**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      10-K**





**ANNUAL
      REPORT PURSUANT TO**


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





**(Mark
      One)**


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


**SECURITIES
                EXCHANGE ACT OF 1934: For the fiscal year ended December 31,
                2005**





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


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





**Commission
      File No. 000-30805**





**WGNB
      CORP.**


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





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




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




**Securities
      registered pursuant to Section 12(b) of the Act: 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 if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o No x




Indicated
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. Yes  ̈ No x




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




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




Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Act).   Yes oNox





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




The
      aggregate market value of the Registrant’s Common Stock held by non-affiliates
      of the Registrant as of June 30, 2005 which is the last business day of its
      most
      recently completed second fiscal quarter, was approximately $56,302,540 based
      on
      a per share price of $30.25 (which is the average of the ask and bid price
      reported by the NASDAQ Stock Market) as of such date. Shares of Common Stock
      held by each executive officer and director and by each person who owns 5%
      or
      more of the Registrant’s Common Stock have been excluded in that such persons
      may be deemed affiliates of the Registrant. This determination of affiliate
      status is not necessarily a conclusive determination for other purposes.








As
      of
      March 14, 2006, there were 3,331,247 shares of the Registrant’s Common Stock
      outstanding.





**DOCUMENTS
      INCORPORATED BY REFERENCE**





Portions
      of the Registrant’s definitive Proxy Statement for the 2006 Annual Meeting of
      Shareholders are incorporated by reference into Part III of this Report.








**WGNB
      CORP.**


**2005
      Form 10-K Annual Report**




**TABLE
      OF CONTENTS**








**Item
                Number**
              **in
                Form 10-K**
            **Description**
            **Page
                or**
              **Location****PART
                I**Item
                1.
            Business
            1Item
                1A.
            Risk
                Factors
            15Item
                1B.
            Unresolved
                Staff Comments
            17Item
                2.
            Properties
            17Item
                3.
            Legal
                Proceedings
            17Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            17**PART
                II**Item
                5.
            Market
                for the Common Equity, Related Shareholder Matters and Issuer Purchases
                of
                Equity Securities
            18Item
                6.
            Selected
                Financial Data
            19Item
                7.
            Management’s
                Discussion and Analysis of FinancialCondition
                and Results of Operations
            20Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market Risk
            35Item
                8.
            Financial
                Statements and Supplementary Data
            35Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            35Item
                9A.
            Controls
                and Procedures
            35Item
                9B.
            Other
                Information
            36**PART
                III**Item
                10.
            Directors
                and Executive Officers of the Registrant
            37Item
                11.
            Executive
                Compensation
            37Item
                12.
            Security
                Ownership of Certain Beneficial Ownersand
                Management and Related Shareholder Matters
            37Item
                13.
            Certain
                Relationships and Related Transactions
            37Item
                14.
            Principal
                Accountant Fees and Services
            37**PART
                IV**Item
                15.
            Exhibits
                and Financial Statement Schedules
            38Signatures
            41








**PART
      I**





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





**General**





WGNB
      Corp. (the “Company”) is a $524 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
      March 14, 2006, the Company had 3,331,247 issued and outstanding shares of
      common stock, $1.25 par value per share (the “Common Stock”), held by
      approximately 950 shareholders of record.





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





**The
      Bank**





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





The
      Bank’s main office is located in Carrollton, Georgia. The Bank operates a total
      of seven branches and six additional 24-hour ATM sites located in Carroll and
      Douglas Counties in Georgia. The Bank operates, in addition to its main office,
      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 all of its branch locations
      drive-thru teller windows and 24-hour automated teller machines. All but one
      location has Saturday banking hours. The Bank is a member of Star, Cirrus and
      several other ATM networks of automated teller machines that permit Bank
      customers to perform monetary transactions in most cities throughout the
      southeast and other regions. The Bank also offers Internet banking services
      through its website located at www.wgnb.com .
      Information included on the Bank’s website is not a part of this
      Report.





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





As
      of
      December 31, 2005, the Bank had deposits of approximately $429 million, and
      approximately 29 thousand deposit accounts. No material portion of the Bank’s
      deposits relates to one or a few persons or entities (including federal, state
      and local governments and agencies). The loss of any one or a few principal
      deposit customers would not have a material adverse effect on the operations
      or
      earnings of the Bank.




The
      following table sets forth the mix of depository accounts at the Bank as a
      percentage of total deposits as of December 31, 2005.




1


Deposit
                MixAt
                December 31, 2005Non-interest
                bearing demand
            11%NOW
                accounts and money market
            37%Savings
            3%Time
                DepositsUnder
                $100,000
            23%$100,000
                and over
            26%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, 2005, the Bank had approximately $424 million in total loans
      outstanding, representing 81% of its total assets of approximately $524 million.
      The loan portfolio is made up of both fixed and adjustable rate loans.
      Approximately 55% of the Company’s total loan portfolio is fixed rate and 45% is
      adjustable rate as of December 31, 2005. The Bank is not dependent to any
      material degree upon any single borrower or a few principal borrowers. The
      loss
      of any individual borrower or of a few principal borrowers would not have a
      material adverse effect on the operations or earnings of the Bank.





*Real
      Estate Loans.* Loans
      secured by real estate make up the primary component of the Bank’s loan
      portfolio, constituting approximately $350 million, or 83%, of the Bank’s total
      loans as of December 31, 2005. Approximately 57% of the real estate loans are
      fixed rate and 43% are adjustable rate. Approximately 60% of the fixed rate
      real
      estate loans mature in one year or less and approximately 92% of the fixed
      rate
      real estate loans mature in five years or less. These loans consist of
      commercial real estate loans, construction and development loans, residential
      real estate loans and home equity loans. Real estate loans are collateralized
      by
      commercial and residential real estate primarily located in the Company’s
      primary and secondary market areas. The types of real estate that typically
      constitute collateral include primary and secondary residences for individuals,
      including multi-family projects, places of business, real estate for
      agricultural uses and undeveloped land.





*Commercial
      Loans, Other Than Commercial Loans Secured by Real Estate* .
      The
      Bank makes loans for commercial purposes in various industries resident to
      its
      market area. As of December 31, 2005, commercial loans constituted approximately
      $52 million, or 12% of the Bank’s total loans. Approximately 46% of commercial
      loans are fixed rate while 54% 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, 2005, the Bank held approximately $22 million
      of
      consumer loans, representing 5% of its total loans. Consumer loans are primarily
      fixed rate in nature with 96% of this loan category carrying fixed rates. These
      loans are typically collateralized by personal automobiles, recreational
      vehicles or cash on deposit and may include unsecured loans to
      individuals.





*Other
      Lending Activities.* The Bank
      also engages in secondary-market mortgage activities whereby the Bank originates
      mortgage loans on behalf of investor correspondent banks 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 damage, loss or depreciation. In addition, consumer loan
      collections are dependent on the borrower's continuing financial stability,
      and
      thus are more likely to be adversely affected by job loss, divorce, illness
      or
      personal bankruptcy. Furthermore, the application of various federal and state
      laws, including federal and state bankruptcy and insolvency laws, may limit
      the
      amount that can be recovered on such loans.





2


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





Construction
      loans are generally considered to involve a higher degree of credit risk than
      residential mortgage loans. Risk of loss on a construction loan is dependent
      largely upon the accuracy of the initial estimate of the security property's
      value upon completion of construction as compared to the estimated costs of
      construction, including interest and fees. In addition, the Bank assumes certain
      risks associated with the borrower’s ability to complete construction in a
      timely and workmanlike manner. If the estimate of value proves to be inaccurate,
      or if construction is not performed timely or in a quality manner, the Bank
      may
      be confronted with a project which, when completed, has a value insufficient
      to
      assure full repayment or to advance funds beyond the amount originally committed
      to permit completion of the project. Additionally, the Bank limits draws on
      construction projects on a percentage of completion basis which is monitored
      by
      an independent inspection process.





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





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





While
      the
      loan policy includes a provision generally limiting all types of real estate
      loans to 85% of the total loan portfolio, the executive loan committee can
      approve loans that exceed the policy limits on a case by case basis where
      warranted. At the end of the fourth quarter of 2005, we were within the overall
      real estate concentration target although we have approved concentrations above
      the target in the specific segments of single family construction and land
      development. With the benefit of our experienced lenders and specialized
      controls, we are able to serve this market with low historical loan loss. We
      will continue to capture opportunities in these segments while actively seeking
      to diversify our portfolio into other business lines such as commercial and
      industrial loans as well as Small Business Administration loans.





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





3


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





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





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





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





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





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





*Loan
      Approval* .
      The
      Bank’s loan approval policies provide for various levels of officer lending
      authority. When the aggregate outstanding loans to a single borrower exceeds
      an
      individual officer’s lending authority, the loan request must be considered and
      approved by an officer with a higher lending limit or an officers’ loan
      committee (the “OLC”). Individual officer’s secured and unsecured lending limits
      range from $5,000 to $100,000, depending on seniority. The OLC, which consists
      of the Bank’s President, one Executive Vice President, two Senior Vice
      Presidents and other lenders, has a lending limit of $500,000 for secured and
      $200,000 for unsecured loans. Loans between $500,000 and the Bank’s legal
      lending limit must be approved by the Bank’s Executive Loan Committee, which is
      made up of the CEO and President of the Bank and six outside
      directors.








*Loan
      Review.* The
      Bank
      has a comprehensive loan review process involving independent internal loan
      review, independent consulting firms, and lending officers. The loan review
      process is designed to promote early identification of credit quality problems
      at both the relationship level and portfolio level. 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. All loan officers are charged with the responsibility of rating their
      loans. Additionally, the loan reviewer recommends grades as part of the loan
      review process to ensure proper risk identification. Per current policy, the
      Executive Loan Committee has final approval authority on loan grades. The Bank’s
      risk identification process is reviewed by its regulators and its independent
      auditors giving further oversight and feedback.





Because
      of employee turnover in the loan review area during 2005, the scope of our
      loan
      review process was not achieved internally. For this reason, we engaged an
      external bank consulting firm that completed a review of our designated scope
      during the fourth quarter of 2005. The Bank also hired a new Chief Credit
      Officer during the fourth quarter of 2005 and a Loan Review Officer during
      the
      first quarter of 2006. The Chief Credit Officer is currently reviewing our
      policies, procedures, and scope for adequacy relative to portfolio size and
      composition. Based on this review, we will create a comprehensive loan review
      schedule that will meet the Bank’s loan review targets for 2006.





4


**Market
      Area**





The
      following statistical data relating to our market area is based on information
      contained in a report published by the University of West Georgia Department
      of
      Economics dated November 4, 2005 and other information published by the FDIC
      on
      its website.





The
      Bank’s primary market area includes all of Carroll, Douglas and Paulding
      Counties in Georgia. Approximately 90% of the Bank’s deposit customers reside in
      Carroll County, although it attracts some loan business from neighboring Douglas
      and Paulding Counties. The Bank’s secondary market area includes the Georgia
      counties of Heard, Haralson, Coweta, Cobb and the southern portion of Fulton,
      and the Alabama counties of Clebourne and Randolph. Carroll County is located
      approximately 45 miles southwest of Atlanta and 90 miles east of Birmingham,
      Alabama. Carroll County ranks 29 th among
      Georgia’s 159 counties in land area and 19 th in
      population. 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 University of West Georgia, which serves more
      than
      9,000 students, Southwire Inc. and Tanner Medical Center are also located in
      Carrollton. Douglas County, which has the largest population of the five county
      West Georgia region, ranks 15 th among
      all 159 Georgia counties.





Carroll
      County continues to be the largest deposit base county in the Bank’s market area
      with Douglas County, to its east, and Paulding County, to its north, emerging
      as
      deposit growth areas. The amount of total deposits in Carroll County was
      approximately $1.57 billion as of June 30, 2005, compared to total deposits
      of
      approximately $1.29 billion as of June 30, 2004. Total deposits in Carroll
      County grew by 21.7% from June 30, 2004 to June 30, 2005 which compares to
      the
      average annual growth rate over the last ten years of just over 5%. The Bank
      holds 24% of the market’s deposits and the number one position in Carroll
      County’s market share. The number two, three and four banks have 20%, 11% and
      10% of the market area’s deposits, respectively. The top four banks (including
      West Georgia National Bank) held a total of 65% of the market share of deposits
      in Carroll County.





Douglas
      County had the second largest deposit base in our market area with $1.15 billion
      in total deposits and an 18.7% deposit growth rate in 2005, and Paulding County
      had the third largest base with $858 million in total deposits and a 15.2%
      deposit growth rate in 2005. The Bank held a market share of 3% of total
      deposits in Douglas County, or $29 million, as of June 30, 2005, representing
      the 9 th largest
      deposit market share for any financial institution located in Douglas County.
      If
      one combines Carroll and Douglas County’s market share, the Bank holds the
      highest market share of total deposits in the combined counties at 14.7%. The
      bank holding the next highest market share for the combined counties holds
      11.4%
      and the top four institutions (including West Georgia National Bank) hold 46%
      of
      the deposits in this market area.





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 rapidly developing area known as Mirror Lake located on Mirror Lake
      Boulevard just north of I-20. The Bank moved into its permanent facility located
      in front of The Village at Mirror Lake Shopping Center in February 2005. The
      Bank has purchased a branch on Chapel Hill Road that was previously a Wachovia
      branch. The Wachovia location is contiguous to an existing First Union location.
      First Union and Wachovia merged in 2002 resulting in duplicative branches on
      one
      site. Management estimates that the new Bank branch on Chapel Hill will be
      open
      in April 2006. The Bank intends to serve its Douglas County market with these
      three locations.





**Competition**





The
      Bank
      operates in a competitive environment, competing for deposits and/or loans
      with
      commercial banks, thrifts and other financial entities. Principal competitors
      include other small community commercial banks (such as McIntosh Commercial
      Bank, First Georgia Community Bank, Community Bank of West Georgia, Peoples
      Community National Bank and Hometown Bank of Villa Rica) and larger institutions
      with branches in the Bank’s market area such as CB&T of West Georgia (a
      division of Synovus Bank), BB&T, Regions Bank, United Community Bank, Bank
      of America, SunTrust Bank and Wachovia Bank. Numerous mergers and consolidations
      involving banks in the Bank’s market area have occurred, requiring the Bank to
      compete with banks with greater resources. However, West Georgia National Bank
      enjoys the reputation of being the largest and oldest independent bank in
      Carroll County. McIntosh Commercial Bank commenced operations in the fourth
      quarter of 2002, Community Bank of West Georgia commenced operations in the
      second quarter of 2003, First Georgia Community Bank commenced operations in
      the
      third quarter of 2003 and Peoples Community National Bank commenced operations
      in the third quarter of 2004. These de novo banks are limited in their funding
      strategies because they typically do not have access to wholesale funding.
      Given
      the limited growth in total deposits in Carroll County, this has the effect
      of
      running up deposit rates as the new banks compete for funds in the market
      area.





5


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 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. In addition, as commercial customers’ needs outgrow a
      de novo bank’s ability to fund their business, the Bank can serve those
      customers because it has a higher loan-to-one borrower limit.





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





**Employees**





As
      of
      December 31, 2005, the Bank had 154 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.





6


**The
      Company**





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





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





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





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





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





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





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





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





·
            making
                or servicing loans and certain leases;





·
            providing
                certain data processing services;





·
            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.





7


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





*Financial
      Services Modernization Act.* 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 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.





8


*Community
      Reinvestment Act* .
      The
      Community Reinvestment Act requires that, in connection with examinations of
      financial institutions within their respective jurisdictions, the Federal
      Reserve, the FDIC or any other appropriate federal agency, shall evaluate the
      record of each financial institution in meeting the credit needs of its local
      community, including low and moderate income neighborhoods. These factors are
      also considered in evaluating mergers, acquisitions and applications to open
      a
      branch or facility. Failure to adequately meet these criteria could pose
      additional requirements and limitations on the bank. The Bank was examined
      for
      CRA compliance in May 2003 and received a CRA rating of “outstanding.”





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





**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 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.





9


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





As
      discussed below, additional capital requirements imposed by the OCC may limit
      the Bank’s ability to pay dividends to the Company. The Bank declared dividends
      in the amount of $3,058,719 to the Company during 2005. Under the OCC
      guidelines, as of December 31, 2005 the Bank was permitted to pay the Company
      dividends of up to $4,011,000 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.





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.





10


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





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





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





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





**Classification**
            **Total
                Risk-**
              **Based
                Capital**
            **Tier
                I Risk-**
              **Based
                Capital**
            **Tier
                I**
              **Leverage**Well
                Capitalized (1)
            10%
            6%
            5%Adequately
                Capitalized (1)
            8%
            4%
            4%
                (2)Undercapitalized
                (3)
            <8%
            <4%
            <4%Significantly
                Undercapitalized (3)
            <6%
            <3%
            <3%Critically
                Undercapitalized (3)
            -
            -
            <2%_________________(1)An
                institution must meet all three minimums.
              (2)3%
                for composite 1-rated institutions, subject to appropriate federal
                banking
                agency guidelines.
              (3)An
                institution is classified as undercapitalized if it is below the
                specified
                capital level for any of the three capital
                measures.





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





11


As
      of the
      date of this Report, the Company and the Bank are both considered to be well
      capitalized according to their regulatory capital requirements. See Note 9
      of
      the Notes to 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. **** It
      is the
      Bank’s policy not to disclose any personal information unless required by
      law.





**Anti-Terrorism
      Legislation** **





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





12


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





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





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





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





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





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





·
            the
                designation of a compliance
                officer;





·
            an
                ongoing employee training program;
                and





·
            an
                independent audit function to test the
                programs.





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





**Regulation
      W**





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





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


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





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





·
            a
                loan or extension of credit to an affiliate;


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


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


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


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





13


In
      addition, under Regulation W:





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





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





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





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





**Consumer
      Credit Reporting**





On
      December 4, 2003, the President signed the Fair and Accurate Credit Transactions
      Act (the FAIR Act), amending the federal Fair Credit Reporting Act (the FCRA).
      A
      number of amendments to the FCRA (the FCRA Amendments) became effective in
      2004
      while others are still subject to the public comment process and final
      rulemaking. The FCRA Amendments include, among other things:





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





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





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





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





The
      FCRA
      Amendments also prohibit a business that receives consumer information from
      an
      affiliate from using that information for marketing purposes unless the consumer
      is first provided a notice and an opportunity to direct the business not to
      use
      the information for such marketing purposes, subject to certain exceptions.
      The
      Company and the Bank have implemented procedures to comply with those new rules
      that have become effective and will take steps to implement appropriate
      procedures to comply with those rules that are to become effective at a later
      date.





**Sarbanes-Oxley
      Act of 2002**





On
      July
      30, 2002, the Sarbanes-Oxley Act of 2002 was enacted. The Sarbanes-Oxley Act
      represents a comprehensive revision of laws affecting corporate governance,
      accounting obligations and corporate reporting. The Sarbanes-Oxley Act is
      applicable to all companies with equity securities registered or that file
      reports under the Securities Exchange Act of 1934. In particular, the
      Sarbanes-Oxley Act established: (i) new requirements for audit committees,
      including independence, expertise and responsibilities; (ii) additional
      responsibilities regarding financial statements for the Chief Executive Officer
      and Chief Financial Officer of the reporting company; (iii) new standards for
      auditors and regulation of audits; (iv) increased disclosure and reporting
      obligations for the reporting company and its directors and executive officers;
      and (v) new and increased civil and criminal penalties for violations of the
      securities laws. Many of the provisions were effective immediately while other
      provisions became effective over a period of time and are subject to rulemaking
      by the SEC. Because WGNB Corp.’s Common Stock is registered with the SEC, it is
      currently subject to this Act.





14


Since
      the
      Sarbanes-Oxley Act was enacted in 2002 and continuing through 2005, the SEC
      and
      The Nasdaq Stock Market, issued new regulations affecting the Company’s
      corporate governance and heightening its disclosure requirements. Among the
      many
      new changes are enhanced proxy statement disclosures on corporate governance
      and
      executive compensation, stricter independence requirements for the Board of
      Directors and its committees, and posting of various SEC reports on the
      Company’s website. While the full impact of the Sarbanes-Oxley Act and the
      increased costs related to the Company’s compliance are still uncertain and
      evolving, management does not expect that compliance will have a material impact
      on the Company’s financial condition or results of operation.





