the years ended December 31, 2003, 2002 and 2001
are as follows: 2003
    
    2002
    
    2001Current:Federal
    
    $
    2,251,444
    
    
    
    2,571,959
    
    
    
    2,518,696State
    
    
    341,612
    
    
    
    259,812
    
    
    
    293,354Deferred:Federal
    
    
    75,351
    
    
    
    (145,490
    )
    
    
    (305,772
    )State
    
    
    11,417
    
    
    
    (17,982
    )
    
    
    (35,614
    )Total
    
    $
    2,679,824
    
    
    
    2,668,299
    
    
    
    2,470,664
  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: 2003
    
    2002
    
    2001Pretax income at statutory rates
    
    $
    2,878,670
    
    
    
    2,790,917
    
    
    
    2,468,327Add (deduct):Tax-exempt interest income
    
    
    (390,578
    )
    
    
    (331,773
    )
    
    
    (268,094
    )State taxes, net of federal effect
    
    
    85,394
    
    
    
    180,054
    
    
    
    223,384Non-deductible interest expense
    
    
    7,965
    
    
    
    28,636
    
    
    
    39,909Other
    
    
    98,373
    
    
    
    465
    
    
    
    7,138$
    2,679,824
    
    
    
    2,668,299
    
    
    
    2,470,664
  The following summarizes the net deferred tax asset, which is included as a
component of other assets, at December 31, 2003 and 2002. 2003
    
    2002Deferred income tax assets:Allowance for loan losses
    
    $
    1,174,257
    
    
    
    1,285,218Other real estate owned
    
    
    149,138
    
    
    
    84,688Other
    
    
    65,620
    
    
    
    82,962Total gross deferred income tax assets
    
    
    1,389,015
    
    
    
    1,452,868Deferred income tax liabilities:Premises and equipment
    
    
    (357,219
    )
    
    
    (335,070
    )Net unrealized gain on securities available for sale
    
    
    (714,812
    )
    
    
    (661,626
    )Other
    
    
    (2,816
    )
    
    
    (2,050
    )Total gross deferred income tax liabilities
    
    
    (1,074,847
    )
    
    
    (998,746
    )Net deferred income tax asset
    
    $
    341,168
    
    
    
    454,122
 F-20




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (13)
    
    Related Party TransactionsThe 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 2003: Beginning balance
    
    $
    5,433,407New loans
    
    
    7,591,585Repayments
    
    
    (8,938,689
    )Change in related parties
    
    
    657,774Ending balance
    
    $
    4,744,077
  At December 31, 2003, deposits from directors, executive officers, and
their related interests totaled approximately $10,500,000.  (14)
    
    Other Operating ExpensesComponents of other operating expenses which exceed 1% of total interest
income and other income are as follows: 2003
    
    2002
    
    2001Professional fees
    
    $
    408,457
    
    
    
    521,305
    
    
    
    355,018Software licensing fee
    
    $
    
    
    
    
    323,654
    
    
    
    256,712
  (15)
    
    Fair Value of Financial InstrumentsThe 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 subsidiaries, 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. Investment 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 Home Loan Bank Advances The fair value of advances outstanding is based on the quoted value
provided by the FHLB. F-21




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (15)
    
    Fair Value of Financial Instruments, continued 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 judgements. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgement 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, 2003 and 2002 are as follows: 2003
    
    2002Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    27,235,798
    
    
    
    27,235,798
    
    
    
    47,667,210
    
    
    
    47,667,210Securities available for sale
    
    $
    55,276,742
    
    
    
    55,276,742
    
    
    
    52,131,793
    
    
    
    52,131,793Securities held to maturity
    
    $
    4,250,000
    
    
    
    4,272,800
    
    
    
    3,500,000
    
    
    
    3,601,400Loans, net
    
    $
    292,564,759
    
    
    
    293,298,157
    
    
    
    269,212,860
    
    
    
    270,684,750Liabilities:Deposits
    
    $
    303,316,180
    
    
    
    304,808,281
    
    
    
    298,725,868
    
    
    
    301,439,155Federal Home Loan Bank advances
    
    $
    45,000,000
    
    
    
    47,852,386
    
    
    
    45,000,000
    
    
    
    49,035,029
 F-22




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (16)
    
    WGNB Corp. (Parent Company Only) Financial Information Balance Sheets December 31, 2003 and 2002 2003
    
    2002AssetsCash
    
    $
    4,103,581
    
    
    
    5,047,181Investment in Bank
    
    
    37,163,669
    
    
    
    33,238,343Securities available for sale
    
    
    663,095
    
    
    
    672,000Securities held to maturity
    
    
    750,000
    
    
    
    Other assets
    
    
    87,380
    
    
    
    297,656$
    42,767,725
    
    
    
    39,255,180Liabilities and Stockholders EquityDividends payable
    
    $
    583,924
    
    
    
