Item 1. Business
General
WGNB Corp. is a $385 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. In 1997, the Company formed a non-bank subsidiary, West Georgia Credit Services, Inc. (the “Finance Company”), which conducts business as “Mortgage & Loan Solutions.” The Finance Company’s operations were discontinued and the assets were transferred to the Bank and the Company as of December 31, 2002. As of March 7, 2003, the Company had 3,307,767 issued and outstanding shares of common stock, $1.25 par value per share (the “Common Stock”), held by approximately 800 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.
The Bank
The Bank is a full service commercial bank offering a variety of services customary for community banks of similar size which are designed to meet the banking needs of individuals and small to medium-sized businesses. The Bank attracts most of its deposits and conducts most of its lending transactions from and within its primary service area encompassing Carroll County, Georgia and the western portion of Douglas County, Georgia.
The Bank’s main office is located in Carrollton, Georgia. The Bank operates a total of seven branches and six additional 24-hour ATM sites, located in Carroll and Douglas Counties in Georgia. The Bank operates two
additional branches in the city of Carrollton, two branches in Villa Rica, one branch in Bowdon and one branch in Douglasville, Georgia.
As a convenience to its customers, the Bank offers at most of its branch locations Saturday banking hours, drive-thru teller windows and 24-hour automated teller machines. The Bank is a member of Honor, Cirrus and several other ATM networks of automated teller machines that permit Bank customers to perform monetary transactions in most cities throughout the southeast and other regions. The Bank also offers Internet banking services through its web site located at www.wgnb.com. Information included on the Bank’s web site is not a part of this Report.
Deposit Services. The Bank offers a full range of deposit services including checking accounts, NOW accounts, savings accounts and other time deposits of various types, ranging from money market accounts to longer-term certificates of deposit. The accounts are all offered to the Bank’s market area at rates competitive to those offered in the area. All deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum allowed by law. In addition, the Bank has implemented service charge fee schedules competitive with other financial institutions in its market area covering such matters as maintenance fees on checking accounts, per item processing fees on checking accounts, returned check charges and the like.
As of December 31, 2002, the Bank had deposits of approximately $299 million, and approximately 26,100 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, 2002.
Deposit Mix
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, 2002, the Bank had approximately $273 million in total loans outstanding, representing 71% of its total assets of approximately $385 million. The loan portfolio is made up of both fixed and adjustable rate loans. Approximately 60% of the Company’s total loan portfolio is fixed rate and 40% is adjustable rate as of December 31, 2002. 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 $222 million, or 81%, of the Bank’s total loans as of December 31, 2002. Approximately 61% of the real estate loans are fixed rate and 39% are adjustable rate. 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, 2002, commercial loans constituted approximately $35 million, or 13% of the Bank’s total loans. Approximately 59% of commercial loans are fixed rate while 41% are adjustable. The typical commercial loan has a maturity of three years or less and 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, 2002, the Bank held approximately $16 million of consumer loans, representing 6% of its total loans. Consumer loans are primarily fixed rate in nature with 97% of this loan category carrying fixed rates. These loans are typically collateralized by personal automobiles, recreational vehicles or household items and may include unsecured loans to individuals.
Other Lending Activities. The Bank also engages in secondary-market mortgage activities whereby the Bank originates mortgage loans on behalf of investor correspondent banks who fund the loans. The investor correspondent banks underwrite and price the loans and the Bank receives a fee for originating and packaging the loans. Periodically, the Bank receives discount points depending on the pricing of the loan. No mortgage loans are held by the Bank for resale nor does the Bank service third party loans.
Risks Associated with Lending Activities. Consumer and non-mortgage loans to individuals entail greater risk than do residential mortgage loans, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Commercial loans and loans secured by commercial and multi-family real estate properties are generally larger and involve greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on these loans are often dependent on the successful operation of the business or management of the property, repayment of such loans may be subject to adverse conditions in the economy or real estate markets. It has been the Bank’s practice to underwrite such loans based on its analysis of the amount of cash flow generated by the business and the resulting ability of the borrower to meet its payment obligations. In addition, the Bank, in general, seeks to obtain a personal guarantee of the loan by the owner of the business and, under certain circumstances, seeks additional collateral.
Construction loans are generally considered to involve a higher degree of credit risk than residential mortgage loans. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the security property’s value upon completion of construction as compared to the estimated costs of construction, including interest and fees. In addition, the Bank assumes certain risks associated with the borrower’s ability to complete construction in a timely and workmanlike manner. If the estimate of value proves to be inaccurate, or if construction is not performed timely or in a quality manner, the Bank may be confronted with a project which, when completed, has a value insufficient to assure full repayment or to advance funds beyond the amount originally committed to permit completion of the project.
Target Concentrations & Loan Portfolio Mix. The Bank has target concentration and portfolio mix limits written in its loan policy. The goal of the policy is to avoid concentrations that would result in particular loan or collateral type, industry or geographic area comprising a large part of the whole portfolio. The portfolio should be varied enough to obtain a balance of maximum yield and minimum risk. The loan portfolio mix is reported and reviewed quarterly by the Board of Directors. Concentration targets are evaluated periodically to determine changes in risk profiles and market need. The following represents maximum target concentrations of loans by category as a percentage of total loans:
While the loan policy includes a provision generally limiting all types of real estate loans to 75% 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:
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the amounts exceeding the limit are sold on a non-recourse basis;
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the amounts exceeding the limit are secured by readily marketable securities, up to a limit of 25% of capital and reserves;
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the amounts exceeding the limit are secured by a perfected first lien security interest in one-to-four family real estate in an amount that does not exceed 80% of the appraised value of the property and the outstanding indebtedness to the borrower does not exceed the lesser of 20% (or 25% with the approval of a majority of the Board of Directors subject to certain additional restrictions) of capital and reserves, or $10 million; or
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the amounts exceeding the limit are for small business purposes and secured by non-farm nonresidential properties or are commercial or industrial loans but in no event can the outstanding indebtedness exceed the lesser of 20% (or 25% with the approval of a majority of the Board of Directors subject to certain additional restrictions) of capital and reserves, or $10 million.
Loan Underwriting Standards. Management recognizes the importance of character and past performance as consideration in the lending decision process. In analyzing a credit relationship, primary emphasis is placed on adequacy of cash flow and the ability of the borrower to service the debt. Secondary emphasis is placed on the past performance of the borrower, the type or value of the collateral, the amount of net worth present or any performance of endorsers or guarantor 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. In general, loans to value on various types of real estate range from a high of 85% to a low of 60%. Installment loans, in general, require a loan to collateral value of at least 80%. 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, executive vice president, two senior vice presidents and other lenders, has a lending limit of $300,000 for secured and $100,000 for unsecured loans. Loans between $300,000 and the Bank’s legal lending limit must be approved by an executive loan committee, which is made up of the CEO of the Company, the President of the Bank and six outside directors.
Loan Review. The Bank has a comprehensive loan review process involving an independent loan review officer and lending officers. The loan review process is designed to promote early identification of credit quality problems. All loan officers are charged with the responsibility of rating their loans. The Bank’s independent loan review officer is charged with the responsibility of ensuring that all problem loans and all loan or line of credit relationships in excess of $350,000 are reviewed annually, with random sample checks on consumer loans and other loans less than $350,000. Additionally, the loan review officer monitors the loan rating system to ensure proper risk identification. The Bank’s risk identification process is also reviewed by its regulators and its independent auditors. Upgrades and credit risk grades require the approval of the loan review officer. In the event of disagreement, the executive loan committee makes the final decision.
Market Area
The following statistical data is based on information contained in a report published by the State University of West Georgia Department of Economics dated October 29, 2002 and information published by the FDIC on its web site.
