##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One)þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934:For the fiscal year ended December 31, 2004 ̈
    
    TRANSITION REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:For the transition period fromto
 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 StreetP.O. Box 280
    
    (770) 832-3557Carrollton, 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 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
þ   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. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes
 ̈    No þ The aggregate market value of the Registrants Common Stock held by non-affiliates of the
Registrant as of June 30, 2004 which is the last business day of its most recently completed second
fiscal quarter, was approximately $52,299,128 based on a per share price of $28.00 (which is the
average of the ask and bid price reported by the NASDAQ Stock Market) as of such date. Shares of
Common Stock held by each executive officer and director and by each person who owns 5% or more of
the Registrants Common Stock have been excluded in that such persons may be deemed affiliates of
the Registrant. This determination of affiliate status is not necessarily a conclusive
determination for other purposes. As of March 14, 2005, there were 3,324,504 shares of the Registrants Common Stock
outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants definitive Proxy Statement for the 2005 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Report.




---



WGNB CORP. 2004 Form 10-K Annual Report TABLE OF CONTENTS Item Number
    
    
    
    Page orin Form 10-K
    
    Description
    
    LocationPART IItem 1.
    
    Business
    
    
    1Item 2.
    
    Properties
    
    
    17Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 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 Financial
Condition 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
    
    
    36Item 9A.
    
    Controls and Procedures
    
    
    36Item 9B.
    
    Other Information
    
    
    36PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    37Item 11.
    
    Executive Compensation
    
    
    37Item 12.
    
    Security Ownership of Certain Beneficial Owners
and Management and Related Shareholder Matters
    
    
    37Item 13.
    
    Certain Relationships and Related Transactions
    
    
    37Item 14.
    
    Principal Accountant Fees and Services
    
    
    37PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    38Signatures
    
    
    41EX-10.29 AMENDMENT TO EMPLOYMENT AGREEMENTEX-10.30 EMPLOYMENT AGREEMENT DATED DECEMBER 31,2002EX-10.31 BONUS AND STOCK OPTION AGREEMENTEX-21 SUBSIDIARY OF WGNB CORPORATIONEX-23 CONSENT OF PORTER KEADLE MOORE LLPEX-31.1 SECTION 302 CERTIFICATION FOR CEOEX-31.2 SECTION 302 CERTIFICATION FOR CFOEX-32.1 SECTION 906 CERTIFICATION FOR CEOEX-32.2 SECTION 906 CERTIFICATION FOR CFO




---



##### Table of Contents



PART I 
 Item 1. Business General WGNB Corp. is a $442 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, 2005, the Company had 3,324,504 issued and
outstanding shares of common stock, $1.25 par value per share (the Common Stock), held by
approximately 900 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 in 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 web site
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, 2004, the Bank had deposits of approximately $338 million, and
approximately 27 thousand deposit accounts. No material portion of the Banks deposits relates to
one or a few persons or entities (including federal, state and local governments and agencies).
The loss of any one or a few principal deposit customers would not be likely to have a material
adverse effect on the operations or earnings of the Bank. The following table sets forth the mix of depository accounts at the Bank as a percentage of
total deposits as of December 31, 2004. 1




---



##### Table of Contents



Deposit Mix At December 31, 2004Non-interesting bearing demand
    
    
    13
    %NOW accounts and money market
    
    
    39
    %Savings
    
    
    4
    %Time DepositsUnder $100,000
    
    
    27
    %$100,000 and over
    
    
    17
    %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, 2004, the Bank had approximately $357 million in total
loans outstanding, representing 81% of its total assets of approximately $442 million. The loan
portfolio is made up of both fixed and adjustable rate loans. Approximately 59% of the Companys
total loan portfolio is fixed rate and 41% is adjustable rate as of December 31, 2004. No
material portion of the Banks loans is concentrated within a single industry or group of related
industries. The Bank is not dependent to any material degree upon any single borrower or a few
principal borrowers. The loss of any individual borrower or of a few principal borrowers would not
be likely to have a material adverse effect on the operations or earnings of the Bank. Real Estate Loans.Loans secured by real estate make up the primary component of the Banks
loan portfolio, constituting approximately $288 million, or 81%, of the Banks total loans as of
December 31, 2004. Approximately 56% of the real estate loans are fixed rate and 44% are
adjustable rate. Approximately 49% of the fixed rate real estate loans mature in one year or less
and approximately 90% of the fixed rate real estate loans mature in five years or less. These
loans consist of commercial real estate loans, construction and development loans, residential real
estate loans and home equity loans. Real estate loans are collateralized by commercial and
residential real estate in the Companys primary and secondary market areas. The types of real
estate that typically constitute collateral include primary and secondary residences for
individuals, including multi-family projects, places of business, real estate for agricultural uses
and undeveloped land. Commercial Loans, Other Than Commercial Loans Secured by Real Estate. The Bank makes loans
for commercial purposes in various industries resident to its market area. As of December 31,
2004, commercial loans constituted approximately $51 million, or 14% of the Banks total loans.
Approximately 61% of commercial loans are fixed rate while 39% 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, 2004, the Bank held approximately $19 million of consumer loans, representing 5% of
its total loans. Consumer loans are primarily fixed rate in nature with 95% of this loan category
carrying fixed rates. These loans are typically collateralized by personal automobiles,
recreational vehicles or cash on deposit and may include unsecured loans to individuals. Other Lending Activities.The Bank also engages in secondary-market mortgage activities
whereby the Bank originates mortgage loans on behalf of investor correspondent banks who fund the
loans. The investor correspondent banks underwrite and price the loans and the Bank receives a fee
for originating and packaging the loans. Periodically, the Bank receives discount points depending
on the pricing of the loan. No mortgage loans are held by the Bank for resale nor does the Bank
service third party loans. Risks Associated with Lending Activities.Consumer and non-mortgage loans to individuals
entail greater risk than do residential mortgage loans, particularly in the case of loans that are
unsecured or secured by rapidly
depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of 2




---



##### Table of Contents



damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrowers continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore,
the application of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans. Commercial loans and loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one-to-four family residential
mortgage loans. Because payments on these loans are often dependent on the successful operation of
the business or management of the property, repayment of such loans may be subject to adverse
conditions in the economy or real estate markets. It has been the Banks practice to underwrite
such loans based on its analysis of the amount of cash flow generated by the business and the
resulting ability of the borrower to meet its payment obligations. In addition, the Bank, in
general, seeks to obtain a personal guarantee of the loan by the owner of the business and, under
certain circumstances, seeks additional collateral. Construction 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 assets
    
    
    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. Although, in aggregate, it accounts for a
large portion of the loan portfolio, real estate lending has historically been the Companys lowest
loan loss category. Legal Lending Limit. The Bank is subject to loans to one borrower limitations prescribed for
national banks by the Office of the Comptroller of the Currency (see Supervision and Regulation).
The legal lending limit to a single borrower by regulation is 15% of a banks total capital plus
reserves, plus an additional 10% of a banks capital and reserves if the amount exceeding the 15%
general limit is secured by readily marketable securities. The
Bank, however, has adopted an internal policy requiring all exposure above 15% of capital and
reserves to be approved by the entire Board of Directors unless certain conditions are met
including one or more of the following: 3




---



##### Table of Contents




    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 that
has not been proven. Collateral is not considered a substitute for the borrowers ability to repay. Collateral
serves as a way to control the borrower and provide additional sources of repayment in the event of
default. The quality and liquidity of the collateral are of paramount importance and must be
confirmed before the loan is made. The Bank has loan-to- value and margin guidelines that are
varied depending on the type of collateral offered. Loans secured by liquid assets and securities
carry margins of 75% to 100% depending on the liquidity and price volatility of the asset. Loans
to value on various types of real estate credits generally do not exceed 85% with most below 80%.
Installment loans, in general, allow for a maximum loan to collateral value of 85%. In addition,
there are limits on terms of repayment of loans for automobiles and related collateral which are
dependent on the age of the asset. There are certain exceptions to the loan to value guidelines
that are dependent on the overall creditworthiness of the borrower. Loan Approval. The Banks loan approval policies provide for various levels of officer
lending authority. When the aggregate outstanding loans to a single borrower exceeds an individual
officers lending authority, the loan request must be considered and approved by an officer with a
higher lending limit or an officers loan committee (the OLC). Individual officers secured and
unsecured lending limits range from $5,000 to $100,000, depending on seniority. The OLC, which
consists of the president, 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 an executive loan
committee, which is made up of the CEO of the Company, the President of the Bank and six outside
directors. Loan Review.The Bank has a comprehensive loan review process involving an independent loan
review officer and lending officers. The loan review process is designed to promote early
identification of credit quality problems. All loan officers are charged with the responsibility
of rating their loans. According to the current bank loan policy, the scope of loan review
activity is to include a minimum of 90% of all commercial and business purpose loan relationships
greater than $500,000, with random sample checks on consumer loans and other loans less than
$500,000. Additionally, the loan review officer monitors the loan rating system to ensure proper
risk identification. The Banks risk identification process is also reviewed by its regulators and
its independent auditors. Upgrades and credit risk grades require the approval of the loan review
officer. In the event of disagreement, the executive loan committee makes the final decision. During the last quarter of 2004, the loan review officer position was vacant. Therefore, the
loan review schedule was not completed for 2004. During this time, the President served in the
capacity of monitoring and approving risk ratings. Other employees prepared and monitored loan
review data. The loan review position has been filled with a qualified candidate as of March 1,
2005. 4




---



##### Table of Contents



Market Area The following statistical data is based on information contained in a report published by the
University of West Georgia Department of Economics dated November 4, 2004 and information published
by the FDIC on its web site. The Banks primary market area includes all of Carroll, Douglas and Paulding Counties in
Georgia. Approximately 94% 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 and Coweta, and the Alabama counties
of Clebourne and Randolph. Carroll County is located approximately 45 miles southwest of Atlanta
and 90 miles east of Birmingham, Alabama. Carroll County ranks 29th among Georgias 159
counties in land area with 499 square miles and 20th (up from 23rd in 2000)
in population with a 2003 population of 98,525. 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. During the 1990s the Carroll County grew at an average annual rate of 2%, down slightly from
the 2.5% annual rate in the 1980s and slower than the State of Georgia annual growth rate of 2.4%.
Net migration accounted for 60% of the 1990 population growth, while 40% was due to natural
increase. Carroll Countys population growth has accelerated in recent years, growing at an annual
average rate of 3.8% from 2000-2003. This is almost double the Countys growth rate in the 1990s.
From April 2000 to July 2003, Carrolls population grew 11,250 with net migration accounting for
80% of the change and most of the growth occurring on the I-20 corridor near Villa Rica and Temple,
Georgia. Carroll County continues to be the largest deposit base county in the Banks market area with
Douglas County, to its east, and Paulding County, to its north, emerging as deposit growth areas.
The compound annual growth rate for deposits at financial institutions in Carroll County for the
years 1993-2003 was 5%. The amount of total deposits in Carroll County was approximately $1.29
billion as of June 30, 2004, compared to total deposits of approximately $710 million as of June
30, 1993. The Bank holds 23% of the markets deposits and the number one position in Carroll
County market share. The number two, three and four banks have 20%, 13% and 8%, respectively. The
top four banks 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 $973 million in
total deposits, and Paulding County had the third largest base with $745 million in total deposits,
as of June 30, 2004. The Bank held a market share of 2% of total deposits in Douglas County or $21
million as of June 30, 2004, representing the 10th largest deposit market share for any
financial institution located in Douglas County. The bank has no deposits in Paulding County. The Bank established two branches in the Douglas County market over the past four years. One
branch is located on Highway 5 just south of I-20 and the other is located in a 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 intends to serve the Douglas County market with these two locations. Douglas County ranks 139th out of 159 counties in land area with 199 square miles,
but 16th in population in Georgia for 2003 with a population of 102,015. During the
90s, Douglas grew at an annual rate of 2.6% with migration accounting for 65% of that growth.
From 2000 to 2003 that growth rate increased to an average annual
rate of 3.2% per year. Based on building permit activity, Douglas joined Carroll, Coweta, and
Paulding as one of the 100 fastest-growing counties in the U.S., ranking 99th in the
nation. In recent years, the city of Douglasville represented 65% of the growth the county
experienced. Douglasvilles population growth was the result of new residential construction and
annexation of county land into the city. 5




---



##### Table of Contents



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 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 SouthTrust Bank. Numerous
mergers and consolidations involving banks in the Banks market area have occurred, requiring the
Bank to compete with banks with greater resources. However, West Georgia National Bank is the
largest and oldest independent bank in Carroll County. McIntosh Commercial Bank commenced
operations in the fourth quarter of 2002, Community Bank of West Georgia commenced operations in
the second quarter of 2003, 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. The
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. 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 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, 2004, the Bank had 143 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




---



##### Table of Contents



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




---



##### Table of Contents



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). 8




---



##### Table of Contents



FDICIA also directs the
FDIC to develop with other appropriate agencies a method for insured depository institutions to
provide supplemental disclosure of the estimated fair market value of assets and liabilities, to
the extent feasible and practicable, in any balance sheet, financial statement, report of condition
or other report of any insured depository institution. FDICIA also requires the federal banking
regulatory agencies to prescribe, by regulation, standards for all insured depository institutions
and depository institution holding companies relating, among other things, to: (i) internal
controls, information systems and audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) interest rate risk exposure; and (v) asset quality. Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions, the Federal Reserve,
the FDIC or any other appropriate federal agency, shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low and moderate income
neighborhoods. These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility. Failure to adequately meet these criteria could pose
additional requirements and limitations on the bank. The Bank was examined for CRA compliance in
May 2003 and received a CRA rating of outstanding. Other Regulations.Interest and certain other charges collected or contracted for by the Bank
are subject to Georgia usury laws and certain federal laws concerning interest rates. The Banks
loan operations are also subject to certain federal laws applicable to credit transactions, such as
the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers, the
Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to
enable the public and public officials to determine whether a financial institution is fulfilling
its obligation to help meet the housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors
in extending credit, the Fair Credit Reporting Act of 1978 governing the use and provision of
information to credit reporting agencies, the Fair Debt Collection Act governing the manner in
which consumer debts may be collected by collection agencies, the Soldiers and Sailors Civil
Relief Act of 1940 governing the repayment terms of, and property rights underlying, secured
obligations of persons in military service, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The deposit operations
of the Bank also are subject to the Right to Financial Privacy Act, which imposes a duty to
maintain confidentiality of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation
E issued by the Federal Reserve to implement that act, which governs automatic deposits to and
withdrawals from deposit accounts and customers rights and liabilities arising from the use of
automated teller machines and other electronic banking services. The Banks commercial
transactions are also subject to the provisions of the Uniform Commercial Code and other provisions
of The Georgia Code Annotated. 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 9




---



##### Table of Contents



or reduce or eliminate
dividends under circumstances in which the bank holding company fails to meet minimum capital
requirements or in which its earnings are impaired. As a national bank, the Bank may not pay dividends from its paid-in-capital. All dividends
must be paid out of retained earnings, after deducting expenses, including reserves for losses and
bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of
common stock until its surplus equals its stated capital, unless there has been transferred to
surplus no less than one-tenth of the banks net profits of the preceding two consecutive half-year
periods (in the case of an annual dividend). The approval of the OCC is required if the total of
all dividends declared by a national bank in any calendar year exceeds the total of its net profits
for that year combined with its retained net profits for the preceding two years, less any required
transfers to surplus. Under FDICIA, the Bank may not pay a dividend if, after paying the dividend,
the Bank would be undercapitalized. SeeCapital Adequacy. As discussed below, additional capital requirements imposed by the OCC may limit the Banks
ability to pay dividends to the Company. The Bank declared dividends in the amount of $2,564,479
to the Company during 2004. Under the OCC guidelines, as of December 31, 2004, the Bank was
permitted to pay the Company dividends of up to $10,668,000 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- 10




---



##### Table of Contents



weighted assets. Most loans are assigned to the 100% risk category, except for first
mortgage loans fully secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment securities are assigned to
the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct
obligations of or obligations guaranteed by the United States Treasury or United States Government
agencies, which have a 0% rating. Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies,
including the termination of deposit insurance by the FDIC, and to certain restrictions on its
business. The Federal Reserve also has implemented a leverage ratio, which is Tier 1 capital as a
percentage of average total assets less intangible assets, to be used as a supplement to the
risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on
the maximum degree to which a bank holding company may leverage its equity capital base. The
Federal Reserve has established a minimum 3% leverage ratio of Tier 1 capital to total assets for
the most highly rated bank holding companies and insured banks. All other bank holding companies
and insured banks will be required to maintain a leverage ratio of 3% plus an additional cushion of
at least 100 to 200 basis points. The tangible Tier 1 Leverage ratio is the ratio of a banking
organizations Tier 1 capital, less all intangibles, to total assets, less all intangibles. FDICIA established a capital-based regulatory plan designed to promote early intervention for
troubled banks and requires the FDIC to choose the least expensive resolution of bank failures.
The capital-based regulatory framework contains five categories of compliance with regulatory
capital requirements, including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. To qualify as a well capitalized
institution, a bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no
less than 6%, and a total risk-based capital ratio of no less than 10%. The bank must also not be
under any order or directive from the appropriate regulatory agency to meet and maintain a specific
capital level. Under FDICIA, regulators must take prompt corrective action against depository institutions
that do not meet minimum capital requirements. FDICIA and the related regulations establish five
capital categories as shown in the following table: Total Risk-
    
    Tier I Risk-
    
    Tier IClassification
    
    Based Capital
    
    Based Capital
    
    LeverageWell Capitalized (1)
    
    
    10
    %
    
    
    6
    %
    
    
    5
    %Adequately Capitalized (1)
    
    
    8
    %
    
    
    4
    %
    
    
    4
    %(2)Undercapitalized (3)
    
    
    <8
    %
    
    
    <4
    %
    
    
    <4
    %Significantly Undercapitalized (3)
    
    
    <6
    %
    
    
    <3
    %
    
    
    <3
    %Critically Undercapitalized (3)
    