**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.





**Other
      Developments**





On
      February 6, 2006, the Board of Directors of each of the Company and the Bank
      accepted the resignation of L. Leighton Alston from his position as the Bank’s
      Chief Executive Officer and the Company’s Chief Executive Officer and President,
      and approved the terms of a settlement reached with respect to the early
      termination of Mr. Alston’s Employment Agreement dated May 27, 2005. Mr. Alston
      also resigned from his position as a Class III director for both the Company
      and
      the Bank. The resignations, which are effective as of February 11, 2006, will
      allow Mr. Alston to pursue other interests and did not involve any disagreements
      relating to financial or accounting matters. H.B. Lipham, III has assumed Mr.
      Alston’s duties.





**Item
      1A. Risk Factors**





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





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





15


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





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





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





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





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





16


*Loss
      of our senior executive officers or other key employees could impair our
      relationship with customers and adversely affect our business* - We
      have assembled a senior management team which has substantial background and
      experience in banking and financial services in the western Georgia market.
      Loss
      of these key personnel could negatively impact our earnings because of their
      skills, customer relationships and/or the potential difficulty of promptly
      replacing them. As previously disclosed, our former Chief Executive Officer,
      L.
      Leighton Alston, recently terminated his employment with us. His duties are
      currently being performed by H.B. Lipham, III, who previously served as our
      Executive Vice President.





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





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





The
      Company and the Bank’s main office is located at 201 Maple Street in Carrollton,
      Georgia near the city’s downtown square at the intersection of Georgia Highway
      16 and U.S. Highway 27. The Bank has 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 permanent Mirror Lake branch opened in February
      of
      2005. The Mirror Lake branch is located on the northeast corner of Mirror Lake
      Boulevard and Conner Road in front of the Village at Mirror Lake shopping
      center. The Bank owns a second Douglas County branch which is located at 9557
      Georgia Highway 5 in Douglasville. In November of 2005, the Bank purchased
      a
      third location in Douglas County, which is located at 9360 The Landing Drive
      on
      Chapel Hill Road adjacent to Arbor Place Mall in Douglasville. This location
      is
      scheduled to open for business at the end of April 2006.





The
      Bank’s main office, operations center and related parking are located on
      approximately 2.5 acres. The main office is a two-story building with a total
      of
      approximately 19,100 square feet housing its lobby, retail offices,
      administrative and executive offices. The operations center is a two-story
      building with a total of approximately 12,200 square feet housing a computer
      room, administrative offices and storage facilities. The branch offices (with
      the exception of the Motor office which is approximately 700 square feet) are
      typical of other banking facilities and are approximately 5,000 square feet
      in
      size. The Mirror Lake branch provides a new look for the Bank and contains
      customer-centric features such as concierge customer service areas with
      workstations and Internet connectivity. The branch utilizes a remote teller
      system and is designed to be high-touch customer service and low-touch
      transactional service. The new Chapel Hill branch (formerly a Wachovia location)
      was built in 2001 and is a 3,400 square foot building on approximately one
      acre
      with brick and veneer exterior. Each branch location has an ATM that is either
      walk-up or drive-up. The Motor office and Highway 5 Douglasville offices are
      leased facilities. All of the other office facilities are owned. The Bank also
      operates six additional ATMs on leased properties located throughout the
      Carrollton and Villa Rica areas.





**Item
      3.**  **Legal
      Proceedings**





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





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





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






17


**PART
      II**





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





**Market
      Information**





The
      Company’s Common Stock is traded on the NASDAQ Capital Market System under
      trading symbol “WGNB”. Approximately 950 shareholders of record held the Common
      Stock as of March 14, 2006. Set forth below are the high and low closing prices
      for each full quarterly period during 2004 and 2005 and the dividends declared
      and paid per share of Common Stock for those periods.





**Price
                Range Per Share**
            **Dividends****Low**
            **High**
            **Paid
                Per Share**2004:First
                Quarter
            $28.07
            $31.25
            $0.183Second
                Quarter
            28.00
            30.40
            0.190Third
                Quarter
            27.50
            29.75
            0.198Fourth
                Quarter
            29.15
            30.52
            0.2102005:First
                Quarter
            $28.85
            $30.50
            $0.215Second
                Quarter
            29.25
            30.50
            0.225Third
                Quarter
            30.00
            32.50
            0.235Fourth
                Quarter
            34.37
            38.00
            0.245




**Dividends**





The
      declaration of future dividends is within the discretion of the Board of
      Directors and will depend, among other things, upon business conditions,
      earnings, the financial condition of the Bank and the Company, and regulatory
      requirements. *See
      “Business - Supervision and Regulation - Dividends.”*





**Recent
      Sales of Unregistered Securities**





The
      Company issued the following securities during the year ended December 31,
      2005
      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 2005, one director of the Bank
      received 479 shares in payment of director compensation for an aggregate
      consideration owed to them by the Bank of $14,246 and 23,730 options to purchase
      the Company’s Common Stock were granted to certain executive officers under the
      Company’s 2003 Stock Incentive Plan. The sale of the shares and the grant of the
      options were exempt from registration under the Securities Act, pursuant to
      Section 4(2) thereof, as a transaction not involving a public offering. The
      Company has since registered the shares reserved for issuance (including the
      shares subject to the outstanding options granted to its executive officers)
      on
      Form S-8.





**Issuer
      Purchases of Equity Securities**





The
      Company did not make any repurchases of its equity securities during the fourth
      quarter of 2005.




18


**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, 2005
      have been derived from the audited consolidated financial statements of the
      Company. The selected consolidated financial data should be read in conjunction
      with the consolidated financial statements of the Company, including the notes
      to those consolidated financial statements contained elsewhere in this Report.





**Year
                  Ended December 31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****(In
                  thousands, except share and per share data)**For
                  the Year:Total
                  Interest Income.
              
              $
              32,546
              
              $
              25,268
              
              $
              23,542
              
              $
              24,296
              
              $
              26,548Total
                  Interest Expense.
              
              
              12,583
              
              
              7,570
              
              
              7,527
              
              
              8,724
              
              
              12,069Net
                  Interest Income.
              
              
              19,963
              
              
              17,698
              
              
              16,015
              
              
              15,572
              
              
              14,479Provision
                  for Loan Losses.
              
              
              1,550
              
              
              925
              
              
              350
              
              
              483
              
              
              910Net Interest Income After Provision for Loan Losses
              
              
              18,413
              
              
              16,773
              
              
              15,665
              
              
              15,089
              
              
              13,569Total
                  Other Income
              
              
              6,008
              
              
              5,637
              
              
              5,554
              
              
              5,251
              
              
              4,550Total
                  Other Expense
              
              
              14,464
              
              
              13,664
              
              
              12,752
              
              
              12,127
              
              
              10,859Earnings
                  Before Income Taxes
              
              
              9,957
              
              
              8,746
              
              
              8,467
              
              
              8,213
              
              
              7,260Income
                  Taxes
              
              
              2,889
              
              
              2,682
              
              
              2,680
              
              
              2,668
              
              
              2,471Net
                  earnings
              
              
              7,067
              
              
              6,064
              
              
              5,787
              
              
              5,545
              
              
              4,789Per
                  Share Data:Net
                  earnings
              
              
              2.13
              
              
              1.83
              
              
              1.75
              
              
              1.71
              
              
              1.55Diluted
                  net earnings
              
              
              2.11
              
              
              1.81
              
              
              1.72
              
              
              1.69
              
              
              1.52Cash
                  dividends declared
              
              
              .92
              
              
              .78
              
              
              .67
              
              
              .60
              
              
              .55Book
                  value
              
              
              14.42
              
              
              13.52
              
              
              12.72
              
              
              11.65
              
              
              9.42Tangible
                  book value
              
              
              14.42
              
              
              13.52
              
              
              12.72
              
              
              11.65
              
              
              9.42At
                  Year End:Total
                  loans
              
              
              423,720
              
              
              356,909
              
              
              296,498
              
              
              273,471
              
              
              253,805Earning
                  assets
              
              
              500,824
              
              
              425,062
              
              
              367,694
              
              
              360,226
              
              
              331,690Assets
              
              
              523,643
              
              
              441,929
              
              
              393,216
              
              
              385,121
              
              
              350,222Total
                  deposits
              
              
              429,049
              
              
              338,398
              
              
              303,316
              
              
              298,726
              
              
              280,531Stockholders’
                  equity
              
              
              47,952
              
              
              44,962
              
              
              42,089
              
              
              38,520
              
              
              29,204Common
                  shares outstanding
              
              
              3,325,196
              
              
              3,325,774
              
              
              3,306,452
              
              
              3,306,733
              
              
              3,100,355Average
                  Balances:Total
                  loans
              
              
              395,943
              
              
              330,159
              
              
              287,861
              
              
              262,781
              
              
              248,863Earning
                  assets
              
              
              473,480
              
              
              404,121
              
              
              357,468
              
              
              337,583
              
              
              310,027Assets
              
              
              501,191
              
              
              428,637
              
              
              384,395
              
              
              357,418
              
              
              326,653Deposits
              
              
              393,851
              
              
              325,991
              
              
              296,723
              
              
              279,483
              
              
              263,668Stockholders’
                  equity
              
              
              46,857
              
              
              43,742
              
              
              40,708
              
              
              35,640
              
              
              27,986Weighted
                  average shares outstanding
              
              
              3,324,620
              
              
              3,305,736
              
              
              3,308,087
              
              
              3,243,849
              
              
              3,098,067Key
                  Performance Ratios:Return
                  on average assets
              
              
              1.41
              %
              
              1.41
              %
              
              1.51
              %
              
              1.55
              %
              
              1.47
              %Return
                  on average equity
              
              
              15.08
              %
              
              13.86
              %
              
              14.22
              %
              
              15.56
              %
              
              17.11
              %Net
                  interest margin, taxable equivalent
              
              
              4.37
              %
              
              4.55
              %
              
              4.65
              %
              
              4.76
              %
              
              4.84
              %Dividend
                  payout ratio
              
              
              43.19
              %
              
              42.62
              %
              
              38.29
              %
              
              34.94
              %
              
              35.48
              %Average
                  equity to average assets
              
              
              9.35
              %
              
              10.20
              %
              
              10.59
              %
              
              9.97
              %
              
              8.57
              %Average
                  loans to average deposits
              
              
              100.53
              %
              
              101.28
              %
              
              97.01
              %
              
              94.02
              %
              
              94.39
              %Overhead
                  ratio
              
              
              55.69
              %
              
              58.56
              %
              
              59.12
              %
              
              58.24
              %
              
              57.07
              %





19


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





The
      purpose of the following discussion is to address information relating to the
      financial condition and results of operations of the Company that may not be
      readily apparent from a review of the consolidated financial statements and
      notes thereto, which begin on page F-1 of this Report. This discussion should
      be
      read in conjunction with information provided in the Company’s consolidated
      financial statements and accompanying footnotes.





**CAUTIONARY
      NOTICE REGARDING FORWARD-LOOKING STATEMENTS**





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





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





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





·
            the
                effect of changes in the Company’s organization, compensation and benefit
                plans;





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





·
            the
                effect of changes in interest rates;





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





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





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





**CRITICAL
      ACCOUNTING POLICIES**





The
      Company has established various accounting policies which govern the application
      of accounting principles generally accepted in the United States of America
      in
      the preparation of its financial statements. These significant accounting
      policies are described in the Notes to the consolidated financial statements.
      Certain accounting policies involve significant judgments and assumptions by
      management which have a material impact on the carrying value of certain assets
      and liabilities; management considers these accounting policies to be critical
      accounting policies. The judgments and assumptions used by management are based
      on historical experience and other factors, which are believed to be reasonable
      under the circumstances. Because of the nature of the judgments and assumptions
      made by management, actual results could differ from these judgments and
      estimates which could have a material impact on the carrying value of assets
      and
      liabilities and the results of operations of the Company. All accounting
      policies are important, and all policies described in Notes to the consolidated
      financial statements should be reviewed for a greater understanding of how
      the
      Company’s financial performance is recorded and reported.





20


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, 2005, 2004 and 2003*





The
      net
      earnings of the Company were $7.1 million in 2005, $6.1 million in 2004 and
      $5.8
      million in 2003, representing an increase of 16.5% between fiscal years 2004
      and
      2005 and an increase of 4.8% between fiscal years 2003 and 2004. Net earnings
      per share on a fully diluted basis were $2.11 for 2005, $1.81 for 2004 and
      $1.72
      for 2003, representing an increase of 16.6% between fiscal years 2004 and 2005
      and 5.2% between fiscal years 2003 and 2004. Return on average assets and return
      on average shareholders’ equity for 2005 were 1.41% and 15.08%, respectively,
      compared with 1.41% and 13.86%, respectively, for 2004, and 1.51% and 14.22%,
      respectively, for 2003. Over the past ten years, the Company’s return on average
      assets has averaged 1.55% and its return on average equity has been 16.1%.





In
      2005,
      the Company again experienced its largest annual loan growth in terms of dollars
      in its 60 year history. Loans increased by $66.8 million, or 18.7%, in 2005
      compared to $60.4 million, or 20.4%, in 2004 and $23.0 million, or 8.4%, in
      2003. The average loan growth rate over the past ten years has been 15.3%.
      The
      Company’s ability to grow loans in both quality and quantity is important to its
      ability to grow earnings. The Company’s core business is lending and management
      maintains underwriting and pricing policies and procedures to grow revenues
      and
      not significantly increase its credit or interest rate risk exposure.
      Additionally, management seeks to increase revenues while controlling costs.
      In
      2005, the overhead ratio (non-interest expense/net interest income plus
      non-interest income) was 55.7% compared to 58.6% in 2004 and 59.1% in 2003.
      Improved overhead ratio is, in essence, evidence of improved efficiency with
      the
      use of the Company’s resources. Described below are details of the major
      components of the Company’s improved earnings performance.





**Net
      Interest Income**





The
      Company’s operational results primarily depend on the earnings of the Bank. The
      Bank’s earnings depend, to a large degree, on its ability to generate net
      interest income. Net interest income represented 76.9%, 75.8% and 74.3% of
      net
      interest income and other income in 2005, 2004 and 2003, respectively. The
      following discussion and analysis of net interest margin assumes and is stated
      on a tax equivalent basis. That is, non-taxable interest is restated at its
      taxable equivalent rate.





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





21


Net
      interest income for the Company increased by $2.3 million, or 12.8%, in 2005
      from 2004, and by $1.7 million, or 10.5%, in 2004 from 2003. Net interest income
      at December 31, 2005 was $20.0 million compared to $17.7 million at December
      31,
      2004 and $16.0 million at December 31, 2003. The net interest margin on interest
      earning assets was 4.37% in 2005, 4.55% in 2004 and 4.65% in 2003 on a tax
      equivalent basis. Beginning in early 2001 through the end of 2003, short term
      interest rates dropped 550 basis points. Through 2005, however, short term
      interest rates recovered 500 of those basis points. Comparing the interest
      margin in 2005 to that in 2004, the Bank’s interest margin declined by 18 basis
      points. Measuring the last three years, the Bank’s interest margin decreased 28
      basis points. We believe management’s interest rate risk strategies helped to
      mitigate the effects of rapidly declining and then rapidly increasing interest
      rates. While banks are able to more easily maintain a steady interest margin
      in
      flat rate environments, without diligent interest rate risk management banks
      are
      susceptible to declining interest margins and earnings in rapidly changing
      interest rate environments.





The
      Bank’s average yield on earning assets in 2005 on a tax equivalent basis was
      7.03%, an increase of 61 basis points over 2004. Its average cost of funds
      was
      3.18% in 2005, an increase of 91 basis points from 2004. Net interest income
      increased nonetheless over the last three years despite declining net interest
      margin. This is a result of the increase in the Bank’s volume of earning assets.
      The average balance of interest earning assets increased by $69.4 million,
      or
      17.2%, in 2005 compared to $46.7 million, or 13.1%, for 2004 and $19.9 million,
      or 5.9%, for 2003.





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





We
      believe the impact of the fixed rates on borrowings in a falling rate
      environment would have been more significant in 2004 and 2005 had management
      not
      chosen to hedge those fixed rates with the $30 million notional amount swap
      contract which is described in Note 1 and Note 7 to the financial statements
      contained elsewhere in this Report. The swap contract reduced interest expense
      in 2004 by $323 thousand. During 2005, that benefit was reduced to $31 thousand
      since short term rates had risen above the 3.40% fixed rate in the swap
      contract. There are approximately 16 months remaining on the contractual term
      of
      the swap and, of course, if short term rates continue to increase, the cost
      of
      the swap will increase, but not as much as the expected yield on interest
      bearing assets.





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%:




22


**Table
                1****Average
                Consolidated Balance Sheets and Net Interest
                Analysis****(in
                thousands)**For
                the Years Ended December 31,2005
            
            2004
            
            2003Average
                Balance
            
            Interest
            
            Yield/
              Rate
            
            Average
                Balance
            
            Interest
            
            Yield/
              Rate
            
            Average
                Balance
            
            Interest
            
            Yield/
              RateAssets:Interest
                earnings assets:Federal
                funds sold
            
            $
            11,331
            
            
            394
            
            
            3.48
            %
            $
            12,155
            
            
            151
            
            
            1.24
            %
            $
            17,363
            
            
            187
            
            
            1.08
            %Investments:Taxable
            
            
            35,687
            
            
            2,109
            
            
            5.91
            %
            
            35,342
            
            
            1,903
            
            
            5.38
            %
            
            30,249
            
            
            1,878
            
            
            6.21
            %Tax
                exempt
            
            
            30,520
            
            
            1,997
            
            
            6.54
            %
            
            26,465
            
            
            1,821
            
            
            6.88
            %
            
            21,995
            
            
            1,559
            
            
            7.09
            %Total
                Investments
            
            
            66,207
            
            
            4,106
            
            
            6.20
            %
            
            61,807
            
            
            3,724
            
            
            6.03
            %
            
            52,244
            
            
            3,437
            
            
            6.58
            %Loans
                (including loan fees):Taxable
            
            
            394,209
            
            
            28,631
            
            
            7.26
            %
            
            328,279
            
            
            21,894
            
            
            6.67
            %
            
            286,055
            
            
            20,329
            
            
            7.11
            %Tax
                Exempt
            
            
            1,734
            
            
            143
            
            
            8.25
            %
            
            1,880
            
            
            178
            
            
            9.46
            %
            
            1,806
            
            
            181
            
            
            10.03
            %Total
                Loans
            
            
            395,943
            
            
            28,774
            
            
            7.27
            %
            
            330,159
            
            
            22,072
            
            
            6.69
            %
            
            287,861
            
            
            20,510
            
            
            7.12
            %Total
                interest earning assets
            
            
            473,481
            
            
            33,274
            
            
            7.03
            %
            
            404,121
            
            
            25,947
            
            
            6.42
            %
            
            357,468
            
            
            24,134
            
            
            6.75
            %Other
                non-interest earnings assets
            
            
            27,710
            
            
            
            
            
            
            
            
            24,516
            
            
            
            
            
            
            
            
            26,927Total
                assets
            
            $
            501,191
            
            
            
            
            
            
            
            $
            428,637
            
            
            
            
            
            
            
            $
            384,395Liabilities
                and shareholders’ equity:Interest-bearing
                liabilities:Deposits:Demand
            
            $
            136,248
            
            
            3,183
            
            
            2.34
            %
            $
            127,754
            
            
            1,181
            
            
            .92
            %
            $
            112,438
            
            
            954
            
            
            .85
            %Savings
            
            
            18,011
            
            
            100
            
            
            .56
            %
            
            17,368
            
            
            43
            
            
            .25
            %
            
            15,915
            
            
            54
            
            
            .34
            %Time
            
            
            189,368
            
            
            6,974
            
            
            3.68
            %
            
            133,997
            
            
            3,916
            
            
            2.92
            %
            
            124,863
            
            
            3,993
            
            
            3.20
            %FHLB
                advances&
                other borrowings
            