The Bank’s primary market area includes all of Carroll County, Georgia and the western portion of Douglas County, Georgia. Approximately 98% of the Bank’s deposit customers reside in Carroll County, although it attracts some loan business from neighboring Douglas and Paulding Counties. The Bank’s secondary market area includes the Georgia counties of Paulding, Douglas, Heard, Haralson and Coweta, and the Alabama counties of Clebourne and Randolph. Carroll County is located approximately 45 miles southwest of Atlanta and 90 miles east of Birmingham, Alabama. Carroll County’s major industries include manufacturing, wholesale trade, food processing, paper and lumber products, construction and health services. The State University of West Georgia, which serves more than 9,000 students, and Tanner Medical Center are located in Carrollton, which is the county seat and the location of the Bank’s main office.
Carroll County’s population has grown steadily but relatively slowly when compared to some metro Atlanta counties, reflecting an average annual growth rate of 2.0% from 1990 to 2000. Its growth rate is also lower than that for the State of Georgia. Out of 159 Georgia counties, Carroll County ranks 29th in land area and 23rd in population. According to 2000 census data, median household income for Carroll County was $38,799, which ranked 40th among Georgia counties. The unemployment rate for Carroll County in August 2002 was 7.2%, which was above the state’s unemployment rate of 4.7%. Per capita income for 2000 in Carroll County was $21,678, which was 78% of the average for the state as a whole and 74% of the national average. Carroll County’s personal income of $1.91 billion in 2000 ranked 25th for all of Georgia’s counties.
Based on the most recent statistical data available for 2001, housing activity in Carroll County remained at record levels. A total of 2,343 housing units, comprised of 1,709 single family and 634 multi-family units, were permitted in 2001. Because of the zero job growth in Carroll County, permit data for the first three quarters of 2002 indicated a decline in residential construction. As of August 2002, 648 single-family permits were issued, compared to 978 for the same period in 2001, with communities near I-20 reflecting the greatest share of the residential construction activity in 2002.
Carroll County’s industrial base remains heavily manufacturing with that sector accounting for 27.9% of total earnings in 2000. Non-durable goods manufacturing is concentrated in food processing, apparel and paper products. Durable goods manufacturing is heavily concentrated in primary metals. The share of earnings related to services rose to 20.2% in 2000. During the 1990’s, employment grew at an average annual rate of 1.4%, down
substantially from the 2.9% annual rate in the 1980’s and the 4.1% rate in the 1970’s. Industries with the fastest employment growth were wholesale trade, which grew at an average annual rate of 4.2%, followed by local government at 3.3% and services at 3.0%. Manufacturing employment fell at an average annual rate of 1.6% in the last ten years.
Carroll County’s manufacturing base is likely to be positively impacted by a number of significant expansions. Janus International Corporation, an overhead rolling door manufacturer, opened a plant near I-20. Janus currently employs about 100 workers and company officials anticipate increasing its work force to 400 by 2006. A Villa Rica manufacturer, PrintPack, Inc., anticipates adding 150 to 200 workers to the 200 it currently employs by 2005. Additionally, Carrollton has attracted an auto parts manufacturing plant owned by Decoma International, Incorporated. Decoma’s new plant is expected to employ 300 workers.
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 1993-2002 was 5.1%. The amount of total deposits in Carroll County was approximately $1.10 billion as of June 30, 2002, compared to total deposits of approximately $710 million as of June 30, 1993. Douglas County had the second largest deposit base in our market area with $809 million in total deposits, and Paulding County coming in third with $547 million in total deposits, as of June 30, 2002. The Bank held a market share of 23.7% of total deposits in Carroll County as of June 30, 2002, representing the largest deposit market share for any financial institution located in Carroll County.
The Bank established two branches in the Douglas County market over the past three years. Douglas County ranks 139th out of 159 counties in land area, but 16th in population in Georgia. Over the last decade, Douglas County’s population increased by almost 30% with migration accounting for 65% of that growth. Douglas County’s median household income was $50,108 in 1999, ranking 12th among all Georgia counties and 30% higher than Carroll County’s median income for that year. Douglas County’s personal income was $2.34 billion, which ranked 19th in the state. The service sector is the largest sector of Douglas County’s economy comprising 30.5% of its total employment, with retail trade in second at 24.7%.
Douglas County’s population grew 3.6% in 2001, making it the 21st fastest growing county in the state. Along with its population, new housing activity accelerated in 2000 and has increased each year through 2002. Both single family and multi family permits rose sharply. As of the end of August 2002, a total of 2,502 housing permits were issued in Douglas County, more than any county in the west Georgia region. However, Douglas County’s 4.4% unemployment rate in August 2002 was well above its 2.7% unemployment rate in August 2001. Employment growth continues to be led by retail trade, which provided 593 new jobs in 2001, although the services industry, Douglas County’s second largest employment sector, lost 456 jobs in 2001 with that trend expected to continue in 2002.
Upscale residential development continues in Douglas County in subdivisions like Chapel Hills and Mirror Lake. A new subdivision in Chapel Hills, the Links, will contain 34 new homes priced from $300,000 to $500,000. Mirror Lake, located north of I-20, sold approximately $30 million in new homes during the first half of 2002, with an average of 24 homes selling per month. Other key developments include Bear Creek, which is expected to contain 500 homes priced from $200,000 to $500,000, Anneewakee Trails Conservation Communities, which will include 1,500 homes priced from $120,000 to $250,000, and St. Andrews Golf and Country Club, which includes approximately 400 homes. There have been numerous retail, commercial and redevelopment plans which have taken place or are in the planning stages as well. The continued development of communities west of metro Atlanta along the I-20 corridor, such as Douglasville, and westward toward the city of Villa Rica, will have an impact on the Company’s primary and secondary market areas.
All of the Company’s market area has been affected by the downturn in the national economy. Even before terrorism became a continued threat and foreign affairs impacted the national economy, evidence suggested a rise in unemployment in all counties in the Company’s market area. Retail trade and business expansion is likely to be effected by the downturn. Inventories of single-family homes are increasing with the upscale home market experiencing particularly hard times. Retail sales were down in 2001 as evidenced by a 15% reduction in sales tax collections in Georgia.
The Bank’s percentage loan growth, a good indicator of business expansion, slowed in 2002 when compared to its loan growth in 2001 and 2000. Total loans grew by only 7.7%, or $20 million, in 2002 compared to 11.1%, or $25 million, in 2001 and 23.6%, or $43.7 million, in 2000. The Bank has recently opened two branches in Douglas County. In September of 2000, the Bank opened a branch in an area known as Mirror Lake, which is located two miles north of I-20 between the cities of Douglasville and Villa Rica near western Douglas County and northern Carroll County. In its 28 months of existence, the Mirror Lake branch has grown to $39 million in loans, including loans transferred from the Villa Rica branch, and $5 million in deposits. The Bank has also expanded into Douglasville in Douglas County with a branch on Georgia Highway 5 near Douglas Boulevard, a major retail trade area. The Douglasville branch has grown to $20 million in loans and $10 million in deposits in the 18 months since it opened in June of 2001.
The Bank’s main office in Carrollton, Carroll County, decreased by $2 million in loans and increased by $23 million, or 14%, in deposits in 2001. By contrast, the main office increased by $18 million, or 14%, in loans and grew by $17 million, or 9%, in deposits in 2002. What impact the local economy will have on loan and deposit production and the collectability of loans is not readily apparent. Should interest rates remain low or decline further, the Bank’s interest margin would be adversely affected.
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 community commercial banks (such as McIntosh Commercial Bank and Gainesville Bank & Trust, successor to 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. Three mergers that have affected the Bank’s market area are the Community First Bank merger with BB&T, which closed in December 2001, the Peoples Bank of West Georgia merger with United Community Bank, which closed in September 2001, and the Hometown Bank of Villa Rica merger with Gainesville Bank & Trust, which closed in November 2002. West Georgia National Bank is now the largest independent bank in Carroll County. McIntosh Commercial Bank commenced operations in the fourth quarter of 2002 and a second de novo bank is in formation in Villa Rica, Georgia.
The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations and office hours. Competition for deposits comes primarily from other commercial banks, savings associations, credit unions, money market funds and other investment alternatives. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services. Competition for loans comes primarily from other commercial banks, savings associations, mortgage banking firms, credit unions and other financial intermediaries. Many of the financial institutions operating in the Bank’s market area offer services such as trust, investment and international banking, which the Bank does not offer, and have greater financial resources or have substantially higher lending limits than do the Bank.
