###### **SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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###### ** **

###### **FORM 10-Q**

 

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

 

##### **For the quarter ended September 30, 2002**

 

**Commission file number 000-25128**

 

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**MAIN STREET BANKS, INC.**

(Exact name of registrantas 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)     |
|                                      |

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý  No  o

 

Indicate by check whether the registrant is an accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).  Yes  ý  No  o

##### ** **

##### **APPLICABLE ONLY TO CORPORATE ISSUERS**

 

Asof October 31, 2002 registrant had outstanding 16,019,874 shares of commonstock.

 

 

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**MAIN STREET BANKS, INC.**

**TABLE OF CONTENTS**

 
| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                                                                  |   |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|         |                                                                                                                                                                       |   |
| Item 1.      | Financial Statements                                                                                                                                                       |   |
|         |                                                                                                                                                                       |   |
|         | Condensed Consolidated  Balance Sheets  September 30, 2002 (unaudited) and December 31, 2001                                                                               | 2      |
|         |                                                                                                                                                                       |   |
|         | Condensed Consolidated  Statements of Income (unaudited)  Three Months Ended September 30, 2002 and 2001 and  Nine Months Ended September 30, 2002 and 2001                | 3      |
|         |                                                                                                                                                                       |   |
|         | Condensed  Consolidated Statements of Comprehensive Income (unaudited)   Three Months Ended September 30, 2002 and 2001 and  Nine Months Ended September 30, 2002 and 2001 | 4      |
|         |                                                                                                                                                                       |   |
|         | Condensed  Consolidated Statements of Cash Flows (unaudited)  Nine Months Ended September 30, 2002 and 2001                                                                | 5      |
|         |                                                                                                                                                                       |   |
|         | Notes  to Condensed Consolidated Financial Statements (unaudited)                                                                                                          | 6-7    |
|         |                                                                                                                                                                       |   |
| Item  2.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                | 8-14   |
|         |                                                                                                                                                                       |   |
| Item 3.      | Quantitative and  Qualitative Disclosures about Market Risk  (included in Item 2)                                                                                          |   |
|         |                                                                                                                                                                       |   |
| Item 4.      | Controls and Procedures                                                                                                                                                    | 15     |
|         |                                                                                                                                                                       |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                                                                      |   |
|         |                                                                                                                                                                       |   |
| Item 5.      | Submission of Matters to a Vote of Security Holders                                                                                                                        |   |
|         |                                                                                                                                                                       |   |
| Item 6.      | Exhibits and  Reports on Form 8-K                                                                                                                                          | 16-18  |
|         |                                                                                                                                                                       |   |
|         | Signatures                                                                                                                                                                 | 19     |

 

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#####  

##### **PARTI. - FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**MAIN STREET BANKS, INC.**

##### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                      |   | **September  30,  2002** |          | **December  31,  2001** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------------|-------------------------|--------|
|                                                                                                                                                                      |   | **(Unaudited)**          |          |                    |   |
| **Assets**                                                                                                                                                                |   |                     |          |                    |   |
| Cash and due  from banks                                                                                                                                                  |   | $                        | 63,599,884    |                    | $      | 36,002,196 |   |
| Interest-bearing  deposits in banks                                                                                                                                       |   | 1,271,296                |          | 14,509,315              |   |
| Federal funds  sold and securities purchased under agreements to resell                                                                                                   |   | 28,345,897               |          | 60,431,897              |   |
| Investment  securities available for sale                                                                                                                                 |   | 216,610,155              |          | 122,447,873             |   |
| Investment  securities held to maturity (fair value of $756,253 and $729,102 at September  30, 2002 and December 31, 2001, respectively)                                  |   | 687,417                  |          | 686,966                 |   |
| Mortgage loans  held for sale                                                                                                                                             |   | 12,751,028               |          | 9,193,983               |   |
| Loans, net of  unearned income                                                                                                                                            |   | 860,297,666              |          | 811,446,346             |   |
| Allowance for  loan losses                                                                                                                                                |   | (12,684,649              | )             | (12,017,448             | )      |
| Loans, net                                                                                                                                                                |   | 847,613,017              |          | 799,428,898             |   |
|                                                                                                                                                                      |   |                     |          |                    |   |
| Premises and  equipment, net                                                                                                                                              |   | 27,873,737               |          | 26,692,404              |   |
| Other real  estate                                                                                                                                                        |   | 2,271,881                |          | 1,266,650               |   |
| Accrued interest  receivable                                                                                                                                              |   | 7,406,373                |          | 5,643,803               |   |
| Goodwill and  other intangible assets                                                                                                                                     |   | 1,757,109                |          | 705,867                 |   |
| Other assets                                                                                                                                                              |   | 40,114,829               |          | 33,158,039              |   |
| Total assets                                                                                                                                                              |   | $                        | 1,250,302,623 |                    | $      | 1,110,167,891 |   |
|                                                                                                                                                                      |   |                     |          |                    |   |
| **Liabilities  and stockholders’ equity**                                                                                                                            |   |                     |          |                    |   |
| Liabilities:                                                                                                                                                              |   |                     |          |                    |   |
| Deposits:                                                                                                                                                                 |   |                     |          |                    |   |
| Noninterest-bearing  demand                                                                                                                                               |   | $                        | 183,416,645   |                    | $      | 160,675,955 |   |
| Interest-bearing  demand and money market                                                                                                                                 |   | 297,426,699              |          | 250,925,349             |   |
| Savings                                                                                                                                                                   |   | 43,858,654               |          | 50,311,997              |   |
| Time deposits of  $100,000 or more                                                                                                                                        |   | 171,063,638              |          | 152,749,296             |   |
| Other time  deposits                                                                                                                                                      |   | 322,986,604              |          | 293,518,204             |   |
| Total deposits                                                                                                                                                            |   | 1,018,752,240            |          | 908,180,801             |   |
|                                                                                                                                                                      |   |                     |          |                    |   |
| Accrued interest  payable                                                                                                                                                 |   | 3,234,028                |          | 4,570,179               |   |
| Federal Home  Loan Bank advances                                                                                                                                          |   | 50,000,000               |          | 75,121,250              |   |
| Federal funds  purchased and securities sold under repurchase agreements                                                                                                  |   | 56,349,937               |          | 15,504,355              |   |
| Other  liabilities                                                                                                                                                        |   | 5,309,564                |          | 1,669,954               |   |
| Total  liabilities                                                                                                                                                        |   | 1,133,645,769            |          | 1,005,046,539           |   |
|                                                                                                                                                                      |   |                     |          |                    |   |
| **Shareholders’  equity**                                                                                                                                            |   |                     |          |                    |   |
| Common stock3⁄4no  par value per share; 50,000,000 shares authorized; outstanding, 15,979,634 and  15,621,755 at September 30,2002 and December 31, 2001, respectively |   | 30,672,959               |          | 32,407,424              |   |
| Retained  earnings                                                                                                                                                        |   | 85,018,306               |          | 72,018,255              |   |
| Accumulated  other comprehensive income                                                                                                                                   |   | 6,189,660                |          | 1,729,548               |   |
| Treasury stock,  at cost, 379,682 shares and 169,082 shares at September 30, 2002 and December  31, 2001, respectively                                                    |   | (5,224,071               | )             | (1,033,875              | )      |
| Total  shareholders’ equity                                                                                                                                          |   | 116,656,854              |          | 105,121,352             |   |
| Total  liabilities and shareholders’ equity                                                                                                                          |   | $                        | 1,250,302,623 |                    | $      | 1,110,167,891 |   |