    
    
    
    
    
    
    
    
    
    <2
    %
   (1)
    
    An institution must meet all three minimums.(2)
    
    3% for composite 1-rated
institutions, subject to appropriate federal banking agency guidelines.(3)
    
    An institution
is classified as undercapitalized if it is below the specified capital level for any of
the three capital measures. A depository institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives a less than satisfactory examination
rating in any one of four categories. As a depository institution moves downward through the
capitalization categories, the degree of regulatory scrutiny will 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, 11




---



##### Table of Contents



prohibition on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring. Other restrictions may be imposed on
the institution either by its primary federal regulator or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the institution. As of the date of this Report, the Company and the Bank are both considered to be well
capitalized according to their regulatory capital requirements. See Footnote 9 of the Notes to
Financial Statements for additional details. Interstate Banking and Branching Restrictions Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Riegle-Neal Act), effective September 29, 1995, an adequately capitalized and adequately managed
bank holding company may acquire a bank across state lines, without regard to whether such
acquisition is permissible under state law. A bank holding company is considered to be adequately
capitalized if it meets all applicable federal regulatory capital standards. While the Riegle-Neal Act precludes a state from entirely insulating its banks from
acquisition by an out-of-state holding company, a state may still provide that a bank may not be
acquired by an out-of-state company unless the bank has been in existence for a specified number of
years, not to exceed five years. Additionally, the Federal Reserve may not approve an interstate
acquisition which would result in the acquirers controlling more than 10% of the total amount of
deposits of insured depository institutions in the United States with 30% or more of the deposits
in the home state of the target bank. A state may waive the 30% limit based on criteria that does
not discriminate against out-of-state institutions. The limitations do not apply to the initial
entry into a state by a bank holding company unless the state has a deposit concentration cap that
applies on a nondiscriminatory basis to in-state or out-of-state bank holding companies making an
initial acquisition. The Riegle-Neal Act also provides that, beginning on June 1, 1997, banks with different home
states may merge, unless a particular state opts out of the statute. Consistent with the
Riegle-Neal Act, Georgia adopted legislation in 1996 which has permitted interstate bank mergers
since June 1, 1997. In addition, beginning June 1, 1997, the Riegle-Neal Act has permitted national and state
banks to establish de novo branches in another state if there is a law in that state which applies
equally to all banks and expressly permits all out-of-state banks to establish de novo branches.
However, in 1996, Georgia adopted legislation which opts out of this provision. The Georgia
legislation provides that, with the prior approval of the Georgia Department of Banking and
Finance, after July 1, 1996, a bank may establish three new or additional de novo branch banks
anywhere in Georgia and, beginning July 1, 1998, a bank may establish new or additional branch
banks anywhere in the state with prior regulatory approval. Privacy Financial institutions are required to disclose their policies for collecting and protecting
confidential information. Customers generally may prevent financial institutions from sharing
nonpublic personal financial information with nonaffiliated third parties except under narrow
circumstances, such as the processing of transactions requested by the consumer. Additionally,
financial institutions generally may not disclose consumer account numbers to any nonaffiliated
third party for use in telemarketing, direct mail marketing or other marketing to consumers. Anti-Terrorism Legislation In the wake of the tragic events of September 11th, on October 26, 2001, the
President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial
institutions are subject to prohibitions against specified financial transactions and account
relationships as well as enhanced due diligence and know your 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




---



##### Table of Contents




    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




---



##### Table of Contents



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 14




---



##### Table of Contents



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. Since the Sarbanes-Oxley Act was enacted in 2002 and continuing through 2004, the SEC and
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, 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. Business Risks Like all other banking and financial services companies, the Companys business and results of
operations are subject to a number of risks, many of which are outside of the Companys control.
In addition to the other information in this Report, readers should carefully consider that the
following important factors, among others, could materially impact the Companys business and
future results of operations. The Companys success depends on its ability to compete effectively in the competitive
financial services industry The Company and the Bank encounter strong competition for deposits,
loans, and other financial services in all of their lines of business. The Companys principal
competitors include other commercial banks, savings banks, credit unions and savings and loan
associations. Many of the Companys competitors are significantly larger and have greater access
to capital and other resources. In recent years, there has been substantial consolidation among
companies in the financial services industry. Such consolidation may increase competition because
consolidation creates larger entities who may be able to offer additional services that the Company
is unable to offer, have greater financial resources or have substantially higher lending limits to
compete with. Further, the Companys ability to compete effectively is dependent on its ability to
adapt successfully to technological and other changes within the banking and financial services
industry. The Companys business may be adversely affected by the highly regulated environment in which
it operates- The Company is highly regulated by state and federal agencies. Recently enacted and
future legislation and regulations may have significant impact on the banking and financial
services industries. Regulatory or legislative changes could increase the Companys costs of doing
business, restrict its access to new products or markets, or otherwise adversely affect its
operations or the manner in which it conducts its business and, on the whole, adversely affect the
profitability of its business. 15




---



##### Table of Contents



The Company may be adversely affected by a general deterioration in economic conditions- The
risks associated with the Companys business are greater in periods of a slowing economy or
recession. Economic
declines may be accompanied by a decrease in demand for consumer or commercial credit and declining
real estate and other asset values. Declining real estate and other asset values may reduce the
ability of borrowers to use such equity to support borrowings. Delinquencies, foreclosures and
losses generally increase during economic slow downs or recessions. Additionally, the Companys
servicing costs, collection costs and credit losses may also increase in periods of economic slow
down or recessions. The Company is subject to credit risk inherent in the Banks loan portfolio- In the financial
services industry, there is always a risk that certain borrowers may not repay borrowings. The
Bank maintains a reserve for loan losses to absorb the level of losses that it estimates to be
probable in its portfolio. However, its reserve for loan losses may not be sufficient to cover the
loan losses that it may actually incur. If the Bank experiences defaults by borrowers in any of
its businesses, the Companys earnings could be negatively affected. Changes in local economic
conditions could adversely affect credit quality in its loan portfolio. In addition, federal and
state regulators periodically review the Banks loan portfolio and may require it to increase the
provision for loan losses or recognize loan charge-offs. Their conclusions about the quality of
the loan portfolio may be different from the Bank. Any increase in the allowance for loan losses
or charge-offs as required by these regulatory agencies could have a negative effect on the
Companys operating results. The Company may be adversely affected by interest rate changes- The Bank realizes income
primarily from the difference between interest earned on loans and investments and interest paid on
deposits and other borrowings. Interest rate fluctuations are caused by many factors which, for
the most part, are not under the Companys direct control. For example, national monetary policy
plays a significant role in the determination of interest rates. Additionally, competitor pricing
and the resulting negotiations that occur with the Banks customers also impact the rates it
collects on loans and the rates it pays on deposits. As interest rates change, the Company expects
that it will periodically experience gaps in the interest rate sensitivities of the Banks assets
and liabilities, meaning that either its interest-bearing liabilities will be more sensitive to
changes in market interest rates than its interest-earning assets, or vice versa. In either event,
if market interest rates should move contrary to the Banks position, this gap may work against
it, and the Companys earnings may be negatively affected. Although the Bank actively manages its
interest rate sensitivity, such management is not an exact science. Rapid increases or decreases
in interest rates could adversely affect its net interest margin if changes in its cost of funds do
not correspond to changes in income yields. An increase in interest rates that adversely affects
the ability of borrowers to pay the principal or interest on loans may lead to an increase in
nonperforming assets and a reduction of interest accrued into income, which could have a material
adverse affect on the Companys results of operations. The Company could be held responsible for environmental liabilities of properties acquired
through foreclosure- Environmentally related hazards have become a source of high risk and
potentially unlimited liability for financial institutions relative to their loans.
Environmentally contaminated properties owned by an institutions borrowers may result in a drastic
reduction in the value of the collateral securing the institutions loans to such borrowers, high
environmental clean up costs to the borrower affecting its ability to repay the loans, the
subordination of any lien in favor of the institution to a state or federal lien securing clean up
costs, and liability to the institution for clean up costs if it forecloses on the contaminated
property or becomes involved in the management of the borrower. To minimize this risk, the Company
may require an environmental examination of, and report with respect to, the property of any
borrower or prospective borrower if circumstances affecting the property indicate a potential for
contamination, taking into consideration the potential loss to the institution in relation to the
burdens to the borrower. Such examination must be performed by an engineering firm experienced in
environmental risk studies and acceptable to the institution, and the costs of such examinations
and reports are the responsibility of the borrower. These costs may be substantial and may deter a
prospective borrower from entering into a loan transaction with the Company. The Company is not
aware of any borrower who is currently subject to any environmental investigation or clean up
proceeding which is likely to have a material adverse affect on the financial condition or results
of operation of the Company. Loss of the Companys senior executive officers or other key employees could impair its
relationship with customers and adversely affect its business- The Company has assembled a senior
management team which has a substantial background and experience in banking and financial services
in the western Georgia market. Loss of 16




---



##### Table of Contents



these key personnel could negatively impact the Companys
earnings because of their skills, customer relationships and/or the potential difficulty of
promptly replacing them. 
  Item 2.
    Properties The Company and the Banks main office is located at 201 Maple Street in Carrollton, Georgia
near the citys downtown square at the intersection of Georgia Highway 16 and U.S. Highway 27. The
Bank has two other locations within the city limits of Carrollton. The First Tuesday Mall office
is located at 1004 Bankhead Highway and the Motor office is located at 314 Newnan Street. In
addition, the Bank has two other locations in Carroll County, one located at 725 Bankhead Highway,
Villa Rica, Georgia and another located at 205 East College Street, Bowdon, Georgia. All locations
are typical of branch banking facilities located throughout the United States and all locations,
except the Motor office, are full service locations. The Motor office provides primarily teller
and ATM transactions and does not originate loans. As to its Douglas County locations, the
permanent Mirror Lake branch opened February 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. A second Douglas County branch is located at 9557 Georgia Highway 5 in
Douglasville. The Banks main office, operations center and related parking are located on approximately 2.5
acres. The main office is a two-story building with a total of approximately 19,100 square feet
housing its lobby, retail offices, administrative and executive offices. The operations center is
a two-story building with a total of approximately 12,200 square feet housing a computer room,
administrative offices and storage facilities. The branch offices (with the exception of the Motor
office 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 features 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. Each branch location has an ATM
that is either walk-up or drive-up. The Motor office and Douglasville offices are leased
facilities. All of the other office facilities are owned. The Bank also operates six additional
ATM 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




---



##### Table of Contents



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 SmallCap Market System under trading symbol
WGNB. Approximately 900 shareholders of record held the Common Stock as of March 14, 2005. Set
forth below are the high and low bid prices for each full quarterly period during 2003 and 2004 and
the dividends declared and paid per share of Common Stock for those periods. Price Range Per ShareDividendsLow
    
    
    High
    
    
    Paid Per Share2003:First Quarter
    
    $
    24.52
    
    
    $
    28.75
    
    
    $
    0.160Second Quarter
    
    
    25.25
    
    
    
    37.25
    
    
    
    0.165Third Quarter
    
    
    25.50
    
    
    
    27.10
    
    
    
    0.170Fourth Quarter
    
    
    26.27
    
    
    
    31.17
    
    
    
    0.1752004: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
    
    
    
    0.210
 Dividends The declaration of future dividends is within the discretion of the Board of Directors and
will depend, among other things, upon business conditions, earnings, the financial condition of the
Bank and the Company, and regulatory requirements. SeeSupervision and Regulation  Dividends. Recent Sales of Unregistered Securities The Company issued the following securities during the year ended December 31, 2004 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 2004, one
director of the Bank received 428 shares in payment of deferred director compensation for an
aggregate consideration owed to him by the Bank of $12,840 and 15,639 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 under the 2003 Stock Incentive Plan (including the shares
subject to the outstanding options granted to its executive officers) on Form S-8. Uses of Proceeds from Registered Securities The Company has previously reported the completion of a registered public offering pursuant to
which it sold 200,000 shares of its Common Stock at a purchase price of $24.00 per share. The net
proceeds from the offering (which was completed in April 2002) of $4,766,454 continue to remain
invested in corporate bonds and federal funds. 18




---



##### Table of Contents



Issuer Purchases of Equity Securities The Company did not make any repurchases of its equity securities during the fourth quarter of
2004. 
  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, 2004 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 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(In thousands, except per share data)For the Year:Total Interest Income
    
    $
    25,268
    
    
    $
    23,542
    
    
    $
    24,296
    
    
    $
    26,548
    
    
    $
    24,049Total Interest Expense
    
    
    7,570
    
    
    
    7,527
    
    
    
    8,724
    
    
    
    12,069
    
    
    
    10,356Net Interest Income
    
    
    17,698
    
    
    
    16,015
    
    
    
    15,572
    
    
    
    14,479
    
    
    
    13,692Provision for Loan Losses
    
    
    925
    
    
    
    350
    
    
    
    483
    
    
    
    910
    
    
    
    509Net Interest Income After Provision for
Loan Losses
    
    
    16,773
    
    
    
    15,665
    
    
    
    15,089
    
    
    
    13,569
    
    
    
    13,184Total Other Income
    
    
    5,637
    
    
    
    5,554
    
    
    
    5,251
    
    
    
    4,550
    
    
    
    2,991Total Other Expense
    
    
    13,664
    
    
    
    12,752
    
    
    
    12,127
    
    
    
    10,859
    
    
    
    9,283Earnings Before Income Taxes
    
    
    8,746
    
    
    
    8,467
    
    
    
    8,213
    
    
    
    7,260
    
    
    
    6,892Income Taxes
    
    
    2,682
    
    
    
    2,680
    
    
    
    2,668
    
    
    
    2,471
    
    
    
    2,487Net earnings
    
    
    6,064
    
    
    
    5,787
    
    
    
    5,545
    
    
    
    4,789
    
    
    
    4,404Per Share Data:Net earnings
    
    
    1.83
    
    
    
    1.75
    
    
    
    1.71
    
    
    
    1.55
    
    
    
    1.42Diluted net earnings
    
    
    1.81
    
    
    
    1.72
    
    
    
    1.69
    
    
    
    1.52
    
    
    
    1.41Cash dividends declared
    
    
    .78
    
    
    
    .67
    
    
    
    .60
    
    
    
    .55
    
    
    
    .48Book value
    
    
    13.52
    
    
    
    12.72
    
    
    
    11.65
    
    
    
    9.42
    
    
    
    8.30Tangible book value
    
    
    13.52
    
    
    
    12.72
    
    
    
    11.65
    
    
    
    9.42
    
    
    
    8.30At Year End:Total loans
    
    
    356,909
    
    
    
    296,498
    
    
    
    273,471
    
    
    
    253,805
    
    
    
    228,467Earning assets
    
    
    425,062
    
    
    
    367,694
    
    
    
    360,226
    
    
    
    331,690
    
    
    
    272,512Assets
    
    
    441,929
    
    
    
    393,216
    
    
    
    385,121
    
    
    
    350,222
    
    
    
    289,112Total deposits
    
    
    338,398
    
    
    
    303,316
    
    
    
    298,726
    
    
    
    280,531
    
    
    
    233,811Stockholders equity
    
    
    44,962
    
    
    
    42,089
    
    
    
    38,520
    
    
    
    29,204
    
    
    
    25,687Common shares outstanding
    
    
    3,325,774
    
    
    
    3,306,452
    
    
    
    3,306,733
    
    
    
    3,100,355
    
    
    
    3,095,455Average Balances:Total loans
    
    
    330,159
    
    
    
    287,861
    
    
    
    262,781
    
    
    
    248,863
    
    
    
    210,127Earning assets
    
    
    404,121
    
    
    
    357,468
    
    
    
    337,583
    
    
    
    310,027
    
    
    
    259,736Assets
    
    
    428,637
    
    
    
    384,395
    
    
    
    357,418
    
    
    
    326,653
    
    
    
    276,719Deposits
    
    
    325,991
    
    
    
    296,723
    
    
    
    279,483
    
    
    
    263,668
    
    
    
    224,220Stockholders equity
    
    
    43,742
    
    
    
    40,708
    
    
    
    35,640
    
    
    
    27,986
    
    
    
    23,700Weighted average shares outstanding
    
    
    3,305,736
    
    
    
    3,308,087
    
    
    
    3,243,849
    
    
    
    3,098,067
    
    
    
    3,098,419Key Performance Ratios:Return on average assets
    
    
    1.41
    %
    
    
    1.51
    %
    
    
    1.55
    %
    
    
    1.47
    %
    
    
    1.59
    %Return on average equity
    
    
    13.86
    %
    
    
    14.22
    %
    
    
    15.56
    %
    
    
    17.11
    %
    
    
    18.58
    %Net interest margin, taxable equivalent
    
    
    4.55
    %
    
    
    4.65
    %
    
    
    4.76
    %
    
    
    4.84
    %
    
    
    5.44
    %Dividend payout ratio
    
    
    42.62
    %
    
    
    38.29
    %
    
    
    34.94
    %
    
    
    35.48
    %
    
    
    33.80
    %Average equity to average assets
    
    
    10.20
    %
    
    
    10.59
    %
    
    
    9.97
    %
    
    
    8.57
    %
    
    
    8.56
    %Average loans to average deposits
    
    
    101.28
    %
    
    
    97.01
    %
    
    
    94.02
    %
    
    
    94.39
    %
    
    
    93.71
    %Overhead ratio
    
    
    58.56
    %
    
    
    59.12
    %
    
    
    58.24
    %
    
    
    57.07
    %
    
    
    55.64
    %
 19




---



##### Table of Contents



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 1, Business  Business Risks. 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 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 20