To compete with other financial services providers, the Bank principally relies upon local promotional activities, personal relationships established by officers, directors and employees with its customers, and specialized services tailored to meet its customers’ needs. Management believes that the Bank has an opportunity to establish business ties with customers who have been displaced by the consolidations and desire to forge banking relationships with locally owned and managed institutions.
The Bank offers many personalized services and attracts customers by being responsive and sensitive to the needs of the community. The Bank relies not only on the goodwill and referrals of satisfied customers, as well as traditional media advertising to attract new customers, but also on individuals who develop new relationships to build the customer base of the Bank. To enhance the Bank’s image in the community, the Bank supports and participates in many events. Employees, officers and directors represent the Bank on many boards and local civic and charitable organizations.
Employees
As of December 31, 2002, 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 extensively 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. Beginning with the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) and following with the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), numerous additional regulatory requirements have been placed on the banking industry in the past fifteen years, and additional changes have been proposed. The banking industry has also changed significantly as a result of the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Act”) and the Financial Services Modernization Act of 1999. The Company’s operations may be affected by legislative changes and the policies of various regulatory authorities and the Company is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control or new federal or state legislation may have in the future.
The Company
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHCA”). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. The Company’s and the Bank’s activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Investments, Control and Activities. With certain limited exceptions, the BHCA requires every bank holding company to obtain prior approval of the Federal Reserve:
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to acquire the ownership or control of more than 5% of any class of voting stock of any bank not already controlled by it;
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for it or any subsidiary (other than a bank) to acquire all or substantially all of the assets of a bank; and
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to merge or consolidate with any other bank holding company.
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:
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making or servicing loans and certain leases;
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providing certain data processing services;
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acting as a fiduciary or investment or financial advisor;
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providing discount brokerage services;
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underwriting bank eligible securities; and
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making investments designed to promote community welfare.
Subsidiary banks of a bank holding company are subject to certain restrictions on extensions of credit to the bank holding company or its subsidiaries, on investments in their securities and on the use of their securities as collateral for loans to any borrower. These regulations and restrictions may limit the Company’s ability to obtain funds from the Bank for its cash needs, including funds for the payment of dividends, interest and operating expenses. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or the furnishing of services. For example, the Bank may not generally require a customer to obtain other services from it or the Company, and may not require that a customer promise not to obtain other services from a competitor as a condition to an extension of credit to the customer.
Financial Services Modernization Act. On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act of 1999, known as the Financial Services Modernization Act of 1999, which repeals many of the restrictions on the activities of banks and bank holding companies. The law establishes two new structures - “financial holding companies” and “financial subsidiaries” - that enable qualifying bank holding companies and banks to provide a wide variety of financial services that formerly could be performed only by insurance companies and securities firms. The law also permits bank affiliations with insurance and securities firms. At this time, the Company does not intend to seek qualification to enter into these additional financial services areas.
Source of Strength; Cross-Guarantee. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support these subsidiaries. This support may be required at times when, absent such policy, the bank holding company might not otherwise provide such support. Under these provisions, a bank holding company may be required to loan money to its subsidiary banks in the form of capital notes or other instruments which qualify for capital under regulatory rules. Under the BHCA, the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC against losses it incurs with respect to any other bank controlled by the Company, which in effect makes the Company’s equity investments in healthy bank subsidiaries available to the FDIC to assist any failing or failed bank subsidiary of the Company.
State Regulation. Activities of the Company are subject to certain provisions of The Financial Institutions Code of Georgia and regulations issued pursuant to such code. These provisions are administered by The Georgia Department of Banking & Finance, which has concurrent jurisdiction with the Federal Reserve over the activities of the Company. The laws and regulations administered by The Georgia Department of Banking & Finance are generally consistent with, or supplemental to, those federal laws and regulations discussed herein.
The Bank
As a national bank, the Bank is subject to the supervision and examination by the Office of the Comptroller of the Currency (the “OCC”). Deposits in the Bank are insured by the FDIC up to a maximum amount of $100,000 per depositor, subject to aggregation rules. The OCC and the FDIC regulate or monitor all areas of the Bank’s commercial banking operations, including security devices and procedures, adequacy of capitalization and loan loss reserves, loans, investments, borrowings, deposits, mergers, consolidations, reorganizations, issuance of securities, payment of dividends, interest rates, establishment of branches, and other aspects of its operations. The OCC requires the Bank to maintain certain capital ratios and imposes limitations on the Bank’s aggregate investment in real estate, bank premises and furniture and fixtures. The Bank is currently required by the OCC to prepare quarterly reports on the Bank’s financial condition and to conduct an annual audit of its financial affairs in compliance with minimum standards and procedures prescribed by the OCC.
Under FDICIA, all insured institutions must undergo periodic on-site examination by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual reports to the FDIC and the appropriate agency (and state supervisor when applicable). FDICIA also directs the FDIC to develop with other appropriate agencies a method for insured depository institutions to provide supplemental disclosure of the estimated fair market value of assets and liabilities, to the extent feasible and practicable, in any balance sheet, financial statement, report of condition or other report of any insured depository institution. FDICIA also requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions and depository institution holding companies relating, among other things, to: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; and (v) asset quality.
Community Reinvestment Act. The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the Federal Reserve, the FDIC or any other appropriate federal agency, shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could pose additional requirements and limitations on the bank. The Bank was examined for CRA compliance in March 1997 and received a CRA rating of “outstanding.”
Other Regulations. Interest and certain other charges collected or contracted for by the Bank are subject to Georgia usury laws and certain federal laws concerning interest rates. The Bank’s loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit, the Fair Credit Reporting Act of 1978 governing the use and provision of information to credit reporting agencies, the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies, 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 Georgia law governing such
transactions as they appear in non-banking commercial activities. These laws include 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 continue to be insured for at least six months and up to two years, at the discretion of the FDIC. After the date of termination, no new deposits accepted by the financial institution will be federally insured.
Dividends
The Company is a legal entity separate and distinct from the Bank. The principal source of cash flow for the Company is dividends from the Bank. The amount of dividends that may be paid by the Bank to the Company depends on the Bank’s earnings and capital position and is limited by various statutory and regulatory limitations. In addition, the Federal Reserve has stated that bank holding companies should refrain from or limit dividend increases or reduce or eliminate dividends under circumstances in which the bank holding company fails to meet minimum capital requirements or in which its earnings are impaired.
As a national bank, the Bank may not pay dividends from its paid-in-capital. All dividends must be paid out of retained earnings, after deducting expenses, including reserves for losses and bad debts. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank’s net profits of the preceding two consecutive half-year periods (in the case of an annual dividend). The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. Under FDICIA, the Bank may not pay a dividend if, after paying the dividend, the Bank would be undercapitalized. See Capital Adequacy.
As discussed below, additional capital requirements imposed by the OCC may limit the Bank’s ability to pay dividends to the Company. The Bank declared dividends in the amount of $1,946,775 to the Company during 2002. Under the OCC guidelines, as of December 31, 2002, the Bank was permitted to pay the Company dividends of up to $6,682,000 in addition to current earnings without obtaining prior regulatory approval.
In addition to the availability of funds from the Bank, the future dividend policy of the Company is subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial condition, cash needs and general business conditions. If dividends should be declared in the future, the amount of such dividends presently cannot be estimated and it cannot be known whether such dividends would continue for future periods.
Capital Adequacy
Federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to:
•
make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies;
•
account for off-balance sheet exposure; and
•
minimize disincentives for holding liquid assets.
The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums.
The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based Total Capital ratio equal to 8%, of which at least 4% must be Tier 1 capital. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Bank holding companies controlling financial institutions can be called upon to boost the institution’s capital and to partially guarantee the institution’s performance under their capital restoration plans. Tier 1 capital includes shareholders’ equity, qualifying perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangible assets and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate-term preferred stock and general reserves for loan and lease losses up to 1.25% of risk-weighted assets.