* *

*See accompanying notes.*

 

2

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**MAIN STREET BANKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
|                                                                        |   | **Three  Months Ended  September 30,** |       | **Nine  Months Ended  September 30,** |   |
|-----------------------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|--------|
|                                                                        |   | **2002**                               |       | **2001**                              |   | **2002** |   | **2001** |   |
| Interest income:                                                            |   |                                   |       |                                  |   |   |   |   |   |
| Loans, including  fees                                                      |   | $                                      | 17,361,867 |                                  | $      | 18,445,983 |   | $ | 50,854,468 |   | $ | 55,802,733 |   |
| Interest on  investment securities:                                         |   |                                   |       |                                  |   |   |   |   |   |
| Taxable                                                                     |   | 2,045,049                              |       | 1,750,869                             |   | 5,592,745 |   | 5,953,890 |   |
| Non-taxable                                                                 |   | 449,463                                |       | 319,240                               |   | 1,211,710 |   | 956,136 |   |
| Federal funds  sold and other short-term investments                        |   | 56,020                                 |       | 449,847                               |   | 449,402 |   | 1,854,021 |   |
| Interest-bearing  deposits in banks                                         |   | 9,696                                  |       | 83,194                                |   | 48,812 |   | 111,726 |   |
| Total interest  income                                                      |   | 19,922,095                             |       | 21,049,133                            |   | 58,157,137 |   | 64,678,506 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Interest  expense:                                                          |   |                                   |       |                                  |   |   |   |   |   |
| Interest-bearing  demand and money market                                   |   | 701,464                                |       | 1,044,362                             |   | 1,915,530 |   | 3,293,001 |   |
| Savings                                                                     |   | 97,617                                 |       | 191,401                               |   | 322,884 |   | 670,603 |   |
| Time deposits of  $100,000 or more                                          |   | 1,548,606                              |       | 2,181,652                             |   | 4,985,390 |   | 7,077,471 |   |
| Other time  deposits                                                        |   | 2,818,137                              |       | 4,357,388                             |   | 9,285,691 |   | 15,030,188 |   |
| Federal funds  purchased and securities sold under agreements to repurchase |   | 483,437                                |       | 42,169                                |   | 873,077 |   | 173,726 |   |
| Federal Home  Loan Bank advances                                            |   | 326,882                                |       | 484,387                               |   | 1,091,117 |   | 1,986,220 |   |
| Other interest  expense                                                     |   | 17,730                                 |       | 18,940                                |   | 57,924 |   | 38,059 |   |
| Total interest  expense                                                     |   | 5,993,873                              |       | 8,320,299                             |   | 18,531,613 |   | 28,269,268 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Net interest  income                                                        |   | 13,928,222                             |       | 12,728,834                            |   | 39,625,524 |   | 36,409,238 |   |
| Provision for loan losses                                                   |   | 217,000                                |       | 562,000                               |   | 2,276,000 |   | 1,532,000 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Net interest  income after provision for loan losses                        |   | 13,711,222                             |       | 12,166,834                            |   | 37,349,524 |   | 34,877,238 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Noninterest  income:                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Service charges  on deposit accounts                                        |   | 1,848,215                              |       | 1,544,847                             |   | 5,138,774 |   | 4,320,558 |   |
| Investment  securities gains                                                |   | —                                 |       | —                                |   | — |   | 22,191 |   |
| Gain (loss) on  sales of assets                                             |   | (80,235                                | )          | 13,066                                |   | (20,096 | ) | 10,224 |   |
| Gain on sales of  loans                                                     |   | 124,659                                |       | 90,756                                |   | 505,551 |   | 407,682 |   |
| Other income                                                                |   | 3,425,480                              |       | 2,008,008                             |   | 8,568,155 |   | 5,356,173 |   |
| Total  noninterest income                                                   |   | 5,318,119                              |       | 3,656,677                             |   | 14,192,384 |   | 10,116,828 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Noninterest  expense:                                                       |   |                                   |       |                                  |   |   |   |   |   |
| Salaries and  other compensation                                            |   | 5,510,648                              |       | 4,416,260                             |   | 14,775,321 |   | 12,300,907 |   |
| Employee  benefits                                                          |   | 820,555                                |       | 732,680                               |   | 2,330,320 |   | 2,000,530 |   |
| Net occupancy  and equipment expense                                        |   | 1,406,481                              |       | 1,227,894                             |   | 3,890,984 |   | 3,629,522 |   |
| Professional services                                                       |   | 1,070,022                              |       | 359,297                               |   | 1,723,965 |   | 1,274,369 |   |
| Regulatory  agency assessments                                              |   | 81,782                                 |       | 60,824                                |   | 194,831 |   | 220,904 |   |
| Amortization of  intangible assets                                          |   | 56,475                                 |       | 59,916                                |   | 123,675 |   | 179,750 |   |
| Merger expense                                                              |   | —                                 |       | —                                |   | — |   | 2,510,625 |   |
| Other expense                                                               |   | 2,592,904                              |       | 2,040,885                             |   | 6,935,520 |   | 5,988,073 |   |
| Total  noninterest expense                                                  |   | 11,538,867                             |       | 8,897,756                             |   | 29,974,616 |   | 28,104,680 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Income before  income taxes                                                 |   | 7,490,474                              |       | 6,925,755                             |   | 21,567,292 |   | 16,889,386 |   |
| Income tax  expense                                                         |   | 2,274,784                              |       | 2,392,434                             |   | 6,575,603 |   | 5,916,552 |   |
| Net income                                                                  |   | $                                      | 5,215,690  |                                  | $      | 4,533,321 |   | $ | 14,991,689 |   | $ | 10,972,834 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Earnings per  share:                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Basic                                                                       |   | $                                      | .33        |                                  | $      | .29 |   | $ | .96 |   | $ | .70 |   |
| Diluted                                                                     |   | $                                      | .32        |                                  | $      | .28 |   | $ | .93 |   | $ | .68 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Dividends  declared per share                                               |   | $                                      | .105       |                                  | $      | .09 |   | $ | .315 |   | $ | .27 |   |
|                                                                        |   |                                   |       |                                  |   |   |   |   |   |
| Weighted average  common shares outstanding:                                |   |                                   |       |                                  |   |   |   |   |   |
| Basic                                                                       |   | 15,716,848                             |       | 15,648,336                            |   | 15,667,429 |   | 15,628,618 |   |
| Diluted                                                                     |   | 16,218,286                             |       | 16,178,030                            |   | 16,187,355 |   | 16,098,382 |   |