---



##### Table of Contents



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. 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, 2004, 2003 and 2002 The Company reported net earnings of $6.1 million in 2004, $5.8 million in 2003 and $5.5
million in 2002, representing an increase of 4.8% between fiscal years 2003 and 2004 and an
increase of 4.4% between fiscal years 2002 and 2003. The increases over the three fiscal years are
primarily attributable to the Banks continued loan growth, higher non-interest income and lower
increases in non-interest expense. Net earnings per share on a fully diluted basis were $1.81 for
2004, $1.72 for 2003 and $1.69 for 2002, representing an increase of 5.2% between fiscal years 2003
and 2004 and 1.8% between fiscal years 2002 and 2003. The net earnings per share for 2004 and 2003
for the entire year and 2002 for a partial year were affected by the previously described Common
Stock offering completed in April, 2002 which increased the weighted average number of shares
outstanding. Return on average assets and return on average shareholders equity for 2004 was
1.41% and 13.86%, respectively, compared with 1.51% and 14.22%, respectively, for 2003, and 1.55%
and 15.56%, respectively, for 2002. The Company experienced its largest annual loan growth in terms of dollars in its almost 60
year history in 2004. Total loans grew by over $60 million, or over 20%. This loan growth
contributed to the Companys earnings growth offsetting the approximately 50% decline in mortgage
origination fees from 2003 to 2004. In the first half of 2004, the Company earned $2.8 million, or
$0.83 per diluted share, compared to $3.3 million, or $0.98 per diluted share in the second half of
2004. When comparing earnings for the first half of 2004 to that in the second half of 2004, the
Company experienced an earnings growth of 18%. Net Interest Income The Companys operational results primarily depend on the earnings of the Bank. The Banks
earnings depend, to a large degree, on net interest income. Net interest income is defined as the
difference between the interest income received from its investments (such as loans, investment
securities, federal funds sold, etc.) and the interest expense on deposits and other borrowings.
The following discussion and analysis of net interest margin assumes and is stated on a tax
equivalent basis. That is, non-taxable interest is restated at its taxable equivalent rate. The banking industry uses two key ratios to measure the relative profitability of net interest
income. The net interest rate spread measures the difference between the average yield on interest
earning assets and the average rate paid on interest bearing liabilities. The interest rate spread
eliminates the impact of non-interest bearing deposits and gives a direct perspective on the effect
of market interest rate movements. The other commonly used measure is net interest margin. The net
interest margin is defined as net interest income as a percent of average total interest earning
assets and takes into account the positive impact of investing non-interest-bearing deposits. Net interest income for the Company increased by $1.7 million, or 10.5%, in 2004 from 2003,
and by $443 thousand, or 2.8%, in 2003 from 2002. Net interest income at December 31, 2004 was
$17.7 million compared to $16.0 million at December 31, 2003 and $15.6 million at December 31,
2002. The net interest margin on interest earning assets was 4.55% in 2004, 4.65% in 2003 and
4.76% in 2002 on a tax equivalent basis. Beginning in early 2001 through the end of 2003, short
term interest rates dropped 550 basis points but recovered 175 basis points in 21




---



##### Table of Contents



2004. Comparing the interest margin in 2004 to that in 2003, the Banks interest margin has
declined by 10 basis points. Measuring the last three years, the Banks interest margin has
decreased 21 basis points. Managements interest rate risk strategies helped to mitigate the
effects of rapidly declining and then increasing interest rates. The average yield on assets in
2004 on a tax equivalent basis was 6.42%, down 33 basis points from 2003 while the cost of funds
was 2.27%, down 25 basis points from 2003, as annualized deposit costs reached their economic low
in 2004. Likewise, during 2003, the Banks yield on earning assets declined 60 basis points while
its cost of funds was reduced by 60 basis points. The Banks balance sheet has traditionally been slightly liability sensitive, but as 2003 and
2004 progressed, management sought to become more evenly matched and perhaps slightly asset
sensitive. That is, management has 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
widen. When rates fall rapidly (as in the past three years), the Banks cost of funds hit an
economic floor while its asset yields flatten out and become slightly more variable. The net
result is that management has been attempting to poise the Banks interest margin to increase as
interest rates rise. The ability of management to accomplish its objective is dependent largely on
its ability to manage the cost of its transaction and savings accounts which accounted for 43.6% of
its average interest-bearing liabilities in 2004. The cost of interest-bearing liabilities was 2.27% for 2004, 2.52% for 2003 and 3.12% for
2002. The borrowings from the Federal Home Loan Bank (FHLB), which are fixed rate, have prevented
the Banks cost of funds from decreasing more rapidly in all three years. The impact of the fixed
rates on borrowings would have been more significant in 2004 had management not chosen to
effectively hedge those rates with the $30 million notional amount swap contract described in Note
1 to the financial statements contained elsewhere in this Report. The swap contract reduced
interest expense in 2004 by $323 thousand. Management anticipates that the Banks cost of funds
will be positively impacted over the next seven months as $15 million of those FHLB borrowings
mature and the borrowings can be replaced with lower cost funds. Considering the Banks yield on interest-bearing assets of 6.42% for 2004, 6.75% for 2003 and
7.35% for 2002, the impact of decreasing rates on asset yields was more pronounced in 2002 than in
2003 and even less significant in 2004. This suggests that the Bank may have reached a plateau in
its net interest margin. As rates rose in the second half of 2004 the Banks net interest margin
also began to expand. This trend supports managements strategy of increasing asset sensitivity in
order to create upside for net interest margin with increasing market rates. Additionally, when
market rates were declining, management sought to implement interest rate floors on adjustable rate
loans, thereby minimizing the negative impact of falling interest rates. 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 of Contents



Table 1
Average Consolidated Balance Sheets and Net Interest Analysis
(in thousands) For the Years Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateAssets:Interest earnings assets:Investments:Federal funds sold
    
    $
    12,155
    
    
    
    151
    
    
    
    1.24
    %
    
    $
    17,363
    
    
    
    187
    
    
    
    1.08
    %
    
    $
    15,761
    
    
    
    249
    
    
    
    1.58
    %Taxable
    
    
    35,342
    
    
    
    1,903
    
    
    
    5.38
    %
    
    
    30,249
    
    
    
    1,878
    
    
    
    6.21
    %
    
    
    40,416
    
    
    
    2,333
    
    
    
    5.77
    %Tax exempt
    
    
    26,465
    
    
    
    1,821
    
    
    
    6.88
    %
    
    
    21,995
    
    
    
    1,559
    
    
    
    7.09
    %
    
    
    18,625
    
    
    
    1,290
    
    
    
    6.93
    %Total Investments
    
    
    73,962
    
    
    
    3,875
    
    
    
    5.24
    %
    
    
    69,607
    
    
    
    3,624
    
    
    
    5.21
    %
    
    
    74,802
    
    
    
    3,872
    
    
    
    5.18
    %Loans (including loan fees):Taxable
    
    
    328,279
    
    
    
    21,894
    
    
    
    6.67
    %
    
    
    286,055
    
    
    
    20,329
    
    
    
    7.11
    %
    
    
    260,982
    
    
    
    20,739
    
    
    
    7.95
    %Tax Exempt
    
    
    1,880
    
    
    
    178
    
    
    
    9.46
    %
    
    
    1,806
    
    
    
    181
    
    
    
    10.03
    %
    
    
    1,799
    
    
    
    188
    
    
    
    10.45
    %Total Loans
    
    
    330,159
    
    
    
    22,072
    
    
    
    6.69
    %
    
    
    287,861
    
    
    
    20,510
    
    
    
    7.12
    %
    
    
    262,781
    
    
    
    20,927
    
    
    
    7.96
    %Total interest earning assets
    
    
    404,121
    
    
    
    25,947
    
    
    
    6.42
    %
    
    
    357,468
    
    
    
    24,134
    
    
    
    6.75
    %
    
    
    337,583
    
    
    
    24,799
    
    
    
    7.35
    %Other non-interest earnings assets
    
    
    24,516
    
    
    
    
    
    
    
    
    
    
    
    26,927
    
    
    
    
    
    
    
    
    
    
    
    19,835Total assets
    
    $
    428,637
    
    
    
    
    
    
    
    
    
    
    $
    384,395
    
    
    
    
    
    
    
    
    
    
    $
    357,418Liabilities and shareholders equity:Interest-bearing liabilities:Deposits:Demand
    
    $
    127,754
    
    
    
    1,181
    
    
    
    .92
    %
    
    $
    112,438
    
    
    
    954
    
    
    
    .85
    %
    
    $
    106,570
    
    
    
    1,487
    
    
    
    1.40
    %Savings
    
    
    17,368
    
    
    
    43
    
    
    
    .25
    %
    
    
    15,915
    
    
    
    54
    
    
    
    .34
    %
    
    
    13,314
    
    
    
    95
    
    
    
    .71
    %Time
    
    
    133,997
    
    
    
    3,916
    
    
    
    2.92
    %
    
    
    124,863
    
    
    
    3,993
    
    
    
    3.20
    %
    
    
    121,558
    
    
    
    5,094
    
    
    
    4.19
    %FHLB advances
& other borrowings
    
    
    54,081
    
    
    
    2,430
    
    
    
    4.49
    %
    
    
    45,000
    
    
    
    2,527
    
    
    
    5.62
    %
    
    
    38,574
    
    
    
    2,048
    
    
    
    5.31
    %Total interest-bearing liabilities
    
    
    333,200
    
    
    
    7,570
    
    
    
    2.27
    %
    
    
    298,216
    
    
    
    7,528
    
    
    
    2.52
    %
    
    
    280,016
    
    
    
    8,724
    
    
    
    3.12
    %Non-interest bearing deposits
    
    
    46,872
    
    
    
    
    
    
    
    
    
    
    
    43,507
    
    
    
    
    
    
    
    
    
    
    
    38,041Other liabilities
    
    
    4,823
    
    
    
    
    
    
    
    
    
    
    
    1,964
    
    
    
    
    
    
    
    
    
    
    
    3,721Shareholders equity
    
    
    43,742
    
    
    
    
    
    
    
    
    
    
    
    40,708
    
    
    
    
    
    
    
    
    
    
    
    35,640Total liabilities and
Shareholders equity
    
    $
    428,637
    
    
    
    
    
    
    
    
    
    
    $
    388,395
    
    
    
    
    
    
    
    
    
    
    $
    357,418Excess of interest-earning assets
Over interest-bearing liabilities
    
    $
    70,921
    
    
    
    
    
    
    
    
    
    
    $
    59,252
    
    
    
    
    
    
    
    
    
    
    $
    57,567Ratio of interest-earning assets to
Interest-bearing liabilities
    
    
    121.28
    %
    
    
    
    
    
    
    
    
    
    
    119.87
    %
    
    
    
    
    
    
    
    
    
    
    120.55
    %Net interest income tax equivalent
    
    
    
    
    
    
    18,377
    
    
    
    
    
    
    
    
    
    
    
    16,606
    
    
    
    
    
    
    
    
    
    
    
    16,075Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.15
    %
    
    
    
    
    
    
    
    
    
    
    4.23
    %
    
    
    
    
    
    
    
    
    
    
    4.23
    %Net interest margin on interest earning assets
    
    
    
    
    
    
    
    
    
    
    4.55
    %
    
    
    
    
    
    
    
    
    
    
    4.65
    %
    
    
    
    
    
    
    
    
    
    
    4.76
    %Taxable Adjustments:Investments
    
    
    
    
    
    
    (619
    )
    
    
    
    
    
    
    
    
    
    
    (530
    )
    
    
    
    
    
    
    
    
    
    
    (439
    )Loans
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (63
    )Net interest income
    
    
    
    
    
    $
    17,698
    
    
    
    
    
    
    
    
    
    
    $
    16,015
    
    
    
    
    
    
    
    
    
    
    $
    15,573
 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 of Contents



Table 2
Changes in Interest Income and Expense on a Tax Equivalent Basis
(in thousands) Increase (decrease) due to changes in:2004 over 2003
    
    
    2003 over 2002Volume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    TotalInterest income on:Federal funds sold
    
    $
    (65
    )
    
    
    29
    
    
    
    (36
    )
    
    $
    17
    
    
    
    (79
    )
    
    
    (62
    )Taxable investments
    
    
    274
    
    
    
    (249
    )
    
    
    25
    
    
    
    (631
    )
    
    
    176
    
    
    
    (455
    )Non-taxable investments
    
    
    308
    
    
    
    (46
    )
    
    
    262
    
    
    
    239
    
    
    
    30
    
    
    
    269Taxable loans
    
    
    2,816
    
    
    
    (1,251
    )
    
    
    1,565
    
    
    
    1,781
    
    
    
    (2,191
    )
    
    
    (410
    )Non-taxable loans
    
    
    7
    
    
    
    (10
    )
    
    
    (3
    )
    
    
    1
    
    
    
    (8
    )
    
    
    (7
    )Total Interest Income
    
    
    3,340
    
    
    
    (1,527
    )
    
    
    1,813
    
    
    
    1,407
    
    
    
    (2,072
    )
    
    
    (665
    )Interest expense on:Deposits:Demand
    
    
    141
    
    
    
    85
    
    
    
    226
    
    
    
    50
    
    
    
    (583
    )
    
    
    (533
    )Savings
    
    
    4
    
    
    
    (14
    )
    
    
    (10
    )
    
    
    9
    
    
    
    (50
    )
    
    
    (41
    )Time
    
    
    267
    
    
    
    (344
    )
    
    
    (77
    )
    
    
    106
    
    
    
    (1,207
    )
    
    
    (1,101
    )FHLB advances & other borrowings
    
    
    408
    
    
    
    (505
    )
    
    
    (97
    )
    
    
    361
    
    
    
    118
    
    
    
    479Total Interest Expense
    
    
    820
    
    
    
    (778
    )
    
    
    42
    
    
    
    526
    
    
    
    (1,722
    )
    
    
    (1,196
    )Increase (decrease) in net interest income
    
    $
    2,520
    
    
    
    (749
    )
    
    
    1,771
    
    
    $
    881
    
    
    
    (350
    )
    
    
    531
 Other Income and Expense Other income in 2004 was $5.6 million, unchanged from 2003. The change in other income from
2002 to 2003 was an increase of $303 thousand, or 5.8%. The increase in other income is primarily
due to an increase in the volume of service charges on deposit accounts. Service charges on
deposit accounts have increased an average of 11.9% over the last two years and most of that
increase is due to insufficient funds charges and service charges on increased new account
activity. Mortgage origination fees have decreased 44.9% from 2003 to 2004 after a decrease of less than
1% from 2002 to 2003. Beginning in the last half of 2003, the Bank experienced a slowdown in
mortgage refinance activity that management expected would not recover. The refinance boom, which
took place in part of 2003 and 2002, has ended. However, continued low rates and increased housing
growth have maintained a normalized volume of new home financing in the Banks market area,
particularly in the northern part of Carroll, the northern part of Douglas and the southern part of
Paulding counties. Miscellaneous income between 2003 and 2004 increased $62 thousand, or 10.0%, and decreased by
$201 thousand, or 24.3%, between 2002 and 2003. The increase in miscellaneous income from 2003 to
2004 is attributable to a number of items, none of which are particularly notable. The increases
were generally attributable to volume increases in miscellaneous fees from 2003 to 2004. The
decrease in miscellaneous income between 2002 and 2003 was attributable to the Bank settling its
interest rate swap position accounted for as a fair value hedge in August 2002 and recognizing a
non-recurring gain in that year of $253 thousand. Other expenses increased by $912 thousand, or 7.2%, in 2004 over 2003 and by $624 thousand, or
5.1%, in 2003 over 2002. Salaries and employee benefits increased $499 thousand, or 6.5%, from
2003 to 2004 and $439 thousand, or 6.1%, from 2002 to 2003. Occupancy expense increased by $135
thousand, or 7.5%, from 2003 to 2004. Comparing 2002 to 2003, occupancy expense increased $163
thousand, or 9.9%, from 2002 to 2003. Other operating expenses, which include professional fees,
increased by $278 thousand, or 8.4%, from 2003 to 2004 and increased only $22 thousand, or 0.7%,
from 2002 to 2003. The increase in salaries and employee benefits for the years ended 2003 and 2004 is
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 24




---



##### Table of Contents



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 Company had two more full time equivalent employees at the end of 2003 than it did at the
end of 2002. The increase in salaries and benefits between 2002 and 2003 was $439 thousand, or
6.1%. The increase in salaries and employee benefits for the years ended 2002 and 2003 is
attributable to a number of factors. Salary costs increased by $299 thousand, or 6.2%,
attributable to annual raises which amounted to approximately 4% and a slight increase in full time
equivalent employees. Profit sharing and bonus costs increased $78 thousand, or 5.6%, attributable
to increased profitability and an expansion of the bonus pool. Health insurance costs increased
$87 thousand, or 14.7%, attributable primarily to an in increase in premiums although the number of
covered employees also increased slightly in 2003. 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. The increase in occupancy expense in 2003 as
compared to 2002 was primarily attributable to an increase in depreciation expense of $118
thousand, or 15.8%. This depreciation expense is also due to capital investment in the Banks
technology and updating the appearance of the Banks main office and selected branches which was
actually completed in 2003. 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 marginal tax
rate), declined to 30.7% in 2004, from 31.7% in 2003 and 32.5% in 2002. The decline in marginal
tax rate over the past three years is primarily attributable to tax credits and other tax
advantaged instruments such as municipal securities purchased 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
2002, 2003 and 2004. BALANCE SHEET OVERVIEW For the Years Ended December 31, 2004 and 2003 General 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, 14.7%, from average
balances recorded in 2003. During 2003, average total assets increased $27.0 million, or 7.5%,
average deposits increased $17.2 million, or 6.2%, and average loans increased $25.1 million, or
9.5%, from amounts recorded in 2002. Based on average balances, growth rates were greater in 2004
than in 2003. The 2004 percentage growth is more representative of the Banks historical growth
rate than the 2003 percentage growth rate. Management believes that growth in 2003 was stalled by
the recessionary period which began in the beginning in 2002 and continued through at least the
first half of 2003. During that time, commercial enterprises declined to expand their businesses
and individuals held off spending until the economic picture locally and nationally improved. Total assets at December 31, 2004, were $442 million, representing a $48.7 million, or 12.4%
increase from December 31, 2003. Total deposits increased $35.1 million, or 11.6%, from 2003 to
2004 while total loans increased $60.4 million, or 20.4%, during 2004 as management attempted to
channel excess liquidity into new loans. Loan demand rebounded in the last half of 2003 after a
decline in the early part of the year. Loan demand remained robust in 2004 with much of the growth
concentrated in the second half of 2004. The $60 million of total loan 25