            
            52,407
            
            
            2,326
            
            
            4.44
            %
            
            54,081
            
            
            2,430
            
            
            4.49
            %
            
            45,000
            
            
            2,527
            
            
            5.62
            %Total
                interest-bearing liabilities
            
            
            396,034
            
            
            12,583
            
            
            3.18
            %
            
            333,200
            
            
            7,570
            
            
            2.27
            %
            
            298,216
            
            
            7,528
            
            
            2.52
            %Non-interest
                bearing deposits
            
            
            50,224
            
            
            
            
            
            
            
            
            46,872
            
            
            
            
            
            
            
            
            43,507Other
                liabilities
            
            
            8,076
            
            
            
            
            
            
            
            
            4,823
            
            
            
            
            
            
            
            
            1,964Shareholders’
                equity
            
            
            46,857
            
            
            
            
            
            
            
            
            43,742
            
            
            
            
            
            
            
            
            40,708Total
                liabilities and Shareholders’
                equity
            
            $
            501,191
            
            
            
            
            
            
            
            $
            428,637
            
            
            
            
            
            
            
            $
            388,395Excess
                of interest-earning assets over
                interest-bearing liabilities
            
            $
            77,447
            
            
            
            
            
            
            
            $
            70,921
            
            
            
            
            
            
            
            $
            59,252Ratio
                of interest-earning assets to interest-bearing
                liabilities
            
            
            119.56
            %
            
            
            
            
            
            
            
            121.28
            %
            
            
            
            
            
            
            
            119.87
            %Net
                interest income tax equivalent
            
            
            
            
            
            20,691
            
            
            
            
            
            
            
            
            18,377
            
            
            
            
            
            
            
            
            16,606Net
                interest spread
            
            
            
            
            
            
            
            
            3.85
            %
            
            
            
            
            
            
            
            4.15
            %
            
            
            
            
            
            
            
            4.23
            %Net
                interest margin on interest earning assets
            
            
            
            
            
            
            
            
            4.37
            %
            
            
            
            
            
            
            
            4.55
            %
            
            
            
            
            
            
            
            4.65
            %Tax
                Equivalent Adjustments:Investments
            
            
            
            
            
            (679
            )
            
            
            
            
            
            
            
            (619
            )
            
            
            
            
            
            
            
            (530
            )Loans
            
            
            
            
            
            (49
            )
            
            
            
            
            
            
            
            (60
            )
            
            
            
            
            
            
            
            (62
            )Net
                interest income
            
            
            
            
            $
            19,963
            
            
            
            
            
            
            
            $
            17,698
            
            
            
            
            
            
            
            $
            16,015




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




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





23


**Table
      2**


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


**(in
      thousands)**


Increase
                  (decrease) due to changes in:2005
                  over 2004
              
              2004
                  over 2003Volume
              
              Rate
              
              Total
              
              Volume
              
              Rate
              
              TotalInterest
                  income on:Federal
                  funds sold
              
              $
              (29
              )
              
              272
              
              
              243
              
              $
              (65
              )
              
              29
              
              
              (36
              )Taxable
                  investments
              
              
              20
              
              
              187
              
              
              207
              
              
              274
              
              
              (249
              )
              
              25Non-taxable
                  investments
              
              
              266
              
              
              (91
              )
              
              175
              
              
              308
              
              
              (46
              )
              
              262Taxable
                  loans
              
              
              4,788
              
              
              1,949
              
              
              6,737
              
              
              2,816
              
              
              (1,251
              )
              
              1,565Non-taxable
                  loans
              
              
              (12
              )
              
              (23
              )
              
              (35
              )
              
              7
              
              
              (10
              )
              
              (3
              )Total
                  Interest Income
              
              
              5,033
              
              
              2,294
              
              
              7,327
              
              
              3,340
              
              
              (1,527
              )
              
              1,813Interest
                  expense on:Deposits:Demand
              
              
              198
              
              
              1,805
              
              
              2,003
              
              
              141
              
              
              85
              
              
              226Savings
              
              
              4
              
              
              53
              
              
              57
              
              
              4
              
              
              (14
              )
              
              (10
              )Time
              
              
              2,039
              
              
              1,019
              
              
              3,058
              
              
              267
              
              
              (344
              )
              
              (77
              )FHLB
                  advances & other borrowings
              
              
              (74
              )
              
              (30
              )
              
              (104
              )
              
              408
              
              
              (505
              )
              
              (97
              )Total
                  Interest Expense
              
              
              2,167
              
              
              2,847
              
              
              5,014
              
              
              820
              
              
              (778
              )
              
              42Increase
                  (decrease) in net interest income
              
              $
              2,866
              
              
              (553
              )
              
              2,313
              
              $
              2,520
              
              
              (749
              )
              
              1,771





**Other
      Income and Expense**





Other
      income in 2005 was $6.0 m illion,
      an increase of $371 thousand, or 6.6%, from 2004. The increase in other income
      from 2003 to 2004 was $84 thousand, or 1.5%. The increase in other income during
      2005 is primarily due to a gain on investment securities available for sale
      in
      the amount of $228 thousand. Management rarely elects to sell investment
      securities. However, this particular sale strategy allowed the Bank to
      reposition its portfolio for rising rates, recognize the gain associated with
      the sale of the investment securities and accomplish both by selling $3.8
      million of bonds, or approximately 5% of the portfolio.





Service
      charges on deposit accounts have stabilized from 2004 to 2005 after having
      increased over 10% per year over the previous three years. ATM network fees
      increased by $68 thousand, or 15.6%. This increase is attributable to increased
      usage of the Bank’s ATM network and an increase in foreign ATM fees which took
      place in the later part of 2004 and was in effect during all of 2005.





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




Miscellaneous
      income between 2004 and 2005 increased $106 thousand, or 15.4%, and increased
      by
      $62 thousand, or 10.0%, between 2003 and 2004. The increase in miscellaneous
      income from 2004 to 2005 and 2003 to 2004 is attributable to a number of income
      line items, none of which are particularly notable. The increases are generally
      attributable to volume increases in miscellaneous fees due to the loan and
      deposit growth of the Bank.





Other
      expenses increased by $800 thousand, or 5.9%, in 2005 over 2004 and by $912
      thousand, or 7.2%, in 2004 over 2003. Salaries and employee benefits increased
      $577 thousand, or 7.1%, from 2004 to 2005 and $499 thousand, or 6.5%, from
      2003
      to 2004. Each year, most of the increase in other expense was attributable
      to
      salaries and employee benefits which is common for a growing financial
      institution.





Occupancy
      expense increased by $190 thousand, or 9.7%, from 2004 to 2005. Comparing 2003
      to 2004, occupancy expense increased $135 thousand, or 7.5%. Other operating
      expenses, which include professional fees, increased by only $33 thousand,
      or
      0.9%, from 2004 to 2005 and increased $278 thousand, or 8.4%, from 2003 to
      2004.
      The following narrative explains in more detail the attributes of the changes
      in
      other expenses.





24


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





The
      increase in salaries and employee benefits for the year ended 2004 as compared
      to 2003 was attributable to a number of factors. Salary costs increased by
      $212
      thousand, or 4.2%, primarily attributable to annual raises since the full time
      equivalent number of employees did not significantly change from 2003 to 2004.
      Profit sharing and bonus costs increased $201 thousand, or 13.7%, attributable
      to a bonus program that was introduced in 2004 for the lending staff in an
      effort to increase loan production. Profit sharing and bonuses also increased
      slightly because of increased profitability, increases in bonus percentages
      and
      improved asset quality. Health insurance costs increased by $55 thousand, or
      8.1%. The increase was attributable to a premium increase by the Company’s
      health insurance carrier.





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





The
      increase in occupancy expense in 2004 over 2003 was primarily attributable
      to an
      increase in depreciation expense of $56 thousand, or 6.5%. Management and the
      Company’s Board of Directors elected to continue to update the Bank’s
      technology, particularly outdated personal computers. Additionally, the Company
      refurbished its main office and branch locations in 2003. That capital
      investment had a full year of depreciation in 2004.





Management
      made a concerted effort to minimize operating costs in 2005. The evidence of
      that effort culminated in very little increase in other operating expense from
      2004 to 2005. Total other operating expense increased by $33 thousand, or 0.9%.
      The largest line item in this expense category is legal, professional and
      accounting fees which remained steady from 2004 to 2005. The compliance costs
      of
      being a public company have largely been realized in the operations of the
      Company and are not expected to increase significantly over the foreseeable
      future.




Other
      operating expenses increased by $278 thousand, or 8.4%, in 2004 over 2003.
      Legal, accounting and other professional fees totaled $623 thousand, $408
      thousand and $520 thousand in 2004, 2003 and 2002, respectively. The increase
      in
      legal, accounting and other professional fees from 2003 to 2004 was $215
      thousand, or 52.7%. The Bank incurred consulting costs associated with an
      executive management change resulting from the retirement of the Bank’s
      President in the first quarter of 2004. The cost resulted in a successful
      transition of duties among the existing executive management team. Additionally,
      during 2004 the Company’s cost of complying with provisions of the
      Sarbanes-Oxley Act of 2002 increased by approximately $80 thousand.





Income
      taxes, expressed as a percentage of earnings before income taxes (the effective
      tax rate), declined to 29.0% in 2005, from 30.7% in 2004 and 31.7% in 2003.
      The
      decline in effective tax rate over the past three years is primarily
      attributable to the impact of the purchase of tax credits and other tax
      advantaged instruments such as municipal securities by the Bank. Additionally,
      in October 2002, the Bank formed WGNB Investments, Inc., a Nevada corporation,
      to manage, hold and trade securities of the Bank which had the effect of
      reducing its state income tax liability in 2003, 2004 and 2005.





25


**BALANCE
      SHEET OVERVIEW**





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





**General**





During
      2005, average total assets increased $72.6 million, or 16.9%, average deposits
      increased $67.9 million, or 20.8%, and average loans increased $65.8 million,
      or
      19.9%, from average balances recorded in 2004. During 2004, average total assets
      increased $44.2 million, or 11.5%, average deposits increased $29.3 million,
      or
      9.9%, and average loans increased $42.3 million, or 14.7%, from amounts recorded
      in 2003. The 2005 and 2004 percentage growth are more representative of the
      Bank’s historical growth rate. The 10 year average growth rate for the Bank’s
      assets, loans and deposits is 12.8%, 15.3% and 12.0%, respectively. The earnings
      and asset growth over the past two years is attributable to robust commercial
      and residential growth in the Bank’s market area. The Company has experienced
      significant loan growth with low historical credit loss. The average net
      charge-off of loans has been less than .25 percent of average loans over the
      past 10 years.





Total
      assets at December 31, 2005 were $524 million, representing a $81.7 million,
      or
      18.5%, increase from December 31, 2004. Total loans increased $66.8 million,
      or
      18.7%, during 2005 as management attempted to take advantage of continued loan
      demand. Total deposits increased $90.7 million, or 26.8%, from 2004 to 2005
      which allowed the Bank to pay off Federal Home Loan Bank borrowings in the
      amount of $13 million. Loan demand rebounded in the last half of 2003 after
      a
      decline in the early part of that year and has remained robust through 2005
      with
      much of the growth concentrated in the second half of 2004 and the first half
      of
      2005.




The
      increase in deposits in 2005 was attributable to an increase in non-interest
      bearing demand accounts of $3.4 million, or 7.7%, an increase in interest
      bearing demand of $23.2 million, or 17.4%, and an increase in time deposit
      accounts of $63.7 million, or 43.0%. Much of the deposit growth ($56.3 million)
      came from growth in time deposit accounts in excess of $100,000 and much of
      that
      growth ($36.0 million) was attributable to brokered time deposits, which were
      priced lower than local market time deposits. In 2005, the Bank funded its
      loan
      growth with deposit growth. In fact, because of the flatness of the yield curve,
      the Bank was able to gather time deposits early in 2005 with three, four and
      five year maturities for the cost of short term time deposits in the latter
      part
      of 2005.





During
      2003 and 2004, five de novo banks began their operations in, or continguous
      to,
      our primary service area. The competition for funding increased significantly
      in
      2004 and 2005 as loan growth outpaced deposit growth in Carroll and Douglas
      Counties. The funding landscape has changed and, along with it, the Bank’s
      deposit strategy since the beginning of 2004. In its almost 60 year history,
      the
      Bank has relied on “in market” deposits to fund its balance sheet growth.
      Because of the continued development of metropolitan Atlanta and its movement
      westward, however, loan demand has preceded the actual movement of deposits.
      Management expects that this dynamic will continue and intends to expand its
      deposit gathering strategy towards greater use of wholesale, or out of market,
      funding sources as loan demand remains high.





**Investments**





The
      Company’s available-for-sale investment portfolio of $64.4 million as of
      December 31, 2005 consisted primarily of debt securities, which provide the
      Company with a source of liquidity, a stable source of income, and a vehicle
      to
      implement asset and liability management strategies. The available-for-sale
      securities portfolio increased $3.5 million, or 5.7%, over December 31, 2004.
      The Company believes its investment portfolio provides a balance to interest
      rate and credit risk in other categories of the balance sheet. The portfolio
      also provides a vehicle for the investment of available funds and supplying
      securities to pledge as required collateral for certain public
      deposits. Securities reported as available-for-sale are stated at fair value. These
      securities may be sold, retained until maturity, or pledged as collateral for
      liquidity and borrowing in response to changing interest rates, changes in
      prepayment risk and other factors as part of the Company’s overall asset
      liability management strategy.





Investment
      securities held-to-maturity are stated at amortized cost and totaled $6.7
      million at December 31, 2005, an increase of $1.9 million, or 39.3%, when
      compared to the year ended 2004. 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.





26


The
      following table shows the carrying value of the Company’s securities, by
      security type, as of December 31, 2005, 2004 and 2003:





**Table
      3**


**Securities**


**(in
                    thousands)**2005
                
                2004
                
                2003Available
                    for SaleUnited
                    States agencies
                
                $
                8,942
                
                $
                5,505
                
                $
                7,080State,
                    county and municipal
                
                
                33,264
                
                
                36,989
                
                
                29,575Mortgage-backed
                    securities
                
                
                18,124
                
                
                16,667
                
                
                16,843Corporate
                    bonds
                
                
                4,028
                
                
                1,707
                
                
                1,779Total
                    available for sale
                
                $
                64,360
                
                $
                60,868
                
                $
                55,277Held
                    to MaturityTrust
                    Preferred Securities
                
                $
                6,737
                
                $
                4,835
                
                $
                4,250


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, 2005. The composition and maturity/re-pricing distribution of
      the
      securities portfolio is subject to change depending on rate sensitivity, capital
      and liquidity needs.





**Table
      4**


**Expected
      Maturity of Securities**


**(in
      thousands)**





Maturities
                at December 31,2005
            
            United
                States Treasury &Agencies
            
            Wtd.
                Avg.Yld.
            
            State,
                County &Municipals
            
            Wtd.
                Avg.Yld.
            
            Mortgage
                BackedSecurities
            
            Wtd.
                Avg.Yld.
            
            CorporateBonds
            
            Wtd.
                Avg.Yld.
            
            TrustPreferred
            
            Wtd.
                Avg.Yld.Within
                1 year
            
            
            7,965
            
            
            4.12
            %
            
            2,846
            
            
            6.33
            %
            
            15
            
            
            7.11
            %
            
            -
            
            
            0.00
            %
            
            -
            
            
            -After
                1 through 5 years
            
            
            999
            
            
            4.18
            %
            
            4,700
            
            
            6.12
            %
            
            15,694
            
            
            4.94
            %
            
            4,044
            
            
            5.73
            %
            
            -
            
            
            -After
                5 through 10 years
            
            
            -
            
            
            -
            %
            
            7,419
            
            
            6.69
            %
            
            901
            
            
            6.49
            %
            
            -
            
            
            -
            %
            
            -
            
            
            -After
                10 years
            
            
            -
            
            
            -
            %
            
            17,902
            
            
            6.61
            %
            
            1,684
            
            
            6.55
            %
            
            -
            
            
            -
            %
            
            6,737
            
            
            9.97
            %Total
            
            
            8,964
            
            
            4.11
            %
            
            32,867
            
            
            6.53
            %
            
            18,294
            
            
            5.17
            %
            
            4,044
            
            
            5.73
            %
            
            6,737
            
            
            9.97
            %Fair
                Value
            
            
            8,942
            
            
            
            
            
            33,264
            
            
            
            
            
            18,124
            
            
            
            
            
            4,028
            
            
            
            
            
            6,840





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





**Loans**





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





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 employ relatively conservative underwriting policies, primarily in the
      analysis of borrowers’ debt service coverage capabilities for commercial and
      commercial real estate loans, while emphasizing lower gross debt ratios for
      consumer loans and lower loan-to-value ratios for all types of real estate
      loans. Given the localized nature of the Bank’s lending activities, the primary
      risk factor affecting the portfolio as a whole is the health of the local
      economy in the West Georgia area and its effects on the value of local real
      estate and the incomes of local professionals and business firms.





27


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, 2005,
      loans outstanding to directors and executive officers of the Company and the
      Bank, their associates and members of their immediate families totaled $3.5
      million, which represented approximately 0.8% of total loans as of that date.
      As
      of December 31, 2005, none of these loans outstanding from the Bank to related
      parties were non-accrual, past due, restructured or considered by management
      to
      be a potential problem loan.





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





**Table
                5****Loan
                Portfolio****(in
                thousands)**
            
            December
                31,2005
            
            2004
            
            2003
            
            2002
            
            2001Commercial,
                financial & agricultural
            
            $
            51,555
            
            $
            50,528
            
            $
            31,219
            
            $
            34,821
            
            $
            26,162Real
                estate - construction
            
            
            153,511
            
            
            114,657
            
            
            68,207
            
            
            68,818
            
            
            60,785Real
                estate - mortgage
            
            
            196,383
            
            
            173,110
            
            
            180,992
            
            
            153,572
            
            
            147,705Consumer
                loans
            
            
            22,271
            
            
            18,614
            
            
            16,080
            
            
            16,260
            
            
            19,153423,720
            
            
            356,909
            
            
            296,498
            
            
            273,471
            
            
            253,805Less:Unearned
                interest and fees
            
            
            (841
            )
            
            (581
            )
            
            (454
            )
            
            (487
            )
            
            (525
            )Allowance
                for loan losses
            
            
            (5,327
            )
            
            (4,080
            )
            
            (3,479
            )
            
            (3,771
            )
            
            (3,720
            )Loans,
                net
            
            $
            417,552
            
            $
            352,248
            
            $
            292,565
            
            $
            269,213
            
            $
            249,560





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, 2005:





**Table
      6**


**Loan
      Portfolio Maturity**


**(in
                thousands)**One
              Yearor
                Less
            
            Wtd.
              Avg.Yld.
            
            OverOne
                to
              FiveYears
            
            Wtd.
              Avg.Yld.
            
            Over
              FiveYears
            
            Wtd.
              Avg.Yld.
            
