**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

----

 

**FORM 10-Q**

 

**Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For thequarter ended June 30, 2002**

 

**Commissionfile number 000-25128**

 

----

 

**MAIN STREETBANKS, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **Georgia**                               |   | **58-2104977**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation)                 |   | (I.R.S. Employer  Identification No.) |
|                                      |   |                                  |
| **676  Chastain Road, Kennesaw, GA**      |   | **30144**                             |
| (Address of principal  executive offices) |   | (Zip Code)                            |
|                                      |   |                                  |
| **770-422-2888**                          |
| (Registrant’s telephone  number)     |

 

Securitiesregistered under Section 12(b) of the Exchange Act: **None**

Securitiesregistered under Section 12(g) of the Exchange Act:

**CommonStock, no par value**

 

----

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o

 

**APPLICABLEONLY TO CORPORATE ISSUERS**

 

As of July 31, 2002registrant had outstanding 15,986,021 shares of common stock.

 

 

----

 

**MAINSTREET BANKS, INC.**

**TABLE OFCONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                     |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |                                                                                                                                                          |
| Item 1.      | Financial Statements                                                                                                                                          |
|         | Condensed  Consolidated Balance Sheets June 30, 2002 (unaudited) and December 31, 2001                                                                        |
|         |                                                                                                                                                          |
|         | Condensed  Consolidated Statements of Income (unaudited) Three Months Ended June 30,  2002 and 2001 and Six Months Ended June 30, 2002 and 2001               |
|         |                                                                                                                                                          |
|         | Condensed  Consolidated Statements of Comprehensive Income (unaudited) Three Months  Ended June 30, 2002 and 2001 and Six Months Ended June 30, 2002 and 2001 |
|         |                                                                                                                                                          |
|         | Condensed  Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30,  2002 and 2001                                                         |
|         |                                                                                                                                                          |
|         | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                                             |
|         |                                                                                                                                                          |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                   |
|         |                                                                                                                                                          |
| Item 3.      | Quantitative and Qualitative Disclosures about  Market Risk (included in Item 2)                                                                              |
|         |                                                                                                                                                          |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                         |
|         |                                                                                                                                                          |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                                                                                          |
|         |                                                                                                                                                          |
| Item 6.      | Exhibits and  Reports on Form 8-K                                                                                                                             |
|         |                                                                                                                                                          |
|         | Signatures                                                                                                                                                    |

 

----

 

**PART I. – FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS**

 

**MAIN STREET BANKS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                    |   | **(Unaudited)**    |          |                    |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------------|-------------------------|--------|
|                                                                                                                                    |   | **June 30,  2002** |          | **December  31,  2001** |   |
|                                                                                                                                    |   |               |          |                    |   |
| **Assets**                                                                                                                              |   |               |          |                    |   |
| Cash and due  from banks                                                                                                                |   | $                  | 31,046,910    |                    | $      | 36,002,196 |   |
| Interest-bearing  deposits in banks                                                                                                     |   | 1,436,168          |          | 14,509,315              |   |
| Federal funds  sold and securities purchased under agreements to resell                                                                 |   | 15,684,897         |          | 60,431,897              |   |
| Investment  securities available for sale                                                                                               |   | 227,610,228        |          | 122,447,873             |   |
| Investment  securities held to maturity (fair value of $741,739 and $729,102 at June 30,  2002 and December 31, 2001, respectively      |   | 687,241            |          | 686,966                 |   |
| Mortgage loans  held for sale                                                                                                           |   | 4,144,673          |          | 9,193,983               |   |
| Loans, net of  unearned income                                                                                                          |   | 861,235,694        |          | 811,446,346             |   |
| Allowance for  loan losses                                                                                                              |   | (12,746,608        | )             | (12,017,448             | )      |
| Loans, net                                                                                                                              |   | 848,489,086        |          | 799,428,898             |   |
|                                                                                                                                    |   |               |          |                    |   |
| Premises and  equipment, net                                                                                                            |   | 26,871,117         |          | 26,692,404              |   |
| Other real  estate                                                                                                                      |   | 1,627,665          |          | 1,266,650               |   |
| Accrued interest  receivable                                                                                                            |   | 7,226,573          |          | 5,643,803               |   |
| Goodwill and  other intangible assets                                                                                                   |   | 1,477,448          |          | 705,867                 |   |
| Other assets                                                                                                                            |   | 40,138,235         |          | 33,158,039              |   |
| Total assets                                                                                                                            |   | $                  | 1,206,440,241 |                    | $      | 1,110,167,891 |   |
|                                                                                                                                    |   |               |          |                    |   |
| **Liabilities  and stockholders’ equity**                                                                                          |   |               |          |                    |   |
| Liabilities:                                                                                                                            |   |               |          |                    |   |
| Deposits:                                                                                                                               |   |               |          |                    |   |
| Noninterest-bearing  demand                                                                                                             |   | $                  | 173,268,897   |                    | $      | 160,675,955 |   |
| Interest-bearing  demand and money market                                                                                               |   | 228,129,134        |          | 250,925,349             |   |
| Savings                                                                                                                                 |   | 41,722,579         |          | 50,311,997              |   |
| Time deposits of  $100,000 or more                                                                                                      |   | 174,468,646        |          | 152,749,296             |   |
| Other time  deposits                                                                                                                    |   | 319,967,471        |          | 293,518,204             |   |
| Total deposits                                                                                                                          |   | 937,556,727        |          | 908,180,801             |   |
|                                                                                                                                    |   |               |          |                    |   |
| Accrued interest  payable                                                                                                               |   | 3,180,230          |          | 4,570,179               |   |
| Federal Home  Loan Bank advances                                                                                                        |   | 90,121,250         |          | 75,121,250              |   |
| Federal funds  purchased and securities sold under repurchase agreements                                                                |   | 59,727,928         |          | 15,504,355              |   |
| Other  liabilities                                                                                                                      |   | 4,396,808          |          | 1,669,954               |   |
| Total  liabilities                                                                                                                      |   | 1,094,982,943      |          | 1,005,046,539           |   |
|                                                                                                                                    |   |               |          |                    |   |
| **Shareholders’  equity**                                                                                                          |   |               |          |                    |   |
| Common stock3⁄4no  par value per share; 50,000,000 shares authorized; outstanding, 15,979,269  shares in 2002 and 15,621,755 in 2001 |   | 30,823,590         |          | 32,407,424              |   |
| Retained  earnings                                                                                                                      |   | 81,454,710         |          | 72,018,255              |   |
| Accumulated  other comprehensive income                                                                                                 |   | 3,726,903          |          | 1,729,548               |   |
| Treasury stock,  at cost, 344,082 shares in 2002 and 169,082 in 2001                                                                    |   | (4,547,905         | )             | (1,033,875              | )      |
| Total  shareholders’ equity                                                                                                        |   | 111,457,298        |          | 105,121,352             |   |
| Total  liabilities and shareholders’ equity                                                                                        |   | $                  | 1,206,440,241 |                    | $      | 1,110,167,891 |   |

 

*See accompanying notes.*

 

2

----

 