---



##### Table of Contents



growth in 2004 was funded with the investment of federal funds sold totaling $15 million, an
increase in deposits of $35 million and borrowings from the FHLB of $10 million. The increase in deposits in 2004 is attributable to an increase in non-interest bearing demand
accounts of $4.5 million, or 11.3%, and an increase in time deposit accounts of $34.6 million, or
30.5%. Interest bearing demand accounts actually decreased $4.7 million, or 3.4%, in 2004 with most
of that decrease occurring in December of 2004. The decline in interest bearing demand accounts in
December 2004, resulted from a reduction in public funds. At the end of 2004, certain public
entities collect tax revenue and, typically, that liquidity remains deposited past year end. In
2004, those funds were disbursed before year end. As indicated above, the Bank funded its loan
growth with liquidity that existed on its balance sheet and subsequently borrowed funds from the
FHLB and attracted deposits as needed to its loan growth. The Bank began a campaign to increase
time deposits through both local and national sources in mid-2004 and was successful in attracting
funding with only minimal increase to its cost of funds. Total assets at December 31, 2003 were $393 million, representing an $8.1 million, or 2.1%,
increase from December 31, 2002. Total deposits increased $4.6 million, or 1.5%, from 2002 to 2003
while total loans increased $23.0 million, or 8.4%, during 2003 as management attempted to invest
its excess liquidity into loans. During 2003, federal funds sold decreased $19.0 million while
total loans increased $23.0 million and investments available-for- sale and held-to-maturity
increased $3.9 million. The decrease in federal funds sold and the increase in deposits primarily
funded the loan and investment portfolio growth in 2003. During 2003 and 2004, five denovo banks
began their operations in or contiguous to our
primary service area. The competition for funding has increased significantly in 2004 as loan
growth has outpaced deposit growth in Carroll County. The funding landscape has changed and, along
with it, the Banks deposit strategy changed in 2004. In its almost 60 year history, the Bank
relied on in market deposits to fund its balance sheet growth. Because of the continued
development of the metropolitan Atlanta and its movement westward, loan demand has preceded the
actual movement of deposits. Management expects that this dynamic will continue and intends to
expand its deposit gathering strategy towards greater use of wholesale or out of market funding
sources. Investments The Companys available-for-sale investment portfolio of $60.9 million as of December 31, 2004
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 portfolio increased $5.6 million, or 10.1%, over available-for-sale securities
at December 31, 2003. 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 $4.8 million
at December 31, 2004, an increase of $585 thousand, or 13.8%, when compared to the prior year. The
increase is attributable to the purchase of banking industry issued trust preferred securities from
various issuers across the United States and particularly the Southeast. The Company has the
intent and ability to hold these securities until maturity. 26




---



##### Table of Contents



The following table shows the carrying value of the Companys securities, by security type, as
of December 31, 2004, 2003 and 2002: Table 3
Securities
(in thousands) 2004
    
    
    2003
    
    
    2002Available for SaleUnited States agencies
    
    $
    5,505
    
    
    $
    7,080
    
    
    $
    3,608State, county and municipal
    
    
    36,989
    
    
    
    29,575
    
    
    
    25,214Mortgage-backed securities
    
    
    16,667
    
    
    
    16,843
    
    
    
    21,583Corporate bonds
    
    
    1,707
    
    
    
    1,779
    
    
    
    1,727Total available for sale
    
    $
    60,868
    
    
    $
    55,277
    
    
    $
    52,132Held to MaturityTrust Preferred Securities
    
    $
    4,835
    
    
    $
    4,250
    
    
    $
    3,500
 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, 2004. 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) UnitedStatesMaturities at
    
    Treasury
    
    
    Wtd.
    
    
    State, County
    
    
    Wtd.
    
    
    Mortgage
    
    
    Wtd.
    
    
    
    
    
    
    Wtd.
    
    
    
    
    
    
    Wtd.December 31,
    
    &
    
    
    Avg.
    
    
    &
    
    
    Avg.
    
    
    Back
    
    
    Avg.
    
    
    Corporate
    
    
    Avg.
    
    
    Trust
    
    
    Avg.2004
    
    Agencies
    
    
    Yld.
    
    
    Municipals
    
    
    Yld.
    
    
    Securities
    
    
    Yld.
    
    
    Bonds
    
    
    Yld.
    
    
    Preferred
    
    
    Yld.Within 1 year
    
    
    1,999
    
    
    
    1.99
    %
    
    
    828
    
    
    
    6.69
    %
    
    
    48
    
    
    
    7.08
    %
    
    
    502
    
    
    
    4.81
    %
    
    
    After 1 through 5
years
    
    
    3,498
    
    
    
    4.18
    %
    
    
    5,385
    
    
    
    5.33
    %
    
    
    12,929
    
    
    
    5.10
    %
    
    
    1,139
    
    
    
    6.42
    %
    
    
    After 5 through 10
years
    
    
    
    
    
    
    0.00
    %
    
    
    7,598
    
    
    
    6.64
    %
    
    
    412
    
    
    
    5.38
    %
    
    
    
    
    
    
    0.00
    %
    
    
    After 10 years
    
    
    
    
    
    
    0.00
    %
    
    
    21,828
    
    
    
    7.22
    %
    
    
    2,999
    
    
    
    6.36
    %
    
    
    
    
    
    
    0.00
    %
    
    
    4,835
    
    
    
    10.56
    %Total
    
    
    5,497
    
    
    
    3.38
    %
    
    
    35,639
    
    
    
    6.80
    %
    
    
    16,388
    
    
    
    5.34
    %
    
    
    1,641
    
    
    
    5.93
    %
    
    
    4,835
    
    
    
    10.56
    %Fair Value
    
    
    5,505
    
    
    
    
    
    
    
    36,989
    
    
    
    
    
    
    
    16,667
    
    
    
    
    
    
    
    1,708
    
    
    
    
    
    
    
    4,835
 Mortgage-backed securities are included in the maturities categories in which they are
anticipated to be repaid based on scheduled maturities. The actual cash flow of mortgage backed
securities differs with this assumption. Additionally, some agency securities in the portfolio
have call features. The above analysis assumes that callable agencies will mature on their final
maturity date. The actual cash flow of agency securities may differ from this assumption. Yields
on tax-exempt securities are calculated on a tax equivalent basis. Loans Loan concentrations are defined as aggregate credits extended to a number of borrowers engaged
in similar activities or resident in the same geographic region, which would cause them to be
similarly affected by economic or other conditions. The Bank, on a routine basis, evaluates these
concentrations for purposes of policing its concentrations and making necessary adjustments in its
lending practices to reflect current economic conditions, loan-to-deposit ratios, and industry
trends. The primary types of loans in the Banks portfolio are residential mortgages and home equity
loans, commercial real estate loans, commercial loans, and consumer installment loans. Generally,
the Bank underwrites loans based upon the borrowers debt service capacity or cash flow, a
consideration of past performance on loans from other creditors as well as an evaluation of the
collateral securing the loan. With some exceptions, the Banks 27




---



##### Table of Contents



general policy is to employ relatively conservative underwriting policies, primarily in the
analysis of borrowers debt service coverage capabilities for commercial and commercial real estate
loans, while emphasizing lower gross debt ratios for consumer loans and lower loan-to-value ratios
for all types of real estate loans. Given the localized nature of the Banks lending activities,
the primary risk factor affecting the portfolio as a whole is the health of the local economy in
the west Georgia area and its effects on the value of local real estate and the incomes of local
professionals and business firms. Loans to directors, executive officers and principal shareholders of the Company and to
directors and officers of the Bank are subject to limitations of the Federal Reserve, the principal
effect of which is to require that extensions of credit by the Bank to executive officers,
directors, and ten percent shareholders satisfy certain standards. The Bank routinely makes loans
in the ordinary course of business to certain directors and executive officers of the Company and
the Bank, their associates, and members of their immediate families. In accordance with Federal
Reserve guidelines, these loans are made on substantially the same terms, including interest rates
and collateral, as those prevailing for comparable transactions with others and do not involve more
than normal risk of collectibility or present other unfavorable features. As of December 31, 2004,
loans outstanding to directors and executive officers of the Company and the Bank, their associates
and members of their immediate families totaled $3.8 million (net of participations sold to other
banks on a non-recourse basis), which represented approximately 1.1% of total loans as of that
date. As of December 31, 2004, none of these loans outstanding from the Bank to related parties
were on non-accrual, past due, restructured or considered by management to be a potential problem
loan. The following table presents loans by type on the dates indicated: Table 5
Loan Portfolio
(in thousands) December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial, financial & agricultural
    
    $
    50,528
    
    
    $
    31,219
    
    
    $
    34,821
    
    
    $
    26,162
    
    
    $
    26,547Real estate  construction
    
    
    114,657
    
    
    
    68,207
    
    
    
    68,818
    
    
    
    60,785
    
    
    
    46,052Real estate  mortgage
    
    
    173,110
    
    
    
    180,992
    
    
    
    153,572
    
    
    
    147,705
    
    
    
    135,750Consumer loans
    
    
    18,614
    
    
    
    16,080
    
    
    
    16,260
    
    
    
    19,153
    
    
    
    20,118356,909
    
    
    
    296,498
    
    
    
    273,471
    
    
    
    253,805
    
    
    
    228,467Less: Unearned interest and fees
    
    
    (581
    )
    
    
    (454
    )
    
    
    (487
    )
    
    
    (525
    )
    
    
    (561
    )Allowance for loan losses
    
    
    (4,080
    )
    
    
    (3,479
    )
    
    
    (3,771
    )
    
    
    (3,720
    )
    
    
    (2,920
    )Loans, net
    
    $
    352,248
    
    
    $
    292,565
    
    
    $
    269,213
    
    
    $
    249,560
    
    
    $
    224,986
 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, 2004: Table 6
Loan Portfolio Maturity
(in thousands) OverOne
    
    
    Wtd.
    
    
    One to
    
    

    Wtd.
    
    
    Over
    
    
    Wtd.
    
    
    
    
    
    
    Wtd.Year
    
    
    Avg.
    
    
    Five
    
    
    Avg.
    
    
    Five
    
    
    Avg.
    
    
    
    
    
    
    Avg.Or Less
    
    
    Yld.
    
    
    Years
    
    
    Yld.
    
    
    Years
    
    
    Yld.
    
    
    Total
    
    
    Yld.Commercial, financial & agricultural
    
    $
    34,480
    
    
    
    5.82
    %
    
    $
    10,072
    
    
    
    6.76
    %
    
    $
    5,976
    
    
    
    5.97
    %
    
    $
    50,528
    
    
    
    6.02
    %Real estate  construction
    
    
    102,063
    
    
    
    5.98
    %
    
    
    11,072
    
    
    
    5.94
    %
    
    
    1,522
    
    
    
    6.34
    %
    
    
    114,657
    
    
    
    5.98
    %Real estate  mortgage
    
    
    39,610
    
    
    
    6.44
    %
    
    
    107,243
    
    
    
    6.16
    %
    
    
    26,257
    
    
    
    6.34
    %
    
    
    173,110
    
    
    
    6.25
    %Consumer
    
    
    9,245
    
    
    
    8.33
    %
    
    
    9,206
    
    
    
    7.83
    %
    
    

    163
    
    
    
    6.49
    %
    
    
    18,614
    
    
    
    8.07
    %Total
    
    $
    185,398
    
    
    
    6.17
    %
    
    $
    137,593
    
    
    
    6.30
    %
    
    $
    33,918
    
    
    
    6.28
    %
    
    $
    356,909
    
    
    
    6.23
    %
 28




---



##### Table of Contents



Variable/Fixed Rate Mix Variable
    
    
    Wtd
    
    
    Fixed
    
    
    WtdInterest
    
    
    Avg
    
    
    Interest
    
    
    AvgRates
    
    
    Yld
    
    
    Rates
    
    
    YldCommercial, financial and agricultural
    
    $
    19,895
    
    
    
    5.72
    %
    
    $
    30,633
    
    
    
    6.22
    %Real estate  construction
    
    
    52,551
    
    
    
    5.96
    %
    
    
    62,106
    
    
    
    6.00
    %Real estate  mortgage
    
    
    73,726
    
    
    
    5.74
    %
    
    
    99,384
    
    
    
    6.63
    %Consumer
    
    
    962
    
    
    
    7.50
    %
    
    
    17,652
    
    
    
    8.10
    %Total
    
    $
    147,134
    
    
    
    5.83
    %
    
    $
    209,775
    
    
    
    6.51
    %
 Provision and Allowance for Possible Loan and Lease Losses The provision for loan losses for the Company in 2004 was $925 thousand compared to $350
thousand in 2003 and $483 thousand in 2002. The increase in the provision for loan losses reflects
a higher level of loan growth in 2004. The allowance for loan losses represented 1.15%, 1.17% and
1.38% of total loans outstanding at December 31, 2004, 2003 and 2002, respectively. The percentage
of the allowance for loan losses expressed as a percentage of total loans declined from 2003 and
2002, taking into account a lower level of nonperforming and adversely rated loans in 2004. Net
charge-offs were $324 thousand, $643 thousand and $431 thousand, during 2004, 2003 and 2002,
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 who is independent
of the lending function to challenge and corroborate the loan grading system and provide additional
analysis in determining the adequacy of the allowance for loan losses and the future provisions for
estimated loan losses. Management believes that the allowance for loan losses is adequate. However, management uses
available information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions and a change in the borrowers ability to repay.
In addition, regulators, as an integral part of their examination process, periodically review the
Companys allowance for loan losses. Such regulators may require the Company to recognize
additions to the allowance based on their judgments of information available to them at the time of
their examination. Management of the Company realizes the importance of maintaining an adequate
allowance for loan losses. Through a professional loan review function and effective loan officer
identification program, management believes it is able to recognize weaknesses in the loan
portfolio in a timely manner. Early 29




---



##### Table of Contents



identification of deteriorating credit attributes allows management to take a proactive role in
documenting an established plan to enhance the Companys position and minimize the potential for
loss. Through the problem loan identification program outlined above, management is able to identify
those loans that exhibit weakness and classify them on a classified and criticized loan list. The
Companys migration analysis assigns historical loss amounts to pools of loans according to
classifications of risk ratings to calculate a general allowance to the overall portfolio. In
cases where significant weaknesses exist in a specific loan, a specific reserve is assigned to such
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. During the first quarter of 2003, the Bank accepted cash in the work-out of nine classified
loans that amounted to $3.3 million and recorded a charge-off in the amount of $337 thousand. The
Bank had no work-outs of loans in 2004. 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 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance at beginning of year
    
    $
    3,479
    
    
    $
    3,772
    
    
    $
    3,720
    
    
    $
    2,920
    
    
    $
    2,281Charge-offs:Commercial, financial and agricultural
    
    
    59
    
    
    
    55
    
    
    
    288
    
    
    
    118
    
    
    
    12Real estate  construction
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Real estate  mortgage
    
    
    215
    
    
    
    581
    
    
    
    165
    
    
    
    3
    
    
    
    3Consumer loans
    
    
    123
    
    
    
    152
    
    
    
    242
    
    
    
    79
    
    
    
    62Total charge-offs
    
    
    397
    
    
    
    790
    
    
    
    695
    
    
    
    200
    
    
    
    77Recoveries:Commercial, financial and agricultural
    
    
    16
    
    
    
    31
    
    
    
    59
    
    
    
    30
    
    
    
    56Real estate  construction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate  mortgage
    
    
    13
    
    
    
    67
    
    
    
    158
    
    
    
    13
    
    
    
    56Consumer loans
    
    
    44
    
    

    
    49
    
    
    
    47
    
    
    
    46
    
    
    
    96Total recoveries
    
    
    73
    
    
    
    147
    
    
    
    264
    
    
    
    89
    
    
    
    208Net (charge-offs) recoveries
    
    
    (324
    )
    
    
    (643
    )
    
    
    (431
    )
    
    
    (111
    )
    
    
    131Provision for loan losses
    
    
    925
    
    
    
    350
    
    
    
    483
    
    
    
    911
    
    
    
    508Balance at end of year
    
    $
    4,080
    
    
    $
    3,479
    
    
    $
    3,772
    
    
    $
    3,720
    
    
    $
    2,920Ratio of net charge-offs (recoveries)
during the
period to average loans outstanding
    
    
    .10
    %
    
    
    .22
    %
    
    
    .16
    %
    
    
    .04
    %
    
    
    (.06
    )%Ratio of allowance to average total loans
    
    
    1.24
    %
    
    
    1.21
    %
    
    
    1.44
    %
    
    
    1.49
    %
    
    
    1.39
    %
 Non-Performing Assets and Past Due Loans Non-performing assets at December 31, 2004, were $1.8 million, or .50%, of total loans and
other real estate owned compared to $2.2 million, or .75%, of total loans and other real estate
owned at December 31, 2003 and $2.8 million, or 1.03%, of total loans and other real estate owned
at December 31, 2002. The levels of non-performing loans remain relatively low compared to the
Banks peer group and its historical level. The percentage of non-performing assets to total loans
has decreased from its peak in 2001. The decrease of non-performing loans from 2003 to 2004 was
attributable to repayment of loans on non-accrual and a reduction of loans ninety days past due and
still accruing. The Bank sold $1.0 million of other real estate owned at a loss of $52 thousand
during 2004. However, the Bank also settled loans in foreclosure in 2004 in the amount of $794
thousand. 30




---



##### Table of Contents



The following table summarizes loans 90 days or greater past due, non-accrual loans and real
estate taken in settlement of foreclosure for the years indicated. Table 8
Non-Performing Assets
(in thousands) December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Other real estate and repossessions
    
    $
    686
    
    
    $
    977
    
    
    $
    488
    
    
    $
    4,357
    
    
    $
    702Non-accrual loans
    
    
    536
    
    
    