            Total
            
            Wtd.
              Avg.Yld.Commercial,
                financial & agricultural
            
            $
            35,550
            
            
            7.16
            %
            $
            10,402
            
            
            7.50
            %
            $
            5,603
            
            
            7.53
            %
            $
            51,555
            
            
            7.27
            %Real
                estate - construction
            
            
            132,043
            
            
            7.60
            %
            
            14,858
            
            
            7.55
            %
            
            6,610
            
            
            7.38
            %
            
            153,511
            
            
            7.59
            %Real
                estate - mortgage
            
            
            66,424
            
            
            6.77
            %
            
            100,184
            
            
            7.15
            %
            
            29,775
            
            
            7.35
            %
            
            196,383
            
            
            6.25
            %Consumer
            
            
            10,764
            
            
            8.74
            %
            
            11,338
            
            
            8.05
            %
            
            169
            
            
            7.43
            %
            
            22,271
            
            
            8.38
            %Total
            
            $
            244,781
            
            
            7.36
            %
            $
            136,782
            
            
            6.30
            %
            $
            42,157
            
            
            7.38
            %
            $
            423,720
            
            
            7.34
            %




28


**Variable/Fixed
      Rate Mix**


Variable
                  Interest Rates
              
              Wtd
                  AvgYld
              
              Fixed
                  InterestRates
              
              Wtd
                  AvgYldCommercial,
                  financial and agricultural
              
              $
              27,885
              
              
              7.46
              %
              $
              23,670
              
              
              7.05
              %Real
                  estate - construction
              
              
              61,781
              
              
              7.24
              %
              
              91,730
              
              
              7.82
              %Real
                  estate - mortgage
              
              
              87,373
              
              
              7.25
              %
              
              109,010
              
              
              6.88
              %Consumer
              
              
              897
              
              
              7.50
              %
              
              21,374
              
              
              8.34
              %Total
              
              $
              177,936
              
              
              7.29
              %
              $
              245,784
              
              
              7.38
              %





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





The
      provision for loan losses for the Company in 2005 was $1.55 million, compared
      to
      $925 thousand in 2004 and $350 thousand in 2003. The increase in the provision
      for loan losses reflects a higher level of loan growth in 2005 and reflects
      the
      weakness in one credit relationship. The allowance for loan losses represented
      1.26%, 1.14% and 1.17% of total loans outstanding at December 31, 2005, 2004
      and
      2003, respectively. The percentage of the allowance for loan losses expressed
      as
      a percentage of total loans increased from 2004 and 2005, taking into account
      a
      slight increase in nonperforming and adversely rated loans in 2005. Net
      charge-offs were $303 thousand, $324 thousand and $643 thousand during 2005,
      2004 and 2003, 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 through eight,
      which
      represent criticized or classified loans, are assigned allocations of loss
      based
      on management’s estimate of potential loss that is generally based on historical
      losses and/or collateral deficiencies. Loans graded one through four are
      stratified by type and allocated loss ranges based on historical loss experience
      for the strata. The combination of these results is compared monthly to the
      recorded allowance for loan losses and material differences are adjusted by
      increasing or decreasing the provision for loan losses. Loans deemed to be
      impaired are evaluated individually to measure the probable loss, if any, in
      the
      credit. Management uses an internal loan reviewer (at times, supplemented by
      third party service providers) who is independent of the lending function to
      challenge and corroborate the loan grading system and provide additional
      analysis in determining the adequacy of the allowance for loan losses and the
      future provisions for estimated loan losses.





Management
      believes that the allowance for loan losses is adequate. However, management
      uses available information to recognize losses on loans, future additions to
      the
      allowance may be necessary based on changes in economic conditions and a change
      in the borrowers’ ability to repay. In addition, regulators, as an integral part
      of their examination process, periodically review the Company’s allowance for
      loan losses. Such regulators may require the Company to recognize additions
      to
      the allowance based on their judgments of information available to them at
      the
      time of their examination. M anagement
      of the Company realizes the importance of maintaining an adequate allowance
      for
      loan losses. Through a professional loan review function and effective loan
      officer identification program, management believes it is able to recognize
      weaknesses in the loan portfolio in a timely manner. Early identification of
      deteriorating credit attributes allows management to take a proactive role
      in
      documenting an established plan to enhance the Company’s position and minimize
      the potential for loss.





29


Through
      the problem loan identification program outlined above, management is able
      to
      identify those loans that exhibit weakness and classify them on a classified
      and
      criticized loan list. The Company’s migration analysis assigns historical loss
      amounts to pools of loans according to classifications of risk ratings to
      calculate a general allowance to the overall portfolio. In cases where
      significant weaknesses exist in a specific loan, a specific reserve is assigned
      to such loan in addition to the general allowance. The Company also evaluates
      the risks associated with concentrations in credit. If it is necessary to assign
      an allowance related to concentrations of credit, the Company adds a specific
      reserve related to such risks.





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


**Table
      7**


**Allowance
      for Loan Losses**


**(in
                  thousands)**
              
              December
                  31,2005
              
              2004
              
              2003
              
              2002
              
              2001Balance
                  at beginning of year
              
              $
              4,080
              
              $
              3,479
              
              $
              3,772
              
              $
              3,720
              
              $
              2,920Charge-offs:Commercial,
                  financial and agricultural
              
              
              24
              
              
              59
              
              
              55
              
              
              288
              
              
              118Real
                  estate - construction
              
              
              -
              
              
              -
              
              
              2
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              235
              
              
              215
              
              
              581
              
              
              165
              
              
              3Consumer
                  loans
              
              
              129
              
              
              123
              
              
              152
              
              
              242
              
              
              79Total
                  charge-offs
              
              
              388
              
              
              397
              
              
              790
              
              
              695
              
              
              200Recoveries:Commercial,
                  financial and agricultural
              
              
              16
              
              
              16
              
              
              31
              
              
              59
              
              
              30Real
                  estate - construction
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Real
                  estate - mortgage
              
              
              18
              
              
              13
              
              
              67
              
              
              158
              
              
              13Consumer
                  loans
              
              
              51
              
              
              44
              
              
              49
              
              
              47
              
              
              46Total
                  recoveries
              
              
              85
              
              
              73
              
              
              147
              
              
              264
              
              
              89Net
                  (charge-offs) recoveries
              
              
              (303
              )
              
              (324
              )
              
              (643
              )
              
              (431
              )
              
              (111
              )Provision
                  for loan losses
              
              
              1,550
              
              
              925
              
              
              350
              
              
              483
              
              
              911Balance
                  at end of year
              
              $
              5,327
              
              $
              4,080
              
              $
              3,479
              
              $
              3,772
              
              $
              3,720Ratio
                  of net (charge-offs) recoveries during the period to average loans
                  outstanding
              
              
              .08
              %
              
              .10
              %
              
              .22
              %
              
              .16
              %
              
              .04
              %Ratio
                  of allowance to total loans
              
              
              1.26
              %
              
              1.14
              %
              
              1.17
              %
              
              1.38
              %
              
              1.47
              %




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





Non-performing
      assets at December 31, 2005 were $3.6 million, or .85%, of total loans and
      other
      real estate owned compared to $1.8 million, or .50%, of total loans and other
      real estate owned at December 31, 2004 and $2.2 million, or .75%, of total
      loans
      and other real estate owned at December 31, 2003. The levels of non-performing
      loans remain relatively low compared to the Bank’s peer group. The percentage of
      non-performing assets to total loans has steadily decreased from its peak in
      2001. The increase of non-performing loans from 2004 to 2005 was attributable
      to
      one credit relationship for which management created a proper specific reserve.





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





30


**Table
      8**


**Non-Performing
      Assets**


**(in
                thousands)**
            
            December
                31,2005
            
            2004
            
            2003
            
            2002
            
            2001Other
                real estate and repossessions
            
            $
            567
            
            $
            686
            
            $
            977
            
            $
            488
            
            $
            4,357Non-accrual
                loans
            
            
            2,382
            
            
            536
            
            
            499
            
            
            943
            
            
            1,620Loans
                90 days past due still accruing
            
            
            673
            
            
            567
            
            
            745
            
            
            1,335
            
            
            1,885Total
            
            $
            3,622
            
            $
            1,789
            
            $
            2,221
            
            $
            2,766
            
            $
            3,862Non-performing
                assets as % of total loans
            
            
            0.85
            %
            
            0.50
            %
            
            0.75
            %
            
            1.03
            %
            
            1.55
            %





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





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





**Deposits**





Time
      deposits of $100 thousand and greater totaled $111.8 million at December 31,
      2005, compared with $55.5 million at year-end 2004 and $31.0 million at year-end
      2003. The following table sets forth the scheduled maturities of time deposits
      of $100 thousand and greater at December 31, 2005.





**Table
      9**


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


**(in
      thousands)**




Within
                3 months
            $
                8,696After
                3 through 6 months
            9,120After
                6 through 12 months
            25,307After
                12 months
            68,717Total
            $111,840





**Liquidity**





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





The
      Bank
      maintains relationships with correspondent banks including the Federal Home
      Loan
      Bank (FHLB) that can provide funds to it on short notice, if needed. The Bank
      has arrangements with correspondent and commercial banks for short term
      unsecured advances up to $20.8 million. As of December 31, 2005, the Bank had
      not drawn on the available facilities. In addition, subject to collateral
      availability, the Bank has a line of credit with the FHLB from which the Bank
      had drawn $42 million as of December 31, 2005. For additional details on the
      line of credit with the FHLB see Note 6 of the consolidated financial
      statements.





31


The
      Company’s cash flows are composed of three classifications: cash flows from
      operating activities, cash flows from investing activities, and cash flows
      from
      financing activities. Cash and cash equivalents amounted to $16.2 million at
      December 31, 2005, which represented an increase of $8.2 million from December
      31, 2004. The increase was primarily attributable to net cash provided by
      operating activities of $9.5 million since net cash provided by financing
      activities of $74.7 million was essentially the same as net cash used by
      investing activities of $76.1 million. The major cash flows from investing
      activities were attributable to a net change in loans of $67.4 million and
      a net
      change in investment securities (both available-for-sale and held-to-maturity
      investment securitise) of $6.7 million. The most notable cash flows from
      financing activities were attributable to a net change in deposits of $90.7
      million and repayment of Federal Home Loan Bank advances of $13.0 million,
      $10.0
      million of which was redrawn in January 2006.





In
      2004,
      management concentrated on investing the excess liquidity that was on the Bank’s
      balance sheet in 2003. Cash and cash equivalents decreased by $19.2 million
      in
      2004. The 2004 cash flows were attributable to $7.5 million cash generated
      by
      operating activities, $69.0 million of cash used by investing activities ($61.4
      million for loans and $6.8 million for investment securities) and $42.2 million
      of cash generated from financing activities ($35.1 million from deposit growth
      and $15.0 million from advances from the FHLB).





**Capital
      Resources**





Total
      shareholders’ equity as of December 31, 2005 was $48.0 million, an increase of
      $3.0 million over 2004. The change in equity was due to $7.1 million in net
      income, less $3.1 million in dividends and a decrease in unrealized holding
      gain
      on securities available for sale of $998 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, 2005, 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, 2005:





**Table
      10**


Actual
                as of December 31, 2005**Capital Ratio**Tier
                1 Capital (to risk weighted assets)
            
            
            11
            %Tier
                1 Capital minimum requirement
            
            
            4
            %Excess
            
            
            7
            %Total
                Capital (to risk weighted assets)
            
            
            12
            %Total
                Capital minimum requirement
            
            
            8
            %Excess
            
            
            4
            %**Leverage
                  Ratio**
            
            Actual
                as of December 31,
                2005Tier
                1 Capital to average assets(“Leverage
                Ratio”)
            
            
            9
            %Minimum
                leverage requirement
            
            
            4
            %Excess
            
            
            5
            %





For
      a
      more complete discussion of the actual and required ratios of the Company and
      its subsidiaries, see Note 9 to the consolidated financial statements. Average
      equity to average assets was 9.35% in 2005 and 10.20% in 2004. The ratio of
      dividends declared to net earnings was 43.3 % during 2005, compared with 42.3%
      in 2004.





**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, 2005
      (dollars in thousands).





32


Obligation
            
            Total
            
            Less
                than 1year
            
            1-3
                years
            
            3-5
                years
            
            More
                than 5yearsDeposits
                without stated maturity
            
            
            217,143
            
            
            217,143
            
            
            -
            
            
            -
            
            
            -Certificates
                of deposit
            
            
            211,906
            
            
            111,164
            
            
            57,827
            
            
            42,915
            
            
            -Federal
                Home Loan Bank advances
            
            
            42,000
            
            
            -
            
            
            5,000
            
            
            7,000
            
            
            30,000Total
            
            
            471,049
            
            
            328,307
            
            
            62,827
            
            
            49,915
            
            
            30,000





**Off
      Balance Sheet Risk**





Through
      the operations of the Bank, the Company has made contractual commitments to
      extend credit in the ordinary course of its business activities. These
      commitments are legally binding agreements to lend money to the Bank’s customers
      at predetermined interest rates for a specified period of time. At December
      31,
      2005, the Bank had issued commitments to extend credit of $98.7 million through
      various types of commercial lending arrangements and additional commitments
      through standby letters of credit of $13.2 million. The Company evaluates each
      customer’s creditworthiness on a case-by-case basis. The amount of collateral
      obtained, if deemed necessary by the Company upon extension of credit, is based
      on its credit evaluation of the borrower. Collateral varies but may include
      accounts receivable, inventory, property, plant and equipment, commercial and
      residential real estate. The Company manages the credit risk on these
      commitments by subjecting them to normal underwriting and risk management
      processes. Because these commitments generally have fixed expiration dates
      and
      many will expire without being drawn upon, the total commitment level does
      not
      necessarily represent future cash requirements. If needed to fund these
      outstanding commitments, the Company has the ability to liquidate federal funds
      sold or securities available-for-sale or on a short-term basis to borrow and
      purchase federal funds from other financial institutions.





**Asset/Liability
      Management**





It
      is the
      Company's objective to manage assets and liabilities to provide a satisfactory,
      consistent level of profitability within the framework of established cash,
      loan, investment, borrowing and capital policies. Certain officers are charged
      with the responsibility for monitoring policies and procedures that are designed
      to ensure acceptable composition of the asset/liability mix. It is the overall
      philosophy of management to support asset growth primarily through growth of
      deposits and borrowing strategies, which minimize the Company’s exposure to
      interest rate risk. The objective of the policy is to control interest sensitive
      assets and liabilities so as to minimize the impact of substantial movements
      in
      interest rates on earnings.





The
      asset/liability mix is monitored on a regular basis. A report reflecting the
      interest sensitive assets and interest sensitive liabilities is prepared and
      presented to management and the asset/liability management committee on at
      least
      a quarterly basis. One method to measure a bank's interest rate exposure is
      through its repricing gap. The gap is calculated by taking all assets that
      reprice or mature within a given time frame and subtracting all liabilities
      that
      reprice or mature within that time frame. The difference between these two
      amounts is called the “gap”, the amount of either liabilities or assets that
      will reprice without a corresponding asset or liability repricing. A
      negative gap (more liabilities repricing than assets) generally indicates that
      the bank's net interest income will decrease if interest rates rise and will
      increase if interest rates fall. A positive gap generally indicates that the
      bank's net interest income will decrease if rates fall and will increase if
      rates rise.





Due
      to
      inherent limitations in traditional gap analysis, the Company also employs
      more
      sophisticated modeling techniques to monitor potential changes in net interest
      income, net income and the market value of portfolio equity under various
      interest rate scenarios. Market risk is the risk of loss from adverse changes
      in
      market prices and rates, arising primarily from interest rate risk in the
      Company’s loan and investment portfolios, which can significantly impact the
      Company’s profitability. Net interest income can be adversely impacted where
      assets and liabilities do not react the same to changes in interest rates.
      At
      year-end 2005, the estimated impact of an immediate increase in interest rates
      of 100 basis points would have resulted in an increase in net interest income
      over a 12-month period of 1.3%, with a comparable decrease in interest rates
      resulting in a decrease in net interest income of 0.1%. 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.





33


The
      following table summarizes the amounts of interest-earning assets and
      interest-bearing liabilities outstanding at December 31, 2005 that are expected
      to mature, prepay or reprice in each of the future time periods shown. Except
      as
      stated below, the amount of assets or liabilities that mature or reprice during
      a particular period was determined in accordance with the contractual terms
      of
      the asset or liability. Adjustable rate loans are included in the period in
      which interest rates are next scheduled to adjust rather than in the period
      in
      which they are due, and fixed rate loans and mortgage-backed securities are
      included in the periods in which they are anticipated to be repaid based on
      scheduled maturities, although the cash flows received often differ from
      scheduled maturities. The Company's savings accounts and interest-bearing demand
      accounts (NOW and money market deposit accounts), which are generally subject
      to
      immediate withdrawal, are included in the “One Year or Less” category, although
      historical experience has proven these deposits to be less interest rate
      sensitive over the course of a year and are subject to management’s
      control.





**Table
      11**


**Interest
      Rate Gap Sensitivity**


**(in
      thousands)**


At
                December 31, 2005Maturing
                or Repricing inOne
                Year
              or
                Less
            
            Over
                1
              Year
                Thru
              2
                Years
            
            Over
                2
              Years
                Thru
              5
                Years
            
            Over
                5Years
            
            TotalInterest-earning
                assets:Interest-bearing
                deposits withOther
                banks
            
            $
            651
            
            
            -
            
            
            -
            
            
            -
            
            
            651Federal
                funds sold
            
            
            5,548
            
            
            -
            
            
            -
            
            
            -
            
            
            5,548Securities
                (at cost)
            
            
            19,784
            
            
            5,961
            
            
            7,701
            
            
            37,459
            
            
            70,905Loans
            
            
            328,967
            
            
            28,483
            
            
            50,436
            
            
            15,834
            
            
            423,720Total
                interest-earning assets
            
            
            354,950
            
            
            34,444
            
            
            58,137
            
            
            53,293
            
            
            500,824Interest-bearing
                liabilities:Deposits:Demand
            
            
            156,805
            
            
            -
            
            
            -
            
            
            -
            
            
            156,805Savings
            
            
            12,160
            
            
            -
            
            
            -
            
            
            -
            
            
            12,160Time
                deposits
            
            
            111,458
            
            
            34,859
            
            
            65,589
            
            
            -
            
            
            211,906FHLB
                advances
            
            
            -
            
            
            -
            
            
            12,000
            
            
            30,000
            
            
            42,000Total
                interest-bearing liabilities
            
            
            280,423
            
            
            34,859
            
            
            77,589
            
            
            30,000
            
            
            422,871per
                period
            
            
            74,527
            
            
            (415
            )
            
            (19,452
            )
            
            23,293
            
            
            77,953Cumulative
                interest sensitivityDifference
            
            $
            74,527
            
            
            74,112
            
            $
            54,660
            
            $
            77,953Cumulative
                difference to totalAssets
            
            
            14.23
            %
            
            14.15
            %
            
            10.44
            %
            
            14.89
            %





At
      December 31, 2005, the difference between the Company's assets and liabilities
      repricing or maturing within one year was $74.5 million. The above chart
      indicates an excess of assets repricing or maturing within one year, thus a
      rise
      in interest rates would theoretically cause the Company's net interest income
      to
      increase. However, certain shortcomings are inherent in the method of analysis
      presented in the foregoing table. For example, although certain assets and
      liabilities may have similar maturities or periods to repricing, they may react
      in different degrees or at different points in time to changes in market
      interest rates. Such is the case in analyzing NOW demand, money market and
      savings accounts, which are disclosed in the one year or less category. Those
      liabilities do not necessarily reprice as quickly or to the same degree as
      rates
      in general. Additionally, certain assets, such as adjustable-rate mortgages,
      have features that restrict changes in interest rates, both on a short-term
      basis and over the life of the asset. Changes in interest rates, prepayment
      rates, early withdrawal levels and the ability of borrowers to service their
      debt, among other factors, may change significantly from the assumptions made
      in
      the table.




34


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





The
      primary effect of inflation on the Company’s operations is reflected in
      increased operating costs. Unlike industrial companies, virtually all of the
      assets and liabilities of a financial institution are monetary in nature. As
      a
      result, changes in interest rates have a more significant effect on the
      performance of a financial institution than do the effects of changes in the
      general rate of inflation and changes in prices. Interest rates do not
      necessarily move in the same direction or in the same magnitude as the prices
      of
      goods and services. Interest rates are highly sensitive to many factors which
      are beyond the control of the Company, including the influence of domestic
      and
      foreign economic conditions and the monetary and fiscal policies of the United
      States government and federal agencies, particularly the Federal Reserve. The
      Federal Reserve implements a national monetary policy such as seeking to curb
      inflation and combat recession by its open market operations in United States
      government securities, control of the discount rate applicable to borrowing
      by
      banks, and establishment of reserve requirements against bank deposits. The
      actions of the Federal Reserve in these areas influence the growth of bank
      loans, investments and deposits, and affect the interest rates charged on loans
      and paid on deposits. The nature, timing and impact of any future changes in
      federal monetary and fiscal policies on the Company and its results of
      operations are not predictable.





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





For
      information regarding the market risk of the Company’s financial instruments,
      see “Management’s Discussion and Analysis of Financial Condition and Results of
      Operation - Asset/Liability Management.” The Company’s principal market risk
      exposure is to interest rates.





**Item
      8.**  **Financial
      Statements and Supplementary Data**





The
      consolidated financial statements of the Company, including notes thereto,
      and
      the report of independent auditors are included in this Report beginning at
      page
      F-1.