Under the guidelines, banks’ and bank holding companies’ assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans, both of which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating.
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:
(1)
An institution must meet all three minimums.
(2)
3% for composite 1-rated institutions, subject to appropriate federal banking agency guidelines.
(3)
An institution is classified as undercapitalized if it is below the specified capital level for any of the three capital measures.
A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives a less than satisfactory examination rating in any one of four categories. As a depository institution moves downward through the capitalization categories, the degree of regulatory scrutiny will increase and the permitted activities of the institution will decrease. Action may be taken by a depository institution’s primary federal regulator against an institution that falls into one of the three undercapitalized categories, including the requirement of filing a capital plan with the institution’s primary federal regulator, prohibition on the payment of dividends and management fees, restrictions on executive compensation, and increased supervisory monitoring. Other restrictions may be imposed on the institution either by its primary federal regulator or by the FDIC, including requirements to raise additional capital, sell assets, or sell the institution.
As of the date of this Report, the Company and the Bank are 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-
•
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.
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 Polices
The earnings of the Company are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order to curb inflation or combat a recession. The monetary policies of the Federal Reserve have major effects upon the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.
Item 2.
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 Bank opened its Mirror Lake office in September 2000. This office is currently a modular branch which will serve as a temporary site until a permanent structure is built. The Bank owns a 1.5 acre parcel in the Mirror Lake area on which it plans to construct its permanent facility. A second branch in Douglas County at 9557 Georgia Highway 5 in Douglasville opened in June 2001.
The Bank’s main office, operations center and related parking are located on approximately 2.5 acres. The main office is a two-story building with a total of approximately 19,100 square feet housing its lobby, retail offices, administrative and executive offices. The operations center is a two-story building with a total of approximately 12,200 square feet housing a computer room, administrative offices and storage facilities. The branch offices (with the exception of the Motor office and the Mirror Lake office which are approximately 700 and 1200 square feet, respectively) are typical of other banking facilities and are approximately 5,000 square feet in size. Each branch location has an ATM machine that is either walk-up or drive-up. The Motor office, Mirror Lake, and Douglasville offices are leased facilities. All of the other office facilities are owned. The Bank also operates six additional ATM machines on leased properties located throughout the Carrollton and Villa Rica area.
Item 3.
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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of shareholders of the Company during the fourth quarter of the fiscal year covered by this Report.
PART II
Item 5.
Item 5. Market for the Common Equity and Related Shareholder Matters
Market Information
The Company’s Common Stock is traded on the NASDAQ SmallCap Market System under trading symbol “WGNB”. Approximately 800 shareholders of record held the Common Stock as of March 7, 2003. Set forth below are the high and low bid prices for each full quarterly period during 2001 and 2002 and the dividends declared and paid per share of Common Stock for those periods.
Price Range Per Share
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, 2002 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 2002, certain directors of the Bank received 1,211 shares in payment of deferred director compensation for an aggregate consideration owed to them by the Bank of $29,366. The sale of the shares was exempt from registration under the Securities Act, pursuant to Section 4(2) thereof, as a transaction not involving a public offering.
Options to purchase 17,272 shares of Common Stock were granted in 2002 to seven individuals pursuant to the Company’s Incentive Stock Option Plan having a weighted average exercise price of $24.00. These options may be exercised anytime beginning five years from the date of grant and ending ten years from the date of grant at which point they expire. A total of 7,512 options were exercised in 2002 at a weighted average exercise price of $8.69. In addition, an individual took early retirement and forfeited 5,681 shares back into the plan. The Company believes that the grant of options and the exercise thereof was exempt from registration under Section 4(2) of the Securities Act.
Uses of Proceeds from Registered Securities
The Company has previously reported the completion of a registered public offering pursuant to which it sold 200,000 shares of its Common Stock at a purchase price of $24.00 per share. The net proceeds from the
offering (which was completed in April 2002) of $4,766,454 have not yet been used by the Company but continue to remain invested in a corporate bond and federal funds.
Item 6.
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, 2002 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.
Item 7.
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 of this Report. This discussion should be read in conjunction with information provided in the Company’s consolidated financial statements and accompanying footnotes.
EARNINGS OVERVIEW
For the Years Ended December 31, 2002, 2001 and 2000
The Company reported net earnings of $5.5 million in 2002, $4.8 million in 2001 and $4.4 million in 2000, representing an increase of 15.8% between fiscal years 2001 and 2002 and an increase of 8.7% between fiscal years 2000 and 2001. 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 was $1.69 for 2002, $1.52 for 2001 and $1.41 for 2000, representing an increase of 11.2% between fiscal years 2001 and 2002 and 7.8% between fiscal years 2000 and 2001. The net earnings per share for 2002 was affected by the previously described Common Stock offering completed in April 2002 which increased the number of shares outstanding. Return on average assets and return on average shareholders’ equity for 2002 was 1.55% and 15.56%, respectively, compared with 1.47% and 17.11%, respectively, for 2001, and 1.59% and 18.58%, respectively, for 2000. The reduction of return on average equity was primarily due to a large increase in equity in 2002. The increase was comprised of the Common Stock offering ($4.8 million), an increase in retained earnings ($3.5 million) and an increase in other comprehensive income ($922 thousand). These items had the effect of increasing the average balance of shareholders’ equity by $7.7 million over 2001.
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 increased by $1.1 million (7.6%) in 2002 from 2001, and by $787 thousand (or 5.7%) in 2001 from 2000. Net interest income at December 31, 2002, was $15.6 million compared to $14.5 million in 2001 and $13.7 million in 2000. The net interest margin on interest earning assets was 4.76% in 2002, 4.84% in 2001 and 5.44% in 2000. Beginning in early 2001 through the end of 2002, short term interest rates have dropped 525 basis points. Comparing the interest margin in 2002 to that in 2001, the Bank’s interest margin has declined by 8 basis points. Measuring from its three year high in 2000, the Bank’s interest margin has decreased 68 basis points. The Bank entered into an interest rate swap in December 2001 that benefited its interest margin for 2002. During 2002, the Bank recorded a net benefit which reduced interest expense by $168 thousand. In addition, management’s interest rate risk strategies helped to mitigate the effects of rapidly declining interest rates. During 2002, the Bank’s cost of funds was reduced by 147 basis points while the yield on earning assets declined 139 basis points resulting in the net interest spread widening in 2002 by 8 basis points. The asset repricing point has “caught up” with the immediate repricing of the interest-bearing transaction account liabilities.
The decrease in the net interest margin between 2000 and 2001 is primarily due to the rapid decline in the prime and discount rates during 2001 as assets repriced more quickly than funding sources. Those benchmark rates declined 475 basis points in ten months. The Bank’s balance sheet has traditionally been slightly liability sensitive.
That is, its liabilities re-price faster than its assets because of its high percentage of transaction accounts. Therefore, in a rising rate environment the Bank’s interest margin tends to narrow whereas in a falling rate environment the Bank’s interest margin tends to widen. However, when rates fall rapidly and drastically, the Bank’s cost of funds hit an economic floor. For instance, if the Bank was paying 2.5% on a NOW checking account, 3.0% on a savings account and 3.5% on a money market account and market rates decrease 475 basis points, the NOW, savings and money market rate can only fall a fraction of that amount due to competitive issues. Additionally, time deposits which have a fixed maturity are unable to decline as quickly as transaction accounts.
The net result is that the Bank’s interest margin narrows since the yield on earning assets has further to fall than the cost of funds. The Bank’s management, through its asset liability management process, attempts to manage its interest sensitivity position. However, no balance sheet management technique can completely shield the Bank’s margin from the precipitous interest rate movement experienced in 2001 and 2002.