 

*See accompanying notes.*

 

3

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**MAIN STREET BANKS, INC.**

##### **CONDENSEDCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME**

**(Unaudited)**

 
|                                               |   | **Three Months Ended  September 30,** |      | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------|--------|---------------------------------------|-----------|--------------------------------------|--------|
|                                               |   | **2002**                              |      | **2001**                             |   | **2002** |   | **2001** |   |
|                                               |   |                                  |      |                                 |   |   |   |   |   |
| **Net  income**                                    |   | $                                     | 5,215,690 |                                 | $      | 4,533,321 |   | $ | 14,991,689 |   | $ | 10,972,834 |   |
|                                               |   |                                  |      |                                 |   |   |   |   |   |
| **Other comprehensive income,****net of  tax**     |   |                                  |      |                                 |   |   |   |   |   |
|                                               |   |                                  |      |                                 |   |   |   |   |   |
| Unrealized gains  on securities available for sale |   | 1,751,395                             |      | 1,379,812                            |   | 3,069,649 |   | 2,918,221 |   |
| Unrealized gain  on derivative transaction         |   | 1,400,000                             |      | —                               |   | 1,400,000 |   | — |   |
| Unrealized loss  on interest rate swap transaction |   | —                                |      | —                               |   | (9,537 | ) | — |   |
|                                               |   |                                  |      |                                 |   |   |   |   |   |
| **Comprehensive  income**                          |   | $                                     | 8,367,085 |                                 | $      | 5,913,133 |   | $ | 19,451,801 |   | $ | 13,891,055 |   |

 

*See accompanying notes.*

 

4

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**MAIN STREET BANKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                               |   | **Nine  Months Ended  September 30,** |       |
|------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                               |   | **2002**                              |       | **2001** |   |
| **Operating  activities**                                                          |   |                                  |       |   |   |
| Net income                                                                         |   | $                                     | 14,991,689 |   | $ | 10,972,834 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                                  |       |   |   |
| Provision for  loan losses                                                         |   | 2,276,000                             |       | 1,532,000 |   |
| Depreciation and  amortization of premises and equipment                           |   | 1,787,502                             |       | 1,631,725 |   |
| Amortization of  intangible assets                                                 |   | 123,675                               |       | 179,750 |   |
| Loss on sales of  other real estate                                                |   | 7,364                                 |       | 27,661 |   |
| Investment  securities gains                                                       |   | —                                |       | (22,191 | ) |
| Net amortization  (accretion) of investment securities                             |   | 439,903                               |       | (503,793 | ) |
| Net accretion of  loans purchased                                                  |   | (52,215                               | )          | (44,655 | ) |
| (Gain) loss on  sales of premises and equipment                                    |   | 12,733                                |       | (10,224 | ) |
| Net increase in  mortgage loans held for sale                                      |   | (3,557,045                            | )          | (5,917,838 | ) |
| Gains on sales  of mortgage loans                                                  |   | (574,813                              | )          | (469,968 | ) |
| Gain on sales of  loans                                                            |   | (505,551                              | )          | (407,682 | ) |
| Deferred income  tax expense (benefit)                                             |   | (1,581,334                            | )          | 1,196,345 |   |
| Deferred net  loan fees                                                            |   | 40,694                                |       | 159,388 |   |
| Vesting in  restricted stock award plan                                            |   | 370,926                               |       | 369,683 |   |
| Changes in  operating assets and liabilities:                                      |   |                                  |       |   |   |
| (Increase)  decrease in accrued interest receivable                                |   | (1,762,570                            | )          | 692,540 |   |
| Decrease in accrued interest payable                                               |   | (1,336,151                            | )          | (414,892 | ) |
| Other                                                                              |   | (84,854                               | )          | (143,074 | ) |
| Net cash  provided by operating activities                                         |   | 10,595,953                            |       | 8,827,609 |   |
|                                                                               |   |                                  |       |   |   |
| **Investing activities**                                                           |   |                                  |       |   |   |
| Purchases of  investment securities available for sale                             |   | (125,995,591                          | )          | (31,506,988 | ) |
| Purchases of  other investments                                                    |   | (750,000                              | )          | — |   |
| Maturities and  calls of investment securities available for sale                  |   | 30,387,822                            |       | 69,583,744 |   |
| Proceeds from  sales of investment securities available for sale                   |   | —                                |       | 1,104,250 |   |
| Net increase in  loans funded                                                      |   | (48,161,718                           | )          | (64,145,388 | ) |
| Purchases of  premises and equipment                                               |   | (2,764,912                            | )          | (2,283,988 | ) |
| Proceeds from  sales of premises and equipment                                     |   | 45,066                                |       | 407,267 |   |
| Proceeds from  sales of other real estate                                          |   | 1,312,496                             |       | 1,863,427 |   |
| Improvements to  other real estate                                                 |   | —                                |       | (35,776 | ) |
| Business  combinations, net of cash acquired                                       |   | (300,000                              | )          | — |   |
| Net cash used in investing activities                                              |   | (146,226,834                          | )          | (25,013,452 | ) |
|                                                                               |   |                                  |       |   |   |
| **Financing activities**                                                           |   |                                  |       |   |   |
| Net increase in  demand and savings accounts                                       |   | 62,788,697                            |       | 60,918,679 |   |
| Increase  (decrease) in time deposits                                              |   | 47,782,742                            |       | (39,865,040 | ) |
| Increase  (decrease) in federal funds purchased                                    |   | 40,845,582                            |       | (26,389,495 | ) |
| Net decrease in  Federal Home Loan Bank advances                                   |   | (25,121,250                           | )          | (6,250 | ) |
| Dividends paid                                                                     |   | (4,955,101                            | )          | (4,109,463 | ) |
| Proceeds from  the issuance of common stock                                        |   | 753,076                               |       | 508,294 |   |
| Payments to  repurchase common stock                                               |   | (4,189,196                            | )          | — |   |
| Net cash  provided by (used in) financing activities                               |   | 117,904,550                           |       | (8,943,275 | ) |
| Net decrease in  cash and cash equivalents                                         |   | (17,726,331                           | )          | (25,129,118 | ) |
| Cash and cash  equivalents at beginning of year                                    |   | 110,943,408                           |       | 129,397,609 |   |
| Cash and cash  equivalents at end of year                                          |   | $                                     | 93,217,077 |   | $ | 104,268,491 |   |
| **Supplemental disclosures of cash  flow information**                             |   |                                  |       |   |   |
| Cash paid during  the period for:                                                  |   |                                  |       |   |   |
| Interest                                                                           |   | $                                     | 15,297,586 |   | $ | 28,684,159 |   |
| Income taxes,  net                                                                 |   | 6,600,000                             |       | 650,000 |   |
| **Supplemental disclosures of noncash  transactions**                              |   |                                  |       |   |   |
| Loans  transferred to other real estate acquired through foreclosure               |   | $                                     | 3,098,739  |   | $ | 894,257 |   |
| Transfer of  investment securities from held to maturity to available for sale     |   | $                                     | —     |   | $ | 17,851,829 |   |