    499
    
    
    
    943
    
    
    
    1,620
    
    
    
    504Loans 90 days past due still accruing
    
    
    567
    
    
    
    745
    
    
    
    1,335
    
    
    
    1,885
    
    
    
    205Total
    
    $
    1,789
    
    
    $
    2,221
    
    
    $
    2,766
    
    
    $
    3,862
    
    
    $
    1,411Non-performing assets as % of total loans
    
    
    .50
    %
    
    
    .75
    %
    
    
    1.03
    %
    
    
    1.55
    %
    
    
    .63
    %
 While there may be additional loans in the portfolio that may become classified as
conditions indicate, management is not aware of any potential problem loans that are not disclosed
in the table above. As a result of managements ongoing review of the loan portfolio, loans are
classified as non-accrual generally when they are past due in principal or interest payments for
more than 90 days or it is otherwise not reasonable to expect collection of principal 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 $55.5 million at December 31, 2004,
compared with $31.0 million at year-end 2003 and $41.1 million at year-end 2002. The following
table sets forth the scheduled maturities of time deposits of $100 thousand and greater at December
31, 2004. Table 9
Deposits
(in thousands) Within 3 months
    
    $
    8,588After 3 through 6 months
    
    
    7,448After 6 through 12 months
    
    
    16,117After 12 months
    
    
    23,350Total
    
    $
    55,503
 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
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 $20.0 million. As of
December 31, 2004, 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 which the Bank had drawn $55
million as of December 31, 2004. For additional details on the line of credit with the FHLB, see
note 6 of the consolidated financial statements. 31




---



##### Table of Contents



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 $8.1 million at December 31, 2004 which represented a decrease of
$19.2 million from December 31, 2003. The decrease was primarily attributable to net cash used by
investing activities of $69.0 million made up of $61.4 million of increased loans and a $6.8
million net increase in investment securities. These cash flow uses were offset by net cash
provided by financing activities which was primarily attributable to a net increase in deposits of
$35.1 million and $10.0 million in FHLB borrowings. Cash inflows from operations totaled $7.5
million in 2004. The cash flows for 2003 were very similar to 2004 in nature except for less volume of both
loan funding and deposit generating. Cash inflows from operations totaled $7.3 million in 2003,
while inflows from financing activities totaled $2.3 million, most of which were net deposit
increases during 2003 of $4.6 million. Investing activities of the Bank and the Company used $30.0
million of cash and cash equivalents, primarily comprised of net changes in loans of $24.5 million
and a net increase in investment securities of $4.0 million during 2003 . Capital Resources Total shareholders equity as of December 31, 2004 was $45.0 million, an increase of $2.9
million over 2003. The change in equity was due to $6.1 million in net income, less $2.6 million
in dividends and a decrease in unrealized holding gain on securities available for sale of $265
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, 2004, 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, 2004: Table 10 Actual as of December 31, 2004Capital RatioTier 1 Capital (to risk weighted assets)
    
    
    12
    %Tier 1 Capital minimum requirement
    
    
    4
    %Excess
    
    
    8
    %Total Capital (to risk weighted assets)
    
    
    13
    %Total Capital minimum requirement
    
    
    8
    %Excess
    
    
    5
    %
 Actual as of December 31, 2004Leverage RatioTier 1 Capital to average assets
(Leverage Ratio)
    
    
    10
    %Minimum leverage requirement
    
    
    4
    %Excess
    
    
    6
    %
 For a more complete discussion of the actual and required ratios of the Company and its
subsidiaries, see Note 9 to the consolidated financial statements. Average equity to average
assets was 10.20% in 2004 and 10.59% in 2003. The ratio of dividends declared to net earnings was
42.3 % during 2004, compared with 38.3% in 2003. 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, 2004 (dollars in thousands). 32




---



##### Table of Contents



Less than
    
    
    
    
    
    
    
    
    
    
    More thanObligation
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsDeposits without
stated maturity
    
    
    190,190
    
    
    
    190,190
    
    
    
    
    
    
    
    
    
    
    
    Certificates of deposit
    
    
    148,208
    
    
    
    90,735
    
    
    
    48,731
    
    
    
    8,742
    
    
    
    Federal Home Loan Bank
advances
    
    
    55,000
    
    
    
    20,000
    
    
    
    
    
    
    
    35,000
    
    
    
    Operating leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    393,398
    
    
    
    300,925
    
    
    
    48,731
    
    
    
    43,742
    
    
    
    
 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, 2004, the Bank had issued commitments to extend credit of $68.0
million through various types of commercial lending arrangements and additional commitments through
standby letters of credit of $8.4 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. 33




---



##### Table of Contents



The Company has adopted the objective of achieving and maintaining a one-year cumulative gap,
as a percent of total assets, of between plus 20% and minus 20%. On a consolidated basis, the
Companys one-year cumulative gap was a positive 0.80% of total assets at December 31, 2004. This
position indicated that the Company was exposed to the potential for decreased earnings if interest
rates were to continue to decline in the next twelve months. Due to inherent limitations in traditional gap analysis, the Company also employs more
sophisticated modeling techniques to monitor potential changes in net interest income, net income
and the market value of portfolio equity under various interest rate scenarios. Market risk is the
risk of loss from adverse changes in market prices and rates, arising primarily from interest rate
risk in the Companys loan and investment portfolios, which can significantly impact the Companys
profitability. Net interest income can be adversely impacted where assets and liabilities do not
react the same to changes in interest rates. At year-end 2004, the estimated impact of an
immediate increase in interest rates of 100 basis points would have resulted in an increase in net
interest income over a 12-month period of 0.4%, with a comparable decrease in interest rates
resulting in a decrease in net interest income of 1.4%. Management finds the above methodologies
meaningful for evaluating market risk sensitivity; however, other factors can affect net interest
income, such as levels of non-earning assets and changes in portfolio composition and volume. The following table summarizes the amounts of interest-earning assets and interest-bearing
liabilities outstanding at December 31, 2004 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, 2004Maturing or Repricing inOver 1
    
    
    Over 3One Year
    
    
    Year Thru
    
    
    Years Thru
    
    
    Over 5or Less
    
    
    3 Years
    
    
    5 Years
    
    
    Years
    
    
    TotalInterest-earning assets:Interest-bearing deposits with
Other banks
    
    $
    246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    246Federal funds sold
    
    
    767
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    767Securities (at cost)
    
    
    3,377
    
    
    
    16,804
    
    
    
    6,147
    
    
    
    37,671
    
    
    
    63,999Loans: Fixed rate
    
    
    114,097
    
    
    
    67,778
    
    
    
    17,921
    
    
    
    9,979
    
    
    
    209,775Variable rate
    
    
    127,803
    
    
    
    19,331
    
    
    
    
    
    
    
    
    
    
    
    147,134Total interest-earning assets
    
    
    246,290
    
    
    
    103,913
    
    
    
    24,068
    
    
    
    47,650
    
    
    
    421,921Interest-bearing liabilities:Deposits:Demand
    
    $
    133,603
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,603Savings
    
    
    11,856
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,856Time deposits
    
    
    90,735
    
    
    
    48,731
    
    
    
    8,742
    
    
    
    
    
    
    
    148,208FHLB advances
    
    
    20,000
    
    
    
    
    
    
    
    35,000
    
    
    
    
    
    
    
    55,000Total interest-bearing liabilities
    
    
    256,194
    
    
    
    48,731
    
    
    
    43,742
    
    
    
    
    
    
    
    348,667per period
    
    
    (9,904
    )
    
    
    55,182
    
    
    
    (19,674
    )
    
    
    47,650
    
    
    
    73,254Cumulative interest sensitivity
Difference
    
    $
    (9,904
    )
    
    
    45,278
    
    
    $
    25,604
    
    
    $
    73,254Cumulative difference to total
Assets
    
    
    (2.35
    )%
    
    
    10.73
    %
    
    
    6.07
    %
    
    
    17.36
    %
 34




---



##### Table of Contents



At December 31, 2004, the difference between the Companys assets and liabilities
repricing or maturing within one year was $9.9 million. The above chart indicates an excess of
liabilities repricing or maturing within one year, thus a rise in interest rates would
theoretically cause the Companys net interest income to decrease. However, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For example, although
certain assets and liabilities may have similar maturities or periods to repricing, they may react
in different degrees or at different points in time to changes in market interest rates. Such is
the case in analyzing NOW demand, money market and savings accounts, which are disclosed in the one
year or less category. Those liabilities do not necessarily reprice as quickly or to the same
degree as rates in general. Additionally, certain assets, such as adjustable-rate mortgages, have
features that restrict changes in interest rates, both on a short-term basis and over the life of
the asset. Changes in interest rates, prepayment rates, early withdrawal levels and the ability of
borrowers to service their debt, among other factors, may change significantly from the assumptions
made in the table. Impact of Inflation, Changing Prices and Monetary Policies The primary effect of inflation on 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 and are incorporated
herein by reference. Presented below is a summary of the unaudited consolidated quarterly financial data for the
years ended December 31, 2004 and 2003. Quarterly Financial Information(Unaudited  in thousands, except per share data) 2004
    
    
    Quarters
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    QuartersFirst
    
    
    Second
    
    
    Third
    
    
    Fourth
    
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthInterest income
    
    
    5,900
    
    
    
    6,147
    
    
    
    6,411
    
    
    
    6,810
    
    
    
    5,908
    
    
    
    5,903
    
    
    
    5,953
    
    
    
    5,778Net interest income
    
    
    4,147
    
    
    
    4,328
    
    
    
    4,499
    
    
    
    4,724
    
    
    
    3,902
    
    
    
    3,982
    
    
    
    4,136
    
    
    
    3,995Provision for loan losses
    
    
    150
    
    
    
    200
    
    
    
    275
    
    
    
    300
    
    
    
    75
    
    
    
    75
    
    
    
    75
    
    
    
    125Income before income taxes
    
    
    1,911
    
    
    
    2,010
    
    
    
    2,309
    
    
    
    2,516
    
    
    
    1,959
    
    
    
    2,203
    
    
    
    2,161
    
    
    
    2,144Net income
    
    
    1,311
    
    
    
    1,471
    
    
    
    1,565
    
    
    
    1,717
    
    
    
    1,355
    
    
    
    1,514
    
    
    
    1,439
    
    
    
    1,479Earnings per share  basic
    
    
    0.40
    
    
    
    0.45
    
    
    
    0.47
    
    
    
    0.51
    
    
    
    0.41
    
    
    
    0.46
    
    
    
    0.44
    
    
    
    0.44Earnings per share  diluted
    
    
    0.39
    
    
    
    0.44
    
    
    
    0.47
    
    
    
    0.51
    
    
    
    0.40
    
    
    
    0.45
    
    
    
    0.43
    
    
    
    0.44Weighted average common
shares outstanding  basic
    
    
    3,306,793
    
    
    
    3,306,524
    
    
    
    3,296,793
    
    
    
    3,312,923
    
    
    
    3,307,296
    
    
    
    3,310,496
    
    
    
    3,307,827
    
    
    
    3,306,729Weighted average common
shares outstanding diluted
    
    
    3,357,387
    
    
    
    3,357,118
    
    
    
    3,347,387
    
    
    
    3,363,517
    
    
    
    3,351,533
    
    
    
    3,354,733
    
    
    
    3,352,064
    
    
    
    3,350,966
 35




---



##### Table of Contents



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. There were no changes in the Companys internal control over financial reporting during the
Companys fiscal quarter ended December 31, 2004 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




---



##### Table of Contents



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
2005 Proxy Statement) relating to the 2005 Annual Meeting of Shareholders of the Company,
currently scheduled to be held on April 13, 2005, is incorporated herein by reference. 
 Item 11. Executive Compensation The information appearing under the heading Executive Compensation in the 2005 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 2005 Proxy Statement is incorporated herein by reference. Securities Authorized for Issuance Under Equity Compensation Plans The following table gives information as of December 31, 2004, about WGNB Corp. Common Stock
that may be issued upon the exercise of options, warrants and rights under the Companys 1994 and
2003 Incentive Stock Plans, which are the Companys only outstanding equity compensation plan. The
Company does not have any equity compensation plans that were not approved by its shareholders.
The 1994 Incentive Stock Plan was approved by the Companys Board of Directors and its shareholders
in 1994. The 2003 Incentive Stock Plan was approved by the Companys Board of Directors and its
shareholders in 2003. Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    
    
    
    under equityissued upon
    
    
    
    Weighted-average
    
    
    
    compensation plansexercise of
    
    
    
    exercise price of
    
    
    
    (excludingoutstanding
    
    
    
    outstanding
    
    
    
    securitiesoptions, warrants
    
    
    
    options, warrants
    
    
    
    reflected in columnand rights
    
    
    
    and rights
    
    
    
    (a))Plan Category
    
    
    (a)
    
    
    
    (b)
    
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    
    100,100
    
    
    
    $
    23.68
    
    
    
    
    644,361
    *Equity compensation
plans not approved
by security holders
    
    
    
    N/A
    
    
    
    
    N/A
    
    
    
    
    N/ATotal
    
    
    
    100,100
    
    
    
    $
    23.68
    
    
    
    
    644,361
    *
   *
    
    The only securities remaining available for future issuance are those under the 2003 Incentive
Stock Plan. There are no additional securities available for future issuance under the 1994
Incentive Stock Plan. 
 Item 13. Certain Relationships and Related Transactions The information appearing under the caption Nomination and Election of Directors  Certain
Relationships and Related Transactions in the 2005 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 2005 Proxy
Statement is incorporated herein by reference. 37




---



##### Table of Contents



PART IV 
 Item 15. Exhibits and Financial Statement Schedules (a)(1)
    
    Financial StatementsThe following financial statements are filed with this Report:Independent Auditors Report
of Porter Keadle Moore, LLPConsolidated Balance Sheets as of December 31, 2004 and 2003Consolidated Statements of Earnings for the Years Ended December 31, 2004, 2003 and 2002Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004,
2003 and 2002Consolidated Statements of Changes in Stockholders Equity for the Years Ended
December 31, 2004, 2003 and 2002Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002Notes to Consolidated Financial Statements(2)
    
    Financial Statement Schedules
 Financial statement schedules have been omitted because they are not applicable or the
required information has been incorporated in the consolidated financial statements and related
notes. (3)
    
    The following exhibits are filed with this Report:3.1
    
    
    
    Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to
the Companys Registration Statement on Form 10-SB filed June 14, 2000 (the Form 10-SB)).3.2
    
    
    
    Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 to the Form 10-SB).4.1
    
    
    
    See exhibits 3.1 and 3.2 for provisions of Companys Articles of Incorporation and Bylaws
Defining the Rights of Shareholders.4.2
    
    
    
    Specimen certificate representing shares of Common Stock (Incorporated by reference to
Exhibit 4.2 to the Form 10-SB).4.3
    
    
    
    Rights Agreement dated as of February 12, 1997 between the Company and SunTrust Bank, Atlanta
(Incorporated by reference to Exhibit 4.3 to the Form 10-SB).10.1
    
    *
    
    Employment
Agreement dated as of September 10, 1996 between the Company and L. Leighton Alston (Incorporated by reference
to Exhibit 10.1 to the Form 10-SB).10.2
    
    *
    
    Incentive Stock Option Plan (Incorporated by reference to Exhibit 10.2 to the Form 10-SB).10.3
    
    *
    
    Bonus and Stock Option
Agreement dated as of May 11, 1993 between the Company and L. Leighton Alston (Incorporated by reference to
Exhibit 10.3 to the Form 10-SB).10.4
    
    *
    
    First Amendment
to Bonus and Stock Option Agreement dated as of June 14, 1994 between the Company and L. Leighton Alston
(Incorporated by reference to Exhibit 10.4 to the Form 10-SB).10.5
    
    *
    
    Bonus and Stock
Option Agreement dated as of June 14, 1994 between the Company and Richard A. Duncan (Incorporated by reference
to Exhibit 10.5 to the Form 10-SB).10.6
    
    *
    
    Bonus and Stock
Option Agreement dated as of September 23, 1998 between the Company and H.B. Lipham, III (Incorporated by
reference to Exhibit 10.6 to the Form 10-SB).
 38




---



##### Table of Contents



10.7
    
    *
    
    Bonus and Stock
Option Agreement dated as of September 23, 1998 between the Company and W. Galen Hobbs, Jr. (Incorporated by
reference to Exhibit 10.7 to the Form 10-SB).10.8
    
    *
    
    Bonus and Stock
Option Agreement dated as of September 23, 1998 between the Company and Steven J. Haack (Incorporated by
reference to Exhibit 10.8 to the Form 10-SB).10.9
    
    *
    
    Form of Election for
Payment of Director Meeting Fees (Incorporated by reference to Exhibit 10.10 to the Form 10-SB).10.10
    
    *
    
    Employment Agreement dated August 30, 2000 between the Company and Richard A. Duncan (Incorporated by reference
to Exhibit 10.11 to the Companys Annual Report on Form 10-KSB filed February 21, 2001 (the 2000 Form 10-KSB)10.11
    
    *
    
    Employment Agreement dated August 31, 2000 between the Company and Steven J. Haack
(Incorporated by reference to Exhibit 10.13 to the 2000 Form 10-KSB)10.12
    
    *
    
    Employment Agreement dated August 31, 2000 between the Company and H.B. Lipham, III
(Incorporated by reference to Exhibit 10.14 to the 2000 Form 10-KSB)10.13
    
    *
    
    Employment Agreement dated August 31, 2000 between the Company and W. Galen Hobbs, Jr.
(Incorporated by reference to Exhibit 10.15 to the 2000 Form 10-KSB)10.14
    
    *
    
    Amendment to Employment Agreement dated May 30, 2002 between the Company and L. Leighton Alston (Incorporated
by reference to Exhibit 10.1 to the Companys Annual report on Form 10-Q filed August 13, 2002 (the 6/30/02
Form 10-Q)10.15
    