The cost of interest-bearing liabilities was 3.12% for 2002, 4.59% for 2001 and 4.80% for 2000, representing a decrease of 147 basis points between fiscal 2001 and 2002 and an decrease of 21 basis points between fiscal 2000 and 2001. If one considers the yield on interest-bearing assets of 7.35% for 2002, 8.74% for 2001 and 9.42% for 2000, the impact of decreasing rates on asset yields was more pronounced in 2002 than in 2001, but the cost of funds decline in the same period was greater. Yields between 2001 and 2002 decreased 139 basis points as opposed to an increase of 68 basis points between 1999 and 2000. Comparing net interest margins of 4.76% for 2002, 4.84% for 2001 and 5.44%, one can clearly identify the impact on net interest margin as rates declined 475 basis points over the last ten months of 2001 and another 50 basis points in 2002. Prolonged low rates will have the impact of lowering the Company’s net interest margin.
The following table shows, for the past three years, the relationship between interest income and interest expense and the average daily balances of interest-earning assets and interest-bearing liabilities on a tax equivalent basis assuming a rate of 34%:
Table 1
Average Consolidated Balance Sheets and Net Interest Analysis
(in thousands)
Non-accrual loans and the interest income that was recorded on these loans are included in the yield calculation for loans in all periods reported. Tax-exempt interest income is calculated on a tax equivalent basis.
The following table shows the relative impact on net interest income of changes in the annual average daily outstanding balances (volume) of interest-earning assets and interest-bearing liabilities and the rates earned (rate) by the Bank on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.
Table 2
Changes in Interest Income and Expense on a Tax Equivalent Basis
(in thousands)
Other Income and Expense
Other income in 2002 was $5.3 million, compared to $4.6 million in 2001 and $3.0 million in 2000. This represents an increase of $701 thousand, or 15.4%, from fiscal 2001 to fiscal 2002 and an increase of $1.6 million, or 52.2%, from fiscal 2000 to fiscal 2001. The continuing increases in all comparative years are primarily due to an increase in the volume of service charges on deposit accounts and more specifically attributable to insufficient funds charges on deposit accounts. Service charges on deposit accounts have increased an average of 24% 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 increased 14% from 2001 to 2002 and 235% from 2000 to 2001. This is primarily due to continued low mortgage rates in 2001 and 2002 and customers desiring to either refinance their existing homes or purchase new homes. The Bank settled its interest rate swap position accounted for as a fair value hedge in August 2002, recognizing a gain of $252,950 which is included in miscellaneous income for 2002. This income is non-recurring in nature as the Bank has no other hedge positions currently in place.
Other expenses increased by $1.3 million, or 11.7%, in 2002 over 2001. The increase was due to an increase in salaries and employee benefits of $682 thousand, or 10.5%, an increase in occupancy expense of $91 thousand, or 5.8%, and an increase in other operating expense of $494 thousand, or 17.7%. The increase in salary and employee benefits is attributable to the following factors: (i) increased number of full time equivalent employees; (ii) a full year of wages for the staff at the Douglasville branch opened in mid 2001; (iii) increased commissions to mortgage loan originators due to the increase of mortgage origination activity; (iv) increased costs of health insurance; and (v) annual raises and increased profit sharing bonuses due to higher profitability. The Company had 10 more full time equivalent employees at the end of 2002 than it did at the end of 2001.
The increase in occupancy expense in 2002 as compared to 2001 was primarily attributable to a full year of operations in our Douglasville branch in addition to increased depreciation expense due to additional office space and investment in bank technology. The increase in other operating expense is due to increases in legal, accounting, and annual fees associated with compliance with SEC regulations and listing requirements for NASDAQ. Additionally, the Bank paid increased software fees associated with its bounce protection program which is commensurate with the increased fee income.
Other notable increases in expenses from 2000 to 2001 are related to occupancy and other operating expenses increasing $492 thousand, or 12.7%. This increase was due to increased occupancy and operating costs associated with the Mirror Lake and Douglasville offices and to increased costs associated with the bounce protection program.
Income taxes, expressed as a percentage of earnings before income taxes, declined to 33% in 2002, from 34% in 2001 and 36% in 2000. The decline in marginal tax rate over the past three years is primarily attributable to tax credits purchased by the Bank in 2001 having a full effect in 2002. In addition, in October 2002 the Bank formed WGNB Investments, Inc., a Nevada corporation, to manage, hold and trade cash, securities and loans of the Bank which had the effect of reducing its state income tax liability slightly in 2002.
BALANCE SHEET OVERVIEW
For the Years Ended December 31, 2002 and 2001
General
During 2002, average total assets increased $30.8 million (9.4%), average deposits increased $15.8 million (6.0%) and average loans increased $13.9 million (5.6%) from those recorded in 2001. During 2001, average total assets increased $49.9 million (18.0%), average deposits increased $39.4 million (17.6%) and average loans increased $38.7 million (18.4%) from those recorded in 2000. The Bank’s growth rate in 2002 slowed significantly when compared to 2001 and 2000. This was attributable to the slowdown of the economy and business expansion in the Bank’s market area. Management endeavors to let loan growth drive balance sheet growth and, thus, a slowdown in loan growth is reflected on the balance sheet.
Total assets at December 31, 2002, were $385 million, representing a $35 million (10.0%) increase from December 31, 2001. Total deposits increased $18.2 million (6.5%) from 2001 to 2002 while total loans increased $19.7 million (7.7%) during 2002. The increase in deposits in 2002 is attributable to an increase in non-interest bearing demand accounts of $5.1 million (15.4%), an increase in interest-bearing demand accounts of $14.4 million (13.1%) and a decrease in time deposit accounts of $2.0 million (1.6%). Demand accounts accounted for the vast majority of deposit increases in 2002. We attribute the demand deposit growth to three events that occurred in 2002. First, the only three independent competing community banks that remained in Carroll County merged with regional banks. This displacement has led to new checking account customers for the Bank. Second, because the time deposit rates are so low, some customers have moved their funds to money market accounts and NOW accounts in hopes that longer term CD rates will increase in the immediate future. Third, the Bank has deposit relationships with numerous county and municipal authorities. These deposit relationships in the banking industry are known as public funds. At the end of 2002, certain public entities had collected tax revenue in the amount of $6 million, subsequently deposited with the Bank, causing the Bank’s liquidity to increase. This amount was on deposit with the Bank at year end 2002, but typically is disbursed in the first quarter of the following year.
As the local and regional economy softened, loan demand fell off in the last half of 2001 and that trend continued throughout 2002. The Bank had grown its loan portfolio by $43.7 million (23.6%) in 2000, by $25.3 million (11.1%) in 2001 and by $19.7 million (7.7%) in 2002. The loans were funded principally with increased demand deposit accounts, a lower cost funding source and FHLB borrowings, typically lower than comparable certificates of deposit rates and terms. The Bank experienced approximately $7 million in loan payoffs in the fourth quarter of 2002 which had a detrimental effect on loan growth for 2002 and is also a factor underlying the spike in the Bank’s liquidity at year end.
Total assets at December 31, 2001, were $350 million, representing a $61 million (21.1%) increase from December 31, 2000. Total deposits increased $46.7 million (20.0%) from 2000 to 2001 while total loans increased $25.3 million (11.1%) during 2001. A little less than half of the increase in deposits came as a result of an increase of $21.0 million (23.8%) in interest-bearing demand accounts from 2000 to 2001 while time deposits accounts increased $22.9 million (21.4%) in 2001. By June 30, 2001, the bank had grown $28.3 million in loans however the actual growth for the year was $25.3 million. Deposit growth, on the other hand, remained strong throughout 2001 as customers sought to move funds from the stock market back to the Bank as a flight to safety. Approximately fifty percent of the loan growth experienced by the Company was funded with FHLB advances. The remainder was funded principally with increases in deposit accounts.
Investments
The Company’s available-for-sale investment portfolio of $52.1 million as of December 31, 2002 consisted primarily of debt securities, which provide the Company with a source of liquidity and a stable source of income. This represented a decrease of $2.8 million (5.1%) over the $54.9 million held at December 31, 2001. The Company believes the investment portfolio provides a balance to interest rate and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds and supplying securities to pledge as required collateral for certain public deposits. Investment securities 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 $3.5 million at December 31, 2002, an increase of $1.5 million (75%) 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 the Southeast. The Company has the intent and ability to hold these securities until maturity.