**MAIN STREET BANKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
|                                                                       |   | **Three  Months Ended  June 30,** |       | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------------------|--------|-----------------------------------|------------|---------------------------------|--------|
|                                                                       |   | **2002**                          |       | **2001**                        |   | **2002** |   | **2001** |   |
| Interest income:                                                           |   |                              |       |                            |   |   |   |   |   |
| Loans, including  fees                                                     |   | $                                 | 16,922,668 |                            | $      | 18,488,251 |   | $ | 33,492,601 |   | $ | 37,356,750 |   |
| Interest on  investment securities:                                        |   |                              |       |                            |   |   |   |   |   |
| Taxable                                                                    |   | 2,262,347                         |       | 1,964,580                       |   | 3,547,696 |   | 4,203,020 |   |
| Non-taxable                                                                |   | 376,112                           |       | 318,229                         |   | 762,247 |   | 636,897 |   |
| Federal funds  sold and other short-term investments                       |   | 120,424                           |       | 593,774                         |   | 393,382 |   | 1,404,174 |   |
| Interest-bearing  deposits in banks                                        |   | 6,705                             |       | 13,970                          |   | 39,116 |   | 28,532 |   |
| Total interest  income                                                     |   | 19,688,256                        |       | 21,378,804                      |   | 38,235,042 |   | 43,629,373 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Interest  expense:                                                         |   |                              |       |                            |   |   |   |   |   |
| Interest-bearing  demand and money market                                  |   | 573,766                           |       | 1,011,118                       |   | 1,214,066 |   | 2,248,639 |   |
| Savings                                                                    |   | 98,997                            |       | 216,807                         |   | 225,267 |   | 479,202 |   |
| Time deposits of  $100,000 or more                                         |   | 1,667,606                         |       | 2,410,235                       |   | 3,436,784 |   | 4,895,809 |   |
| Other time  deposits                                                       |   | 3,110,527                         |       | 5,118,651                       |   | 6,467,554 |   | 10,672,800 |   |
| Federal funds  purchased and securities sold under agreement to repurchase |   | 376,678                           |       | 44,064                          |   | 389,640 |   | 131,557 |   |
| Federal Home  Loan Bank advances                                           |   | 390,836                           |       | 691,231                         |   | 764,235 |   | 1,501,843 |   |
| Other interest  expense                                                    |   | 17,731                            |       | 14,259                          |   | 40,194 |   | 19,119 |   |
| Total interest  expense                                                    |   | 6,236,141                         |       | 9,506,365                       |   | 12,537,740 |   | 19,948,969 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Net interest  income                                                       |   | 13,452,115                        |       | 11,872,439                      |   | 25,697,302 |   | 23,680,404 |   |
| Provision for loan losses                                                  |   | 1,434,000                         |       | 440,000                         |   | 2,059,000 |   | 970,000 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Net interest  income after provision for loan losses                       |   | 12,018,115                        |       | 11,432,439                      |   | 23,638,302 |   | 22,710,404 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Noninterest  income:                                                       |   |                              |       |                            |   |   |   |   |   |
| Service charges  on deposit accounts                                       |   | 1,767,453                         |       | 1,464,039                       |   | 3,290,559 |   | 2,775,711 |   |
| Investment  securities gains                                               |   | —                            |       | 18,536                          |   | — |   | 22,191 |   |
| Gain on sales of  assets                                                   |   | 59,639                            |       | 1,382                           |   | 60,139 |   | 47,158 |   |
| Gain on sales of  loans                                                    |   | 84,111                            |       | 75,178                          |   | 380,892 |   | 316,926 |   |
| Other income                                                               |   | 2,718,473                         |       | 1,730,230                       |   | 5,142,675 |   | 3,348,165 |   |
| Total  noninterest income                                                  |   | 4,629,676                         |       | 3,289,365                       |   | 8,874,265 |   | 6,510,151 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Noninterest  expense:                                                      |   |                              |       |                            |   |   |   |   |   |
| Salaries and  other compensation                                           |   | 4,753,499                         |       | 3,780,083                       |   | 9,264,673 |   | 7,884,647 |   |
| Employee  benefits                                                         |   | 655,496                           |       | 591,135                         |   | 1,509,765 |   | 1,267,850 |   |
| Net occupancy  and equipment expense                                       |   | 1,306,706                         |       | 1,223,334                       |   | 2,484,503 |   | 2,401,628 |   |
| Professional services                                                      |   | 359,192                           |       | 537,765                         |   | 653,943 |   | 915,072 |   |
| Regulatory  agency assessments                                             |   | 53,898                            |       | 85,703                          |   | 113,049 |   | 160,080 |   |
| Amortization of  intangible assets                                         |   | 33,600                            |       | 59,917                          |   | 67,200 |   | 119,834 |   |
| Merger expense                                                             |   | —                            |       | 861,651                         |   | — |   | 2,560,625 |   |
| Other expense                                                              |   | 2,210,445                         |       | 2,100,156                       |   | 4,342,616 |   | 3,947,188 |   |
| Total  noninterest expense                                                 |   | 9,372,836                         |       | 9,239,744                       |   | 18,435,749 |   | 19,256,924 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Income before  income taxes                                                |   | 7,274,955                         |       | 5,482,060                       |   | 14,076,818 |   | 9,963,631 |   |
| Income tax  expense                                                        |   | 2,268,561                         |       | 1,701,388                       |   | 4,300,819 |   | 3,524,118 |   |
| Net income                                                                 |   | $                                 | 5,006,394  |                            | $      | 3,780,672 |   | $ | 9,775,999 |   | $ | 6,439,513 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Earnings per  share:                                                       |   |                              |       |                            |   |   |   |   |   |
| Basic                                                                      |   | $                                 | .32        |                            | $      | .24 |   | $ | .63 |   | $ | .41 |   |
| Diluted                                                                    |   | $                                 | .31        |                            | $      | .23 |   | $ | .61 |   | $ | .40 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Dividends  declared per share                                              |   | $                                 | .105       |                            | $      | .09 |   | $ | .21 |   | $ | .18 |   |
|                                                                       |   |                              |       |                            |   |   |   |   |   |
| Weighted average  common shares outstanding:                               |   |                              |       |                            |   |   |   |   |   |
| Basic                                                                      |   | 15,586,254                        |       | 15,634,599                      |   | 15,558,280 |   | 15,618,595 |   |
| Diluted                                                                    |   | 16,145,163                        |       | 16,103,230                      |   | 16,089,642 |   | 16,053,033 |   |

 

*See accompanying notes.*

 

3

----

 