 

*See accompanying notes.*

 

5

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**MAIN STREET BANKS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

##### **September 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 nine month periodended September 30, 2002 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2002. These financial statementsand related “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,included in the Company’s Current Annual Report on Form 10-K.

 

**NOTE 2.**        **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 common stock.  The combination was accounted for as apooling of interests.

 

 On July 17,2002, the Company executed a definitive merger agreement with First NationalBank of Johns Creek of Suwanee, Georgia (“FNB Johns Creek”).  The merger is subject to FNB Johns Creekshareholder approval.  The shareholdervote is scheduled to occur on November 20, 2002 and if approved the mergerwould be consummated by November 30,2002. In the merger, each share of FNB Johns Creek common stock outstanding onthe effective date of the merger will be converted into either 1.1823 shares ofMain Street common stock or $24 in cash at the election of the shareholdersubject to the condition that a total amount of cash of $10,712,000 shall bepaid to all shareholders.  The mergerwill be accounted for under the purchase method of accounting.

 

**NOTE 3.**        **CURRENTACCOUNTING DEVELOPMENTS**

 

In July 2001, the Financial Accounting Standards Board(‘FASB”) issued FASB Statement No. 142, “Goodwill and Other Intangible Assets”(“Statement 142”).  Under Statement No.142, goodwill and intangible assets deemed to have indefinite lives will nolonger be amortized but will be subject to annual impairment tests.  Other intangible assets will continue to beamortized over their useful lives.  Theadoption of this statement did not have a material financial impact on theCompany’s financial position or results of operations.  The adoption of Statement 142 resulted inthe company reducing amortization expense by $26,317 and $78,951 for the threeand nine months ended September 30, 2002, respectively.  The Company will complete an impairment testannually and will record the appropriate charges if any impairment in value isindicated.

 

In October 2001, the FASB issued FASB Statement No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”(“Statement 144”), effective for fiscal years beginning after December 15, 2001and applied prospectively.  Statement144 superceded Statement 121 and APB 30. Statement 144 retains the fundamental provisions of Statement 121related to the recognition and measurement of long-lived assets.  Statement 144 provides more guidance onestimating cash flows when performing a recoverability test.  Furthermore, Statement 144 requires thatoperating losses from a “component of an entity” would be recognized in theperiod in which they occur rather than as of the

 

6

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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.

 

****In June2002, FASB issued FASB Statement No. 146, “Accounting for Costs Associated withExit or Disposal Activities”. This Statement requires that a liability forcosts associated with exit or disposition activities be recognized when theliability is incurred and be measured at fair value and adjusted for changes inestimated cash flows. Existing generally accepted accounting principles providefor the recognition of such costs at the date of management’s commitment to anexit plan. Under Statement No. 146, management’s commitment to an exit planwould not be sufficient, by itself, to recognize a liability. The Statement iseffective for exit or disposal activities initiated after December 31, 2002 andis not expected to have a material impact on the results of operations orfinancial condition of the Company.****

 

In October 2002, the FASB issued FASB Statement No.147, “Acquisitions of Certain Financial Institutions”. This Statement providesguidance on the accounting for the acquisition of a financial institution,which had previously been addressed in FASB Statement No. 72, “Accounting forCertain Acquisitions of Banking or Thrift Institutions”. The provisions ofStatement No. 147 are effective for acquisitions for which the date ofacquisition is on or after October 1, 2002. The Statement ****is not expected to have amaterial impact on the results of operations or financial condition of theCompany.****

 

**NOTE 4.**        **EARNINGS PERCOMMON SHARE**

 