The following table shows the carrying value of the Company’s securities, by security type, as of December 31, 2002, 2001 and 2000:
Table 3
Investment Portfolio
(in thousands)
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, 2002. 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)
Mortgage backed securities are included in the maturities categories in which they are anticipated to be repaid based on scheduled maturities. The actual cash flow of mortgage backed securities differs with this assumption. Additionally, some agency securities in the portfolio have call features. The above analysis assumes that callable agencies will mature on their final maturity date. The actual cash flow of agency securities may differ from this assumption. Yields on tax-exempt securities are calculated on a tax equivalent basis.
Loans
Loan concentrations are defined as aggregate credits extended to a number of borrowers engaged in similar activities or resident in the same geographic region, which would cause them to be similarly affected by economic or other conditions. The Bank, on a routine basis, evaluates these concentrations for purposes of policing its concentrations and making necessary adjustments in its lending practices to reflect current economic conditions, loan to deposit ratios, and industry trends.
The primary types of loans in the Bank’s portfolio are residential mortgages and home equity loans, commercial real estate loans, commercial loans, and consumer installment loans. Generally, the Bank underwrites loans based upon the borrower’s debt service capacity or cash flow, a consideration of past performance on loans from other creditors as well as an evaluation of the collateral securing the loan. With some exceptions, the Bank’s general policy is to require conservative underwriting policies, primarily in the analysis of borrowers’ debt service coverage capabilities for commercial and commercial real estate loans, while emphasizing lower gross debt ratios for consumer loans and lower loan-to-value ratios for all types of real estate loans. Given the localized nature of the Bank’s lending activities, the primary risk factor affecting the portfolio as a whole is the health of the local economy in the west Georgia area and its effects on the value of local real estate and the incomes of local professionals and business firms.
Loans to directors, executive officers and principal shareholders of the Company and to directors and officers of the Bank are subject to limitations of the Federal Reserve, the principal effect of which is to require that extensions of credit by the Bank to executive officers, directors, and ten percent shareholders satisfy certain standards. The Bank routinely makes loans in the ordinary course of business to certain directors and executive officers of the Company and the Bank, their associates, and members of their immediate families. In accordance with Federal Reserve guidelines, these loans are made on substantially the same terms, including interest rates and collateral, as those prevailing for comparable transactions with others and do not involve more than normal risk of collectibility or present other unfavorable features. As of December 31, 2002, loans and commitments outstanding to directors and executive officers of the Company and the Bank, their associates and members of their immediate families totaled $5.4 million (net of participations sold to other banks on a non-recourse basis), which represented approximately 2.0% of total loans as of that date. As of December 31, 2002, 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)
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, 2002:
Table 6
Loan Portfolio Maturity
(in thousands)
Variable/Fixed Rate Mix
Provision and Allowance for Possible Loan and Lease Losses
The provision for loan losses for the Company in 2002 was $483 thousand compared to $911 thousand in 2001 and $509 thousand in 2000. The decrease in the provision for loan losses reflects the slower loan growth and lower level of nonperforming loans in 2002 as compared to 2001. The Company’s methodology described below for measuring the adequacy of the allowance for loan loss continues to indicate sufficient reserve for expected losses in the portfolio.
The allowance for loan losses represented 1.38%, 1.47% and 1.28% of total loans outstanding at December 31, 2002, 2001 and 2000, respectively. Total charge-offs were $695 thousand, $200 thousand and $77 thousand compared to recoveries of $264 thousand, $89 thousand and $208 thousand during 2002, 2001 and 2000, respectively.
The Company has an independent loan review function. All loans are placed in loan grade categories, which are consistent with those used by the Bank’s regulators. All loans are constantly monitored by the loan officer and the loan review function for credit quality, consistency and accuracy. Through this grading process, the Bank assures the timely recognition of credit risks. In general, as credit risk increases, the level of the allowance for loan loss will also increase.
A formal allowance for loan loss adequacy test is performed at each month end. Specific amounts of loss are estimated on problem loans and historical loss percentages are applied to the balance of the portfolio using certain portfolio stratifications. Additionally, the evaluation takes into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions, regulatory examination results, and the existence of loan concentrations.
Management’s judgment in determining the adequacy of the allowance is based on evaluations of the collectability of loans. These evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, current economic conditions that may affect the borrower’s ability to pay, overall portfolio quality, and review of specific problem loans. In determining the adequacy of the allowance for loan losses, management uses a loan grading system that rates loans in eight different categories. Grades five though eight, which represent criticized or classified loans, are assigned allocations of loss based on management’s estimate of potential loss that is generally based on historical losses and/or collateral deficiencies. Loans graded one through four are stratified by type and allocated loss ranges based on historical loss experience for the strata. The
combination of these results are 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. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and a change in the borrowers’ ability to repay. In addition, regulators, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such regulators may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Management of the Company realizes the importance of maintaining an adequate allowance for loan losses. Through a professional loan review function and effective loan officer identification program, management is recognizing weaknesses in the loan portfolio in a timely manner. Early identification of deteriorating credit attributes allows management to take a proactive role in documenting an established plan to enhance the Company’s position and minimize the potential for loss.
Through the problem loan identification program outlined above, management is able to identify those loans that exhibit weakness and classify them on a classified and criticized loan list. The Company’s migration analysis assigns historical loss amounts to pools of loans according to classifications of risk ratings to calculate a general allowance to the overall portfolio. In cases where significant weaknesses exist in a specific loan, a specific reserve is assigned to such loans in addition to the general allowance. The Company also evaluates the risks associated with concentrations in credit. If it is necessary to assign an allowance related to concentrations of credit, the Company adds a specific reserve related to such risks.
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)
Non-Performing Assets and Past Due Loans
Non-performing assets at December 31, 2002, were $2.8 million, or 1.03%, of total loans and other real estate owned compared to $3.9 million, or 1.55%, of total loans and other real estate owned at December 31, 2001 and $1.4 million, or .63%, of total loans and other real estate owned at December 31, 2000. The levels of non-performing loans remain relatively low. The percentage of non-performing assets to total loans has decreased from its peak in 2001. The decrease of non-performing loans from 2001 to 2002 was attributable to loans on non-accrual paying off or coming off non-accrual status in the amount of $677 thousand and a reduction of loans ninety days past due in the amount of $550 thousand.
The following table summarizes loans 90 days or greater past due, non-accrual loans and real estate taken in settlement of foreclosure for the years indicated.
Table 8
Non-Performing Assets
(in thousands)
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 continually monitors selected accruing loans for which general economic conditions or changes within a particular industry that could cause the borrowers financial difficulties. The loan review function also identifies loans with high degrees of credit or other risks. The focus of loan review and management is to maintain a low level of non-performing assets and return current non-performing assets to earning status. Management is unaware of any known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company’s liquidity, capital resources or operations.
Deposits
Time deposits of $100 thousand and greater totaled $41.1 million at December 31, 2002, compared with $41.5 million at year-end 2001 and $31.2 million at year-end 2000. The following table sets forth the scheduled maturities of time deposits of $100 thousand and greater at December 31, 2002.
Table 9
Deposits
(in thousands)
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 to meet liquidity needs. It is the policy of the Bank to monitor its liquidity to meet regulatory requirements and their local funding requirements. Management believes that the Bank’s current level of liquidity is adequate to meet its needs.
The Bank maintains relationships with correspondent banks including the Federal Home Loan Bank (the “FHLB”) that can provide funds to it on short notice, if needed. The Bank has arrangements with correspondent and commercial banks for short term unsecured advances up to $11.0 million. As of December 31, 2002, the Bank had not drawn on the available facilities. In addition, the Bank has a line of credit with the FHLB in the amount of $53.9 million of which the Bank had drawn $45 million at December 31, 2002. The lines of credit have varying terms and maturities that are disclosed in detail in the notes to the financial statements.