    *
    
    Amendment to Bonus and Stock Option Agreement dated June 17, 2002 between the Company and L. Leighton Alston
(Incorporated by reference to Exhibit 10.2 to the 6/30/02 Form 10-Q)10.16
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and L. Leighton Alston (Incorporated
by reference to Exhibit 10.3 to the 6/30/02 Form 10-Q)10.17.
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and Richard A. Duncan (Incorporated
by reference to Exhibit 10.4 to the 6/30/02 Form 10-Q)10.18
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and Richard A. Duncan (Incorporated
by reference to Exhibit 10.5 to the 6/30/02 Form 10-Q)10.19
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and H.B. Lipham, III (Incorporated
by reference to Exhibit 10.6 to the 6/30/02 Form 10-Q)10.20
    
    *
    
    Second Amendment to Bonus and Stock Option Agreement dated June 17, 2002 between the Company and H.B. Lipham,
III (Incorporated by reference to Exhibit 10.7 to the 6/30/02 Form 10-Q)10.21
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and H.B. Lipham, III
(Incorporated by reference to Exhibit 10.8 to the 6/30/02 Form 10-Q)10.22
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and W. Galen Hobbs, Jr.
(Incorporated by reference to Exhibit 10.9 to the 6/30/02 Form 10-Q)10.23
    
    *
    
    Amendment to Bonus and Stock Option Agreement dated May 30, 2002 between the Company and W. Galen Hobbs, Jr.
(Incorporated by reference to Exhibit 10.10 to the 6/30/02 Form 10-Q)10.24
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and W. Galen Hobbs, Jr. (Incorporated
by reference to Exhibit 10.11 to the 6/30/02 Form 10-Q)
 39




---



##### Table of Contents



10.25
    
    *
    
    Amendment to Employment Agreement dated April 11, 2002 between the Company and Steven J. Haack (Incorporated by
reference to Exhibit 10.12 to the 6/30/02 Form 10-Q)10.26
    
    *
    
    Amendment to Bonus and Stock Option Agreement dated April 26, 2002 between the Company and Steven J. Haack
(Incorporated by reference to Exhibit 10.13 to the 6/30/02 Form 10-Q)10.27
    
    *
    
    Incentive Stock Option Agreement dated March 12, 2002 between the Company and Steven J. Haack
(Incorporated by reference to Exhibit 10.14 to the 6/30/02 Form 10-Q)10.28
    
    *
    
    2003 Stock Incentive Plan (Incorporated by reference to Appendix A to 2004 Proxy Statement)10.29
    
    *
    
    Amendment to Employment Agreement dated May 10, 2004 between the Company and Steven J. Haack10.30
    
    *
    
    Employment Agreement dated December 31, 2002 between the Company and William R. Whitaker10.31
    
    *
    
    Bonus and Stock Option Agreement dated December 27, 2004 between the Company and William R. Whitaker21
    
    
    
    Subsidiary of WGNB Corp.23
    
    
    
    Consent of Porter Keadle Moore LLP31.1
    
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of
200232.1
    
    
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
200232.2
    
    
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of
2002
   *
    
    Indicates management contract or compensatory plan or arrangement. 40




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. WGNB CORP.By:
    /s/ L. Leighton AlstonL. Leighton Alston, Chief Executive OfficerDate: March 22, 2005 Pursuant to the requirements of the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ L. Leighton Alston
    
    
    
    Date: March 22, 2005L. Leighton Alston, President, ChiefExecutive Officer and Director[Principal Executive Officer]/s/ Steven J. Haack
    
    
    
    Date: March 22, 2005Steven J. Haack, Secretary and Treasurer[Principal Financial and Accounting Officer]W. T. Green, Chairman of the Board
    
    
    
    Date: March ___, 2005Wanda W. Calhoun, Director
    
    
    
    Date: March ___, 2005/s/ Grady W. Cole
    
    
    
    Date: March 23, 2005Grady W. Cole, Director/s/ Richard A. Duncan
    
    
    
    Date: March 23, 2005Richard A. Duncan, Director/s/ L. G. Joyner
    
    
    
    Date: March 23, 2005L.G. (Jack) Joyner, DirectorR. David Perry, Director
    
    
    
    Date: March ___, 2005L. Richard Plunkett, Director
    
    
    
    Date: March ___, 2005
 41




---



##### Table of Contents



/s/ Thomas E. Reeve, III, M.D.
    
    
    
    Date: March 23, 2005Thomas E. Reeve, III, M.D., Director/s/ Thomas T. Richards
    
    
    
    Date: March 23, 2005Thomas T. Richards, Director
    
    
    
    Date: March ___, 2005Oscar W. Roberts, III, Director/s/ Frank T. Thomasson, III
    
    
    
    Date: March 23, 2005Frank T. Thomasson, III, Director/s/ J. Thomas Vance
    
    
    
    Date: March 23, 2005J. Thomas Vance, Director/s/ Charles M. Willis, Sr.
    
    
    
    Date: March 23, 2005Charles M. Willis, Sr., Director
 42




---



##### Table of Contents



WGNB CORP. Consolidated Financial Statements December 31, 2004 and 2003 (with Independent Accountants Report thereon) F-1




---



##### Table of Contents



(PKM LOGO)Porter Keadle Moore, LLP REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders
WGNB Corp. and Subsidiaries We have audited the accompanying consolidated balance sheets of WGNB Corp. and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of earnings, comprehensive
income, changes in stockholders equity and cash flows for each of the three years ended December
31, 2004. 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 of America). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of WGNB Corp. and subsidiaries as of December 31, 2004
and 2003, and the results of their operations and their cash flows for each of the three years
ended December 31, 2004, in conformity with generally accepted accounting principles in the United
States of America. (PORTER KEADLE MOORE, LLP) Atlanta, Georgia
January 21, 2005 Certified Public Accountants  www.pkm.com
 F-2




---



##### Table of Contents



WGNB CORP. Consolidated Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003AssetsCash and due from banks, including reserve requirements
of $100,000 each year
    
    $
    7,288,973
    
    
    
    15,564,312Federal funds sold
    
    
    767,270
    
    
    
    11,671,486Cash and cash equivalents
    
    
    8,056,243
    
    
    
    27,235,798Securities available for sale
    
    
    60,867,553
    
    
    
    55,276,742Securities held to maturity
    
    
    4,834,649
    
    
    
    4,250,000Loans, net
    
    
    352,247,628
    
    
    
    292,564,759Premises and equipment, net
    
    
    7,644,879
    
    
    
    6,762,895Accrued interest receivable
    
    
    2,097,166
    
    
    
    1,939,028Other assets
    
    
    6,180,855
    
    
    
    5,186,689$
    441,928,973
    
    
    
    393,215,911Liabilities and Stockholders EquityDeposits:Demand
    
    $
    44,730,335
    
    
    
    40,181,696Interest bearing demand
    
    
    133,603,250
    
    
    
    138,337,540Savings
    
    
    11,856,408
    
    
    
    11,215,937Time
    
    
    92,704,938
    
    
    
    82,537,712Time, over $100,000
    
    
    55,503,108
    
    
    
    31,043,295Total deposits
    
    
    338,398,039
    
    
    
    303,316,180Federal Home Loan Bank advances
    
    
    55,000,000
    
    
    
    45,000,000Accrued interest payable
    
    
    1,426,132
    
    
    
    1,028,269Other liabilities
    
    
    2,142,492
    
    
    
    1,782,200Total liabilities
    
    
    396,966,663
    
    
    
    351,126,649CommitmentsStockholders equity:Common stock, $1.25 par value, 10,000,000 shares authorized;
3,325,774 and 3,306,452 shares issued and outstanding
    
    
    4,157,218
    
    
    
    4,133,065Additional paid-in capital
    
    
    4,902,369
    
    
    
    5,287,947Retained earnings
    
    
    34,778,931
    
    
    
    31,279,245Accumulated comprehensive income
    
    
    1,123,792
    
    
    
    1,389,005Total stockholders equity
    
    
    44,962,310
    
    
    
    42,089,262$
    441,928,973
    
    
    $
    393,215,911
 See accompanying notes to consolidated financial statements. F-3




---



##### Table of Contents



WGNB CORP. Consolidated Statements of Earnings For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Interest income:Interest and fees on loans
    
    $
    22,011,568
    
    
    
    20,448,355
    
    
    
    20,863,583Interest on federal funds sold
    
    
    151,063
    
    
    
    186,752
    
    
    
    249,061Interest on investment securities:U.S. Government agencies
    
    
    975,354
    
    
    
    1,073,225
    
    
    
    1,560,529State, county and municipal
    
    
    1,489,111
    
    
    
    1,319,700
    
    
    
    1,159,393Other
    
    
    640,644
    
    
    
    514,357
    
    
    
    464,123Total interest income
    
    
    25,267,740
    
    
    
    23,542,389
    
    
    
    24,296,689Interest expense:Interest on deposits:Demand
    
    
    1,180,420
    
    
    
    954,060
    
    
    
    1,487,148Savings
    
    
    43,309
    
    
    
    53,579
    
    
    
    94,811Time
    
    
    3,915,778
    
    
    
    3,993,126
    
    
    
    5,094,063Interest on FHLB and other borrowings
    
    
    2,430,288
    
    
    
    2,526,780
    
    
    
    2,048,130Total interest expense
    
    
    7,569,795
    
    
    
    7,527,545
    
    
    
    8,724,152Net interest income
    
    
    17,697,945
    
    
    
    16,014,844
    
    
    
    15,572,537Provision for loan losses
    
    
    925,000
    
    
    
    350,000
    
    
    
    483,340Net interest income after provision for loan losses
    
    
    16,772,945
    
    
    
    15,664,844
    
    
    
    15,089,197Other income:Service charges on deposit accounts
    
    
    4,000,420
    
    
    
    3,659,098
    
    
    
    3,195,766Mortgage origination fees
    
    
    514,011
    
    
    
    933,053
    
    
    
    938,439ATM network fees
    
    
    434,203
    
    
    
    335,128
    
    
    
    282,536Gain on sale of securities available for sale
    
    
    
    
    
    
    
    
    
    
    6,705Miscellaneous
    
    
    688,595
    
    
    
    626,243
    
    
    
    827,634Total other income
    
    
    5,637,229
    
    
    
    5,553,522
    
    
    
    5,251,080Other expenses:Salaries and employee benefits
    
    
    8,125,097
    
    
    
    7,625,750
    
    
    
    7,186,935Occupancy
    
    
    1,944,875
    
    
    
    1,809,859
    
    
    
    1,646,537Other operating
    
    
    3,593,949
    
    
    
    3,316,083
    
    
    
    3,293,841Total other expenses
    
    
    13,663,921
    
    
    
    12,751,692
    
    
    
    12,127,313Earnings before income taxes
    
    
    8,746,253
    
    
    
    8,466,674
    
    
    
    8,212,964Income taxes
    
    
    2,682,088
    
    
    
    2,679,824
    
    
    
    2,668,299Net earnings
    
    $
    6,064,165
    
    
    
    5,786,850
    
    
    
    5,544,665Net earnings per share
    
    $
    1.83
    
    
    
    1.75
    
    
    
    1.71Diluted net earnings per share
    
    $
    1.81
    
    
    
    1.72
    
    
    
    1.69Dividends per share
    
    $
    0.78
    
    
    
    0.67
    
    
    
    0.60
 See accompanying notes to consolidated financial statements. F-4




---



##### Table of Contents



WGNB CORP. Consolidated Statements of Comprehensive Income For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Net earnings
    
    $
    6,064,165
    
    
    
    5,786,850
    
    
    
    5,544,665Other comprehensive income (loss), net of tax:Unrealized gains (losses) on investment
securities available for sale:Unrealized gains (losses) arising during the period
    
    
    (401,838
    )
    
    
    119,477
    
    
    
    1,403,646Associated (taxes) benefit
    
    
    136,625
    
    
    
    (40,622
    )
    
    
    (477,240
    )Reclassification adjustment for gain realized
    
    
    
    
    
    
    
    
    
    
    (6,705
    )Associated taxes
    
    
    
    
    
    
    
    
    
    
    2,213Other comprehensive income (loss)
    
    
    (265,213
    )
    
    
    78,855
    
    
    
    921,914Comprehensive income
    
    $
    5,798,952
    
    
    $
    5,865,705
    
    
    
    6,466,579
 See accompanying notes to consolidated financial statements. F-5




---



##### Table of Contents



WGNB CORP. Consolidated Statements of Changes in Stockholders Equity For the Years Ended December 31, 2004, 2003 and 2002 Additional
    
    
    
    
    
    
    AccumulatedCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2001
    
    
    3,100,355
    
    
    
    3,875,444
    
    
    
    829,324
    
    
    
    24,111,323
    
    
    
    388,236
    
    
    
    29,204,327Cash dividends ($.60 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,946,775
    )
    
    
    
    
    
    
    (1,946,775
    )Retirement of common stock
    
    
    (2,345
    )
    
    
    (2,932
    )
    
    
    (62,350
    )
    
    
    
    
    
    
    
    
    
    
    (65,282
    )Exercise of stock options
    
    
    7,512
    
    
    
    9,390
    
    
    
    55,892
    
    
    
    
    
    
    
    
    
    
    
    65,282Common stock offering at $24 per share, net of
offering
cost of $33,546
    
    
    200,000
    
    
    
    250,000
    
    
    
    4,516,454
    
    
    
    
    
    
    
    
    
    
    
    4,766,454Issuance of common stock in lieu of directors fees
    
    
    1,211
    
    
    
    1,514
    
    
    
    27,852
    
    
    
    
    
    
    
    
    
    
    
    29,366Change in unrealized holding gain on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    921,914
    
    
    
    921,914Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,544,665
    
    
    
    
    
    
    
    5,544,665Balance, December 31, 2002
    
    
    3,306,733
    
    
    $
    4,133,416
    
    
    
    5,367,172
    
    
    
    27,709,213
    
    
    
    1,310,150
    
    
    
    38,519,951Cash dividends ($.67 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,216,818
    )
    
    
    
    
    
    
    (2,216,818
    )Retirement of common stock
    
    
    (5,847
    )
    
    
    (7,309
    )
    
    
    (147,224
    )
    
    
    
    
    
    
    
    
    
    
    (154,533
    )Exercise of stock options
    
    
    4,651
    
    
    
    5,814
    
    
    
    40,228
    
    
    
    
    
    
    
    
    
    
    
    46,042Issuance of common stock in lieu of directors fees
    
    
    915
    
    
    
    1,144
    
    
    
    27,771
    
    
    
    
    
    
    
    
    
    
    
    28,915Change in unrealized holding gain on
securities available for sale, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78,855
    
    
    
    78,855Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,786,850
    
    
    
    
    
    
    
    5,786,850Balance, December 31, 2003
    
    
    3,306,452
    
    
    
    4,133,065
    
    
    
    5,287,947
    
    
    
    31,279,245
    
    
    
    1,389,005
    
    
    
    42,089,262Cash 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
    
    
    
    44,962,310
 See accompanying notes to consolidated financial statements. F-6




---



##### Table of Contents



WGNB CORP. Consolidated Statements of Cash Flows For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net earnings
    
    $
    6,064,165
    
    
    $
    5,786,850
    
    
    
    5,544,665Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation, amortization and accretion
    
    
    1,105,857
    
    
    
    1,078,280
    
    
    
    1,060,285Provision for loan losses
    
    
    925,000
    
    
    
    350,000
    
    
    
    483,340Change in deferred income taxes
    
    
    28,896
    
    
    
    86,768
    
    
    
    (163,472
    )Gain on sale of securities available for sale
    
    
    
    
    
    
    
    
    
    
    (6,705
    )(Gain) loss on sale of premises and equipment
    
    
    (5,430
    )
    
    
    (13,997
    )
    
    
    7,851Gain on settlement of interest rate swap
    
    
    
    
    
    
    
    
    
    
    (252,950
    )Loss on sale of other real estate
    
    
    52,312
    
    
    
    86,205
    
    
    
    9,710Change in:Other assets
    
    
    (1,035,421
    )
    
    
    15,973
    
    
    
    (254,145
    )Other liabilities
    
    
    397,864
    
    
    
    (120,087
    )
    
    
    (1,355,021
    )Net cash provided by operating activities
    
    
    7,533,243
    
    
    
    7,269,992
    
    
    
    5,073,558Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    
    
    
    
    
    
    
    
    6,498,385Proceeds from maturities, calls and paydowns of securities
available for sale
    
    
    11,192,131
    
    
    
    15,424,516
    
    
    
    11,480,591Purchases of securities available for sale
    
    
    (17,371,254
    )
    
    
    (18,664,899
    )
    
    
    (14,135,073
    )Purchase of securities held to maturity
    
    
    (1,604,000
    )
    
    
    (750,000
    )
    
    
    (1,500,000
    )Proceeds from calls of securities held to maturity
    
    
    1,019,121
    
    
    
    
    
    
    
    Net change in loans
    
    
    (61,402,267
    )
    
    
    (24,547,649
    )
    
    
    (20,526,228
    )Proceeds from sales of premises and equipment
    
    
    5,430
    
    
    
    46,047
    
    
    
    17,048Purchases of premises and equipment
    
    
    (1,801,137
    )
    
    
    (1,698,547
    )
    
    
    (426,370
    )Capital expenditures for other real estate
    
    
    
    
    
    
    
    
    
    
    (11,843
    )Proceeds from sales of other real estate
    
    
    1,002,312
    
    
    
    155,250
    
    
    
    157,730Net cash used by investing activities
    
    
    (68,959,664
    )
    
    
    (30,035,282
    )
    
    
    (18,445,760
    )Cash flows from financing activities:Net change in deposits
    
    
    35,081,859
    
    
    
    4,590,312
    
    
    
    18,194,740Proceeds from Federal Home Loan Bank advances
    
    
    15,000,000
    
    
    
    
    
    
    
    10,000,000Repayment of Federal Home Loan Bank advances
    
    
    (5,000,000
    )
    
    
    
    
    
    
    Repayment of other borrowings
    
    
    
    
    
    
    
    
    
    
    (1,282,000
    )Proceeds from settlement of interest rate swap
    
    
    
    
    
    
    
    
    