**MAIN STREET BANKS, INC.**

##### **CONDENSED CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE INCOME**

**(Unaudited)**

 
|                                                                     |   | **Three  Months Ended  June 30,** |      | **Six  Months Ended  June 30,** |   |
|--------------------------------------------------------------------------|--------|-----------------------------------|-----------|---------------------------------|--------|
|                                                                     |   | **2002**                          |      | **2001**                        |   | **2002** |   | **2001** | ** ** |
|                                                                     |   |                              |      |                            |   |   |   |   |   |
| **Net  income**                                                          |   | $                                 | 5,006,394 |                            | $      | 3,780,672 |   | $ | 9,775,999 |   | $ | 6,439,513 |   |
|                                                                     |   |                              |      |                            |   |   |   |   |   |
| **Other comprehensive income,****net of  tax**                           |   |                              |      |                            |   |   |   |   |   |
|                                                                     |   |                              |      |                            |   |   |   |   |   |
| Unrealized gains  on securities available for sale                       |   | 539,077                           |      | 182,023                         |   | 1,318,254 |   | 1,553,055 |   |
| Less  reclassification adjustment for net (gains) included in net income |   | (31,603                           | )         | (12,234                         | )      | (52,715 | ) | (14,646 | ) |
|                                                                     |   |                              |      |                            |   |   |   |   |   |
| **Comprehensive  income**                                                |   | $                                 | 5,513,869 |                            | $      | 3,950,461 |   | $ | 11,041,538 |   | $ | 7,977,922 |   |

 

*See accompanying notes.*

 

4

----

 

**MAIN STREET BANKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**

 
|                                                                               |   | **Six Months  Ended  June 30,** |       |
|------------------------------------------------------------------------------------|--------|---------------------------------|------------|
|                                                                               |   | **2002**                        |       | **2001** | ** ** |
| **Operating  activities**                                                          |   |                            |       |   |   |
| Net income                                                                         |   | $                               | 9,775,999  |   | $ | 6,439,513 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                            |       |   |   |
| Provision for  loan losses                                                         |   | 2,059,000                       |       | 970,000 |   |
| Depreciation and  amortization of premises and equipment                           |   | 1,137,435                       |       | 1,103,478 |   |
| Amortization of  intangible assets                                                 |   | 67,200                          |       | 119,834 |   |
| (Gain) loss on  sales of other real estate                                         |   | (57,036                         | )          | 27,661 |   |
| Investment  securities gains                                                       |   | —                          |       | (22,191 | ) |
| Net amortization  (accretion) of investment securities                             |   | 134,035                         |       | (432,519 | ) |
| Net accretion of  loans purchased                                                  |   | (16,285                         | )          | (19,682 | ) |
| (Gain) loss on  sales of premises and equipment                                    |   | (3,130                          | )          | 2,842 |   |
| Net decrease  (increase) in mortgage loans held for sale                           |   | 5,049,310                       |       | (5,195,030 | ) |
| Gains on sales  of mortgage loans                                                  |   | (325,344                        | )          | (282,617 | ) |
| Gain on sales of  loans                                                            |   | (380,892                        | )          | (316,926 | ) |
| Deferred income  tax expense (benefit)                                             |   | (758,248                        | )          | 584,441 |   |
| Deferred net  loan fees                                                            |   | (27,129                         | )          | (409,148 | ) |
| Vesting in  restricted stock award plan                                            |   | 255,606                         |       | 252,482 |   |
| Changes in  operating assets and liabilities:                                      |   |                            |       |   |   |
| (Increase) decrease  in accrued interest receivable                                |   | (1,582,770                      | )          | 792,670 |   |
| Increase in accrued interest payable                                               |   | (1,389,949                      | )          | (37,953 | ) |
| Other                                                                              |   | (560,145                        | )          | 275,445 |   |
| Net cash  provided by operating activities                                         |   | 13,377,684                      |       | 3,852,300 |   |
|                                                                               |   |                            |       |   |   |
| **Investing activities**                                                           |   |                            |       |   |   |
| Purchases of  investment securities available for sale                             |   | (125,995,591                    | )          | (21,449,629 | ) |
| Purchases of  other investments                                                    |   | (750,000                        | )          | — |   |
| Maturities and  calls of investment securities available for sale                  |   | 18,810,466                      |       | 50,997,381 |   |
| Proceeds from  sales of investment securities available for sale                   |   | —                          |       | 1,104,250 |   |
| Net increase in  loans funded                                                      |   | (49,369,684                     | )          | (32,397,438 | ) |
| Purchases of  premises and equipment                                               |   | (1,735,370                      | )          | (1,399,215 | ) |
| Proceeds from  sales of premises and equipment                                     |   | 45,066                          |       | 340,336 |   |
| Proceeds from  sales of other real estate                                          |   | 646,172                         |       | 1,815,426 |   |
| Business  combinations, net of cash acquired                                       |   | (300,000                        | )          | — |   |
| Net cash used in investing activities                                              |   | (158,648,941                    | )          | (988,889 | ) |
|                                                                               |   |                            |       |   |   |
| **Financing activities**                                                           |   |                            |       |   |   |
| Net (decrease)  increase in demand and savings accounts                            |   | (18,792,691                     | )          | 27,332,950 |   |
| Increase  (decrease) in time deposits                                              |   | 48,168,617                      |       | (21,594,256 | ) |
| Increase  (decrease) in federal funds purchased                                    |   | 44,223,573                      |       | (26,456,846 | ) |
| Net increase  (decrease) in Federal Home Loan Bank advances                        |   | 15,000,000                      |       | (6,500 | ) |
| Dividends paid                                                                     |   | (3,303,007                      | )          | (2,701,425 | ) |
| Proceeds from  the issuance of common stock                                        |   | 713,362                         |       | 460,451 |   |
| Proceeds from  the issuance of common stock                                        |   | (3,514,030                      | )          | — |   |
| Net cash  provided by (used in) financing activities                               |   | 82,495,824                      |       | (22,965,626 | ) |
| Net decrease in  cash and cash equivalents                                         |   | (62,775,433                     | )          | (20,102,215 | ) |
| Cash and cash  equivalents at beginning of year                                    |   | 110,943,408                     |       | 129,397,609 |   |
| Cash and cash  equivalents at end of year                                          |   | $                               | 48,167,975 |   | $ | 109,295,394 |   |
| **Supplemental disclosures of cash  flow information**                             |   |                            |       |   |   |
| Cash paid during  the period for:                                                  |   |                            |       |   |   |
| Interest                                                                           |   | $                               | 12,537,740 |   | $ | 19,986,649 |   |
| Income taxes,  net                                                                 |   | 3,900,000                       |       | 650,000 |   |
| **Supplemental disclosures of noncash  transactions**                              |   |                            |       |   |   |
| Loans  transferred to other real estate acquired through foreclosure               |   | $                               | 1,297,082  |   | $ | 543,817 |   |
| Transfer of  investment securities from held to maturity to available for sale     |   | $                               | —     |   | $ | 17,851,829 |   |

 

*See accompanying notes.*

 

5

----

 

**MAIN STREET BANKS, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**JUNE 30, 2002**

 

**NOTE 1.        BASIS OFPRESENTATION**

 

The accompanying unaudited condensed consolidatedfinancial statements for Main Street Banks, Inc. (the “Company”) have beenprepared in accordance with accounting principles generally accepted in theUnited States followed within the financial services industry for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andnotes required for complete financial statement presentation. In the opinion ofmanagement, all adjustments (consisting solely of normal recurring adjustments)considered necessary for a fair presentation of the financial position andresults of operations for interim periods have been included.