    515,049Other liabilities
    
    
    94,539
    
    
    
    220,180Total liabilities
    
    
    678,463
    
    
    
    735,229Stockholders equity
    
    
    42,089,262
    
    
    
    38,519,951$
    42,767,725
    
    
    
    39,255,180
 Statements of Earnings For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Dividends from Bank
    
    $
    2,216,517
    
    
    
    1,946,290
    
    
    
    1,954,115Other income
    
    
    20,500
    
    
    
    60,637
    
    
    
    82,338Other expense
    
    
    (26,295
    )
    
    
    (51,332
    )
    
    
    (157,314
    )Earnings before equity in undistributed
earnings of subsidiaries
    
    
    2,210,722
    
    
    
    1,955,595
    
    
    
    1,879,139Equity in undistributed earnings (loss) of WGCS
    
    
    
    
    
    
    (22,803
    )
    
    
    23,739Equity in undistributed earnings of Bank
    
    
    3,576,128
    
    
    
    3,611,873
    
    
    
    2,886,243Net earnings
    
    $
    5,786,850
    
    
    
    5,544,665
    
    
    
    4,789,121
 F-23




---



##### 



WGNB CORP. Notes to Consolidated Financial Statements, continued  (16)
    
    WGNB Corp. (Parent Company Only) Financial Information, continued Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001 2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings
    
    $
    5,786,850
    
    
    
    5,544,665
    
    
    
    4,789,121Adjustments to reconcile net earnings to net
cash provided by operating activities:Accretion on securities available for sale
    
    
    11,534
    
    
    
    6,440
    
    
    
    Loss on sale of other real estate
    
    
    54,269
    
    
    
    
    
    
    
    Equity in undistributed earnings of Bank
    
    
    (3,576,128
    )
    
    
    (3,611,873
    )
    
    
    (2,886,243
    )Equity in undistributed earnings of WGCS
    
    
    
    
    
    
    22,803
    
    
    
    (23,739
    )Change in other assets
    
    
    (8,540
    )
    
    
    (131,488
    )
    
    
    (11,904
    )Change in other liabilities
    
    
    18,462
    
    
    
    189,015
    
    
    
    37,645Net cash provided by operating activities
    
    
    2,286,447
    
    
    
    2,019,562
    
    
    
    1,904,880Cash flows from investing activities:Capital infusion to bank
    
    
    (275,253
    )
    
    
    
    
    
    
    Net assets transferred from WGCS
    
    
    
    
    
    
    91,895
    
    
    
    Purchase of securities held to maturity
    
    
    (750,000
    )
    
    
    (647,672
    )
    
    
    Proceeds from paydowns of securities available for sale
    
    
    6,684
    
    
    
    
    
    
    
    Proceeds from sale of real estate owned
    
    
    44,956
    
    
    
    
    
    
    
    Net cash used by investing activities
    
    
    (973,613
    )
    
    
    (555,777
    )
    
    
    Cash flows from financing activities:Proceeds from borrowings
    
    
    
    
    
    
    
    
    
    
    372,000Payments on borrowings
    
    
    
    
    
    
    (1,282,000
    )
    
    
    (390,000
    )Loan to WGCS
    
    
    
    
    
    
    
    
    
    
    (372,000
    )Payments received from WGCS
    
    
    
    
    
    
    1,282,000
    
    
    
    390,000Offering proceeds, net of offering cost
    
    
    
    
    
    
    4,766,454
    
    
    
    Dividends paid
    
    
    (2,147,943
    )
    
    
    (1,891,627
    )
    
    
    (1,651,553
    )Exercise of stock options
    
    
    46,042
    
    
    
    65,282
    
    
    
    47,512Retirement of common stock
    
    
    (154,533
    )
    
    
    (65,282
    )
    
    
    (55,365
    )Net cash (used) provided by financing activities
    
    
    (2,256,434
    )
    
    
    2,874,827
    
    
    
    (1,659,406
    )(Decrease) increase in cash
    
    
    (943,600
    )
    
    
    4,338,612
    
    
    
    245,474Cash at beginning of year
    
    
    5,047,181
    
    
    
    708,569
    
    
    
    463,095Cash at end of year
    
    $
    4,103,581
    
    
    
    5,047,181
    
    
    
    708,569Supplemental disclosure of non-cash financing activities:Change in dividends payable
    
    $
    (68,875
    )
    
    
    (55,148
    )
    
    
    (53,938
    )Changes in unrealized gains on securities
available for sale, net of tax, of Bank
    
    $
    78,855
    
    
    
    921,914
    
    
    
    416,099Issuance of common stock to directors in lieu of
directors fees
    
    $
    28,915
    
    
    
    29,366
    
    
    
    25,438Transfer of assets from WGCS to the Company
    
    $
    
    
    
    
    155,940
    
    
    
    
 F-24