    
    252,950Offering proceeds, net of offering cost
    
    
    
    
    
    
    
    
    
    
    4,766,454Dividends paid
    
    
    (2,460,728
    )
    
    
    (2,147,943
    )
    
    
    (1,891,627
    )Exercise of stock options
    
    
    589,977
    
    
    
    46,042
    
    
    
    65,282Retirement of common stock
    
    
    (964,242
    )
    
    
    (154,533
    )
    
    
    (65,282
    )Net cash provided by financing activities
    
    
    42,246,866
    
    
    
    2,333,878
    
    
    
    30,040,517Change in cash and cash equivalents
    
    
    (19,179,555
    )
    
    
    (20,431,412
    )
    
    
    16,668,315Cash and cash equivalents at beginning of year
    
    
    27,235,798
    
    
    
    47,667,210
    
    
    
    30,998,895Cash and cash equivalents at end of year
    
    $
    8,056,243
    
    
    
    27,235,798
    
    
    
    47,667,210
 F-7




---



##### Table of Contents



WGNB CORP. Consolidated Statements of Cash Flows, continued For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    7,171,932
    
    
    
    7,709,700
    
    
    
    9,409,115Income taxes
    
    $
    2,184,700
    
    
    
    2,322,000
    
    
    
    3,357,950Non-cash investing and financing activities:Transfer of loans to other real estate
    
    $
    794,398
    
    
    
    845,750
    
    
    
    390,397Change in unrealized gains on
securities available for sale, net of tax
    
    $
    (265,213
    )
    
    
    78,855
    
    
    
    921,914Change in dividends payable
    
    $
    (103,751
    )
    
    
    (68,875
    )
    
    
    (55,148
    )Issuance of common stock to directors in
lieu of directors fees
    
    $
    12,840
    
    
    
    28,915
    
    
    
    29,366
 See accompanying notes to consolidated financial statements. F-8




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements  (1)
    Summary of Significant Accounting Policies The following is a summary of the significant policies and procedures. 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. In 2002, the Company completed a public offering of 200,000 shares of its common stock at a
purchase price of $24.00 per share, or an aggregate amount of $4,800,000. The offering was
conducted through the Companys officers and directors on a best-efforts basis without
compensation. The Company received net proceeds from the offering of $4,766,654, representing
total offering proceeds of $4,800,000, less offering expenses of $33,346. During 2002, the Company merged the operation of West Georgia Credit Services, Inc. into the
Bank and the Company. Additionally, the Company has ceased offering non-traditional consumer
financing. WGCS had operated under the name Mortgage & Loan Solutions and commenced operations
in 1997 serving Paulding, Douglas and Carroll Counties. The Bank commenced business in 1946 upon receipt of its banking charter from the Office of the
Comptroller of the Currency (the OCC). The Bank is primarily regulated by the OCC and
undergoes periodic examinations by this regulatory agency. The Company is regulated by the
Federal Reserve and is also subject to periodic examinations. The Bank provides a full range
of commercial and consumer banking services principally in Carroll and Douglas Counties,
Georgia. The accounting and reporting policies of the Company, and the methods of applying these
principles, conform with accounting principles generally accepted in the United States of
America (GAAP) and with general practices within the banking industry. In preparing the
financial statements, management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet and income and
expenses for the year. Actual results could differ significantly from those estimates.
Material estimates common to the banking industry that are particularly susceptible to
significant change in an operating cycle of one year include, but are not limited to, the
determination of the allowance for loan losses, the valuation of any real estate acquired in
connection with foreclosures or in satisfaction of loans and valuation allowances associated
with the realization of deferred tax assets which are based on future taxable income. Cash and Cash 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 comprehensive income in stockholders equity until realized.
Transfers of securities between categories are recorded at fair value at the date of transfer. A decline in the market value of any available for sale investment below cost that is deemed
other than temporary is charged to earnings and establishes a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an
adjustment to the yield. Realized gains and losses for securities classified as available for
sale are included in earnings and are derived using the specific identification method for
determining the cost of securities sold. F-9




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (1)
    Summary of Significant Accounting Policies, continued 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. Accrual of interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts that the borrowers financial
condition is such that collection of interest is doubtful. The allowance for loan losses is established through a provision for loan losses charged to
expense. Loans are charged against the allowance for loan losses when management believes that
the collectibility of the principal is unlikely. The allowance represents an amount which, in
managements judgment based on historical losses and on current economic environment, will be
adequate to absorb probable losses on existing loans that may become uncollectible. Loans
deemed uncollectible are charged-off and deducted from the allowance and recoveries on loans
previously charged-off are added back to the reserve. Managements judgment in determining the adequacy of the allowance is based on evaluations of
the collectibility of loans. These evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, current economic conditions that may affect
the borrowers ability to pay, overall portfolio quality, and review of specific problem
loans. Management believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically review the Companys allowance
for loan losses. Such agencies may require the Company to recognize additions to the allowance
based on their judgments of information available to them at the time of their examination. Premises and 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: Building and improvements
    
    15  39 yearsFurniture 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. Accounting literature
defines fair value as the amount that is expected to be received in a current sale between a
willing buyer and seller other than in a forced or liquidation sale. Fair values at
foreclosure are based on appraisals. Losses arising from the acquisition of foreclosed
properties are charged against the allowance for loan losses. Subsequent write-downs are
provided by a charge to income through the allowance for losses on other real estate in the
period in which the need arises. Income 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




---



##### Table of Contents



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 the portion of the deferred tax asset when it
is more likely than not that some portion or all of the deferred tax asset will not be
realized. In assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable income, and tax
planning strategies. Derivative Instruments and Hedging 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 settled or terminated, the cumulative change in the fair value is amortized into
income over the original hedge period. If the underlying hedged instrument is sold, the
Company immediately recognizes the cumulative change in the derivatives value in the
component of earnings. As of December 31, 2004, the Company held an interest rate swap, which it entered into as a
means of managing its interest rate risk and accounted for the hedge instrument as a fair
value hedge. The interest rate swap contract, with a notional amount of $30,000,000, was used
to hedge the Banks fixed rate interest risk related to its borrowing with the Federal Home
Loan Bank. Under the interest rate swap contract, the Company received a fixed rate of 3.40%
and paid a rate of 90 day LIBOR which was 2.36% at December 31, 2004. As of December 31, 2003
and 2002, the Company did not hold an interest rate swap position. Stock Compensation Plans Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, encourages all entities to adopt a fair value based method of accounting for
employee stock compensation plans, whereby compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period, which is usually
the vesting period. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
whereby compensation cost is the excess, if any, of the quoted market price of the stock at
the grant date (or other measurement date) over the amount an employee must pay to acquire the
stock. Stock options issued under the Companys stock option plan have no intrinsic value at
the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The
Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a
result, has provided pro forma disclosures of net earnings and earnings per share and other
disclosures, as if the fair value based method of accounting had been applied. Had compensation cost for the plan been determined based upon the fair value of the options at
the grant dates, the Companys net earnings and net earnings per share would have been reduced
to the proforma amounts indicated below: 2004
    
    
    2003
    
    
    2002Net earnings
    
    As reported
    
    $
    6,064,165
    
    
    
    5,786,850
    
    
    
    5,544,665Proforma
    
    $
    5,969,411
    
    
    
    5,573,908
    
    
    
    5,465,894Net earnings per share
    
    As reported
    
    $
    1.83
    
    
    
    1.75
    
    
    
    1.71Proforma
    
    $
    1.81
    
    
    
    1.68
    
    
    
    1.69Diluted earnings per share
    
    As reported
    
    $
    1.81
    
    
    
    1.72
    
    
    
    1.69Proforma
    
    $
    1.78
    
    
    
    1.66
    
    
    
    1.66
 F-11




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (1)
    Summary of Significant Accounting Policies, continued Stock Compensation Plans, continued 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 2004, 2003 and 2002,
respectively: dividend yield of 2.40%, 2.40% and 2.40%, risk free interest rates of 4.27%,
4.27% and 4.14% and an expected life of 10 years. Price volatilities of 29%, 29% and 25%, were
applied for the years ended 2004, 2003 and 2002, respectively. For disclosure purposes, the
Company immediately recognized the expense associated with the option grants assuming that all
awards will vest. The compensation expense included in the proforma results was determined
based on the fair value of the option at the time of grant multiplied by the number of options
granted net of the related tax effect. Earnings Per Share Earnings per common share are based on the weighted average number of common shares
outstanding during the period. The effects of potential common shares outstanding during the
period are included in diluted earnings per share. Stock options, which are described in note
10, are granted to key management personnel. Common
    
    
    Per ShareFor the Year Ended December 31, 2004

    Net Earnings
    
    
    Shares
    
    
    AmountEarnings per common share
    
    $
    6,064,165
    
    
    
    3,305,736
    
    
    $
    1.83Effect of dilutive stock options
    
    
    
    
    
    
    50,594
    
    
    
    (.02
    )Diluted earnings per common share
    
    $
    6,064,165
    
    
    
    3,356,330
    
    
    $
    1.81
 Common
    
    
    Per ShareFor the Year Ended December 31, 2003
    
    Net Earnings
    
    
    Shares
    
    
    AmountEarnings per common share
    
    $
    5,786,850
    
    
    
    3,308,087
    
    
    $
    1.75Effect of dilutive stock options
    
    
    
    
    
    
    48,893
    
    
    
    (.03
    )Diluted earnings per common share
    
    $
    5,786,850
    
    
    
    3,356,980
    
    
    $
    1.72
 Common
    
    
    Per ShareFor the Year Ended December 31, 2002
    
    Net Earnings
    
    
    Shares
    
    
    AmountEarnings per common share
    
    $
    5,544,665
    
    
    
    3,243,849
    
    
    $
    1.71Effect of dilutive stock options
    
    
    
    
    
    
    42,353
    
    
    
    (.02
    )Diluted earnings per common share
    
    $
    5,544,665
    
    
    
    3,286,202
    
    
    $
    1.69
 New Accounting Standards Accounting standards that have been issued or proposed by the Financial Accounting Standards
Board 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. Share-Based Payment In December 2004, the FASB revised SFAS No. 123 (SFAS No. 123 ®). SFAS 123 ®,
Share-Based Payment, requires all share based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on their fair
values. Pro forma disclosure is no longer an alternative to financial statement recognition.
SFAS No. 123 ® is effective for periods beginning after June 15, 2005. The Company is still
evaluating the transition provisions allowed by SFAS No. 123 ® and expects to adopt this
standard in the third quarter of 2005. 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. F-12




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  ReclassificationsCertain reclassifications have been made in the prior years consolidated financial statements
to conform to the presentation used in 2004.(2)
    SecuritiesSecurities available for sale and held-to-maturity at December 31, 2004 and 2003 are
summarized as follows: December 31, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable for SaleU.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
 December 31, 2003Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Government agencies
    
    $
    7,026,625
    
    
    
    53,574
    
    
    
    
    
    
    
    7,080,199Mortgage-backed securities
    
    
    16,398,266
    
    
    
    492,122
    
    
    
    47,714
    
    
    
    16,842,674State, county and municipals
    
    
    28,089,647
    
    
    
    1,495,022
    
    
    
    9,583
    
    
    
    29,575,086Corporate bonds
    
    
    1,657,651
    
    
    
    121,132
    
    
    
    
    
    
    
    1,778,783$
    53,172,189
    
    
    
    2,161,850
    
    
    
    57,297
    
    
    
    55,276,742
 December 31, 2004Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueHeld to MaturityTrust preferred securities
    
    $
    4,834,649
    
    
    
    
    
    
    
    
    
    
    
    4,834,649
 December 31, 2003Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueTrust preferred securities
    
    $
    4,250,000
    
    
    
    22,800
    
    
    
    
    
    
    
    4,272,800
 F-13




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (2)
    Securities, continuedThe amortized cost and estimated fair value of investment securities available for sale and
held to maturity at December 31, 2004, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers have the right to call or
prepay certain obligations with or without call or prepayment penalties. Amortized
    
    
    EstimatedCost
    
    
    Fair ValueAvailable for SaleU.S. Government agencies, state, county
and municipals and corporate bonds:Within 1 year
    
    $
    3,328,893
    
    
    
    3,348,8981 to 5 years
    
    
    10,021,950
    
    
    
    10,204,8805 to 10 years
    
    
    7,598,453
    
    
    
    7,879,200After 10 years
    
    
    21,827,658
    
    
    
    22,767,504Mortgage-backed securities
    
    
    16,387,883
    
    
    
    16,667,071$
    59,164,837
    
    
    
    60,867,553Held to MaturityTrust preferred securities:After 10 years
    
    $
    4,834,649
    
    
    
    4,834,649
 The following is a summary of the fair values of securities that have market losses as of
December 31, 2004. The Company has determined that the decline in fair value below the
amortized cost basis is temporary for purposes promulgated by Statement of Financial
Accounting Standards No. 115  Accounting for Certain Debt and Equity Securities since there
are no securities with losses for a twelve month period. December 31, 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
    
    
    
    
    
    
    
    Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,038,973
    
    
    
    67,514
    
    
    
    1,972,401
    
    
    
    41,147
 December 31, 2003Less Than 12 Months
    
    
    12 Months or MoreFair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    LossesU.S. Government agencies
    
    $
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    3,369,392
    
    
    
    47,714
    
    
    
    
    
    
    
    State, county and municipals
    
    
    1,285,300
    
    
    
    9,583
    
    
    
    
    
    
    
    Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,654,692
    
    
    
    57,297
    
    
    
    
    
    
    
    
 F-14




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (2)
    Securities, continuedAt 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 government backed.Proceeds from sales of securities available for sale during 2002 were $6,498,385 with gross
gains of $6,705 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 $56,601,000 and $53,473,000 as of
December 31, 2004 and 2003, respectively, were pledged to secure public deposits, as required
by law, and for other purposes.(3)
    LoansMajor classifications of loans at December 31, 2004 and 2003 are summarized as follows: 2004
    
    
    2003Commercial, financial and agricultural
    
    $
    50,527,769
    
    
    
    31,219,230Real estate  mortgage
    
    
    173,110,259
    
    
    
    180,991,556Real estate  construction
    
    
    114,657,248
    
    
    
    68,207,499Consumer
    
    
    18,614,114
    
    
    
    16,079,558356,909,390
    
    
    
    296,497,843Less: Unearned interest
    
    
    581,614
    
    
    
    453,718Allowance for loan losses
    
    
    4,080,148
    
    
    
    3,479,366$
    352,247,628
    
    
    
    292,564,759
  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, 2004, 2003 and 2002
are as follows: 2004
    
    
    2003
    
    
    2002Balance, beginning of year
    
    $
    3,479,366
    
    
    
    3,771,676
    
    
    
    3,720,206Provision for loan losses
    
    
    925,000
    
    
    
    350,000
    
    
    
    483,340Loans charged off
    
    
    (397,095
    )
    
    
    (789,544
    )
    
    
    (694,566
    )Recoveries
    
    
    72,877
    
    
    
    147,234
    
    
    
    262,696Balance, end of year
    
    $
    4,080,148
    
    
    
    3,479,366
    
    
    
    3,771,676
 F-15




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (4)
    Premises and EquipmentMajor classifications of premises and equipment at December 31, 2004 and 2003 are summarized
as follows: 2004
    
    
    2003Land
    
    $
    1,188,765
    
    
    
    1,188,765Buildings and improvements
    
    
    7,715,254
    
    
    
    6,350,989Furniture and equipment
    
    
    6,127,392
    
    
    
    5,842,82915,031,411
    
    
    
    13,382,583Less: Accumulated depreciation
    
    
    (7,386,532
    )
    
    
    (6,619,688
    )$
    7,644,879
    
    
    
    6,762,895
  Depreciation expense amounted to $919,153, $863,369 and $748,049 in 2004, 2003 and 2002,
respectively.(5)
    Time DepositsAt December 31, 2004 the scheduled maturities of time deposits are as follows: 2005
    
    $
    90,734,7742006
    
    
    36,773,6092007
    
    
    6,812,1542008
    
    
    5,146,1012009
    
    
    8,741,408$
    148,208,046
  (6)
    Lines of CreditThe Bank has lines of credit for overnight borrowings of $20,800,000 and 11,000,000 at
December 31, 2004 and 2003. The Bank also has a line of credit with the Federal Home Loan Bank
of Atlanta (FHLB) with credit availability totaling $110,500,000 at December 31, 2004. The
FHLB advances are secured by the Banks stock in the FHLB, its 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, 2004 and 2003, the Bank had advances outstanding from
the FHLB amounting to $55,000,000 and $45,000,000, respectively. The Bank had no excess
collateral available at December 31, 2004 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, 2004Interest
    
    Current
    
    
    
    
    
    Early ConversionAdvance
    
    Basis
    
    Rate
    
    Maturity
    
    Call Date
    
    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
 F-16




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (6)
    Lines of Credit, continued December 31, 2003Interest
    
    Current
    
    
    
    
    
    Early ConversionAdvance
    
    Basis
    
    Rate
    
    Maturity
    
    Call Date
    
    Option$
    10,000,000
    
    
    Fixed
    
    
    5.49
    %
    
    May 2011
    
    May 2006
    
    May 2006,
3 month LIBOR$
    5,000,000
    
    
    Fixed
    
    
    6.14
    %
    
    December 2004
    
    
    
    $
    5,000,000
    
    
    Fixed
    
    
    7.07
    %
    
    May 2005
    
    
    
    $
    10,000,000
    
    
    Fixed
    
    
    6.16
    %
    
    July 2005
    
    
    
    $
    5,000,000
    
    
    Fixed
    
    
    5.44
    %
    
    February 2008
    
    
    
    $
    10,000,000
    
    
    Fixed
    
    
    3.37
    %
    
    September 2012
    
    September 2007
    
    September 2007,
3 month LIBOR
  (7)
    CommitmentsThe Company is a party to financial instruments with off balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized in the balance
sheet. The contractual amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.The Companys exposure to credit loss in the event of non-performance by the other party to
the financial instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on balance sheet
instruments.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, 2004 and 2003: ApproximateContractual Amount2004
    