 

The results of operations for the six month periodended June 30, 2002 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2002. These financial statements andrelated “Management’s Discussion and Analysis of Financial Condition andResults of Operations” should be read in conjunction with the consolidatedfinancial statements and notes thereto for the year ended December 31, 2001, includedin the Company’s Current Report Annual Report on Form 10-K.

 

**NOTE2.**        **BUSINESSCOMBINATION**

 

On January 25, 2001, the Company completed a businesscombination with Walton Bank and Trust Company (“Walton”) by exchanging 2.752shares of its common stock for each share of Walton outstanding commonstock.  The combination was accountedfor as a pooling of interests and, accordingly, all prior financial statementshave been restated to include the results of Walton.

 

**NOTE3.**        **CURRENTACCOUNTING DEVELOPMENTS**

 

In July 2001, the FASB issued StatementNo. 142, “Goodwill and Other Intangible Assets” (“Statement 142”).  Under Statement No. 142, goodwill andintangible assets deemed to have indefinite lives will no longer be amortizedbut will be subject to annual impairment tests.  Other intangible assets will continue to be amortized over theiruseful lives.  The adoption of thisstatement did not have a material financial impact on the Company’s financialposition or results of operations.  Theadoption of Statement 142 resulted in the company reducing amortization expenseby $26,317 and $52,634 for the three and six months ended June 30, 2002,respectively.

 

In October 2001, the FASB issued Statement No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“Statement144”), effective for fiscal years beginning after December 15, 2001 and appliedprospectively.  Statement 144 supercededStatement 121 and APB 30.  Statement 144retains the fundamental provisions of Statement 121 related to the recognitionand measurement of long-lived assets. Statement 144 provides more guidance on estimating cash flows whenperforming a recoverability test. Furthermore, Statement 144 requires that operating losses from a“component of an entity” would be recognized in the period in which they occurrather than as of the measurement date as presently required by APB 30.  The adoption of this statement did not havea material financial impact on the Company’s financial position or results ofoperations.

 

6

----

 

**NOTE4.**        **EARNINGS PERCOMMON SHARE**

 

The computation of diluted earnings pershare is as follows:

 
|                              |   | **Three Months Ended  June 30,** |      | **Six Months Ended  June 30,** |   |
|-----------------------------------|--------|----------------------------------|-----------|--------------------------------|--------|
|                              |   | **2002**                         |      | **2001**                       |   | **2002** |   | **2001** |   |
|                              |   |                             |      |                           |   |   |   |   |   |
| Basic and diluted net  income     |   | $                                | 5,006,394 |                           | $      | 3,780,672 |   | $ | 9,775,999 |   | $ | 6,439,513 |   |
|                              |   |                             |      |                           |   |   |   |   |   |
| Basic weighted average  shares    |   | 15,586,254                       |      | 15,634,599                     |   | 15,558,280 |   | 15,618,595 |   |
| Effect of Employee  Stock Options |   | 558,909                          |      | 468,631                        |   | 531,362 |   | 434,438 |   |
| Diluted weighted  average shares  |   | 16,145,163                       |      | 16,103,230                     |   | 16,089,642 |   | 16,053,033 |   |
|                              |   |                             |      |                           |   |   |   |   |   |
| Diluted earnings per  share       |   | $                                | .31       |                           | $      | .23 |   | $ | .61 |   | $ | .40 |   |

 

**NOTE 5.**        **LOANS**

 

Loans are stated atunpaid principal balances, net of unearned income and deferred loan fees.  Interest is accrued only if deemedcollectible.  The following tablerepresents the composition of the Company’s loan portfolio:

 
|                       |   | **June 30,  2002**           |    | **December 31,  2001** |   |
|----------------------------|--------|------------------------------|---------|------------------------|--------|
|                       |   | ***(Dollars in thousands)*** |    |
|                       |   |                         |    |                   |   |
| Commercial                 |   | $                            | 69,458  |                   | $      | 68,320 |   |
| Construction               |   | 199,899                      |    | 173,464                |   |
| Residential  mortgage      |   | 167,333                      |    | 152,226                |   |
| Real  estate – other  |   | 381,782                      |    | 366,003                |   |
| Consumer                   |   | 44,294                       |    | 53,075                 |   |
| Total  loans               |   | 862,766                      |    | 813,088                |   |
| Less:                      |   |                         |    |                   |   |
| Net  deferred loan fees    |   | (1,530                       | )       | (1,642                 | )      |
| Allowance  for loan losses |   | (12,747                      | )       | (12,017                | )      |
|                       |   |                         |    |                   |   |
| Net  loans                 |   | $                            | 848,489 |                   | $      | 799,429 |   |

 

 

**ITEM 2.****                                  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following is management’s discussion and analysisof certain significant factors which have affected the Company’s financialposition at June 30, 2002 as compared to December 31, 2001 and operatingresults for the three month and six month periods ended June 30, 2002. Thesecomments should be read in conjunction with the Company’s unaudited condensedconsolidated financial statements and accompanying notes appearing elsewhereherein.

 

**ForwardLooking Statements**

 

This discussion contains certain forward-lookingstatements including statements relating to present or future trends or factorsgenerally affecting the banking industry and specifically affecting theCompany’s operations, markets and products. Without limiting the foregoing, the words “believes” “anticipates”,“intends”, “expects” or similar expressions are intended to identify forward-lookingstatements.  These forward-lookingstatements involve certain risks and uncertainties.  Actual results could differ materially from those projected formany reasons including, without limitation, changing events and trends thathave influenced the Company’s assumptions. These trends and events include (i) changes in the interest rateenvironment which may reduce margins, (ii) non-achievement of expected growth(iii) less favorable than anticipated changes in national and local businessenvironment and securities markets (iv) adverse changes in the regulatoryrequirements affecting the Company (v) greater competitive pressures amongfinancial institutions in the Company’s market and (vi) greater than expectedloan losses. Additional information and other factors that could affect futurefinancial results are included in the Company’s filings with the Securities andExchange Commission, including the Annual Report on Form 10-K for 2001.

 

 

7

----

 

 

**Overview**

 

The Company’s total assets have increased $96.3million or 8.67% since December 2001. Federal funds sold decreased $44.7 million primarily due to the purchaseof investment securities and an increase in loan demand.  Loans have increased 6.14% or $49.8 millionsince December 2001.  The investmentportfolio has increased $105.2 million due to the use of federal funds sold topurchase additional securities. Total deposits have increased by 3.23% or $29.4million due to an ongoing deposit campaign and limited use of brokered andnational deposits.

 

Return on average equity for the three months and sixmonths ended June 30, 2002 was 18.5% and 18.3% on average equity of $108.7million and $107.5 million, respectively. This compares to 17.6% and 17.7% on average equity of $98.1 million and$96.6 million respectively, for the same periods in 2001, excluding mergerrelated expenses.

 

Return on average assets for the three months and sixmonths ended June 30, 2002 was 1.71% and 1.72%, respectively.  This compares to 1.66% and 1.64%,respectively for the same periods in 2001, excluding merger related expenses.