The Company’s cash flows are composed of three classifications: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Cash and cash equivalents increased $16.7 million for a total $47.7 million at December 31, 2002, compared with $31.0 million at December 31, 2001. The increase was primarily attributable to net cash provided by financing activities of $30.0 million made up of $18.2 million of increased deposits, $10.0 million of borrowing proceeds and $4.8 million in offering proceeds offset by other items totaling approximately $2.9 million. Cash inflows from operations totaled $5.1 million in 2002, while outflows from investing activities totaled $18.4 million, most of which was net loan increases during 2002 of $20.5 million.
Cash inflows from operations totaled $6.4 million in 2001, while inflows from financing activities totaled $54.4 million, most of which was net deposit increases during 2001 of $46.7 million and FHLB advances of $10 million. Investing activities used $41.8 million of cash and cash equivalents, principally composed of net advances of loans to customers of $25.5 million and net cash flows invested in securities of $14.4 million during 2001. The Bank purchased property and equipment for operations and future expansion amounting to $1.3 million.
Capital Resources
Total shareholders’ equity as of December 31, 2002 was $38.5 million, an increase of $9.3 million over 2001. The increase in equity was due to a public offering the Company completed in April 2002 through the sales efforts of its directors and officers. The Company offered and sold 200,000 shares of Common Stock for $24.00 per share. The net proceeds of the offering less offering costs was $4.8 million. The offering, combined with $5.5 million in net income less $1.9 million in dividends and an increase in unrealized holding gain on securities available for sale of $922 thousand net of tax, accounted for the large increase in shareholders’ equity.
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, 2002, the Bank exceeded all applicable regulatory capital requirements for classification as a “well capitalized” bank, and the Company satisfied all applicable regulatory requirements imposed on it by the Federal Reserve. The following tables present the Company’s regulatory capital position at December 31, 2002:
Table 10
For a more complete discussion of the actual and required ratios of the Company and its subsidiaries, see Note 9 to the consolidated financial statements. Average equity to average assets was 9.97% in 2002 and 8.57% in 2001. The ratio of dividends declared to net earnings was 35.1 % during 2002, compared with 35.5% in 2001.
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, 2002, the Bank had issued commitments to extend credit of $40,842,000 through various types of commercial lending arrangements and additional commitments through standby letters of credit of $1,658,000. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on its credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The Company manages the credit risk on these commitments by subjecting them to normal underwriting and risk management processes.
Asset/Liability Management
It is the Company’s objective to manage assets and liabilities to provide a satisfactory, consistent level of profitability within the framework of established cash, loan, investment, borrowing and capital policies. Certain officers are charged with the responsibility for monitoring policies and procedures that are designed to ensure acceptable composition of the asset/liability mix. It is the overall philosophy of management to support asset growth primarily through growth of deposits and borrowing strategies, which minimize the Company’s exposure to interest rate risk. The objective of the policy is to control interest sensitive assets and liabilities so as to minimize the impact of substantial movements in interest rates on earnings.
The asset/liability mix is monitored on a regular basis. A report reflecting the interest sensitive assets and interest sensitive liabilities is prepared and presented to management and the asset/liability management committee on at least a quarterly basis. One method to measure a bank’s interest rate exposure is through its repricing gap. The gap is calculated by taking all assets that reprice or mature within a given time frame and subtracting all liabilities that reprice or mature within that time frame. The difference between these two amounts is called the “gap”, the amount of either liabilities or assets that will reprice without a corresponding asset or liability repricing. A negative gap (more liabilities repricing than assets) generally indicates that the bank’s net interest income will decrease if interest rates rise and will increase if interest rates fall. A positive gap generally indicates that the bank’s net interest income will decrease if rates fall and will increase if rates rise.
The Company has adopted the objective of achieving and maintaining a one-year cumulative gap, as a percent of total assets, of between plus 20% and minus 20%. On a consolidated basis, the Company’s one-year cumulative gap
was a negative 3.59% of total assets at December 31, 2002. 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 2002, the estimated impact of an immediate increase in interest rates of 100 basis points would have resulted in a decrease in net interest income over a 12-month period of .7%, with a comparable decrease in interest rates resulting in a decrease in net interest income of .7%. 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, 2002 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, 2002, the difference between the Company’s liabilities and assets repricing or maturing within one year was $12.6 million. The above chart indicates an excess of liabilities repricing or maturing within one year, thus a rise in interest rates would cause the Company’s net interest income to decline. However, certain
shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees or at different points in time to changes in market interest rates. Such is the case in analyzing NOW accounts, which are disclosed in the one year or less category. Those liabilities do not necessarily reprice as quickly or to the same degree as rates in general. Additionally, certain assets, such as adjustable-rate mortgages, have features that restrict changes in interest rates, both on a short-term basis and over the life of the asset. Changes in interest rates, prepayment rates, early withdrawal levels and the ability of borrowers to service their debt, among other factors, may change significantly from the assumptions made in the table.
Impact of Inflation, Changing Prices and Monetary Policies
The primary effect of inflation on the Company’s operations is reflected in increased operating costs. Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors which are beyond the control of the Company, including the influence of domestic and foreign 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.
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.
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 and are incorporated herein by reference.
Presented below is a summary of the unaudited consolidated quarterly financial data for the years ended December 31, 2002 and 2001.
Quarterly Financial Information
(Unaudited - in thousands, except per share data)
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant; Compliance with Section 16(a) of the Exchange Act
The information appearing under the headings “Nomination and Election of Directors” and “Compliance With Section 16(a) of the Securities Exchange Act of 1934” and the subheading “Information as to Nominees, Other Directors and Executive Officers” in the Proxy Statement (the “2003 Proxy Statement”) relating to the 2003 Annual Meeting of Shareholders of the Company, currently scheduled to be held on April 8, 2003, is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information appearing under the heading “Executive Compensation” in the 2003 Proxy Statement is incorporated herein by reference.
Item 12.
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” and “Information Regarding Plans and Other Arrangements Not Subject to Shareholder Action “ in the 2003 Proxy Statement is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information appearing under the caption “Certain Relationships and Related Transactions” in the 2003 Proxy Statement is incorporated herein by reference.
Item 14.
Item 14. Controls and Procedures
Evaluation of disclosure controls and procedures.
The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive and chief financial officers of the Company concluded that the Company’s disclosure controls and procedures were adequate.
Changes in internal controls.
The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive and chief financial officers.
Item 15.
Item 15. Exhibits and Reports on Form 8-K
(a)(1)
Financial Statements
The following financial statements are filed with this Report:
Independent Auditors’ Report of Porter Keadle Moore, LLP
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Earnings for the Years Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002,
2001 and 2000
Consolidated Statements of Changes in Stockholders’ Equity for the Years
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000
(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)
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)
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)
Subsidiary of WGNB Corp.
99.1
**
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2
**
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002
*
Indicates management contract or compensatory plan or arrangement.
**
Pursuant to Commission Release No. 33-8212, this certification will be treated as “accompanying” this Annual Report on Form 10-K and not “filed” as part of such report for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of Section 18 of the Exchange Act and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31, 2002.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 19, 2003
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints L. Leighton Alston and Steven J. Haack, or either of them, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
In accordance with the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ L. Leighton Alston
L. Leighton Alston, President, Chief
Executive Officer and Director
[Principal Executive Officer]
Date: March 19, 2003
/s/ Steven J. Haack
Steven J. Haack, Secretary and Treasurer
[Principal Financial and Accounting Officer]
Date: March 19, 2003
/s/ W. T. Green
W. T. Green, Chairman of the Board
Date: March 24, 2003
Wanda W. Calhoun, Director
Date: March __, 2003
/s/ Grady W. Cole
Grady W. Cole, Director
Date: March 27, 2003
/s/ Richard A. Duncan
Richard A. Duncan, Director
Date: March 24, 2003
/s/ L.G. Joyner
L.G. (Jack) Joyner, Director
Date: March 24, 2003
R. David Perry, Director
Date: March __, 2003
L. Richard Plunkett, Director
Date: March __, 2003
/s/ Thomas E. Reeve, III
Thomas E. Reeve, III, M.D., Director
Date: March 27, 2003
/s/ Thomas T. Richards
Thomas T. Richards, Director
Date: March 24, 2003
/s/ Oscar W. Roberts, III
Oscar W. Roberts, III, Director
Date: March 26, 2003
/s/ Frank T. Thomasson, III
Frank T. Thomasson, III, Director
Date: March 27, 2003
J. Thomas Vance, Director
Date: March __, 2003
/s/ Charles M. Willis, Sr.