Presented
      below is a summary of the unaudited consolidated quarterly financial data for
      the years ended December 31, 2005 and 2004.




**Quarterly
      Financial Information**


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





2005
                Quarters
            
            2004
                QuartersFirst
            
            Second
            
            Third
            
            Fourth
            
            First
            
            Second
            
            Third
            
            FourthInterest
                income
            
            $
            7,075
            
            
            7,874
            
            
            8,521
            
            
            9,076
            
            
            5,900
            
            
            6,147
            
            
            6,411
            
            
            6,810Net
                interest income
            
            
            4,703
            
            
            4,931
            
            
            5,061
            
            
            5,268
            
            
            4,147
            
            
            4,328
            
            
            4,499
            
            
            4,724Provision
                for loan losses
            
            
            300
            
            
            500
            
            
            450
            
            
            300
            
            
            150
            
            
            200
            
            
            275
            
            
            300Income
                before income taxes
            
            
            2,234
            
            
            2,316
            
            
            2,620
            
            
            2,787
            
            
            1,911
            
            
            2,010
            
            
            2,309
            
            
            2,516Net
                income
            
            
            1,614
            
            
            1,647
            
            
            1,857
            
            
            1,949
            
            
            1,311
            
            
            1,471
            
            
            1,565
            
            
            1,717Earnings
                per share - basic
            
            
            0.49
            
            
            0.50
            
            
            0.56
            
            
            0.58
            
            
            0.40
            
            
            0.45
            
            
            0.47
            
            
            0.51Earnings
                per share - diluted
            
            $
            0.48
            
            
            0.49
            
            
            0.56
            
            
            0.58
            
            
            0.39
            
            
            0.44
            
            
            0.47
            
            
            0.51Weighted
                average common shares outstanding - basic
            
            
            3,324,427
            
            
            3,324,323
            
            
            3,325,005
            
            
            3,325,100
            
            
            3,306,793
            
            
            3,306,524
            
            
            3,296,793
            
            
            3,312,923Weighted
                average common shares outstanding - diluted
            
            
            3,343,082
            
            
            3,342,978
            
            
            3,343,660
            
            
            3,350,099
            
            
            3,357,387
            
            
            3,357,118
            
            
            3,347,387
            
            
            3,363,517





**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.





35


There
      were no changes in the Company’s internal control over financial reporting
      during the Company’s fiscal quarter ended December 31, 2005 that have materially
      affected, or are reasonably likely to materially effect, the Company’s internal
      control over financial reporting.





**Item
      9B. Other Information**





Not
      applicable.




36


**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 “2006 Proxy Statement”) relating to the 2006 Annual
      Meeting of Shareholders of the Company, currently scheduled to be held on April
      11, 2006, is incorporated herein by reference.


Item
          11.Executive
          Compensation




The
      information appearing under the heading “Executive Compensation” in the 2006
      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 2006 Proxy Statement is incorporated
      herein by reference.





*Securities
      Authorized for Issuance Under Equity Compensation Plans*





The
      following table gives information as of December 31, 2005, about WGNB Corp.
      Common Stock that may be issued upon the exercise of options, warrants and
      rights under the Company’s 2003 Incentive Stock Plans, which is the Company’s
      only outstanding equity compensation plan. The Company’s previous 1994 Incentive
      Stock Plan has since expired in accordance with its terms. The Company does
      not
      have any equity compensation plans that were not approved by its shareholders.
      The 2003 Incentive Stock Plan was approved by the Company’s Board of Directors
      and its shareholders in 2003.





*Plan
                Category*
            
            *Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights*
            
            *Weighted-average
                exercise price of outstanding options, warrants and
                rights*
            
            *Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))*(a)
            
            (b)
            
            (c)*Equity
                compensation plans approved by security holders*
            
            123,117
            
            $24.79
            
            620,631**Equity
                compensation plans not approved by security holders*
            
            N/A
            
            N/A
            
            N/A*Total*
            
            123,117
            
            $24.79
            
            620,631*


*
      The
      only securities remaining available for future issuance are those under the
      2003
      Incentive Stock Plan. There are no additional securities available for future
      issuance under the 1994 Incentive Stock Plan which has expired.





****Item
      13.**Certain Relationships and Related
      Transactions**


The
      information appearing under the caption “Nomination and Election of Directors -
      Certain Relationships and Related Transactions” in the 2006 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
      2006 Proxy Statement is incorporated herein by reference.





37


**PART
      IV**





**Item
      15.**  **Exhibits and Financial Statement Schedules**





(a)(1)  Financial
      Statements





The
      following financial statements are filed with this Report:





Report
      of
      Independent Registered Public Accounting Firm





Consolidated
      Balance Sheets as of December 31, 2005 and 2004





Consolidated
      Statements of Earnings for the Years Ended December 31, 2005, 2004 and
      2003





Consolidated
      Statements of Comprehensive Income for the Years Ended December 31,
      2005,


2005
      and
      2003





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


December
      31, 2005, 2004 and 2003





Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and
      2003





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 May 27, 2005
                among WGNB
                Corp., West Georgia National Bank and L. Leighton Alston (Incorporated
                by
                reference to Exhibit 10.1 to the Company’s Form 8-K dated May 27,
                2005)
 
 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 theCompany
                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 September
                23, 1998 between the Company andH.B.
                Lipham, III (Incorporated by reference to Exhibit 10.6 to the Form
                10-SB)




38


10.6*
              
              Bonus and Stock Option Agreement dated as of September
                23, 1998 between the Company andW. Galen
                Hobbs, Jr. (Incorporated by reference to Exhibit 10.7 to the Form
                10-SB)
 
 10.7*
              
              Bonus and Stock Option Agreement dated as of September
                23, 1998 between the Company andSteven
                J. Haack (Incorporated by reference to Exhibit 10.8 to the Form
                10-SB)
 
 10.8*
              
              Form of Election for Payment of Director Meeting
                Fees
                (Incorporated by reference to Exhibit10.10
                to the Form 10-SB)
 
 10.9*
              
              Employment Agreement dated August 8, 2005 among
                WGNB
                Corp., West Georgia National Bank and
                Steven J. Haack (Incorporated by reference to Exhibit 10.1 to the
                Company’s Form 8-K dated August 8,
                2005)
 
 10.10*
              
              Employment
                Agreement dated August 8, 2005 among WGNB Corp., West Georgia National
                Bankand
                H.B. Lipham, III (Incorporated by reference to Exhibit 10.2
                to the Company’s Form 8-K dated August 8,
                2005)
 
 10.11*
              
              Employment Agreement dated July 11, 2005 between
                West
                Georgia National Bank and W. Galen Hobbs, Jr. (Incorporated
                by reference to Exhibit 10.1 to the Company’s Form 8-K dated July 11,
                2005)
 
 10.12*
              
              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 Company’s Form 10-Q for quarter ended
                6/30/02 (the “6/30/02 Form 10-Q”))
 
 10.13*
              
              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)





10.14*
            
            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)





10.15*
            
            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)




10.16*
            
            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)





10.17*
            
            Incentive
                Stock Option Agreement dated March 12, 2002 between the Company and
                W.
                Galen Hobbs, Jr. (Incorporated by reference to Exhibit 10.11 to the
                6/30/02 Form 10-Q)





10.18*
            
            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)





10.19*
            
            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)





10.20*
            
            2003
                Stock Incentive Plan (Incorporated by reference to Appendix A to
                the
                Company’s Definitive Proxy Statement for its 2004 Annual Meeting)





10.21*
            
            Employment
                Agreement dated December 31, 2002 between the Company and William
                R.
                Whitaker (Incorporated by reference to Exhibit 10.31 to the Company
                Annual
                Report on Form 10-K for year ended 12/31/04 (the “2004 Form
                10-K”))





10.22*
            
            Bonus
                and Stock Option Agreement dated December 27, 2004 between the Company
                and
                William R. Whitaker (Incorporated by reference to Exhibit 10.32 to
                the
                2004 Form 10-K)





39


10.23*
            
            Separation
                Agreement and Release dated February 14, 2006 among WGNB Corp., West
                Georgia National Bank and L. Leighton
                Alston





21
            
            Subsidiary
                of WGNB Corp.





31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002





31.2
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes
                Oxley
                Act of 2002





32.1
            
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002





32.2
            
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes
                Oxley
                Act of 2002


_____________________


*  Indicates
      management contract or compensatory plan or arrangement.






40


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant
      has duly caused this Report to be signed on its behalf by the undersigned,
      thereunto duly authorized.




**WGNB
              CORP.**Date: 
March
              14, 2006
            By:
            /s/ H.
              B.
              Lipham, IIIH.B
              Lipham, IIIChief Executive Officer






Pursuant
      to the requirements of the Exchange Act, this Report has been signed below
      by
      the following persons on behalf of the registrant and in the capacities and
      on
      the dates indicated.





/s/
                  H. B. Lipham, III
              Date:
                  March 14, 2006H.B.
                  Lipham, III, President, ChiefExecutive
                  Officer[Principal
                  Executive Officer]/s/
                  Steven J. Haack
              Date:
                  March 14, 2006Steven
                  J. Haack, Secretary and Treasurer[Principal
                  Financial and Accounting Officer]/s/
                  W. T. Green
              Date:
                  March 14, 2006W.
                  T. Green, Chairman of the BoardDate:
                  March 14, 2006Wanda
                  W. Calhoun, Director/s/
                  Grady W. Cole
              Date:
                  March 14, 2006Grady
                  W. Cole, Director/s/
                  Richard A. Duncan
              Date:
                  March 14, 2006Richard
                  A. Duncan, Director/s/
                  L. G. Joyner
              Date:
                  March 14, 2006L.G.
                  (Jack) Joyner, Director/s/
                  R. David Perry
              Date:
                  March 14, 2006R.
                  David Perry, DirectorDate:
                  March 14, 2006L.
                  Richard Plunkett, Director
  41
 Date:
                  March 14, 2006Thomas
                  E. Reeve, III, M.D., Director/s/
                  Thomas T. Richards
              Date:
                  March 14, 2006Thomas
                  T. Richards, Director/s/
                  Oscar W. Roberts, III
              Date:
                  March 14, 2006Oscar
                  W. Roberts, III, DirectorDate:
                  March 14, 2006Frank
                  T. Thomasson, III, Director/s/
                  J. Thomas Vance
              Date:
                  March 14, 2006J.
                  Thomas Vance, Director/s/
                  Charles M. Willis, Sr.
              Date:
                  March 14, 2006Charles
                  M. Willis, Sr., Director




42


**WGNB
        CORP.**
 
 
 **Consolidated
        Financial Statements**
 
 **December
        31, 2005 and 2004**
 
 **(with
        Independent Accountants’ Report thereon)**
 
 F-1
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
  
 
 To
          the
          Board of Directors and Stockholders
 WGNB
          Corp. and Subsidiary
 
 We
          have
          audited the accompanying consolidated balance sheets of WGNB Corp. and
          subsidiary as of December 31, 2005 and 2004, and the related consolidated
          statements of earnings, comprehensive income, changes in stockholders’ equity
          and cash flows for each of the three years in the period ended December
          31,
          2005. These financial statements are the responsibility of the Company’s
          management. Our responsibility is to express an opinion on these financial
          statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provide a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of WGNB Corp. and subsidiary
          as
          of December 31, 2005 and 2004, and the results of their operations and
          their
          cash flows for each of the three years in the period ended December 31,
          2005, in
          conformity with accounting principles generally accepted in the United
          States of
          America.
  
 
 
 
 
 
 Atlanta,
          Georgia
 February
          13, 2006
  F-2
 **WGNB
          CORP.**
 
 **Consolidated
          Balance Sheets**
 
 **December
          31, 2005 and 2004**
  2005
                
                2004AssetsCash
                    and due from banks, including reserve requirements of $594,000
                    and
                    $487,000, respectively
                
                $
                10,673,541
                
                
                7,288,973Federal
                    funds sold
                
                
                5,548,348
                
                
                767,270Cash
                    and cash equivalents
                
                
                16,221,889
                
                
                8,056,243Securities
                    available-for-sale
                
                
                64,359,833
                
                
                60,867,553Securities
                    held-to-maturity, estimated fair values of $6,839,552 and
                    $4,834,649
                
                
                6,736,552
                
                
                4,834,649Loans,
                    net
                
                
                417,551,614
                
                
                352,247,628Premises
                    and equipment, net
                
                
                9,134,245
                
                
                7,644,879Accrued
                    interest receivable
                
                
                2,881,206
                
                
                2,097,166Other
                    assets
                
                
                6,758,048
                
                
                6,180,855$
                523,643,387
                
                
                441,928,973Liabilities
                    and Stockholders’ EquityDeposits:Demand
                
                $
                48,178,654
                
                
                44,730,335Interest
                    bearing demand
                
                
                156,804,968
                
                
                133,603,250Savings
                
                
                12,160,203
                
                
                11,856,408Time
                
                
                100,065,972
                
                
                92,704,938Time,
                    over $100,000
                
                
                111,839,648
                
                
                55,503,108Total
                    deposits
                
                
                429,049,445
                
                
                338,398,039Federal
                    Home Loan Bank advances
                
                
                42,000,000
                
                
                55,000,000Accrued
                    interest payable
                
                
                2,133,858
                
                
                1,426,132Other
                    liabilities
                
                
                2,508,051
                
                
                2,142,492Total
                    liabilities
                
                
                475,691,354
                
                
                396,966,663Commitments
                    and contingenciesStockholders’
                    equity:Common
                    stock, $1.25 par value, 10,000,000 shares authorized; 3,325,196
                    and
                    3,325,774 shares issued and outstanding
                
                
                4,156,495
                
                
                4,157,218Additional
                    paid-in capital
                
                
                4,881,728
                
                
                4,902,369Retained
                    earnings
                
                
                38,787,699
                
                
                34,778,931Accumulated
                    other comprehensive income
                
                
                126,111
                
                
                1,123,792Total
                    stockholders’ equity
                
                
                47,952,033
                
                
                44,962,310$
                523,643,387
                
                
                441,928,973
 
 
 See
          accompanying notes to consolidated financial statements.
  F-3
 **WGNB
          CORP.**
 
 **Consolidated
          Statements of Earnings**
 
 **For
          the Years Ended December 31, 2005, 2004 and 2003**
  2005
                
                2004
                
                2003Interest
                    income:Interest
                    and fees on loans
                
                $
                28,725,171
                
                
                22,011,568
                
                
                20,448,355Interest
                    on federal funds sold
                
                
                393,955
                
                
                151,063
                
                
                186,752Interest
                    on investment securities:U.S.
                    Government agencies
                
                
                1,009,760
                
                
                975,354
                
                
                1,073,225State,
                    county and municipal
                
                
                1,597,744
                
                
                1,489,111
                
                
                1,319,700Other
                
                
                819,549
                
                
                640,644
                
                
                514,357Total
                    interest income
                
                
                32,546,179
                
                
                25,267,740
                
                
                23,542,389Interest
                    expense:Interest
                    on deposits:Demand
                
                
                3,183,385
                
                
                1,180,420
                
                
                954,060Savings
                
                
                99,612
                
                
                43,309
                
                
                53,579Time
                
                
                6,973,958
                
                
                3,915,778
                
                
                3,993,126Interest
                    on FHLB and other borrowings
                
                
                2,326,566
                
                
                2,430,288
                
                
                2,526,780Total
                    interest expense
                
                
                12,583,521
                
                
                7,569,795
                
                
                7,527,545Net
                    interest income
                
                
                19,962,658
                
                
                17,697,945
                
                
                16,014,844Provision
                    for loan losses
                
                
                1,550,000
                
                
                925,000
                
                
                350,000Net
                    interest income after provision for loan losses
                
                
                18,412,658
                
                
                16,772,945
                
                
                15,664,844Other
                    income:Service
                    charges on deposit accounts
                
                
                4,080,734
                
                
                4,000,420
                
                
                3,659,098Mortgage
                    origination fees
                
                
                402,468
                
                
                514,011
                
                
                933,053ATM
                    network fees
                
                
                502,092
                
                
                434,203
                
                
                335,128Gain
                    on sale of securities available-for-sale
                
                
                227,863
                
                
                -
                
                
                -Miscellaneous
                
                
                794,733
                
                
                688,595
                
                
                626,243Total
                    other income
                
                
                6,007,890
                
                
                5,637,229
                
                
                5,553,522Other
                    expenses:Salaries
                    and employee benefits
                
                
                8,702,150
                
                
                8,125,097
                
                
                7,625,750Occupancy
                
                
                2,134,379
                
                
                1,944,875
                
                
                1,809,859Other
                    operating
                
                
                3,627,107
                
                
                3,593,949
                
                
                3,316,083Total
                    other expenses
                
                
                14,463,636
                
                
                13,663,921
                
                
                12,751,692Earnings
                    before income taxes
                
                
                9,956,912
                
                
                8,746,253
                
                
                8,466,674Income
                    taxes
                
                
                2,889,425
                
                
                2,682,088
                
                
                2,679,824Net
                    earnings
                
                $
                7,067,487
                
                
                6,064,165
                
                
                5,786,850Basic
                    earnings per share
                
                $
                2.13
                
                
                1.83
                
                
                1.75Diluted
                    earnings per share
                
                $
                2.11
                
                
                1.81
                
                
                1.72Dividends
                    per share
                
                $
                0.92
                
                
                0.78
                
                
                0.67
 
 See
          accompanying notes to consolidated financial statements.
  F-4
 **WGNB
          CORP.**
 
 **Consolidated
          Statements of Comprehensive Income**
 
 **For
          the Years Ended December 31, 2005, 2004 and 2003**
  2005
                
                2004
                
                2003Net
                    earnings
                
                $
                7,067,487
                
                
                6,064,165
                
                
                5,786,850Other
                    comprehensive income (loss), net of tax:Unrealized
                    gains (losses) on investment securities
                    available-for-sale:Unrealized
                    gains (losses) arising during the period
                
                
                (1,283,774
                )
                
                (401,838
                )
                
                119,477Associated
                    (taxes) benefit
                
                
                436,483
                
                
                136,625
                
                
                (40,622
                )Reclassification adjustment for gain realized
                
                
                (227,863
                )
                
                -
                
                
                -Associated
                    taxes
                
                
                77,473
                
                
                -
                
                
                -Other
                    comprehensive income (loss)
                
                
                (997,681
                )
                
                (265,213
                )
                
                78,855Comprehensive
                    income
                
                $
                6,069,806
                
                
                5,798,952
                
                
                5,865,705
 
 See
          accompanying notes to consolidated financial statements.
  F-5
 **WGNB
          CORP.**
 
 **Consolidated
          Statements of Changes in Stockholders’ Equity**
 
 **For
          the Years Ended December 31, 2005, 2004 and 2003**
 
 AccumulatedAdditional
                
                
                
                OtherCommon Stock
                
                Paid-in
                
                Retained
                
                ComprehensiveShares
                
                Amount
                
                Capital
                
                Earnings
                
                Income
                
                TotalBalance,
                    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
                
                
                42,089,262Cash
                    dividends ($.78 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,564,479
                )
                
                -
                
                
                (2,564,479
                )Retirement
                    of common stock
                
                
                (32,086
                )
                
                (40,108
                )
                
                (924,134
                )
                
                -
                
                
                -
                
                
                (964,242
                )Exercise
                    of stock options
                
                
                50,980
                
                
                63,726
                
                
                526,251
                
                
                -
                
                
                -
                
                
                589,977Issuance
                    of common stock in lieu of directors’ fees
                
                
                428
                
                
                535
                
                
                12,305
                
                
                -
                
                
                -
                
                
                12,840Change
                    in unrealized holding gain on securities available-  for-sale, net of
                    tax
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (265,213
                )
                
                (265,213
                )Net
                    earnings
                
                
                -
                
                
                -
                
                
                -
                
                
                6,064,165
                
                
                -
                
                
                6,064,165Balance,
                    December 31, 2004
                
                
                3,325,774
                
                
                4,157,218
                
                
                4,902,369
                
                
                34,778,931
                
                
                1,123,792
                
                
                44,962,310Cash
                    dividends ($.92 per share)
                