 

**Critical Accounting Policies**

 

The Company has established various accountingpolicies that govern the application of generally accepted accountingprinciples of the United States in the preparation of the Company’s financialstatements.  Certain accounting policiesinvolve significant judgments and assumptions on the part of management thatcan have a material impact on the carrying value of assets and liabilities.  Management considers such accountingpolicies to be critical accounting policies. The Company believes the allowance for loan losses is a criticalaccounting policy that requires the most significant use of estimates andassumptions in the preparation of its condensed consolidated financialstatements.

 

Allowance for loan losses is based on management’sopinion of an amount that is adequate to absorb losses in the existing loanportfolio.  The allowance for loanlosses is established through a provision for losses based on management’sevaluation of current economic conditions. The evaluation, which includes a review of all loans on which fullcollection may not be reasonably assumed, considers among other matters,economic conditions, the fair market value or the estimated net realizablevalue of the underlying collateral, management’s estimate of probable creditlosses, historical loan loss experience, and other factors that warrantrecognition in providing for an adequate loan loss allowance.

 

**Capital**

 

At June 30, 2002, the capital ratios of the Companyand Main Street Bank (the Bank) were adequate based on regulatory minimumcapital requirements.  The minimumcapital requirements for banks and bank holding companies require a leveragecapital to total assets ratio of at least 4%, core capital to risk-weightedassets ratio of at least 4% and total capital to risk-weighted assets of8%.  The following table reflects theCompany’s and the Bank’s compliance with regulatory capital requirements atJune 30, 2002.

 

|                        |   | **Company** |   | **Bank** |   |
|-----------------------------|--------|-------------|--------|----------|--------|
|                        |   |        |   |     |   |
| Leverage ratio              |   | 9.12        | %      | 8.92     | %      |
|                        |   |        |   |     |   |
| Risk based  capital ratios: |   |        |   |     |   |
| Tier 1 risk  based capital  |   | 11.68       | %      | 11.44    | %      |
| Risk-based  capital         |   | 12.94       | %      | 12.69    | %      |

 

8

----

 

**Loansand Allowance for Loan Losses**

 

At June 30, 2002,loans, net of unearned income, were $861.2 million, an increase of $49.8million or 6.14% over net loans at December 31, 2001 of $811.4 million. Thegrowth in the loan portfolio was attributable to a consistent focus on qualityloan production and strong loan markets in the state and region. Realestate-construction loans increased $26.4 million or 15.24% from December 31,2001. The Company continues to monitor the composition of the loan portfolio toensure that the market risk to the balance sheet is not adversely affected bythe impact of changes in the economic environment on any one segment of theportfolio.

 

The Companyprimarily focuses on the following loan categories: (1) commercial, (2) realestate construction, (3) real estate mortgage and (4) consumer loans. TheCompany’s management has strategically located its branches in high growthmarkets and has taken advantage of a surge in residential and industrial growthin northeastern Georgia.

 

The allowance for loan losses is a reserve establishedthrough charges to earnings in the form of a provision for loan losses.  The provision for loan losses is based onmanagement’s evaluation of the size and composition of the loan portfolio, thelevel of non-performing and past due loans, historical trends of charged-offloans and recoveries, prevailing economic conditions and other factorsmanagement deems appropriate. The Company’s management has established anallowance for loan losses which it believes is adequate for anticipated lossesin the loan portfolio.  Based on acontinuous credit evaluation of the loan portfolio, management presents aquarterly review of the allowance for loan losses to the Company’s board ofdirectors. The review that management has developed primarily focuses on riskby evaluating the level of loans in certain risk categories.  These categories have also been establishedby management and take the form of loan grades. These loan grades closely mirrorregulatory classification guidelines and include pass loan categories 1 through4 and special mention, substandard, doubtful, and loss categories of 5 through8, respectively.  By grading the loanportfolio in this manner the Company’s management is able to effectivelyevaluate the portfolio by risk, which management believes is the most effectiveway to analyze the loan portfolio and thus analyze the adequacy of theallowance for loan losses. Management also reviews charge-offs and recoverieson a quarterly basis to identify trends.

 

The Company’s risk management processes include a loanreview program to evaluate the credit risk in the loan portfolio. The creditreview department is independent of the loan function and reports to theExecutive Vice President of Risk Management. Through the loan review process, the Company maintains an internallycriticized classified loan watch list which, along with the delinquency reportof loans, serves as a tool to assist management in assessing the overallquality of the loan portfolio and the adequacy of the allowance for loanlosses. Loans classified as “substandard” are those loans with clear anddefined weaknesses such as a highly leveraged position, unfavorable financialratios, uncertain financial ratios, uncertain repayment sources, deteriorationin underlying collateral values, or poor financial condition which mayjeopardize recoverability of the debt. Loans classified as “doubtful” are thoseloans that have characteristics similar to substandard loans but have anincreased risk of loss, or at least a portion of the loan may require beingcharged-off.  Loans classified as “loss”are those loans that are in the process of being charged-off.

 

For the six month period ending June 30, 2002, netcharge-offs totaled $1,329,840 or .32% (annualized) of average loansoutstanding for the period, net of unearned income, compared to $460,813 or..12% in net charge-offs for the same period in 2001. The increase in the netcharge-offs was largely related to the Company’s decision to exit thereceivables financing line of business. The provision for loan losses for the six months ended June 30, 2002 was$2,059,000 compared to $970,000 for the same period in 2001. The allowance forloan losses totaled $12,746,608 or 1.48% of total loans, net of unearned incomeat June 30, 2002, compared to $12,017,448 or 1.48% at December 31, 2001.

 

9

----

 

The following table presents an analysis of theallowance for loan losses for the six month period ended June 30, 2002 and June30, 2001 follows:

 
|                                                         |   | **Six Months Ended  June 30,** |       |
|--------------------------------------------------------------|--------|--------------------------------|------------|
|                                                         |   | **2002**                       |       | **2001** | ** ** |
|                                                         |   |                           |       |   |   |
| Balance of  allowance for loan losses at beginning of period |   | $                              | 12,017,448 |   | $ | 10,907,424 |   |
|                                                         |   |                           |       |   |   |
| Provision  charged to operating expense                      |   | 2,059,000                      |       | 970,000 |   |
| Charge-offs:                                                 |   |                           |       |   |   |
| Commercial,  financial and agricultural                      |   | 578,957                        |       | 147,174 |   |
| Real estate –  construction and land development        |   | 134,941                        |       | 11,107 |   |
| Real estate –  mortgage                                 |   | —                         |       | 40,793 |   |
| Installment and  other consumer                              |   | 752,727                        |       | 465,417 |   |
| Total  charge-offs                                           |   | $                              | 1,466,625  |   | $ | 664,491 |   |
| Recoveries:                                                  |   |                           |       |   |   |
| Commercial,  financial and agricultural                      |   | 8,584                          |       | 21,832 |   |
| Real estate –  construction and land development        |   | 2,929                          |       | — |   |
| Real estate –  mortgage                                 |   | —                         |       | 20,836 |   |
| Installment and  other consumer                              |   | 125,272                        |       | 161,010 |   |
| Total recoveries                                             |   | $                              | 136,785    |   | $ | 203,678 |   |
| Net charge-offs                                              |   | $                              | 1,329,840  |   | $ | 460,813 |   |
|                                                         |   |                           |       |   |   |
| Balance of  allowance for loan losses at end of period       |   | $                              | 12,746,608 |   | $ | 11,416,611 |   |

 

**Liquidityand Market Risk Sensitivity**

 

Liquidity involves the Company’s ability to raise fundsto support asset growth or reduce assets to meet deposit withdrawals and otherpayment obligations, to maintain reserve requirements and otherwise to operateon an ongoing basis. During the past three years, the Company’s liquidity needshave primarily been met by growth in core deposits, as previously discussed,together with advances from the Federal Home Loan Bank. Although access topurchased funds from correspondent banks is available and has been utilized onoccasion to take advantage of investment opportunities, the Company does notgenerally rely on these external funding sources. The cash and federal fundssold position, supplemented by amortizing investment and loan portfolios, havegenerally created an adequate liquidity position.