The computation of diluted earnings pershare is as follows:

 
|                              |   | **Three Months Ended  September 30,** |      | **Nine Months Ended  September 30,** |   |
|-----------------------------------|--------|---------------------------------------|-----------|--------------------------------------|--------|
|                              |   | **2002**                              |      | **2001**                             |   | **2002** |   | **2001** |   |
|                              |   |                                  |      |                                 |   |   |   |   |   |
| Basic and diluted net  income     |   | $                                     | 5,215,690 |                                 | $      | 4,533,321 |   | $ | 14,991,689 |   | $ | 10,972,834 |   |
|                              |   |                                  |      |                                 |   |   |   |   |   |
| Basic weighted average  shares    |   | 15,716,848                            |      | 15,648,336                           |   | 15,667,429 |   | 15,628,618 |   |
| Effect of Employee  Stock Options |   | 501,438                               |      | 529,694                              |   | 519,926 |   | 469,764 |   |
| Diluted weighted  average shares  |   | 16,218,286                            |      | 16,178,030                           |   | 16,187,355 |   | 16,098,382 |   |
|                              |   |                                  |      |                                 |   |   |   |   |   |
| Diluted earnings per  share       |   | $                                     | .32       |                                 | $      | .28 |   | $ | .93 |   | $ | .68 |   |

 

**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:

 
|                       |   | **September 30,  2002**      |    | **December 31,  2001** |   |
|----------------------------|--------|------------------------------|---------|------------------------|--------|
|                       |   | ***(Dollars in thousands)*** |    |
|                       |   |                         |    |                   |   |
| Commercial                 |   | $                            | 65,595  |                   | $      | 68,320 |   |
| Construction               |   | 205,178                      |    | 173,464                |   |
| Residential mortgage       |   | 173,119                      |    | 152,226                |   |
| Real estate – other   |   | 374,385                      |    | 366,003                |   |
| Consumer                   |   | 43,459                       |    | 53,075                 |   |
| Total loans                |   | 861,736                      |    | 813,088                |   |
| Less:                      |   |                         |    |                   |   |
| Net deferred loan fees     |   | (1,438                       | )       | (1,642                 | )      |
| Allowance for loan  losses |   | (12,685                      | )       | (12,017                | )      |
|                       |   |                         |    |                   |   |
| Net loans                  |   | $                            | 847,613 |                   | $      | 799,429 |   |

 

7

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### **ITEM 2.          MANAGEMENT’S DISCUSSION AND ANALYSISOF 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 September 30, 2002 as compared to December 31, 2001 and operatingresults for the three month and nine month periods ended September 30, 2002 ascompared to the three and nine month periods ended September 30, 2001. Thesecomments should be read in conjunction with the Company’s unaudited condensedconsolidated financial statements and accompanying notes appearing elsewhereherein.

 

**Forward LookingStatements**

#  

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.

 

**Overview**

 

The Company’s total assets have increased $140.1million or 12.62% since December 2001. Federal funds sold decreased $32.1 million primarily due to the purchaseof investment securities and an increase in loan demand.  Loans have increased 6.02% or $48.9 millionsince December 2001.  The investmentportfolio has increased $94.2 million due to the purchase of additionalsecurities. Total deposits have increased by 12.18% or $110.6 million due to anongoing deposit campaign, limited use of brokered and national deposits, andseasonal public funds.

 

Return on average equity for the three months and ninemonths ended September 30, 2002 was 18.2% and 18.3% on average equity of $113.5million and $109.5 million, respectively. This compares to 17.8% and 17.7% on average equity of $101.1 million and$98.1 million respectively, for the same periods in 2001, excluding mergerrelated expenses.

 

Return on average assets for the three months and ninemonths ended September 30, 2002 was 1.72% and 1.72%, respectively.  This compares to 1.71% and 1.66%,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 andliabilities.  Management considers suchaccounting policies to be critical accounting policies. The Company believesthe allowance for loan losses is a critical accounting policy that requires themost significant use of estimates and assumptions in the preparation of itscondensed consolidated financial statements.

 

The 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 loan lossesis established through a provision for losses based on management’s evaluationof current economic conditions.  Theevaluation, which includes a review of all loans on which

 

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full collection may not be reasonably assumed, considers among othermatters, economic conditions, the fair market value or the estimated netrealizable value of the underlying collateral, management’s estimate ofprobable credit losses, historical loan loss experience, and other factors thatwarrant recognition in providing for an adequate loan loss allowance.

 

**Capital**

 

At September 30, 2002, the capital ratios of theCompany and Main Street Bank (the “Bank”) were adequate based on regulatoryminimum capital 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 of 8%.  The following table reflects the Company’sand the Bank’s compliance with regulatory capital requirements at September 30,2002.

 
|                        |   | **Company** |   | **Bank** |   |
|-----------------------------|--------|-------------|--------|----------|--------|
|                        |   |        |   |     |   |
| Leverage ratio              |   | 9.16        | %      | 8.96     | %      |
|                        |   |        |   |     |   |
| Risk based  capital ratios: |   |        |   |     |   |
| Tier 1 risk  based capital  |   | 11.48       | %      | 11.23    | %      |
| Risk-based  capital         |   | 12.73       | %      | 12.48    | %      |

 

**Loansand Allowance for Loan Losses**

 

At September 30, 2002, loans, net of unearned income,were $860.3 million, an increase of $48.9 million or 6.02% over net loans atDecember 31, 2001 of $811.4 million. The growth in the loan portfolio wasattributable to a consistent focus on quality loan production and strong loanmarkets in the state and region. Real estate-construction loans increased $31.7million or 18.28% from December 31, 2001 and residential mortgages increased$20.9 million or 13.72% from December 31, 2001. The Company continues tomonitor the composition of the loan portfolio to ensure that the market risk tothe balance sheet is not adversely affected by the impact of changes in theeconomic environment on any one segment of the portfolio.