    
    2003Financial instruments whose contract amounts
represent credit risk:Commitments to extend credit
    
    $
    68,013,000
    
    
    
    51,587,000Standby letters of credit
    
    
    8,367,000
    
    
    
    2,402,000
 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. Various legal actions and proceedings are pending or are threatened against the Company and
its subsidiaries, 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. F-17




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (8)
    Stock Repurchase PlanIn 1996, the Board of Directors approved a Stock Repurchase Plan of up to $2,000,000 of the
Companys common stock currently outstanding. During 2001, the Board of Directors approved an
additional $1,000,000 to be used for the Stock Repurchase Plan. The Company retired 12,858
shares of common stock during 2004. At December 31, 2004, the Company had $943,871 remaining
to reacquire shares under the Stock Repurchase Plan.(9)
    Regulatory MattersThe Company and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Companys and the Banks financial
statements. Under certain adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings, and
other factors.Quantitative measures established by regulation to ensure capital adequacy require the Company
and the Bank to maintain minimum amounts and ratios of total and Tier I capital to
risk-weighted assets and of Tier I capital to average assets. Management believes, as of
December 31, 2004, that the Company and the Bank met all capital adequacy requirements to
which it is subject.As of December 31, 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, 2004:Total Capital (to Risk
Weighted Assets)Consolidated
    
    $
    47,919
    
    
    
    13
    %
    
    
    329,475
    
    
    
    38
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    43,259
    
    
    
    12
    %
    
    
    329,234
    
    
    
    38
    %
    
    
    336,542
    
    
    
    310
    %Tier I Capital
(to Risk Weighted Assets)Consolidated
    
    $
    43,839
    
    
    
    12
    %
    
    
    314,737
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    39,179
    
    
    
    11
    %
    
    
    314,617
    
    
    
    34
    %
    
    
    321,925
    
    
    
    3  6
    %Tier I Capital
(to Average Assets)Consolidated
    
    $
    43,839
    
    
    
    10
    %
    
    
    317,891
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    39,179
    
    
    
    9
    %
    
    
    317,769
    
    
    
    34
    %
    
    
    322,211
    
    
    
    3 5
    %As of December 31, 2003:Total Capital (to Risk
Weighted Assets)Consolidated
    
    $
    43,280
    
    
    
    14
    %
    
    
    324,640
    
    
    
    38
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    39,280
    
    
    
    13
    %
    
    
    324,597
    
    
    
    38
    %
    
    
    330,747
    
    
    
    310
    %Tier I Capital
(to Risk Weighted Assets)Consolidated
    
    $
    39,801
    
    
    
    13
    %
    
    
    312,320
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    35,801
    
    
    
    12
    %
    
    
    312,299
    
    
    
    34
    %
    
    
    318,448
    
    
    
    3  6
    %Tier I Capital
(to Average Assets)Consolidated
    
    $
    39,801
    
    
    
    10
    %
    
    
    315,474
    
    
    
    34
    %
    
    
    N/A
    
    
    
    N/ABank
    
    $
    35,801
    
    
    
    9
    %
    
    
    315,414
    
    
    
    34
    %
    
    
    319,267
    
    
    
    3 5
    %
 F-18




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (9)
    Regulatory Matters, continuedDividends 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, 2004 the Bank could pay approximately $10,668,000 in dividends without obtaining
prior regulatory approval.(10)
    Incentive Stock Option PlanUnder the January 11, 1994 Incentive Stock Option Plan (the 1994 Plan) the Company may grant
options to certain key officers to acquire shares of common stock of the Company at the then
fair value, with the number of shares to be determined annually by agreed upon formulas. A
total of 160,000 shares of common stock were reserved for possible issuance under the 1994
plan. At December 31, 2003, the Company had distributed all the remaining options available
for awards under the 1994 Plan. The options may not be exercised prior to five years from the
date of grant and are exercisable no later than ten years from that date. No compensation cost
has been recognized for the stock options.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, 2004, the Company had
distributed 15,639 of the options available for awards under the 2003 Plan. The options under
the 2003 Plan were to be distributed commencing in the 2004 fiscal year and will terminate
February 11, 2013 unless previously terminated by the Board of Directors or when the shares
approved under the plan have been distributed. The options may be exercised by the
participants under a vesting period of five years ratably at 20% per year. The options are
exercisable no later than ten years after the date of grant. No compensation cost has been
recognized for the stock options.A summary status of the Companys stock option plan as of December 31, 2004, 2003 and
2002, and changes during the years ending on those dates, is presented below: 2004
    
    
    2003
    
    
    2002Wtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.Exercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding, beginning of year
    
    
    135,441
    
    
    $
    18.53
    
    
    
    100,358
    
    
    $
    15.57
    
    
    
    96,279
    
    
    $
    13.75Awarded during the year
    
    
    15,639
    
    
    $
    28.87
    
    
    
    39,734
    
    
    $
    24.99
    
    
    
    17,272
    
    
    $
    24.00Forfeited during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,681
    )
    
    $
    19.59Exercised during the year
    
    
    (50,980
    )
    
    $
    11.57
    
    
    
    (4,651
    )
    
    $
    9.90
    
    
    
    (7,512
    )
    
    $
    8.69Outstanding, end of year
    
    
    100,100
    
    
    $
    23.68
    
    
    
    135,441
    
    
    $
    18.53
    
    
    
    100,358
    
    
    $
    15.57Options exercisable at year end
    
    
    15,568
    
    
    
    
    
    
    
    48,739
    
    
    
    
    
    
    
    36,792Weighted average fair value of
options granted during the year
    
    
    
    
    
    $
    9.18
    
    
    
    
    
    
    $
    8.12
    
    
    
    
    
    
    $
    6.91
 F-19




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (10)
    Incentive Stock Option Plan, continuedThe following information applies to all options outstanding at December 31, 2004: Options Outstanding
    
    
    Options ExercisableWtd. Avg.
    
    
    Wtd. Avg.
    
    
    
    
    
    
    Wtd. Avg.Exercise
    
    
    Remaining
    
    
    
    
    
    
    ExerciseShares
    
    Range
    
    Price
    
    
    Life (Years)
    
    
    Shares
    
    
    Price6,400
    
    $13.00
    
    $
    13.00
    
    
    
    3.11
    
    
    
    6,400
    
    
    $
    13.0079,333
    
    $20.00 - 25.00
    
    $
    23.60
    
    
    
    6.93
    
    
    
    9,168
    
    
    $
    20.0014,367
    
    $28.87
    
    $
    28.87
    
    
    
    8.11
    
    
    
    
    
    
    
    100,100
    
    $13.00  28.87
    
    $
    23.68
    
    
    
    6.86
    
    
    
    15,568
    
    
    $
    17.12
  (11)
    Defined Contribution PlanThe Company began a qualified retirement plan pursuant to Internal Revenue Code Section 401(k)
in 1996 covering substantially all employees subject to certain minimum age and service
requirements. Contribution to the plan by employees is voluntary. During 2004, 2003 and 2002,
the Company matched 100% of the participants contributions up to 6% of the participants
salaries which is limited to the annual 401(k) contribution limits. The Company also made
discretionary contributions to the plan in 2004, 2003 and 2002 of 5% of participants
salaries. Contributions to the plan charged to expense during 2004, 2003 and 2002 were
$453,704, $433,505 and $366,148, respectively.(12)
    Income TaxesThe components of the provision for income taxes in the consolidated statements of earnings
for the years ended December 31, 2004, 2003 and 2002 are as follows: 2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    2,387,873
    
    
    
    2,251,444
    
    
    
    2,571,959State
    
    
    265,319
    
    
    
    341,612
    
    
    
    259,812Deferred:Federal
    
    
    26,006
    
    
    
    75,351
    
    
    
    (145,490
    )State
    
    
    2,890
    
    
    
    11,417
    
    
    
    (17,982
    )Total
    
    $
    2,682,088
    
    
    
    2,679,824
    
    
    
    2,668,299
 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: 2004
    
    
    2003
    
    
    2002Pretax income at statutory rates
    
    $
    2,973,726
    
    
    
    2,878,670
    
    
    
    2,790,917Add (deduct):Tax-exempt interest income
    
    
    (448,781
    )
    
    
    (390,578
    )
    
    
    (331,773
    )State taxes, net of federal effect
    
    
    54,870
    
    
    
    85,394
    
    
    
    180,054Non-deductible interest expense
    
    
    12,757
    
    
    
    7,965
    
    
    
    28,636Other
    
    
    89,516
    
    
    
    98,373
    
    
    
    465$
    2,682,088
    
    
    
    2,679,824
    
    
    
    2,668,299
 F-20




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (12)
    Income Taxes, continuedThe following summarizes the net deferred tax asset, which is included as a component of other
assets, at December 31, 2004 and 2003. 2004
    
    
    2003Deferred income tax assets:Allowance for loan losses
    
    $
    1,402,314
    
    
    
    1,174,257Other real estate owned
    
    
    48,160
    
    
    
    149,138Other
    
    
    100,719
    
    
    
    65,620Total gross deferred income tax assets
    
    
    1,551,193
    
    
    
    1,389,015Deferred income tax liabilities:Premises and equipment
    
    
    (368,778
    )
    
    
    (357,219
    )Net unrealized gain on securities available for sale
    
    
    (607,526
    )
    
    
    (714,812
    )Other
    
    
    (182,331
    )
    
    
    (2,816
    )Total gross deferred income tax liabilities
    
    
    (1,158,635
    )
    
    
    (1,074,847
    )Net deferred income tax asset
    
    $
    392,558
    
    
    
    314,168
  (13)
    Related Party TransactionsThe Bank conducts transactions with directors and executive officers, including companies in
which they have beneficial interests, in the normal course of business. It is the Banks
policy to comply with federal regulations that require that loan transactions with directors
and executive officers be made on substantially the same terms as those prevailing at the time
made for comparable loans to other persons. The following summary reflects activity for
related party loans for 2004: Beginning balance
    
    $
    4,744,077New loans
    
    
    4,242,349Repayments
    
    
    (5,216,129
    )Change in related parties
    
    
    3,746Ending balance
    
    $
    3,774,043
  At December 31, 2004 and 2003, deposits from directors, executive officers, and their related
interests totaled approximately $8,300,000 and 10,500,000, respectively.(14)
    Other Operating ExpensesComponents of other operating expenses which exceed 1% of total interest income and other
income are as follows: 2004
    
    
    2003
    
    
    2002Professional fees
    
    $
    622,993
    
    
    
    408,457
    
    
    
    521,305Printing and supplies
    
    $
    319,709
    
    
    
    306,552
    
    
    
    295,281Software licensing fee
    
    $
    
    
    
    
    
    
    
    
    323,654
  (15)
    Fair Value of Financial InstrumentsThe Company is required to disclose fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is practicable to
estimate that value. The assumptions used in the estimation of the fair value of the Companys
financial instruments are detailed below. Where quoted prices are not available, fair values
are based on estimates using discounted cash flows and other valuation techniques. The use of
discounted cash flows can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following disclosures should not be
considered a surrogate of the liquidation value of the Company or its subsidiaries, but rather
a good-faith estimate of the increase or decrease in value of financial instruments held by
the Company since purchase, origination, or issuance. F-21




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (15)
    Fair Value of Financial Instruments, continued 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. Commitments to Extend Credit, Standby Letters of Credit Off balance sheet instruments (commitments to extend credit and standby letters of credit)
are generally short-term and at variable interest rates. Therefore, both the carrying
value and estimated fair value associated with these instruments are immaterial. Limitations Fair value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the Companys
entire holdings of a particular financial instrument. Because no market exists for a
significant portion of the Companys financial instruments, fair value estimates are based
on many judgements. These estimates are subjective in nature and involve uncertainties and
matters of significant judgement and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments. Significant assets
and liabilities that are not considered financial instruments include deferred income taxes
and premises and equipment. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value estimates
and have not been considered in the estimates. The carrying amount and estimated fair values of the Companys financial instruments at
December 31, 2004 and 2003 are as follows: 2004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    8,056,243
    
    
    
    8,056,243
    
    
    
    27,235,798
    
    
    
    27,235,798Securities available for sale
    
    $
    60,867,553
    
    
    
    60,867,553
    
    
    
    55,276,742
    
    
    
    55,276,742Securities held to maturity
    
    $
    4,834,649
    
    
    
    4,834,649
    
    
    
    4,250,000
    
    
    
    4,272,800Loans, net
    
    $
    352,247,628
    
    
    
    351,433,142
    
    
    
    292,564,759
    
    
    
    293,298,157Liabilities:Deposits
    
    $
    338,398,039
    
    
    
    338,165,290
    
    
    
    303,316,180
    
    
    
    304,808,281Federal Home Loan Bank advances
    
    $
    55,000,000
    
    
    
    56,009,314
    
    
    
    45,000,000
    
    
    
    47,852,386
 F-22




---



##### Table of Contents



WGNB CORP. Notes to Consolidated Financial Statements, continued  (16)
    WGNB Corp. (Parent Company Only) Financial Information Balance Sheets December 31, 2004 and 2003 2004
    
    
    2003AssetsCash
    
    $
    2,407,351
    
    
    
    4,103,581Investment in Bank
    
    
    40,291,753
    
    
    
    37,163,669Securities available for sale
    
    
    635,399
    
    
    
    669,779Securities held to maturity
    
    
    2,334,649
    
    
    
    743,316Other assets
    
    
    57,140
    
    
    
    87,380$
    45,726,292
    
    
    
    42,767,725Liabilities and Stockholders EquityDividends payable
    
    $
    687,675
    
    
    
    583,924Other liabilities
    
    
    76,307
    
    
    
    94,539Total liabilities
    
    
    763,982
    
    
    
    678,463Stockholders equity
    
    
    44,962,310
    
    
    
    42,089,262$
    45,726,292
    
    
    
    42,767,725
 Statements of Earnings For the Years Ended December 31, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Dividends from Bank
    
    $
    2,564,479
    
    
    
    2,216,517
    
    
    
    1,946,290Other income
    
    
    157,496
    
    
    
    20,500
    
    
    
    60,637Other expense
    
    
    (36,083
    )
    
    
    (26,295
    )
    
    
    (51,332
    )Earnings before equity in undistributed
earnings of subsidiaries
    
    
    2,685,892
    
    
    
    2,210,722
    
    
    
    1,955,595Equity in undistributed earnings loss of WGCS
    
    
    
    
    
    
    
    
    
    
    (22,803
    )Equity in undistributed earnings of Bank
    
    
    3,378,273
    
    
    
    3,576,128
    
    
    
    3,611,873Net earnings
    
    $
    6,064,165
    
    
    
    5,786,850
    
    
    
    5,544,665
 F-23




---



##### Table of Contents



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, 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net earnings
    
    $
    6,064,165
    
    
    
    5,786,850
    
    
    
    5,544,665Adjustments to reconcile net earnings to net
cash provided by operating activities:Accretion on securities available for sale
    
    
    11,846
    
    
    
    11,534
    
    
    
    6,440Loss on sale of other real estate
    
    
    9,675
    
    
    
    54,269
    
    
    
    Equity in undistributed earnings of Bank
    
    
    (3,378,273
    )
    
    
    (3,576,128
    )
    
    
    (3,611,873
    )Equity in undistributed loss of WGCS
    
    
    
    
    
    
    
    
    
    
    22,803Change in other assets
    
    
    (6,538
    )
    
    
    (8,540
    )
    
    
    (131,488
    )Change in other liabilities
    
    
    2,348
    
    
    
    18,462
    
    
    
    189,015Net cash provided by operating activities
    
    
    2,703,223
    
    
    
    2,286,447
    
    
    
    2,019,562Cash flows from investing activities:Capital infusion to bank
    
    
    
    
    
    
    (275,253
    )
    
    
    Net assets transferred from WGCS
    
    
    
    
    
    
    
    
    
    
    91,895Purchase of securities held to maturity
    
    
    (1,604,000
    )
    
    
    (750,000
    )
    
    
    (647,672
    )Proceeds from paydowns of securities available for sale
    
    
    
    
    
    
    6,684
    
    
    
    Proceeds from sale of real estate owned
    
    
    39,540
    
    
    
    44,956
    
    
    
    Net cash used by investing activities
    
    
    (1,564,460
    )
    
    
    (973,613
    )
    
    
    (555,777
    )Cash flows from financing activities:Payments on borrowings
    
    
    
    
    
    
    
    
    
    
    (1,282,000
    )Payments received from WGCS
    
    
    
    
    
    
    
    
    
    
    1,282,000Offering proceeds, net of offering cost
    
    
    
    
    
    
    
    
    
    
    4,766,454Dividends paid
    
    
    (2,460,728
    )
    
    
    (2,147,943
    )
    
    
    (1,891,627
    )Exercise of stock options
    
    
    589,977
    
    
    
    46,042
    
    
    
    65,282Retirement of common stock
    
    
    (964,242
    )
    
    
    (154,533
    )
    
    
    (65,282
    )Net cash (used) provided by financing activities
    
    
    (2,834,993
    )
    
    
    (2,256,434
    )
    
    
    2,874,827(Decrease) increase in cash
    
    
    (1,696,230
    )
    
    
    (943,600
    )
    
    
    4,338,612Cash at beginning of year
    
    
    4,103,581
    
    
    
    5,047,181
    
    
    
    708,569Cash at end of year
    
    $
    2,407,351
    
    
    
    4,103,581
    
    
    
    5,047,181Supplemental disclosure of non-cash financing activities:Change in dividends payable
    
    $
    (103,751
    )
    
    
    (68,875
    )
    
    
    (55,148
    )Changes in unrealized gains on securities
available for sale, net of tax, of Bank
    
    $
    (265,213
    )
    
    
    78,855
    
    
    
    921,914Issuance of common stock to directors in lieu of
directors fees
    
    $
    12,840
    
    
    
    28,915
    
    
    
    29,366Transfer of assets from WGCS to the Company
    
    $
    
    
    
    
    
    
    
    
    155,940
 F-24