 

The Company’sasset liability and funds management policy provides management with thenecessary guidelines for effective funds management and a measurement systemfor monitoring its net interest rate sensitivity position. The Company managesits sensitivity position within established guidelines.

 

Market risk is defined as the risk of loss arisingfrom adverse changes in market interest rates and prices. In order to maintainacceptable net interest income levels, interest rates, liquidity and maturitiesof the Company’s assets and liabilities need to be managed.  In a decreasing rate environment earningsare typically negatively impacted as the Company’s rate sensitive assetsgenerally reprice faster than its rate sensitive liabilities thus an increasein interest rates will typically have a positive impact on earnings.

 

Interest rate riskis managed by the asset liability committee which is composed of seniorofficers of the Company, in accordance with policies approved by its board ofdirectors. The asset liability committee formulates strategies based onappropriate levels of interest rate risk. In determining the appropriate levelof interest rate risk, the asset liability committee considers the impact onearnings and capital of the current outlook on interest rates, potentialchanges in interest rates, regional economies, liquidity, business strategiesand other factors. The asset liability committee meets regularly to review,among other things, the sensitivity of assets and liabilities to interest ratechanges, the book and market values of assets and liabilities, unrealized gainsand losses, purchase and sale activities, commitments to originate loans andthe maturities of investments and borrowings. Additionally, the asset liabilitycommittee reviews liquidity, cash flow flexibility, maturities of deposits andconsumer and commercial deposit activity. The Company’s management uses twomethodologies to manage interest rate risk: (i) an analysis of relationshipsbetween interest-earning assets and interest-bearing liabilities; and (ii) aninterest rate shock simulation model. The Company has traditionally managed itsbusiness to reduce its overall exposure to changes in interest rates.

 

 

10

----

 

 

The Companymanages its exposure to interest rates by structuring its balance sheet in theordinary course of business. The Company has in the past, and may in the futureutilize interest rate swaps, financial options, or financial futures contractsin order to reduce interest rate risk.

 

As of June 30,2002, a $50 million notional amount interest rate floor is in place to protectthe Company from further interest rate reductions.  The interest rate floor has a 12 month contract term that is tiedto the 3 month London Interbank Offered Rate (LIBOR) and has a strike price of2.0%.  The interest rate floor contractterm expires during 2002.

 

The Company alsoas of June 30, 2002 has entered into an interest rate swap transaction.  The swap has a declining notional amount $50million in year one, $35 million in year two, and $20 million in yearthree.  The entire swap matures during2004.  The Company will receive a fixedrate and pay prime.  The Company had a$535,000 unrealized gain as of June 30, 2002 related to the swap transaction.

 

An interest ratesensitive asset or liability is one that, within a defined time period, eithermatures or experiences an interest rate change in line with general marketinterest rates. The management of interest rate risk is performed by analyzingthe maturity and repricing relationships between interest-earning assets andinterest-bearing liabilities at specific points in time (gap) and by analyzingthe effects of interest rate changes on net interest income over specificperiods of time by projecting the performance of the mix of assets andliabilities in varied interest rate environments. Interest rate sensitivityreflects the potential effect on net interest income of a movement in interestrates. A company is considered to be asset sensitive, or having a positive gap,when the amount of its interest-earning assets maturing or repricing within agiven period exceeds the amount of its interest-bearing liabilities alsomaturing or repricing within that time period. Conversely, a company isconsidered to be liability sensitive, or having a negative gap, when the amountof its interest-bearing liabilities maturing or repricing within a given periodexceeds the amount of its interest-earning assets also maturing or repricingwithin that time period. During a period of rising interest rates, a negativegap would tend to affect net interest income adversely, while a positive gapwould tend to result in an increase in net interest income. During a period offalling interest rates, a negative gap would tend to result in an increase innet interest income, while a positive gap would tend to affect net interestincome adversely.

 

## **Results of Operationsfor the Three Months Ended June 30, 2002 and 2001**

 

### **Interest Income**

 

Interest income for the three months ended June 30,2002 was $19.7 million, a decrease of $1.7 million, or 7.9% compared to $21.4million for the same period in 2001. Interest and fees on loans decreased $1.6 million to $16.9 million forthe three months ended June 30, 2002 compared to $18.5 million for the sameperiod ending June 30, 2001.  Thedecrease is mainly attributable to the Federal Reserve’s aggressive interestrate reductions during 2001.  Intereston federal funds sold decreased $473,350 or 79.72%.  This was due to the Company’s decision to use the funds topurchase investment securities to earn a higher yield.   Average earning assets for the three monthperiod increased $107.8 million to $1,080.3 million as of June 30, 2002compared to $972.5 million as of June 30, 2001.   Yield on average earning assets decreased 151 basis points to7.31% from 8.82 % for the quarter ended June 30, 2002 and 2001, respectively.

 

##### **Interest Expense**

 

Interestexpense on deposits and other borrowings for the three months ended June 30,2002 was $6.2 million, a $3.3 million, or 34.4% decrease from June 30,2001.  The decrease was attributable tothe yield on average interest bearing liabilities decreasing to 2.82% from4.84% as of June 30, 2002 and June 30, 2001, respectively.  Average interest bearing liabilities increased$99.0 million to $886.5 million for the three months ended June 30, 2002compared to $787.6 for the three months ended June 30, 2001.   The decrease was also attributable to theCompany refinancing its Federal Home Loan Bank borrowings to take advantage ofthe Federal Reserve’s aggressive interest rate reductions.

 

 

11

----

 

 

**Net Interest Income**

 

Netinterest income for the three months ended June 30, 2002 increased $1.6million, or 13.31% to $13.5 million compared to $11.9 million for the sameperiod ending June 30, 2001.  Theincrease was mainly attributable to the Company’s ability to manage the effectsof the Federal Reserve’s aggressive rate reductions.  The Company’s net interest margin increased to 5.10% for thethree months ended June 30, 2002 compared to 4.99% as of June 30, 2001.

 

**Provision for Loan Losses**

 

Theprovision for loan losses was $1.4 million for the three months ended June 30,2002 as compared to $0.4 million for the three months ended June 30, 2001.  The increase in the provision for loanlosses was attributable to the Company’s decision to exit the receivablesfinancing line of business.  Although noassurance is given, management believes that the present allowance for loanlosses is adequate considering the Company’s historical loss experience.