                
                -
                
                
                -
                
                
                -
                
                
                (3,058,719
                )
                
                -
                
                
                (3,058,719
                )Retirement
                    of common stock
                
                
                (1,770
                )
                
                (2,213
                )
                
                (50,133
                )
                
                -
                
                
                
                
                
                (52,346
                )Exercise
                    of stock options
                
                
                713
                
                
                891
                
                
                15,845
                
                
                -
                
                
                -
                
                
                16,736Issuance
                    of common stock in lieu of directors’ fees
                
                
                479
                
                
                599
                
                
                13,647
                
                
                -
                
                
                -
                
                
                14,246Change
                    in unrealized holding gain on securities available-for-sale,
                    net of
                    tax
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (997,681
                )
                
                (997,681
                )Net
                    earnings
                
                
                -
                
                
                -
                
                
                -
                
                
                7,067,487
                
                
                -
                
                
                7,067,487Balance,
                    December 31, 2005
                
                
                3,325,196
                
                $
                4,156,495
                
                
                4,881,728
                
                
                38,787,699
                
                
                126,111
                
                
                47,952,033
 
 See
          accompanying notes to consolidated financial statements .
  F-6
 **WGNB
          CORP.**
 
 **Consolidated
          Statements of Cash Flows**
 
 **For
          the Years Ended December 31, 2005, 2004 and 2003**
  2005
                
                2004
                
                2003Cash
                    flows from operating activities:Net
                    earnings
                
                $
                7,067,487
                
                
                6,064,165
                
                
                5,786,850Adjustments
                    to reconcile net earnings to net cashprovided
                    by operating activities:Depreciation,
                    amortization and accretion
                
                
                1,086,505
                
                
                1,105,857
                
                
                1,078,280Provision
                    for loan losses
                
                
                1,550,000
                
                
                925,000
                
                
                350,000Provision
                    for deferred income taxes (benefit)
                
                
                (931,240
                )
                
                28,896
                
                
                86,768Gain
                    on sale of securities available-for-sale
                
                
                (227,863
                )
                
                -
                
                
                -(Gain)
                    loss on sale of premises and equipment
                
                
                75,393
                
                
                (5,430
                )
                
                (13,997
                )Loss
                    on sale of other real estate
                
                
                4,125
                
                
                52,312
                
                
                86,205Change
                    in:Other
                    assets
                
                
                (35,230
                )
                
                (1,035,421
                )
                
                15,973Other
                    liabilities
                
                
                950,423
                
                
                397,864
                
                
                (120,087
                )Net
                    cash provided by operating activities
                
                
                9,539,600
                
                
                7,533,243
                
                
                7,269,992Cash
                    flows from investing activities:Proceeds
                    from sales of securities available-for-sale
                
                
                3,789,185
                
                
                -
                
                
                -Proceeds
                    from maturities, calls and paydowns of securitiesavailable-for-sale
                
                
                12,686,014
                
                
                11,192,131
                
                
                15,424,516Proceeds
                    from maturities, calls and paydowns of securitiesheld-to-maturity
                
                
                204,941
                
                
                1,019,121
                
                
                -Purchases
                    of securities available-for-sale
                
                
                (21,289,748
                )
                
                (17,371,254
                )
                
                (18,664,899
                )Purchase
                    of securities held-to-maturity
                
                
                (2,105,990
                )
                
                (1,604,000
                )
                
                (750,000
                )Net
                    change in loans
                
                
                (67,394,063
                )
                
                (61,402,267
                )
                
                (24,547,649
                )Proceeds
                    from sales of premises and equipment
                
                
                88,497
                
                
                5,430
                
                
                46,047Purchases
                    of premises and equipment
                
                
                (2,702,122
                )
                
                (1,801,137
                )
                
                (1,698,547
                )Capital
                    expenditures for other real estate
                
                
                (99,293
                )
                
                -
                
                
                -Proceeds
                    from sales of other real estate
                
                
                754,440
                
                
                1,002,312
                
                
                155,250Net
                    cash used by investing activities
                
                
                (76,068,139
                )
                
                (68,959,664
                )
                
                (30,035,282
                )Cash
                    flows from financing activities:Net
                    change in deposits
                
                
                90,651,406
                
                
                35,081,859
                
                
                4,590,312Proceeds
                    from Federal Home Loan Bank advances
                
                
                -
                
                
                15,000,000
                
                
                -Repayment
                    of Federal Home Loan Bank advances
                
                
                (13,000,000
                )
                
                (5,000,000
                )
                
                -Proceeds
                    from other borrowings
                
                
                9,479,000
                
                
                -
                
                
                -Repayment
                    of other borrowings
                
                
                (9,479,000
                )
                
                -
                
                
                -Dividends
                    paid
                
                
                (2,921,611
                )
                
                (2,460,728
                )
                
                (2,147,943
                )Exercise
                    of stock options
                
                
                16,736
                
                
                589,977
                
                
                46,042Retirement
                    of common stock
                
                
                (52,346
                )
                
                (964,242
                )
                
                (154,533
                )Net
                    cash provided by financing activities
                
                
                74,694,185
                
                
                42,246,866
                
                
                2,333,878Change
                    in cash and cash equivalents
                
                
                8,165,646
                
                
                (19,179,555
                )
                
                (20,431,412
                )Cash
                    and cash equivalents at beginning of year
                
                
                8,056,243
                
                
                27,235,798
                
                
                47,667,210Cash
                    and cash equivalents at end of year
                
                $
                16,221,889
                
                
                8,056,243
                
                
                27,235,798
  F-7
 **WGNB
          CORP.**
 
 **Consolidated
          Statements of Cash Flows, continued**
 
 **For
          the Years Ended December 31, 2005, 2004 and 2003**
 
  2005
                
                2004
                
                2003Supplemental
                    disclosure of cash flow information:Cash
                    paid during the year for:Interest
                
                $
                11,875,795
                
                
                7,171,932
                
                
                7,709,700Income
                    taxes
                
                $
                3,501,000
                
                
                2,184,700
                
                
                2,322,000Non-cash
                    investing and financing activities:Transfer
                    of loans to other real estate
                
                $
                579,105
                
                
                794,398
                
                
                845,750Loans
                    to facilitate sales of other real estate
                
                $
                39,028
                
                
                -
                
                
                -Change
                    in unrealized gains onsecurities
                    available-for-sale, net of tax
                
                $
                (997,681
                )
                
                (265,213
                )
                
                78,855Change
                    in dividends payable
                
                $
                137,108
                
                
                103,751
                
                
                68,875Issuance
                    of common stock to directors in lieu of directors’ fees
                
                $
                14,246
                
                
                12,840
                
                
                28,915
  
 See
          accompanying notes to consolidated financial statements.
 
 F-8
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements**
 
 **(1)** **Summary
          of Significant Accounting Policies**
 ***Basis
                    of Presentation***
 The
                    consolidated financial statements of WGNB Corp. (the “Company”) include
                    the financial statements of its wholly owned subsidiary, West
                    Georgia
                    National Bank (the “Bank”). All significant intercompany accounts and
                    transactions have been eliminated in
                    consolidation.
 The
                    Bank commenced business in 1946 upon receipt of its banking charter
                    from
                    the Office of the Comptroller of the Currency (the “OCC”). The Bank is
                    primarily regulated by the OCC and undergoes periodic examinations
                    by this
                    regulatory agency. The Company is regulated by the Federal Reserve
                    and is
                    also subject to periodic examinations. The Bank provides a full
                    range of
                    commercial and consumer banking services principally in Carroll,
                    Paulding
                    and Douglas Counties, Georgia.
 
 The
                    accounting and reporting policies of the Company, and the methods
                    of
                    applying these principles, conform with accounting principles
                    generally
                    accepted in the United States of America (GAAP) and with general
                    practices
                    within the banking industry. In preparing the financial statements,
                    management is required to make estimates and assumptions that
                    affect the
                    reported amounts of assets and liabilities as of the date of
                    the balance
                    sheet and income and expenses for the year. Actual results could
                    differ
                    significantly from those estimates. Material estimates common
                    to the
                    banking industry that are particularly susceptible to significant
                    change
                    in an operating cycle of one year include, but are not limited
                    to, the
                    determination of the allowance for loan losses, the valuation
                    of any real
                    estate acquired in connection with foreclosures or in satisfaction
                    of
                    loans and valuation allowances associated with the realization
                    of deferred
                    tax assets which are based on future taxable
                    income.
 
 ***Cash
          and Cash Equivalents***
 For
                    purposes of reporting cash flows, cash and cash equivalents include
                    cash
                    and due from banks and federal funds
                    sold.
 
 ***Securities***
 The
                    Company classifies its securities in one of three categories:
                    trading,
                    available-for-sale, or held-to-maturity. Trading securities are
                    bought and
                    held principally for the purpose of selling them in the near
                    term.
                    Held-to-maturity securities are those securities for which the
                    Company has
                    the ability and intent to hold the security until maturity. All
                    other
                    securities not included in trading or held-to-maturity are classified
                    as
                    available-for-sale.
 
 Trading
                    and available-for-sale securities are recorded at fair value.
                    Held-to-maturity securities are recorded at amortized cost, adjusted
                    for
                    the amortization of premiums and accretion of discounts. Unrealized
                    holding gains and losses, net of the related tax effect, on securities
                    available-for-sale are excluded from earnings and are reported
                    as a
                    separate component of accumulated other comprehensive income
                    in
                    stockholders’ equity until realized. Transfers of securities between
                    categories are recorded at fair value at the date of transfer.
 
 A
                    decline in the market value of any available-for-sale or held-to-maturity
                    investment below cost that is deemed other than temporary is
                    charged to
                    earnings and establishes a new cost basis for the
                    security.
 
 Premiums
                    and discounts are amortized or accreted over the life of the
                    related
                    security as an adjustment to the yield. Realized gains and losses
                    for
                    securities classified as available-for-sale are included in earnings
                    and
                    are derived using the specific identification method for determining
                    the
                    cost of securities sold.
 
 ***Loans
                    and Allowance for Loan
                    Losses***
 Loans
                    are stated at the principal amount outstanding, net of unearned
                    interest
                    and the allowance for loan losses. Interest income on loans is
                    recognized
                    in a manner that results in a level yield on the principal amount
                    outstanding. Nonrefundable loan fees are deferred, net of certain
                    direct
                    origination costs, and amortized into income over the life of
                    the related
                    loan.
   F-9
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(1)** **Summary
          of Significant Accounting Policies** **,
          continued**
 ***Loans
                    and Allowance for Loan Losses*****,
                    continued**
 Accrual
                    of interest is discontinued on a loan when management believes,
                    after
                    considering economic and business conditions and collection efforts,
                    that
                    the borrower’s financial condition is such that collection of interest is
                    doubtful.
  The
                    allowance for loan losses is established through a provision
                    for loan
                    losses charged to expense. Loans are charged against the allowance
                    for
                    loan losses when management believes that the collectibility
                    of the
                    principal is unlikely. The allowance represents an amount which,
                    in
                    management’s judgment based on historical losses and on current economic
                    environment, will be adequate to absorb probable losses on existing
                    loans
                    that may become uncollectible. Loans deemed uncollectible are
                    charged-off
                    and deducted from the allowance and recoveries on loans previously
                    charged-off are added back to the
                    allowance.
  Management’s
                    judgment in determining the adequacy of the allowance is based
                    on
                    evaluations of the collectibility of loans. These evaluations
                    take into
                    consideration such factors as changes in the nature and volume
                    of the loan
                    portfolio, current economic conditions that may affect the borrower’s
                    ability to pay, overall portfolio quality, and review of specific
                    problem
                    loans. In determining the adequacy of the allowance for loan
                    losses,
                    management uses a loan grading system that rates loans in eight
                    different
                    categories. Grades are assigned allocations of loss based on
                    peer group
                    loss experience and regulatory guidelines. The combination of
                    these
                    results are compared monthly to the recorded allowance for loan
                    losses and
                    material differences are adjusted by increasing or decreasing
                    the
                    provision for loan losses.
  Management
                    believes that the allowance for loan losses is adequate. While
                    management
                    uses available information to recognize losses on loans, future
                    additions
                    to the allowance may be necessary based on changes in economic
                    conditions.
                    In addition, various regulatory agencies, as an integral part
                    of their
                    examination process, periodically review the Company’s allowance for loan
                    losses. Such agencies may require the Company to recognize additions
                    to
                    the allowance based on their judgments of information available
                    to them at
                    the time of their examination.
  ***Premises
                    and Equipment***
 Premises
                    and equipment are carried at cost less accumulated depreciation.
                    Depreciation is computed using the straight-line method over
                    the estimated
                    useful lives of the related assets. When assets are retired or
                    otherwise
                    disposed, the cost and related accumulated depreciation are removed
                    from
                    the accounts, and any resulting gain or loss is reflected in
                    earnings for
                    the period. The cost of maintenance and repairs that do not improve
                    or
                    extend the useful life of the respective asset is charged to
                    income as
                    incurred, whereas significant renewals and improvements are capitalized.
                    The range of estimated useful lives for premises and equipment
                    are:
 
 Buildings
          and improvements  15
          - 39
          years
 Furniture
          and equipment 3
          - 10
          years
  ***Other
                    Real Estate***
 Properties
                      acquired through foreclosure are carried at the lower of cost
                      (defined as
                      fair value at foreclosure) or fair value less estimated costs
                      to dispose.
                      Fair value is defined as the amount that is expected to be
                      received in a
                      current sale between a willing buyer and seller other than
                      in a forced or
                      liquidation sale. Fair values at foreclosure are based on appraisals.
                      Losses arising from the acquisition of foreclosed properties
                      are charged
                      against the allowance for loan losses. Subsequent write-downs
                      are provided
                      by a charge to income through the allowance for losses on other
                      real
                      estate in the period in which the need
                      arises.
 
 ***Income
                    Taxes***
 The
                    Company accounts for income taxes under the liability method.
                    Accordingly,
                    deferred tax assets and liabilities are recognized for the future
                    tax
                    consequences attributable to differences between the financial
                    statement
                    carrying amounts of existing assets and liabilities and their
                    respective
                    tax bases and operating loss and tax credit carryforwards. Deferred
                    tax
                    assets and liabilities are measured using enacted tax rates expected
                    to
                    apply to taxable income in the years in which those temporary
                    differences
                    are expected to be recovered or settled. The effect on deferred
                    tax assets
                    and liabilities of a change in tax rates is recognized in income
                    in the
                    period that includes the enactment date.
  F-10
 **WGNB
          CORP.**
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(1)** **Summary
          of Significant Accounting Policies** **,
          continued**
 ***Income
          Taxes,*** **continued**
 In
          the
          event the future tax consequences of differences between the financial
          reporting
          bases and the tax bases of the assets and liabilities results in deferred
          tax
          assets, an evaluation of the probability of being able to realize the future
          benefits indicated by such asset is required. A valuation allowance is
          provided
          for a portion of the deferred tax asset when it is more likely than not
          that
          some portion or all of the deferred tax asset will not be realized. In
          assessing
          the realizability of the deferred tax assets, management considers the
          scheduled
          reversals of deferred tax liabilities, projected future taxable income,
          and tax
          planning strategies.
 
 ***Derivative
          Instruments and Hedging Activities***
 The
          Company recognizes the fair value of derivatives as assets or liabilities
          in the
          financial statements. Accounting for the changes in the fair value of a
          derivative depends on the intended use of the derivative instrument at
          inception. The change in fair value of instruments used as fair value hedges
          is
          accounted for in the earnings of the period simultaneous with accounting
          for the
          fair value change of the item being hedged. The change in fair value of
          the
          effective portion of cash flow hedges is accounted for in comprehensive
          income
          rather than earnings. The change in fair value of derivative instruments
          that
          are not intended as a hedge is accounted for in the earnings of the period
          of
          the change. When a swap contract is terminated, the cumulative change in
          the
          fair value is amortized into income over the original hedge period. If
          the
          underlying hedged instrument is sold or settled, the Company immediately
          recognizes the cumulative change in the derivative’s value in the component of
          earnings.
 
 ***Stock
          Compensation Plans***
 At
          December 31, 2005, the Company sponsors stock-based compensation plans,
          which
          are described more fully in Note 10. The Company accounts for these plans
          under
          the recognition and measurement principles of APB Opinion No. 25, “Accounting
          for Stock Issued to Employees” *,* and
          related Interpretations. No stock-based employee compensation cost is reflected
          in net earnings, as all options granted under those plans had an exercise
          price
          equal to the market value of the underlying common stock on the date of
          grant.
          The following table illustrates the effect on net earnings and earnings
          per
          share if the Company had applied the fair value recognition provisions
          of
          Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for
          Stock-Based Compensation” *,* to
          stock-based employee compensation for the years ended December 31, 2005,
          2004
          and 2003.
  2005
                  
                  2004
                  
                  2003Net
                      earningsAs
                      reported
                  
                  $
                  7,067,487
                  
                  $
                  6,064,165
                  
                  $
                  5,786,850Proforma
                  
                  $
                  6,911,381
                  
                  $
                  5,930,258
                  
                  $
                  5,685,867Basic
                      earnings per shareAs
                      reported
                  
                  $
                  2.13
                  
                  $
                  1.83
                  
                  $
                  1.75Proforma
                  
                  $
                  2.08
                  
                  $
                  1.79
                  
                  $
                  1.72Diluted
                      earnings per shareAs
                      reported
                  
                  $
                  2.11
                  
                  $
                  1.81
                  
                  $
                  1.72Proforma
                  
                  $
                  2.06
                  
                  $
                  1.77
                  
                  $
                  1.69
  The
          fair
          value of each option is estimated on the date of grant using the Black-Scholes
          Model. The following weighted average assumptions were used for grants
          in 2005,
          2004 and 2003, respectively: dividend yield of 2.86%, 2.40% and 2.40%,
          risk free
          interest rates of 4.09%, 4.27% and 4.27%, an expected life of 10 years
          and price
          volatilities of 11%, 29% and 29%. 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 allocated over
          the
          vesting period.
  F-11
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(1)** **Summary
          of Significant Accounting Policies** **,
          continued**
 ***Earnings Per Share***
 Basic
                    earnings
                    per share are based on the weighted average number of common
                    shares
                    outstanding during the period. The effects of potential common
                    shares
                    outstanding during the period are included in diluted earnings
                    per share.Stock
                    options, which are described in note 10, are granted to key management
                    personnel.
   Common
                
                Per
                    Share**For
                    the Year Ended December 31, 2005**
                
                Net
                    Earnings
                
                Shares
                
                AmountBasic
                    earnings per share
                
                $
                7,067,487
                
                
                3,324,620
                
                $
                2.13Effect
                    of dilutive stock options
                
                
                -
                
                
                24,999
                
                
                (.02
                )Diluted
                    earnings per share
                
                $
                7,067,487
                
                
                3,349,619
                
                $
                2.11
 
 Common
                
                Per
                    Share**For
                    the Year Ended December 31, 2004**
                
                Net
                    Earnings
                
                Shares
                
                AmountBasic
                    earnings per share
                
                $
                6,064,165
                
                
                3,305,736
                
                $
                1.83Effect
                    of dilutive stock options
                
                
                -
                
                
                50,594
                
                
                (.02
                )Diluted
                    earnings per share
                
                $
                6,064,165
                
                
                3,356,330
                
                $
                1.81
  Common
                
                Per
                    Share**For
                    the Year Ended December 31, 2003**
                
                Net
                    Earnings
                
                Shares
                
                AmountBasic
                    earnings per share
                
                $
                5,786,850
                
                
                3,308,087
                
                $
                1.75Effect
                    of dilutive stock options
                
                
                -
                
                
                48,893
                
                
                (.03
                )Diluted
                    earnings per share
                
                $
                5,786,850
                
                
                3,356,980
                
                $
                1.72
  ***Recent
          Accounting Pronouncements***
 In
          December 2004, the Financial Accounting Standards Board (“FASB”) adopted
          Statement of Financial Accounting Standards No. 123(R), *Share-Based
          Payment* (“SFAS
          No. 123(R)”), which revises and amends SFAS No. 123. SFAS No. 123(R) requires
          all share-based payments to employees, including stock options, to be recognized
          in the financial statements based on their fair values. Upon adoption,
          pro forma
          disclosure is no longer an alternative to financial statement recognition.
          SFAS
          No. 123(R) will be effective for the Company for financial statements beginning
          after December 15, 2005. The Company will adopt the provisions of SFAS
          No.
          123(R) in the first quarter of 2006. The
          financial statement impact is not expected to be materially different from
          that
          shown in the existing pro forma disclosure required under the original
          SFAS No.
          123.
  In
          March
          2004, The Emerging Issues Task Force (“EITF”) issued EITF 03-1, *The
          Meaning of Other-Than-Temporary Impairment and its Application to Certain
          Investments (* “EITF
          03-1”). EITF 03-1 provides guidance for evaluating whether an investment is
          other-than-temporarily impaired. The disclosure guidance was effective
          for
          other-than-temporary impairment evaluations made in reporting periods beginning
          after June 15, 2004,whereas the recognition and measurement guidance has
          been
          deferred. The disclosures required by EITF 03-1 are included in Note 2
          to the
          consolidated financial statements. The Company did not recognize an impairment
          loss on any investment in 2005, 2004 or 2003.
 