 

The Company primarily focuses on the following loancategories: (1) commercial, (2) real estate construction, (3) real estatemortgage and (4) consumer loans. The Company’s management has strategicallylocated its branches in high growth markets and has taken advantage of a surgein residential and industrial growth in 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 closelymirror regulatory classification guidelines and include pass loan categories 1through 4 and special mention, substandard, doubtful, and loss categories of 5through 8, respectively.  By grading theloan portfolio 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

 

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those loans with clear and defined weaknesses such as a highlyleveraged position, unfavorable financial ratios, uncertain financial ratios,uncertain repayment sources, deterioration in underlying collateral values, orpoor financial condition which may jeopardize recoverability of the debt. Loansclassified as “doubtful” are those loans that have characteristics similar tosubstandard loans but have an increased risk of loss, or at least a portion ofthe loan may require being charged-off. Loans classified as “loss” are those loans that are in the process ofbeing charged-off.

 

For the nine month period ending September 30, 2002,net charge-offs totaled $1,608,799 or .25% (annualized) of average loansoutstanding for the period, net of unearned income, compared to $627,966 or..11% in net charge-offs for the same period in 2001. The increase in the netcharge-offs was related to the Company’s decision to exit the receivablesfinancing line of business.  The provisionfor loan losses for the nine months ended September 30, 2002 was $2,276,000compared to $1,532,000 for the same period in 2001. The allowance for loanlosses totaled $12,684,649 or 1.48% of total loans, net of unearned income atSeptember 30, 2002, compared to $12,017,448 or 1.48% at December 31, 2001.

 

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

 
|                                                         |   | **Nine Months Ended  September 30,** |       |
|--------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                         |   | **2002**                             |       | **2001** |   |
|                                                         |   |                                 |       |   |   |
| Balance of  allowance for loan losses at beginning of period |   | $                                    | 12,017,448 |   | $ | 10,907,424 |   |
|                                                         |   |                                 |       |   |   |
| Provision  charged to operating expense                      |   | 2,276,000                            |       | 1,532,000 |   |
| Charge-offs:                                                 |   |                                 |       |   |   |
| Commercial,  financial and agricultural                      |   | 644,066                              |       | 162,047 |   |
| Real estate –  construction and land development        |   | 252,592                              |       | 11,107 |   |
| Real estate –  mortgage                                 |   | —                               |       | 56,156 |   |
| Installment and  other consumer                              |   | 883,689                              |       | 671,502 |   |
| Total  charge-offs                                           |   | $                                    | 1,780,347  |   | $ | 900,812 |   |
| Recoveries:                                                  |   |                                 |       |   |   |
| Commercial,  financial and agricultural                      |   | 14,672                               |       | 100,471 |   |
| Real estate –  construction and land development        |   | 3,081                                |       | — |   |
| Real estate –  mortgage                                 |   | —                               |       | 21,731 |   |
| Installment and  other consumer                              |   | 153,795                              |       | 150,644 |   |
| Total recoveries                                             |   | $                                    | 171,548    |   | $ | 272,846 |   |
| Net charge-offs                                              |   | $                                    | 1,608,799  |   | $ | 627,966 |   |
|                                                         |   |                                 |       |   |   |
| Balance of allowance  for loan losses at end of period       |   | $                                    | 12,684,649 |   | $ | 11,811,458 |   |

 

**Liquidityand Market Risk Sensitivity**

 

Liquidity involves the Company’s ability to raisefunds to support asset growth or reduce assets to meet deposit withdrawals andother payment obligations, to maintain reserve requirements and otherwise tooperate on an ongoing basis. During the past three years, the Company’sliquidity needs have primarily been met by growth in core deposits, aspreviously discussed, together with advances from the Federal Home Loan Bank.Although access to purchased funds from correspondent banks is available andhas been utilized on occasion to take advantage of investment opportunities,the Company does not generally rely on these external funding sources. The cashand federal funds sold position, supplemented by amortizing investment and loanportfolios, have generally created an adequate liquidity position.

 

The Company’s asset liability and funds managementpolicy provides management with the necessary guidelines for effective fundsmanagement and a measurement system for monitoring its net interest ratesensitivity position. The Company manages its sensitivity position withinestablished guidelines.

 

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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 risk is managed by the asset liabilitycommittee which is composed of senior officers of the Company, in accordancewith policies approved by its board of directors. The asset liability committeeformulates strategies based on appropriate levels of interest rate risk. Indetermining the appropriate level of interest rate risk, the asset liabilitycommittee considers the impact on earnings and capital of the current outlookon interest rates, potential changes in interest rates, regional economies,liquidity, business strategies and other factors. The asset liability committeemeets regularly to review, among other things, the sensitivity of assets andliabilities to interest rate changes, the book and market values of assets andliabilities, unrealized gains and losses, purchase and sale activities,commitments to originate loans and the maturities of investments andborrowings. Additionally, the asset liability committee reviews liquidity, cashflow flexibility, maturities of deposits and consumer and commercial depositactivity. The Company’s management uses two methodologies to manage interestrate risk: (i) an analysis of relationships between interest-earning assets andinterest-bearing liabilities; and (ii) an interest rate shock simulation model.The Company has traditionally managed its business to reduce its overallexposure to changes in interest rates.

 

The Company manages its exposure to interest rates bystructuring its balance sheet in the ordinary course of business. The Companyhas in the past, and may in the future utilize interest rate swaps, financialoptions, or financial futures contracts in order to reduce interest rate risk.

 

As of September 30, 2002, a $50 million notionalamount interest rate floor is in place to protect the Company from furtherinterest rate reductions.  The interestrate floor has a 12 month contract term that is tied to the 3 month LondonInterbank Offered Rate (LIBOR) and has a strike price of 2.0%.  The interest rate floor contract termexpires during 2002.

 

As of September 30, 2002, the Company had entered intoone interest rate swap transaction.  Theswap has a declining notional amount $50 million in year one, $35 million inyear two, and $20 million in year three. The entire swap matures during 2005. The Company will receive a fixed rate and pay prime.  The Company had a $1.4 million unrealizedgain as of September 30, 2002 related to the swap transaction.