 

**Noninterest Income**

 

Noninterestincome was $4.6 million for the three months ended June 30, 2002, an increaseof $1.3 million, or 40.75% compared to $3.3 million as of the three monthsended June 30, 2001.  The components ofthe increase were service charges on deposit accounts and bank owned lifeinsurance.  Service charges on depositaccounts increased $0.3 million, or 20.72% to $1.8 million from $1.5 millionfor the three months ended June 30, 2002 and 2001, respectively.  The Company also received $0.4 millionrelated to the bank owned life insurance that was not in place during 2001.

 

**Noninterest Expense**

 

Noninterestexpense increased $0.1 million or 1.44% to $9.4 million from $9.2 million forthe three months ended June 30, 2002 and 2001, respectively.  The increase was mainly attributable tohiring of additional personnel required to accommodate the Company’sgrowth.  Salaries and employee benefitswere $5.4 million, an increase of $1.0 million, or 23.74% from the three monthsended June 30, 2001.  The Company’sefficiency ratio (excluding merger and other one time expenses) was 51.1% forthe three months ended June 30, 2002 compared to 54.5% for the three monthsended June 30, 2001.

 

**Income Taxes**

 

Theamount of income tax expense is influenced by the amount of taxable income, theamount of tax-exempt income, the amount of nondeductible interest expense, andthe amount of other nondeductible expenses. For the three months ended June 30, 2002, the provision for taxes was$2.3 million, an increase of $567,173 from the $1.7 million provided for in thesame period in 2001.  The effective taxrate for the three months ended June 30, 2002 was 31.18% compared to 31.04% forthe same period in 2001.

 

## **Results of Operationsfor the Six Months Ended June 30, 2002 and 2001**

 

### **Interest Income**

 

Interest income for the six months ended June 30, 2002was $38.2 million, a decrease of $5.4 million, or 12.36% compared to $43.6million for the six months ended June 30, 2001.  Interest and fees on loans decreased $3.9 million to $33.5million for the six months ended June 30, 2002 compared to $37.4 million forthe same period in 2001.  Interest oninvestment securities decreased $529,974 to $4.3 million from $4.8 million forthe six months ended June 30, 2002 and 2001, respectively.  The decrease is mainly attributable to theFederal Reserve’s aggressive interest rate reductions during 2001.  Average earning assets increased $74.9million to $1,049.6 million for the six months ended June 30, 2002 compared to$974.7 million for the same period ended June 30, 2001.   Yield on average earning assets decreased168 basis points to 7.35% from 9.03 % for the six months ended June 30, 2002and 2001, respectively.

 

 

12

----

 

 

##### **Interest Expense**

 

Interest expense on deposits and other borrowings forthe six months ended June 30, 2002 was $12.5 million, a $7.4 million, or 37.15%decrease from the same period ending June 30, 2001.  The decrease was attributable to the yield on average interestbearing liabilities decreasing to 2.92% from 5.05% for the six months endedJune 30, 2002 and June 30, 2001, respectively. Average interest bearing liabilities increased $68.7 million to $864.5million for the six months ended June 30, 2002 compared to $795.9 for the sixmonths ended June 30, 2001.   Thedecrease was also attributable to the Company refinancing its Federal Home LoanBank borrowings to take advantage of the Federal Reserve’s aggressive interestrate reductions.

 

**Net Interest Income**

 

Net interest income for the six monthsended June 30, 2002 increased $2.0 million, or 8.52% to $25.7 million comparedto $23.7 million for the same period ending June 30, 2001.  The increase was mainly attributable to theCompany’s ability to manage the effects of the Federal Reserve’s aggressiverate reductions.  The Company’s netinterest margin increased to 5.03% for the six months ended June 30, 2002compared to 4.99% as of June 30, 2001.

 

**Provision for Loan Losses**

 

Theprovision for loan losses was $2.1 million for the six months ended June 30,2002 as compared to $1.0 million for the same period ending June 30, 2001.  The increase was attributable to theCompany’s decision to exit the receivables financing line of business and theincrease in loan demand.  Although noassurance is given, management believes that the present allowance for loanlosses is adequate considering the Company’s historical loss experience.

 

**Noninterest Income**

 

Noninterestincome was $8.9 million for the six months ended June 30, 2002, an increase of$2.4 million, or 37.37% compared to $6.5 million for the six months ended June30, 2001.  The components of theincrease were service charges on deposit accounts and bank owned life insurance.  Service charges on deposit accountsincreased $0.5 million, or 18.55% to $3.3 million from $2.8 million for the sixmonths ended June 30, 2002 and 2001, respectively.  The Company also received $0.9 million related to the bank ownedlife insurance that was not in place during 2001.

 

**Noninterest Expense**

 

Noninterestexpense decreased $0.8 million or 4.02% to $18.4 million from $19.2 million forthe six months ended June 30, 2002 and 2001, respectively.  The decrease from the prior year was mainlyattributable to the inclusion of merger related expenses in the prioryear.  Excluding merger relatedexpenses, noninterest expense increased $1.7 million.  The increase was mainly attributable to hiring of additionalpersonnel required to accommodate the Company’s growth.  Salaries and employee benefits were $10.8million an increase of $1.6 million, or 17.72% from the six months ended June30, 2001.  The Company’s efficiencyratio, excluding 2001 merger related expenses, was 52.6% for the six monthsended June 30, 2002 compared to 54.6% for the six months ended June 30, 2001.

 

13

----

 

**Income Taxes**

 

Incometax expense includes the regular federal income tax at the statutory rate, plusthe income taxes related to the State of Georgia income tax.  The amount of income tax expense isinfluenced by the amount of taxable income, the amount of tax-exempt income,the amount of nondeductible interest expense, and the amount of other nondeductibleexpenses.  For the six months ended June30, 2002, the provision for taxes was $4.3 million, an increase of $0.8 millionfrom the $3.5 million provided for in the same period in 2001.  The effective tax rate for the six monthsended June 30, 2002 was 30.55% compared to 35.37% for the same period in 2001.