 Other
          accounting standards that have been issued or proposed by the FASB and
          other
          standard setting entities that do not require adoption until a future date
          are
          not expected to have a material impact on the Company’s consolidated financial
          statements upon adoption.
 
 F-12
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(2)**
                **Securities**
 Securities
                    available-for-sale and held-to-maturity at December 31, 2005
                    and 2004 are
                    summarized as follows:
 
 **Available-for-Sale**
                    
                    December 31, 2005Gross
                    
                    Gross
                    
                    EstimatedAmortized
                    
                    Unrealized
                    
                    Unrealized
                    
                    FairCost
                    
                    Gains
                    
                    Losses
                    
                    ValueU.S.
                        Government agencies
                    
                    $
                    8,964,018
                    
                    
                    -
                    
                    
                    21,599
                    
                    
                    8,942,419Mortgage-backed
                        securities
                    
                    
                    18,294,070
                    
                    
                    128,395
                    
                    
                    297,557
                    
                    
                    18,124,908State,
                        county and municipals
                    
                    
                    32,867,044
                    
                    
                    542,847
                    
                    
                    145,354
                    
                    
                    33,264,537Corporate
                        bonds
                    
                    
                    4,043,624
                    
                    
                    22,929
                    
                    
                    38,584
                    
                    
                    4,027,969$
                    64,168,756
                    
                    
                    694,171
                    
                    
                    503,094
                    
                    
                    64,359,833
 
 December 31, 2004Gross
                    
                    Gross
                    
                    EstimatedAmortized
                    
                    Unrealized
                    
                    Unrealized
                    
                    FairCost
                    
                    Gains
                    
                    Losses
                    
                    ValueU.S.
                        Government agencies
                    
                    $
                    5,496,962
                    
                    
                    8,550
                    
                    
                    632
                    
                    
                    5,504,880Mortgage-backed
                        securities
                    
                    
                    16,387,883
                    
                    
                    341,622
                    
                    
                    62,434
                    
                    
                    16,667,071State,
                        county and municipals
                    
                    
                    35,638,790
                    
                    
                    1,395,663
                    
                    
                    45,595
                    
                    
                    36,988,858Corporate
                        bonds
                    
                    
                    1,641,202
                    
                    
                    65,542
                    
                    
                    -
                    
                    
                    1,706,744$
                    59,164,837
                    
                    
                    1,811,377
                    
                    
                    108,661
                    
                    
                    60,867,553
 
 **Held-to-Maturity**
                    
                    December 31, 2005Gross
                    
                    Gross
                    
                    EstimatedAmortized
                    
                    Unrealized
                    
                    Unrealized
                    
                    FairCost
                    
                    Gains
                    
                    Losses
                    
                    ValueTrust
                        preferred securities
                    
                    $
                    6,736,552
                    
                    
                    103,000
                    
                    
                    -
                    
                    
                    6,839,552
  December 31, 2005Gross
                
                Gross
                
                EstimatedAmortized
                
                Unrealized
                
                Unrealized
                
                FairCost
                
                Gains
                
                Losses
                
                ValueTrust
                    preferred securities
                
                $
                4,834,649
                
                
                -
                
                
                -
                
                
                4,834,649
  F-13
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
  **(2)Securities** **,
          continued**
 The
                    amortized cost and estimated fair value of investment securities
                    available-for-sale and held-to-maturity at December 31, 2005,
                    by
                    contractual maturity are shown below. Expected maturities will
                    differ from
                    average life contractual maturities because borrowers have the
                    right to
                    call or prepay certain obligations with or without call or prepayment
                    penalties.
 
 **Available-for-Sale**
                  Amortized
                  
                  EstimatedCost
                  
                  Fair
                      ValueU.S.
                      Government agencies, state, county and
                      municipals and corporate bonds:Within
                      1 year
                  $
                  10,811,091
                  
                  
                  10,822,6261
                      to 5 years
                  
                  9,742,850
                  
                  
                  9,756,8495
                      to 10 years
                  
                  7,418,557
                  
                  
                  7,521,556After
                      10 years
                  
                  17,902,188
                  
                  
                  18,133,894Mortgage-backed
                      securities
                  
                  18,294,070
                  
                  
                  18,124,908$
                  64,168,756
                  
                  
                  64,359,833**Held-to-Maturity**Trust
                      preferred securities:After
                      10 years
                  $
                  6,736,552
                  
                  
                  6,839,552
 
 The
                    following is a summary of the fair values of securities that
                    have
                    unrealized losses as of December 31, 2005 and 2004.
 December
                    31, 2005Less Than 12 Months
                
                12
                    Months or MoreFair
                
                Unrealized
                
                Fair
                
                UnrealizedValue
                
                Losses
                
                Value
                
                LossesU.S.
                    Government agencies
                
                $
                999,399
                
                
                21,599
                
                
                -
                
                
                -Mortgage-backed
                    securities
                
                
                10,205,739
                
                
                194,224
                
                
                2,980,921
                
                
                103,333State,
                    county and municipals
                
                
                8,246,350
                
                
                108,821
                
                
                1,447,617
                
                
                36,533Corporate
                    bonds
                
                
                2,874,273
                
                
                38,584
                
                
                -
                
                
                -$
                22,325,761
                
                
                363,228
                
                
                4,428,538
                
                
                139,866
 
 December
                    31, 2004Less Than 12 Months
                
                12
                    Months or MoreFair
                
                Unrealized
                
                Fair
                
                UnrealizedValue
                
                Losses
                
                Value
                
                LossesU.S.
                    Government agencies
                
                $
                999,400
                
                
                632
                
                
                -
                
                
                -Mortgage-backed
                    securities
                
                
                1,873,570
                
                
                21,287
                
                
                1,927,401
                
                
                41,147State,
                    county and municipals
                
                
                3,166,003
                
                
                45,595
                
                
                -
                
                
                -$
                6,038,973
                
                
                67,514
                
                
                1,972,401
                
                
                41,147
 
  F-14
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 **(2)** **Securities** **,
          continued**
 At
          December 31, 2005, all unrealized losses in the investment securities portfolio
          related to debt securities. The unrealized losses on these debt securities
          arose
          due to changing interest rates and are considered to be temporary. From
          the
          December 31, 2005 tables above, 22 securities out of 60 securities issued
          by
          U.S. Government agencies, and Government sponsored corporations including
          mortgage backed securities contained unrealized losses, 30 out of 85 securities
          issued by state and political subdivisions contained unrealized losses
          and two
          out of five securities issued by corporations contained unrealized losses.
          These
          unrealized losses are considered temporary because of acceptable investment
          grades on each security and the repayment sources of principal and interest
          are
          largely government backed.
  At
                    December 31, 2004, 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, 2004 tables above, 9 out of 98
                    securities issued by state and political subdivisions contained
                    unrealized
                    losses and 7 out of 60 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 largely government
                    backed.
 
 Proceeds
                    from sales of securities available-for-sale during 2005 were
                    $3,789,185
                    with gross gains of $227,863 and no gross losses recognized.
                    There were no
                    sales of securities available-for-sale during 2004 or
                    2003.
  Investment
                    securities with a fair value of approximately $61,904,000 and
                    $56,601,000
                    as of December 31, 2005 and 2004, respectively, were pledged
                    to secure
                    public deposits, as required by law, and for other
                    purposes.
 
 **(3)**
                **Loans**
 Major
                    classifications of loans at December 31, 2005 and 2004 are summarized
                    as
                    follows:
 
 2005
                
                2004Commercial,
                    financial and agricultural
                
                $
                51,555,201
                
                
                50,527,769Real
                    estate - mortgage
                
                
                196,382,365
                
                
                173,110,259Real
                    estate - construction
                
                
                153,511,262
                
                
                114,657,248Consumer
                
                
                22,271,301
                
                
                18,614,114423,720,129
                
                
                356,909,390Less:
                    Unearned interest
                
                
                841,109
                
                
                581,614Allowance
                    for loan losses
                
                
                5,327,406
                
                
                4,080,148$
                417,551,614
                
                
                352,247,628
 
 The
                    Company grants loans and extensions of credit to individuals
                    and a variety
                    of businesses and corporations primarily located in its general
                    trade area
                    of Carroll, Paulding and Douglas Counties, Georgia. Although
                    the Bank has
                    a diversified loan portfolio, a substantial portion of the loan
                    portfolio
                    is collateralized by improved and unimproved real estate and
                    is dependent
                    upon the real estate market.
 
 Under
                    the line of credit agreement with the Federal Home Loan Bank
                    (see Note 6),
                    the Bank pledges acceptable loans under a blanket lien as collateral
                    for
                    its borrowings.
 
 Changes
                    in the allowance for loan losses for the years ended December
                    31, 2005,
                    2004 and 2003 are as follows:
 
 2005
                
                2004
                
                2003Balance,
                    beginning of year
                
                $
                4,080,148
                
                
                3,479,366
                
                
                3,771,676Provision
                    for loan losses
                
                
                1,550,000
                
                
                925,000
                
                
                350,000Loans
                    charged off
                
                
                (387,811
                )
                
                (397,095
                )
                
                (789,544
                )Recoveries
                
                
                85,069
                
                
                72,877
                
                
                147,234Balance,
                    end of year
                
                $
                5,327,406
                
                
                4,080,148
                
                
                3,479,366
 
 F-15
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(4)**
                **Premises
                    and Equipment**
 Major
                    classifications of premises and equipment at December 31, 2005
                    and 2004
                    are summarized as follows:
  2005
                  
                  2004Land
                  
                  $
                  1,444,265
                  
                  
                  1,188,765Buildings
                      and improvements
                  
                  
                  9,046,004
                  
                  
                  7,715,254Furniture
                      and equipment
                  
                  
                  6,528,209
                  
                  
                  6,127,39217,018,478
                  
                  
                  15,031,411Less:
                      Accumulated depreciation
                  
                  
                  7,884,233
                  
                  
                  7,386,532$
                  9,134,245
                  
                  
                  7,644,879
  Depreciation
          expense amounted to $1,048,865, $919,153 and $863,369 in 2005, 2004 and
          2003,
          respectively.
 
 **(5)** **Deposits**
 At
          December 31, 2005 the scheduled maturities of time deposits are as
          follows:
  2006
                  
                  $
                  111,163,6302007
                  
                  
                  34,859,8812008
                  
                  
                  22,967,3592009
                  
                  
                  18,180,9682010
                  
                  
                  24,733,782$
                  211,905,620
 The
          Bank
          held $55,577,610 and $19,580,452 in certificates of deposit obtained through
          the
          efforts of third party brokers at December 31, 2005 and 2004, respectively.
          The
          weighted average interest rate on the deposits at December 31, 2005 and
          2004 was
          3.93% and 3.34%, respectively. The deposits outstanding at December 31,
          2005
          mature as follows:
 2006
                  
                  $
                  11,480,6102007
                  
                  
                  7,498,0002008
                  
                  
                  12,202,0002009
                  
                  
                  11,057,0002010
                  
                  
                  13,340,000$
                  55,577,610
  **(6)**
                  **Lines
                        of Credit**
 The
                        Bank has lines of credit for overnight borrowings of $20,800,000
                        at
                        December 31, 2005 and 2004. The Bank also has a line of credit
                        with the
                        Federal Home Loan Bank of Atlanta (FHLB) with credit availability
                        totaling
                        $128,720,000 at December 31, 2005. The FHLB advances are
                        secured by the
                        Bank’s stock in the FHLB, its qualifying 1-4 family first mortgage
                        loans
                        and qualified commercial loans.****Advances
                        on the FHLB line of credit are subject to available collateral
                        of the
                        Bank. At December 31, 2005 and 2004, the Bank had advances
                        outstanding
                        from the FHLB amounting to $42,000,000 and $55,000,000, respectively.
                        The
                        Bank had $13,928,000 in excess collateral available at December
                        31, 2005
                        for additional borrowing. An early conversion option allows
                        the FHLB to
                        convert the advances to a variable interest rate upon notification
                        to the
                        Bank. The following advances require quarterly interest
                        payments:
  ****
 December
                    31, 2005Advance
                Interest
                    Basis
                Current
                    Rate
                Maturity
                Call
                    Date
                Early
                    Conversion Option$
                  10,000,000
                Fixed
                5.49%
                May
                    2011
                May
                    2006
                May
                    2006,
                  3
                    month LIBOR$
                  7,000,000
                Fixed
                4.24%
                June
                    2010
                -
                -$
                  5,000,000
                Fixed
                5.44%
                February
                    2008
                -
                -$
                  10,000,000
                Fixed
                3.37%
                September
                    2012
                September
                    2007
                September
                    2007,
                  3
                    month LIBOR$
                  10,000,000
                Fixed
                3.225%
                February
                    2014
                February
                    2009
                February
                    2009,
                  3
                    month LIBOR
  F-16
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 **(6)**
                  **Lines
                        of Credit,
                        continued**
 
 December
                      31, 2004Advance
                  Interest
                      Basis
                  Current
                      Rate
                  Maturity
                  Call
                      Date
                  Early
                      Conversion Option$
                      10,000,000
                  Fixed
                  5.49%
                  May
                      2011
                  May
                      2006
                  May
                      2006, 3 month LIBOR$
                      5,000,000
                  Variable
                  2.44%
                  Daily
                      Rate
                  -
                  -$
                      5,000,000
                  Fixed
                  7.07%
                  May
                      2005
                  -
                  -$
                      10,000,000
                  Fixed
                  6.16%
                  July
                      2005
                  -
                  -$
                      5,000,000
                  Fixed
                  5.44%
                  February
                      2008
                  -
                  -$
                      10,000,000
                  Fixed
                  3.37%
                  September
                      2012
                  September
                      2007
                  September
                      2007,
                    3
                      month LIBOR$
                      10,000,000
                  Fixed
                  3.225%
                  February
                      2014
                  February
                      2009
                  February
                      2009,
                    3
                      month LIBOR
  **(7)**
                    **Commitments
                            and
                            Contingencies**
 ***Off
                        Balance Sheet
                        Commitments***
 The
                            Company is a party to financial instruments with off
                            balance sheet risk in
                            the normal course of business to meet the financing needs
                            of its
                            customers. These financial instruments include commitments
                            to extend
                            credit and standby letters of credit. Those instruments
                            involve, to
                            varying degrees, elements of credit risk in excess of
                            the amount
                            recognized in the balance sheet. The contractual amounts
                            of those
                            instruments reflect the extent of involvement the Company
                            has in
                            particular classes of financial
                            instruments.
 
 The
                        Company’s exposure to credit loss in the event of non-performance
                        by the
                        other party to the financial instrument for commitments to
                        extend credit
                        and standby letters of credit is represented by the contractual
                        amount of
                        those instruments. The Company uses the same credit policies
                        in making
                        commitments and conditional obligations as it does for on
                        balance sheet
                        instruments.
 
 In
                        most cases, the Company requires collateral to support financial
                        instruments with credit risk. The following table summarizes
                        the off
                        balance sheet financial instruments as of December 31, 2005
                        and
                        2004:
 ApproximateContractual
                      Amount2005
                  
                  2004Financial
                      instruments whose contract amounts represent credit risk:Commitments
                      to extend credit
                  
                  $
                  98,678,000
                  
                  
                  68,013,000Standby
                      letters of credit
                  
                  $
                  13,222,000
                  
                  
                  8,367,000
  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.
 ***Derivative
          Instruments and Hedging Activities***
 As
          of
          December 31, 2005 and 2004, the Company held an interest rate swap position.
          The
          Company entered into the swap on May 24, 2004 for a 36-month period. The
          interest rate swap contract has a notional amount of $30,000,000 and the
          Company
          receives a fixed rate of 3.40% and pays a rate of 90 day LIBOR floating
          quarterly. The 90 day LIBOR was 4.39% at December 31, 2005 and 2.36% at
          December
          31, 2004.
  F-17
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(7)** *****Commitments
            and Contingencies****,
            continued*****
 ***Derivative
          Instruments and Hedging Activities*** , **continued**
 The
          objective of the swap was to manage the Company’s interest rate risk exposure.
          The Company was susceptible to interest rate risk outside the tolerance
          of its
          asset and liability management policy if interest rates would have remained
          low
          or moved lower in early 2004. This was, in part, attributable to the fixed
          rate
          nature of certain borrowings from the Federal Home Loan Bank and the preceding
          rapid decline of market interest rates. The discount rate was at a historic
          low
          and economic data suggested that rates could remain low for an extended
          period
          of time. Management modeled the swap using multiple interest rate environments
          and determined that its interest rate risk exposure would be greatly reduced
          by
          engaging in pay-fixed receive floating interest rate swap.
 
 The
          Company uses the long haul method to assess the effectiveness of its current
          hedging activity and accounted for the hedge instrument as a fair value
          hedge.
          The Company has determined the hedge to be effective by measuring the change
          in
          the net present value of the expected cash flows of the interest on the
          advances
          against the change in the market value of the swap. The Company has determined
          that the swap was effective during 2005 and 2004.
 
 ***Contingencies***
 Various
          legal actions and proceedings are pending or are threatened against the
          Company
          and its subsidiary, some of which seek relief or damages in amounts that
          are
          substantial. These actions and proceedings arise in the ordinary course
          of the
          Company’s business. After consultation with legal counsel, management believes
          that the aggregate liability, if any, resulting from such pending and threatened
          actions and proceedings will not have a material adverse effect on the
          Company’s
          financial condition.
 
 **(8)**
                **Stock
                    Repurchase Plan**
 In
                    1996, the Board of Directors approved a Stock Repurchase Plan
                    of up to
                    $2,000,000 of the Company’s common stock currently outstanding. During
                    2001, the Board of Directors approved an additional $1,000,000
                    to be used
                    for the Stock Repurchase Plan. The Company retired 1,770, 32,086
                    and 5,847
                    shares of common stock during 2005, 2004 and 2003, respectively.
                    At
                    December 31, 2005, the Company had $891,525 remaining to reacquire
                    shares
                    under the Stock Repurchase Plan.
 
 **(9)** **Regulatory
          Matters**
 The
                    Company and the Bank are subject to various regulatory capital
                    requirements administered by the federal banking agencies. Failure
                    to meet
                    minimum capital requirements can initiate certain mandatory and
                    possibly
                    additional discretionary actions by regulators that, if undertaken,
                    could
                    have a direct material effect on the Company’s and the Bank’s financial
                    statements. Under certain adequacy guidelines and the regulatory
                    framework
                    for prompt corrective action, the Company and the Bank must meet
                    specific
                    capital guidelines that involve quantitative measures of the
                    assets,
                    liabilities, and certain off-balance-sheet items as calculated
                    under
                    regulatory accounting practices. The capital amounts and classification
                    are also subject to qualitative judgments by the regulators about
                    components, risk weightings, and other
                    factors.
 