 

An interest rate sensitive asset or liability is onethat, within a defined time period, either matures or experiences an interestrate change in line with general market interest rates. The management ofinterest rate risk is performed by analyzing the maturity and repricingrelationships between interest-earning assets and interest-bearing liabilitiesat specific points in time (gap) and by analyzing the effects of interest ratechanges on net interest income over specific periods of time by projecting theperformance of the mix of assets and liabilities in varied interest rateenvironments. Interest rate sensitivity reflects the potential effect on netinterest income of a movement in interest rates. A company is considered to beasset sensitive, or having a positive gap, when the amount of itsinterest-earning assets maturing or repricing within a given period exceeds theamount of its interest-bearing liabilities also maturing or repricing withinthat time period. Conversely, a company is considered to be liabilitysensitive, or having a negative gap, when the amount of its interest-bearingliabilities maturing or repricing within a given period exceeds the amount ofits interest-earning assets also maturing or repricing within that time period.During a period of rising interest rates, a negative gap would tend to affectnet interest income adversely, while a positive gap would tend to result in anincrease in net interest income. During a period of falling interest rates, anegative gap would tend to result in an increase in net interest income, whilea positive gap would tend to affect net interest income adversely.

 

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

 

### **Interest Income**

 

Interest income for the three months ended September30, 2002 was $19.9 million, a decrease of $1.1 million, or

 

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5.35% compared to $21.0 million for the same period in 2001.  Interest and fees on loans decreased $1.1million to $17.4 million for the three months ended September 30, 2002 comparedto $18.4 million for the same period ending September 30, 2001.  The decrease is mainly attributable to theFederal Reserve’s aggressive interest rate reductions during 2001.  Interest on federal funds sold decreased$393,827 or 87.55%.  This was due to theCompany’s decision to use the funds to purchase investment securities to earn ahigher yield.   Average earning assetsfor the three month period increased $122.7 million to $1,098.5 million as ofSeptember 30, 2002 compared to $975.8 million as of September 30, 2001.   Yield on average earning assets decreased135 basis points to 7.30% from 8.65 % for the quarter ended September 30, 2002and 2001, respectively.

##### ** **

##### **Interest Expense**

 

Interest expense on deposits and other borrowings forthe three months ended September 30, 2002 was $6.0 million, a $2.3 million, or27.96% decrease from September 30, 2001. The decrease was attributable to the yield on average interest bearingliabilities decreasing to 2.63% from 4.17% as of September 30, 2002 and 2001,respectively.  Average interest bearingliabilities increased $113.2 million to $904.1 million for the three monthsended September 30, 2002 compared to $790.9 for the three months endedSeptember 30, 2001.   The decrease wasalso attributable to the Company refinancing its Federal Home Loan Bankborrowings to take advantage of the Federal Reserve’s aggressive interest ratereductions.

 

**Net Interest Income**

 

Netinterest income for the three months ended September 30, 2002 increased $1.2million, or 9.42% to $13.9 million compared to $12.7 million for the sameperiod ending September 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 decreased to 5.13% for thethree months ended September 30, 2002 compared to 5.27% as of September 30,2001.

 

**Provision for LoanLosses**

 

Theprovision for loan losses was $0.2 million for the three months ended September30, 2002 as compared to $0.6 million for the three months September 30,2001.  The decrease in the provision forloan losses was attributable to flat loan demand for the quarter.  Although no assurance is given, managementbelieves that the present allowance for loan losses is adequate considering theCompany’s historical loss experience.

 

**Noninterest Income**

 

Noninterestincome was $5.3 million for the three months ended September 30, 2002, anincrease of $1.7 million, or 45.44% compared to $3.7 million as of the threemonths ended September 30, 2001.  Thecomponents of the increase were service charges on deposit accounts, mortgageorigination fees, insurance agency revenue and bank owned life insurance.  Service charges on deposit accountsincreased $0.3 million, or 19.64% to $1.8 million from $1.5 million for the threemonths ended September 30, 2002 and 2001, respectively.  Mortgage origination fees increased $0.2million, or 33.99% to $0.7 million from $0.5 million for the three months endedSeptember 30, 2002 and 2001, respectively. Insurance agency revenue increased $0.4 million, 56.11% to $1.1 millionfrom $0.7 million for the three months ended September 30, 2002,respectively.  The Company also received$0.5 million related to the bank owned life insurance that was not in placeduring 2001.

 

**Noninterest Expense**

 

Noninterestexpense increased $2.6 million or 29.68% to $11.5 million from $8.9 million forthe three months ended September 30, 2002 and 2001, respectively.  The increase was mainly attributable tohiring and use of additional

 

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personnelrequired to accommodate the Company’s growth. Salaries and employee benefits were $6.3 million, an increase of $1.2million, or 22.96% from the three months ended September 30, 2001.  Professional fees increased $0.7 million to$1.1 million for the quarter ended September 30, 2002.  The Company’s efficiency ratio (excludingmerger and other one time expenses) was 59.1% for the three months endedSeptember 30, 2002 compared to 53.6% for the three months ended September 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 September 30, 2002, the provision for taxeswas $2.3 million, a decrease of $0.1 million from the $2.4 million provided forin the same period in 2001.  Theeffective tax rate for the three months ended September 30, 2002 was 30.37%compared to 34.54% for the same period in 2001.  The decrease is primarily related to the Company forming a RealEstate Investment Trust.

 

## **Results of Operationsfor the Nine Months Ended September 30, 2002 and 2001**

 

### **Interest Income**

 

Interest income for the nine months ended September30, 2002 was $58.2 million, a decrease of $6.5 million, or 10.08% compared to$64.7 million for the nine months ended September 30, 2001.  Interest and fees on loans decreased $4.9million to $50.9 million for the nine months ended September 30, 2002 comparedto $55.8 million for the same period in 2001. Interest on investment securities decreased $0.1 million to $6.8 millionfrom $6.9 million for the nine months ended September 30, 2002 and 2001, respectively.  The decrease is mainly attributable to theFederal Reserve’s aggressive interest rate reductions during 2001.  Average earning assets increased $91.5million to $1,066.6 million for the nine months ended September 30, 2002compared to $975.2 million for the same period ended September 30, 2001.   Yield on average earning assets decreased157 basis points to 7.39% from 8.96 % for the nine months ended September 30,2002 and 2001, respectively.

 

##### **Interest Expense**

 

Interest expense on deposits and other borrowings forthe nine months ended September 30, 2002 was $18.5 million, a $9.7 million, or34.45% decrease from the same period ending September 30, 2001.  The decrease was attributable to the yieldon average interest bearing liabilities decreasing to 2.82% from 4.76% for thenine months ended September 30, 2002 and September 30, 2001, respectively.  Average interest bearing liabilitiesincreased $83.7 million to $877.8 million for the nine months ended September30, 2002 compared to $794.2 for the nine months ended September 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.