 

14

----

 

##### **PART II. – OTHERINFORMATION**

 

### **ITEM4.      SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

At the Company’s Annual Meeting of Shareholders heldon May 8, 2002, the following individuals were elected to serve as Class IIDirectors for three-year terms expiring at the 2005 Annual Meeting ofShareholders:

 
|            |   | **Votes For** |   | **Votes  Against** |   | **Votes  Withheld** |   |
|-----------------|--------|---------------|--------|--------------------|--------|---------------------|--------|
| Eugene L. Argo  |   | 13,496,552    |   | 0                  |   | 23,602              |   |
| Frank B. Turner |   | 13,496,552    |   | 0                  |   | 23,602              |   |

 

### **ITEM6.          EXHIBITS AND REPORTS ON FORM8-K**

 

(a)                          Thefollowing are filed with or incorporated by reference into this report

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                            |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | Articles of  Incorporation of Main Street Bank, Inc. (incorporated by reference to Exhibit  3.1 to Registration Statement No. 33-78046 on Form S-4) as amended by  Certificate of Merger and Name Change (incorporated by reference to Exhibit  3.1 of the December 31, 1996, Form 10-KSB) |
|             |   |                                                                                                                                                                                                                                                                                       |
| 3.2              |   | Bylaws of Main  Street Bank, Inc. (incorporated by reference to Exhibit 3.2 to Registration  Statement No. 33-78046 on Form S-4)                                                                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.1             |   | Registrant’s  1994 Substitute Incentive Stock Option Plan for The Westside Bank & Trust  Company’s Incentive Stock Option Plan filed as Exhibit 4.4 to Form S-8 (File  No. 33-97300) (incorporated by reference)                                                             |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.2             |   | Form of  Registrant’s 1994 Incentive Stock Option Agreement filed as Exhibit 4.5 to  Form S-8 (File No. 33-97300) (incorporated by reference)                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.3             |   | Registrant’s  1995 Directors Stock Option Plan filed as Exhibit 4.4 to Form S-8 (File No.  33-81053) (incorporated by reference)                                                                                                                                                      |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.4             |   | Form of  Registrant’s 1995 Directors Stock Option Agreement filed as Exhibit 4.5 to  Form S-8 (File No. 33-81053) (incorporated by reference)                                                                                                                                         |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.5             |   | Registrant’s  1996 Substitute Incentive Stock Option Plan filed as Exhibit 4.1 to Form S-8  (File No. 333-15069) (incorporated by reference)                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.6             |   | Form of  Registrant’s 1996 Substitute Incentive Stock Option Agreement filed as  Exhibit 4.2 to Form S-8 (File No. 333-15069) (incorporated by reference)                                                                                                                             |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.7             |   | Registrant’s  1997 Directors Stock Option Plan filed as Exhibit 4.1 to Form S-8 (File No.  333-56473) (incorporated by reference)                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                       |
| 10.8             |   | Form of  Registrant’s 1997 Directors Stock Option Agreement filed as Exhibit 4.2 to  Form S-8 (File No. 333-56473) (incorporated by reference)                                                                                                                                        |

 

 

 

15

----

 
| 10.9   |   | Registrant’s  1997 Incentive Stock Option Plan filed as Exhibit 4.1 to Form S-8 (File No.  333-74555) (incorporated by reference)                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |
| 10.10  |   | Form of Registrant’s  1997 Incentive Stock Option Agreement filed as Exhibit 4.2 to Form S-8 (File  No. 333-74555) (incorporated by reference)                                                                                            |
|   |   |                                                                                                                                                                                                                                           |
| 10.11  |   | Registrant’s  1999 Directors Stock Option Plan included as Appendix B to the Joint  Proxy Statement/Prospectus set forth in Part I of the Registration Statement                                                                          |
|   |   |                                                                                                                                                                                                                                           |
| 10.12  |   | Form of  Registrant’s 1999 Directors Stock Option Agreement filed as Exhibit 4.2 to  Form S-8 (File No. 333-88645) (incorporated by reference)                                                                                            |
|   |   |                                                                                                                                                                                                                                           |
| 10.13  |   | Registrant’s  2000 Directors Stock Option Plan files as Exhibit 4.1 to Form S-8 (File No.  333-49436) (incorporated by reference)                                                                                                         |
|   |   |                                                                                                                                                                                                                                           |
| 10.14  |   | Form of  Registrant’s 2000 Director’s Stock Option Agreement filed as Exhibit 4.2 to  Form S-8 (File No. 333-49436) (incorporated by reference)                                                                                      |
|   |   |                                                                                                                                                                                                                                           |
| 10.15  |   | Registrant’s Omnibus  Stock Ownership and Long Term Incentive Plan filed as Exhibit 4.1 to Form S8  (File No. 33365188) (incorporated by reference)                                                                                       |
|   |   |                                                                                                                                                                                                                                           |
| 10.15  |   | Form of  Registrant’s Omnibus Stock Ownership and Long Term Incentive Plan Incentive  Plan Option Agreement filed as Exhibit 4.2 to File S-8 (File No. 333-65188)  (incorporated by reference)                                            |
|   |   |                                                                                                                                                                                                                                           |
| 10.17  |   | Form of  Registrant’s Omnibus Stock Ownership and Long Term Incentive Plan Restricted  Stock Grant Agreement filed as Exhibit 4.3 to Form S-8 (File No. 333-65188)                                                                        |
|   |   |                                                                                                                                                                                                                                           |
| 10.18  |   | Employment  Agreement dated May 24, 2000 between Registrant and Edward C. Milligan  (incorporated by referenced to Exhibit 10.13 to Registration Statement No.  333-50762 on Form S-4)                                                         |
|   |   |                                                                                                                                                                                                                                           |
| 10.19  |   | Employment  Agreement dated May 24, 2000 between the Registrant and Robert R. Fowler, III  (incorporated by referenced to Exhibit 10.14 to Registration Statement No.  333-50762 on Form S-4)                                                  |
|   |   |                                                                                                                                                                                                                                           |
| 10.20  |   | Employment  Agreement dated May 24, 2000 between the Registrant and Sam B. Hay  (incorporated by referenced to Exhibit 10.15 to Registration Statement No.  333-50762 on Form S-4)                                                             |
|   |   |                                                                                                                                                                                                                                           |
| 10.21  |   | Employment  Agreement dated September 17, 2001 between the Registrant and Robert D.  McDermott filed as Exhibit 10.21 to Form 10-K (File No. 000-25128)  (incorporated by reference)                                                           |
|   |   |                                                                                                                                                                                                                                           |
| 10.22  |   | Employment  Agreement dated April 23, 2002 between the Registrant and Max S. Crowe                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                           |
| 21     |   | The sole  subsidiaries of the Registrant are Main Street Bank (Ga.) and Williamson,  Musselwhite & The Company Insurance, Inc. (Ga.) and Main Street Bank has  two subsidiaries, MSB Holdings, Inc. (Del.) and MSB Investments, Inc. (Ga.) |
|   |   |                                                                                                                                                                                                                                           |
| 99.1   |   | Certification of  CEO and CFO pursuant to Section 906 of the Sarbanes-Oxly Act                                                                                                                                                                 |

 

 

16

----

 

(b)                           Reportson Form 8K

 

The Company filed a Form8-K on April 12, 2002 announcing a stock repurchase program.

 

 

17

----

 

**SIGNATURES**

 

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                         |   |   | **MAIN  STREET BANKS, INC.**                               |
|------------------------------|--------|--------|------------------------------------------------------------|
|                         |   |   |                                                       |
|                         |   |   |                                                       |
| Date:  August  13, 2002 |   | By:    | /s/ Edward C. Milligan                                     |   |
|                         |   |   | Edward C. Milligan, President and  Chief Executive Officer |
|                         |   |   |                                                       |
|                         |   |   |                                                       |
| Date:  August  13, 2002 |   | By:    | /s/ Robert D. McDermott                                    |   |
|                         |   |   | Robert  D. McDermott, Chief  Financial Officer             |

 

 

18

----