 Quantitative
                    measures established by regulation to ensure capital adequacy
                    require the
                    Company and the Bank to maintain minimum amounts and ratios of
                    total and
                    Tier I capital to risk-weighted assets and of Tier I capital
                    to average
                    assets. Management believes, as of December 31, 2005 and 2004,
                    that the
                    Company and the Bank met all capital adequacy requirements to
                    which it is
                    subject. The 1994 Plan has expired according to its
                    terms.
  F-18
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(9)** **Regulatory
          Matters** **,
          continued**
 As
                    of December 31, 2005 and 2004, 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, 2005**:Total
                      Capital (to RiskWeighted
                      Assets)Consolidated
                  
                  $
                  53,153
                  
                  
                  12
                  %
                  
                  ≥$
                      36,038
                  
                  
                  ≥8
                  %
                  
                  N/A
                  
                  
                  N/ABank
                  
                  $
                  48,223
                  
                  
                  11
                  %
                  
                  ≥$
                      35,774
                  
                  
                  ≥8
                  %
                  
                  ≥$
                      44,717
                  
                  
                  ≥10
                  %Tier
                      I Capital(to
                      Risk Weighted Assets)Consolidated
                  
                  $
                  47,826
                  
                  
                  11
                  %
                  
                  ≥$
                      18,019
                  
                  
                  ≥4
                  %
                  
                  N/A
                  
                  
                  N/ABank
                  
                  $
                  42,899
                  
                  
                  10
                  %
                  
                  ≥$
                      17,887
                  
                  
                  ≥4
                  %
                  
                  ≥$
                      26,830
                  
                  
                  ≥6
                  %Tier
                      I Capital(to
                      Average Assets)Consolidated
                  
                  $
                  47,286
                  
                  
                  9
                  %
                  
                  ≥$
                      20,965
                  
                  
                  ≥4
                  %
                  
                  N/A
                  
                  
                  N/ABank
                  
                  $
                  42,899
                  
                  
                  8
                  %
                  
                  ≥$
                      20,817
                  
                  
                  ≥4
                  %
                  
                  ≥$
                      26,022
                  
                  
                  ≥5
                  %**As
                      of December 31, 2004****:**Total
                      Capital (to RiskWeighted
                      Assets)Consolidated
                  
                  $
                  47,919
                  
                  
                  13
                  %
                  
                  ≥$
                      29,475
                  
                  
                  ≥8
                  %
                  
                  N/A
                  
                  
                  N/ABank
                  
                  $
                  43,259
                  
                  
                  12
                  %
                  
                  ≥$
                      29,234
                  
                  
                  ≥8
                  %
                  
                  ≥$
                      36,542
                  
                  
                  ≥10
                  %Tier
                      I Capital(to
                      Risk Weighted Assets)Consolidated
                  
                  $
                  43,839
                  
                  
                  12
                  %
                  
                  ≥$
                      14,737
                  
                  
                  ≥4
                  %
                  
                  N/A
                  
                  
                  N/ABank
                  
                  $
                  39,179
                  
                  
                  11
                  %
                  
                  ≥$
                      14,617
                  
                  
                  ≥4
                  %
                  
                  ≥$
                      21,925
                  
                  
                  ≥6
                  %Tier
                      I Capital(to
                      Average Assets)Consolidated
                  
                  $
                  43,839
                  
                  
                  10
                  %
                  
                  ≥$
                      17,891
                  
                  
                  ≥4
                  %
                  
                  N/A
                  
                  
                  N/ABank
                  
                  $
                  39,179
                  
                  
                  9
                  %
                  
                  ≥$
                      17,769
                  
                  
                  ≥4
                  %
                  
                  ≥$
                      22,211
                  
                  
                  ≥5
                  %
   Dividends
                    paid by the Bank are the primary source of funds available to
                    the Company.
                    Banking regulations limit the amount of dividends that may be
                    paid without
                    prior approval of the regulatory authorities. These restrictions
                    are based
                    on the level of regulatory classified assets, the prior years’ net
                    earnings, and the ratio of equity capital to total assets. At
                    December 31,
                    2005, the Bank could pay approximately $4,011,000 in dividends
                    without
                    obtaining prior regulatory
                    approval.
  **(10)**
                  **Incentive Stock Option
                    Plan**
 Under
                      the January 11, 1994 Incentive Stock Option Plan (the “1994 Plan”) the
                      Company may grant options to certain key officers to acquire
                      shares of
                      common stock of the Company at the then fair value, with the
                      number of
                      shares to be determined annually by agreed upon formulas. A
                      total of
                      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
                      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 as of and through December
                      31, 2005. The
                      1994 Plan has expired according to its
                      terms.
 F-19
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(10)** **Incentive
          Stock Option Plan** **,
          continued**
 On
          April
          8, 2003, the shareholders approved the WGNB Corp. 2003 Stock Incentive
          Plan (the
“2003 Plan”). Under the 2003 Plan, the Company may grant options to certain key
          officers to acquire shares of common stock of the Company at the then fair
          value
          for incentive stock options and no less than 85% of the fair value for
          nonqualified stock options, with the number of shares to be determined
          annually
          by agreed upon formulas. A total of 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, 2005, the
          Company
          had distributed 23,730 of the options available for awards under the 2003
          Plan.
          The options under the 2003 Plan were to be distributed commencing in the
          2005
          fiscal year and will terminate February 3, 2014 unless previously terminated
          by
          the Board of Directors or when the options approved under the plan have
          been
          distributed. The options may be exercised by the participants under a vesting
          period of five years ratably at 20% per year. The options are exercisable
          no
          later than ten years after the date of grant. No compensation cost has
          been
          recognized for the stock options as of and through December 31, 2005.
 
 A
          summary
          status of the Company’s stock option plans as of December 31, 2005, 2004 and
          2003, and changes during the years ending on those dates, is presented
          below:
 
 2005
                
                2004
                
                2003Wtd.
                    Avg.
                
                
                
                Wtd.
                    Avg.
                
                
                
                Wtd.
                    Avg.Exercise
                
                
                
                Exercise
                
                
                
                ExerciseShares
                
                Price
                
                Shares
                
                Price
                
                Shares
                
                PriceOutstanding,
                    beginning of year
                
                
                100,100
                
                $
                23.68
                
                
                135,441
                
                $
                18.53
                
                
                100,358
                
                $
                15.57Awarded
                    during the year
                
                
                23,730
                
                $
                29.43
                
                
                15,639
                
                $
                28.87
                
                
                39,734
                
                $
                24.99Exercised
                    during the year
                
                
                (713
                )
                $
                23.47
                
                
                (50,980
                )
                $
                11.57
                
                
                (4,651
                )
                $
                9.90Outstanding,
                    end of year
                
                
                123,117
                
                $
                24.79
                
                
                100,100
                
                $
                23.68
                
                
                135,441
                
                $
                18.53Options
                    exercisable at year end
                
                
                23,855
                
                $
                19.52
                
                
                15,568
                
                $
                17.12
                
                
                48,739
                
                $
                13.90
 
 The
          following information applies to all options outstanding at December 31,
          2005:
  Options
                        Outstanding
                    Options
                        ExercisableShares
                    Range
                    Wtd.
                        Avg.
                      Exercise
                      Price
                    Wtd.
                        Avg.
                      Remaining
                      Life
                        (Years)
                    Shares
                    Wtd.
                        Avg.
                      Exercise
                      Price6,400
                    $
                        13.00
                    $
                        13.00
                    2.11
                    6,400
                    $
                        13.0078,811
                    $
                        20.00 - 24.99
                    $
                        23.62
                    5.82
                    14,620
                    $
                        20.5637,906
                    $
                        28.87 - 29.43
                    $29.22
                    7.73
                    2,835
                    $28.87123,117
                    $
                        13.00 - 29.43
                    $24.79
                    6.21
                    23,855
                    $19.52
 
 **(11)**
                **Defined
                    Contribution Plan**
 The
                    Company began a qualified retirement plan pursuant to Internal
                    Revenue
                    Code Section 401(k) in 1996 covering substantially all employees
                    subject
                    to certain minimum age and service requirements. Contribution
                    to the plan
                    by employees is voluntary. During 2005, 2004 and 2003, the Company
                    matched
                    100% of the participants’ contributions up to 6% of the participants’
                    salaries, subject to the annual 401(k) contribution limits. The
                    Company
                    also made discretionary contributions to the plan in 2005, 2004
                    and 2003
                    of 5% of participants’ salaries. Contributions to the plan charged to
                    expense during 2005, 2004 and 2003 were $491,265, $453,704 and
                    $433,505,
                    respectively.
  F-20
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(12)**
                **Income
                    Taxes**
 The
                    components of the provision for income taxes in the consolidated
                    statements of earnings for the years ended December 31, 2005,
                    2004 and
                    2003 are as follows:
 
 2005
                
                2004
                
                2003Current:Federal
                
                $
                3,418,489
                
                
                2,387,873
                
                
                2,251,444State
                
                
                402,176
                
                
                265,319
                
                
                341,612Deferred:Federal
                
                
                (833,215
                )
                
                26,006
                
                
                75,351State
                
                
                (98,025
                )
                
                2,890
                
                
                11,417Total
                
                $
                2,889,425
                
                
                2,682,088
                
                
                2,679,824
 
 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:
 
 2005
                
                2004
                
                2003Pretax
                    income at statutory rates
                
                $
                3,385,350
                
                
                2,973,726
                
                
                2,878,670Add
                    (deduct):Tax-exempt
                    interest income
                
                
                (479,991
                )
                
                (448,781
                )
                
                (390,578
                )State
                    taxes, net of federal effect
                
                
                68,924
                
                
                54,870
                
                
                85,394Non-deductible
                    interest expense
                
                
                17,885
                
                
                12,757
                
                
                7,965Other
                
                
                (102,743
                )
                
                89,516
                
                
                98,373$
                2,889,425
                
                
                2,682,088
                
                
                2,679,824
 
 The
                    following summarizes the net deferred tax asset, which is included
                    as a
                    component of other assets, at December 31, 2005 and
                    2004.
 
 2005
                
                2004Deferred
                    income tax assets:Allowance
                    for loan losses
                
                $
                1,971,467
                
                
                1,402,314Other
                    real estate owned
                
                
                183,706
                
                
                48,160Other
                
                
                91,379
                
                
                100,719Total
                    gross deferred income tax assets
                
                
                2,246,552
                
                
                1,551,193Deferred
                    income tax liabilities:Premises
                    and equipment
                
                
                (299,490
                )
                
                (368,778
                )Net
                    unrealized gain on securities available-for-sale
                
                
                (64,966
                )
                
                (607,526
                )Other
                
                
                (15,738
                )
                
                (182,331
                )Total
                    gross deferred income tax liabilities
                
                
                (380,194
                )
                
                (1,158,635
                )Net
                    deferred income tax asset
                
                $
                1,866,358
                
                
                392,558
  F-21
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(13)**
                **Related
                    Party Transactions**
 The
                    Bank conducts transactions with directors and executive officers,
                    including companies in which they have beneficial interests,
                    in the normal
                    course of business. It is the Bank’s policy to comply with federal
                    regulations that require that loan transactions with directors
                    and
                    executive officers be made on substantially the same terms as
                    those
                    prevailing at the time made for comparable loans to other persons.
                    The
                    following summary reflects activity for related party loans for
                    2005:
  Beginning
                    balance
                
                $
                3,774,043New
                    loans
                
                
                3,174,279Repayments
                
                
                (3,636,099
                )Change
                    in related parties
                
                
                149,370Ending
                    balance
                
                $
                3,461,593
 
 At
          December 31, 2005 and 2004, deposits from directors, executive officers,
          and
          their related interests totaled approximately $7,559,000 and $8,300,000,
          respectively.
 
 **** **(14)**
                  **Other
                      Operating Expenses**
 Components
                        of other operating expenses which exceed 1% of total interest
                        income and
                        other income are as
                        follows:
    2005
                
                2004
                
                2003Professional
                    fees
                
                $
                644,479
                
                
                622,993
                
                
                408,457Printing
                    and supplies
                
                $
                303,452
                
                
                319,709
                
                
                306,552
 
 ****
 **(15)**
                  **Fair Value of Financial
                    Instruments**
 The
                      Company is required to disclose fair value information about
                      financial
                      instruments, whether or not recognized on the face of the balance
                      sheet,
                      for which it is practicable to estimate that value. The assumptions
                      used
                      in the estimation of the fair value of the Company’s financial instruments
                      are detailed below. Where quoted prices are not available,
                      fair values are
                      based on estimates using discounted cash flows and other valuation
                      techniques. The use of discounted cash flows can be significantly
                      affected
                      by the assumptions used, including the discount rate and estimates
                      of
                      future cash flows. The following disclosures should not be
                      considered a
                      surrogate of the liquidation value of the Company or its 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.
 
 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-22
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
  **(15)** **Fair
          Value of Financial Instruments** **,
          continued**
 Derivative
          Instruments
 For
                    derivative instruments, fair value is estimated as the amount
                    that the
                    Company would receive or pay to terminate the contracts at the
                    reporting
                    date, taking into account the current unrealized gains or losses
                    on open
                    contracts.
 
 Commitments
          to Extend Credit, Standby Letters of Credit
 Off
                    balance sheet instruments (commitments to extend credit and standby
                    letters of credit) are generally short-term and at variable interest
                    rates. Therefore, both the carrying value and estimated fair
                    value
                    associated with these instruments are
                    immaterial.
 
 Limitations
 Fair
                    value estimates are made at a specific point in time, based on
                    relevant
                    market information and information about the financial instrument.
                    These
                    estimates do not reflect any premium or discount that could result
                    from
                    offering for sale at one time the Company’s entire holdings of a
                    particular financial instrument. Because no market exists for
                    a
                    significant portion of the Company’s financial instruments, fair value
                    estimates are based on many judgments. These estimates are subjective
                    in
                    nature and involve uncertainties and matters of significant judgment
                    and
                    therefore cannot be determined with precision. Changes in assumptions
                    could significantly affect the
                    estimates.
 
 Fair
                    value estimates are based on existing on and off balance sheet
                    financial
                    instruments without attempting to estimate the value of anticipated
                    future
                    business and the value of assets and liabilities that are not
                    considered
                    financial instruments. Significant assets and liabilities that
                    are not
                    considered financial instruments include deferred income taxes
                    and
                    premises and equipment. In addition, the tax ramifications related
                    to the
                    realization of the unrealized gains and losses can have a significant
                    effect on fair value estimates and have not been considered in
                    the
                    estimates.
 
 The
          carrying amount and estimated fair values of the Company’s financial instruments
          at December 31, 2005 and 2004 are as follows:
 2005
                
                2004Carrying
                
                Estimated
                
                Carrying
                
                EstimatedAmount
                
                Fair
                    Value
                
                Amount
                
                Fair
                    ValueAssets:Cash
                    and cash equivalents
                
                $
                16,221,889
                
                
                16,221,889
                
                
                8,056,243
                
                
                8,056,243Securities
                    available-for-sale
                
                $
                64,359,833
                
                
                64,359,833
                
                
                60,867,553
                
                
                60,867,553Securities
                    held-to-maturity
                
                $
                6,736,552
                
                
                6,839,552
                
                
                4,834,649
                
                
                4,834,649Loans,
                    net
                
                $
                417,551,614
                
                
                414,936,820
                
                
                352,247,628
                
                
                351,433,142Liabilities:Deposits
                
                $
                429,049,445
                
                
                427,101,659
                
                
                338,398,039
                
                
                338,165,290Federal
                    Home Loan Bank advances
                
                $
                42,000,000
                
                
                41,494,694
                
                
                55,000,000
                
                
                56,009,314Derivative
                    instruments
                
                $
                571,000
                
                
                571,000
                
                
                5,000
                
                
                5,000
 F-23
 **WGNB
          CORP.**
 
 **Notes
          to Consolidated Financial Statements, continued**
 
 **(16)**
                **WGNB
                    Corp. (Parent Company Only) Financial
                    Information**
 
 Balance
          Sheets
 
 December
          31, 2005 and 2004
  2005
                
                2004AssetsCash
                
                $
                2,573,339
                
                
                2,407,351Investment
                    in Bank
                
                
                43,025,166
                
                
                40,291,753Securities
                    available-for-sale
                
                
                606,240
                
                
                635,399Securities
                    held-to-maturity
                
                
                2,466,240
                
                
                2,334,649Other
                    assets
                
                
                105,831
                
                
                57,140$
                48,776,816
                
                
                45,726,292Liabilities
                    and Stockholders’ EquityDividends
                    payable
                
                $
                824,783
                
                
                687,675Other
                    liabilities
                
                
                -
                
                
                76,307Total
                    liabilities
                
                
                824,783
                
                
                763,982Stockholders’
                    equity
                
                
                47,952,033
                
                
                44,962,310$
                48,776,816
                
                
                45,726,292
 
 Statements
          of Earnings
 
 For
          the
          Years Ended December 31, 2005, 2004 and 2003
 
 2005
                
                2004
                
                2003Dividends
                    from Bank
                
                $
                3,058,719
                
                
                2,564,479
                
                
                2,216,517Other
                    income
                
                
                310,101
                
                
                157,496
                
                
                20,500Other
                    expense
                
                
                (21,251
                )
                
                (36,083
                )
                
                (26,295
                )Earnings
                    before equity in undistributedearnings
                    of Bank
                
                
                3,347,569
                
                
                2,685,892
                
                
                2,210,722Equity
                    in undistributed earnings of Bank
                
                
                3,719,918
                
                
                3,378,273
                
                
                3,576,128Net
                    earnings
                
                $
                7,067,487
                
                
                6,064,165
                
                
                5,786,850
  F-24
 **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, 2005, 2004 and 2003
 
 2005
                
                2004
                
                2003Cash
                    flows from operating activities:Net
                    earnings
                
                $
                7,067,487
                
                
                6,064,165
                
                
                5,786,850Adjustments
                    to reconcile net earnings to netcash
                    provided by operating activities:Amortization
                    and accretion
                
                
                11,722
                
                
                11,846
                
                
                11,534Loss
                    on sale of other real estate
                
                
                -
                
                
                9,675
                
                
                54,269Equity
                    in undistributed earnings of Bank
                
                
                (3,719,918
                )
                
                (3,378,273
                )
                
                (3,576,128
                )Change
                    in other assets
                
                
                (48,691
                )
                
                (6,538
                )
                
                (8,540
                )Change
                    in other liabilities
                
                
                (56,305
                )
                
                2,348
                
                
                18,462Net
                    cash provided by operating activities
                
                
                3,254,295
                
                
                2,703,223
                
                
                2,286,447Cash
                    flows from investing activities:Capital
                    infusion to Bank
                
                
                -
                
                
                -
                
                
                (275,253
                )Purchase
                    of securities held-to-maturity
                
                
                (232,500
                )
                
                (1,604,000
                )
                
                (750,000
                )Proceeds
                    from paydowns of securities available-for-sale
                
                
                -
                
                
                -
                
                
                6,684Proceeds
                    from paydowns of securities held-to-maturity
                
                
                101,414
                
                
                -
                
                
                -Proceeds
                    from sale of other real estate
                
                
                -
                
                
                39,540
                
                
                44,956Net
                    cash used by investing activities
                
                
                (131,086
                )
                
                (1,564,460
                )
                
                (973,613
                )Cash
                    flows from financing activities:Dividends
                    paid
                
                
                (2,921,611
                )
                
                (2,460,728
                )
                
                (2,147,943
                )Exercise
                    of stock options
                
                
                16,736
                
                
                589,977
                
                
                46,042Retirement
                    of common stock
                
                
                (52,346
                )
                
                (964,242
                )
                
                (154,533
                )Net
                    cash used by financing activities
                
                
                (2,957,221
                )
                
                (2,834,993
                )
                
                (2,256,434
                )Increase
                    (decrease) in cash
                
                
                165,988
                
                
                (1,696,230
                )
                
                (943,600
                )Cash
                    at beginning of year
                
                
                2,407,351
                
                
                4,103,581
                
                
                5,047,181Cash
                    at end of year
                
                $
                2,573,339
                
                
                2,407,351
                
                
                4,103,581Supplemental
                    disclosure of non-cash financing activities:Change
                    in dividends payable
                
                $
                137,108
                
                
                103,751
                
                
                68,875Changes in unrealized gains on securities available-for-sale,
                      net of tax
                
                $
                (997,681
                )
                
                (265,213
                )
                
                78,855Issuance of common stock to directors in lieu of directors’
                      fees
                
                $
                14,246
                
                
                12,840
                
                
                28,915
  F-25