 

**Net Interest Income**

 

Net interest income for the nine monthsended September 30, 2002 increased $3.2 million, or 8.83% to $39.6 millioncompared to $36.4 million for the same period ending September 30, 2001.  The increase was mainly attributable to theCompany’s ability to manage the effects of the Federal Reserve’s aggressive ratereductions.  The Company’s net interestmargin decreased to 5.07% for the nine months ended September 30, 2002 comparedto 5.08% as of September 30, 2001.

 

**Provision for LoanLosses**

 

Theprovision for loan losses was $2.3 million for the nine months ended September30, 2002 as compared to $1.5 million for the same period ending September 30,2001.  The increase was attributable tothe Company’s decision to

 

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exitthe receivables financing line of business and an increase in loan demand.  Although no assurance is given, managementbelieves that the present allowance for loan losses is adequate considering theCompany’s historical loss experience.

 

**Noninterest Income**

 

Noninterestincome was $14.2 million for the nine months ended September 30, 2002, anincrease of $4.1 million, or 40.28% compared to $10.1 million for the ninemonths ended September 30, 2001.  Thecomponents of the increase were service charges on deposit accounts, mortgageorigination fees, insurance agency revenue and bank owned life insurance.  Service charges on deposit accountsincreased $0.8 million, or 18.94% to $5.1 million from $4.3 million for thenine months ended September 30, 2002 and 2001, respectively.  Mortgage origination fees increased $0.3million, or 23.38% to $1.8 million from $1.4 million for the nine months endedSeptember 30, 2002 and 2001, respectively. Insurance agency revenue increased $0.8 million, or 40.94% to $2.8million from $2.0 million for the nine months ended September 30, 2002 and2001, respectively.  The Company alsoreceived $1.4 million related to the bank owned life insurance that was not inplace during 2001.

 

**Noninterest Expense**

 

Noninterestexpense increased $1.9 million or 6.65% to $30.0 million from $28.1 million forthe nine months ended September 30, 2002 and 2001, respectively.  The increase was mainly attributable tohiring and use of additional personnel required to accommodate the Company’sgrowth.  Salaries and employee benefitswere $17.1 million an increase of $2.8 million, or 19.61% from the nine monthsended September 30, 2001.  Professionalfees increased $0.5 million or 35.28% to $1.7 million for the nine months endedSeptember 30, 2002.  The Company’sefficiency ratio, excluding 2001 merger related expenses, was 54.9% for thenine months ended September 30, 2002 compared to 54.3% for the nine monthsended September 30, 2001.

 

**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 othernondeductible expenses.  For the ninemonths ended September 30, 2002, the provision for taxes was $6.6 million, anincrease of $0.7 million from the $5.9 million provided for in the same periodin 2001.  The effective tax rate for thenine months ended September 30, 2002 was 30.49% compared to 35.03% for the sameperiod in 2001.  The decrease isprimarily related to the Company forming a Real Estate Investment Trust.

 

14

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**ITEM 4.****                             CONTROLSAND PROCEDURES**

 

(a) Evaluation ofdisclosure controls and procedures

 

The Registrants ChiefExecutive Officer and Chief Financial Officer believe that the Registrant’sdisclosure controls and procedures, as defined in Securities Exchange Act Rules13a-14 (c) and 15d-14(c), are effective. The conclusion was reached after an evaluation of these controls andprocedures as of September 30, 2002.

 

 

(b) Changes in internalcontrols

 

We are not aware of anysignificant changes in the Registrant’s internal controls, including anycorrective actions with regard to significant deficiencies and materialweaknesses, or in other factors that could significantly affect these controlsafter September 30, 2002.

 

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##### **PARTII. – OTHER INFORMATION**

 

### **ITEM6.  EXHIBITS AND REPORTS ON FORM 8-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)                                                                                                                                        |
|              |   |                                                                                                                                                                                                                                                                                       |
| 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                                                                                                                      |

 

 

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|   |   |                                                                                                                                                                                                                                           |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 filed as Exhibit  10.22 to form 10-Q filed on August 13, 2002 (File No. 000-25128)  (incorporated by reference)                                             |
|   |   |                                                                                                                                                                                                                                           |
| 10.23  |   | Employment Agreement  dated May 15, 2002 between the Registrant and John T. Monroe                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                           |
| 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 Chief  Executive Officer                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                           |
| 99.2   |   | Certification of Chief  Financial Officer                                                                                                                                                                                                      |

 

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(b)                                 Reportson Form 8K

 

The Company fileda Form 8-K on July 18, 2002 issuing two press releases.  The first announced Main Street Banks, Inc’s2002 second quarter results.  The secondannounced that Main Street Banks, Inc had agreed to acquire First National Bankof Johns Creek of Suwanee, Georgia

** **

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**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:  | November 14, 2002 | By:    | /s/ Edward C. Milligan                                    |
|   |              |   | Edward C. Milligan, Chairman and  Chief Executive Officer |
|   |              |   |                                                      |
|   |              |   |                                                      |
|   |              |   |                                                      |
| Date:  | November 14, 2002 | By:    | /s/ Robert D. McDermott                                   |
|   |              |   | Robert  D. McDermott, Chief  Financial Officer            |

 

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**CERTIFICATION**

 

I, Edward C. Milligan, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Main StreetBanks, Inc.;

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

 

a) designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design oroperation of internal controls which could adversely affect theregistrant’s  ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the  registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:   November 14, 2002 | /s/ Edward C Milligan.                 |   |
|--------------------------------|----------------------------------------|--------|
|                           | Edward C. Milligan                     |
|                           | Chairman & Chief Executive Officer |

 

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**CERTIFICATION**

 

I, Robert D. McDermott, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Main StreetBanks, Inc.;

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have;

 

a) designed such disclosure controls and procedures toensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this quarterly report is beingprepared;

 

b) evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

 a) allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the  registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:   November 14, 2002 | /s/ Robert D. McDermott |   |
|--------------------------------|-------------------------|--------|
|                           | Robert D. McDermott     |
|                           | Chief Financial Officer |

 

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