Charles M. Willis, Sr., Director
Date: March 24, 2003
CERTIFICATIONS
I, L. Leighton Alston, Chief Executive Officer of WGNB Corp., certify that:
1.
I have reviewed this annual report on Form 10-K of WGNB Corp.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 19, 2003
/s/ L. Leighton Alston L. Leighton Alston
Chief Executive Officer
I, Steven J. Haack, Principal Financial Officer of WGNB Corp., certify that:
1.
I have reviewed this annual report on Form 10-K of WGNB Corp.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 19, 2003
/s/ Steven J. Haack Steven J. Haack
Treasurer
(Principal Financial Officer)
WGNB CORP.
Consolidated Financial Statements
December 31, 2002 and 2001
(with Independent Accountants’ Report thereon)
[Letterhead of Porter Keadle Moore LLP]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
WGNB Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of WGNB Corp. and subsidiaries as of December 31, 2002 and 2001, 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, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of WGNB Corp. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years ended December 31, 2002, in conformity with auditing standards generally accepted in the United States of America.
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
January 31, 2003
WGNB CORP.
Consolidated Balance Sheets
December 31, 2002 and 2001
See accompanying notes to consolidated financial statements.
WGNB CORP.
Consolidated Statements of Earnings
For the Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
WGNB CORP.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
WGNB CORP.
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
WGNB CORP.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2002, 2001 and 2000
WGNB CORP.
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2002, 2001 and 2000
See accompanying notes to consolidated financial statements.
WGNB CORP.
Notes to Consolidated Financial Statements
(1)
Summary of Significant Accounting Policies
The following is a summary of the significant policies and procedures.
The consolidated financial statements of WGNB Corp. (the “Company”) include the financial statements of its wholly owned subsidiaries West Georgia National Bank (the “Bank”) and West Georgia Credit Services, Inc. (“WGCS”). All significant intercompany accounts and transactions have been eliminated in consolidation.
The Bank commenced business in 1946 upon receipt of its banking charter from the Office of the Comptroller of the Currency (the “OCC”). The Bank is primarily regulated by the OCC and undergoes periodic examinations by this regulatory agency. The Company is regulated by the Federal Reserve and is also subject to periodic examinations. The Bank provides a full range of commercial and consumer banking services principally in Carroll and Douglas Counties, Georgia.
During 2002, the Company merged the operation of WGCS into the Bank and the Company. Additionally, the Company has ceased offering non-traditional consumer financing. WGCS had operated under the name Mortgage & Loan Solutions and commenced operations in 1997 serving Paulding, Douglas and Carroll Counties.
The accounting and reporting policies of the Company, and the methods of applying these principles, conform with generally accepted accounting principles 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.
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold.
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.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(1)
Summary of Significant Accounting Policies, continued
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to the yield. Realized gains and losses for securities classified as available for sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold.
Loans and Allowance for Loan Losses
Loans are stated at the principal amount outstanding, net of unearned interest and the allowance for loan losses. Interest income on loans is recognized in a manner that results in a level yield on the principal amount outstanding. Nonrefundable loan fees are deferred, net of certain direct origination costs, and amortized into income over the life of the related loan.
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 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 years
Furniture and equipment
3 - 10 years
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.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(1)
Summary of Significant Accounting Policies, continued
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.
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. Changes in the fair value of a derivative depend on the intended use of the derivative instrument at inception. The change in fair value of instruments used as fair value hedges is accounted for in the earnings of the period simultaneous with accounting for the fair value change of the item being hedged. The change in fair value of the effective portion of cash flow hedges is accounted for in comprehensive income rather than earnings. The change in fair value of derivative instruments that are not intended as a hedge is accounted for in the earnings of the period of the change. When a swap contract is settled or terminated, the cumulative change in the fair value is amortized into income over the original hedge period. If the underlying hedged instrument is sold, the Company immediately recognizes the cumulative change in the derivative’s value in the component of earnings.
SFAS No. 123, “Accounting for Stock-Based Compensation”, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
Stock Compensation Plans, continued
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:
GAAP generally requires that recognized revenues, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheets, such items along with net income, are components of comprehensive income. The Company presents comprehensive income in a separate consolidated statement of comprehensive income.
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. During 2000, the Company completed a two for one stock split. Earnings per share and the related average shares outstanding for each reporting period have been restated to reflect the effects of the stock split.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(1)
Summary of Significant Accounting Policies, continued
Earnings Per Share, continued
Effective October 1, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 147, “Acquisitions of Certain Financial Institutions,” which amends SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions.” It also requires that those transactions be accounted for in accordance with SFAS No. 141, “Business Combinations,” and SFAS No. 142 “Goodwill and Other Intangible Assets.” Specifically, the requirement of SFAS No. 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to business combinations within the scope of SFAS No. 72. In addition, this Statement amends SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” to include in its scope long-term customer-relationship intangible asset of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. This new pronouncement will not have a significant impact on the financial position or results of operations of the Company.
Additionally, effective December 15, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123.” This statement provides alternative methods of transition for voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on the reported results. This new pronouncement did not have a significant impact on the financial position of the Company.
Certain reclassifications have been made in the prior years consolidated financial statements to conform to the presentation used in 2002.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(2)
Investment Securities
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(2)
Investment Securities, continued
The amortized cost and estimated fair value of investment securities available for sale and held to maturity at December 31, 2002, 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.
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.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
WGNB CORP.
Notes to Consolidated Financial Statements, continued
The early conversion option allows the FHLB to convert the advances to a variable interest rate upon notification to the Bank. The FHLB advances are secured by the Bank’s stock in the FHLB, its 1-4 family first mortgage loans and qualified commercial loans.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
The Company is a party to financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation. Collateral held varies, but may include unimproved and improved real estate, certificates of deposit or personal property.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under certain adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of December 31, 2002, that the Company and the Bank met all capital adequacy requirements to which it is subject.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(9)
Regulatory Matters, continued
As of December 31, 2002 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.
Dividends paid by the Bank are the primary source of funds available to the Company. Banking regulations limit the amount of dividends that may be paid without prior approval of the regulatory authorities. These restrictions are based on the level of regulatory classified assets, the prior years’ net earnings, and the ratio of equity capital to total assets. At December 31, 2002 the Bank could pay approximately $6,682,000 in addition to current earnings without obtaining prior regulatory approval.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
WGNB CORP.
Notes to Consolidated Financial Statements, continued
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:
The Bank conducts transactions with directors and executive officers, including companies in which they have beneficial interests, in the normal course of business. It is the Bank’s policy to comply with federal regulations that require that loan transactions with directors and executive officers be made on substantially the same terms as those prevailing at the time made for comparable loans to other persons. The following summary reflects activity for related party loans for 2002:
WGNB CORP.
Notes to Consolidated Financial Statements, continued
Components of other operating expenses which exceed 1% of total interest income and other income are as follows:
The Company is required to disclose fair value information about financial instruments, whether or not recognized on the face of the balance sheet, for which it is practicable to estimate that value. The assumptions used in the estimation of the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company or its subsidiaries, but rather a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination, or issuance.
For cash, due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.
The fair values for investment securities are based on quoted market prices.
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.
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.
Because other borrowings are based on variable rates, the carrying value is a reasonable estimate of fair value.
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.
Derivative Instruments
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(15)
Fair Value of Financial Instruments, continued
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.
WGNB CORP.
Notes to Consolidated Financial Statements, continued
(16)
WGNB Corp. (Parent Company Only) Financial Information
Balance Sheets
December 31, 2002 and 2001
Statements of Earnings
For the Years Ended December 31, 2002, 2001 and 2000
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, 2002, 2001 and 2000