##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section 13 or 15(d) of the

Securities Exchange
Act of 1934



For the quarter ended September 30, 2004



Commission file number 000-25128



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MAIN STREET BANKS, INC.

(Exact name of registrant as specified in its
charter)



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



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



As of October 22, 2004, registrant had outstanding 19,458,141 shares of common stock.



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##### Table of Contents

SPECIAL CAUTIONARY NOTICE

REGARDING FORWARD-LOOKING STATEMENTS



Certain of the statements made herein under the caption Managements Discussion and Analysis of Financial Condition and Results of
Operations, and elsewhere are forward-looking statements within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (the Exchange Act).



Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and
unknown risks, uncertainties and other factors, many of which may be beyond our control, and which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements.



All
statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as may, will,
anticipate, assume, should, indicate, would, believe, contemplate, expect, estimate, continue, plan, point
to, project, predict, could, intend, target, potential, and other similar words and expressions of the future. These forward-looking statements may not be realized due to
a variety of factors, including, without limitation:



| |  | future local and national economic or business and real estate market conditions;
| | - | ---------------------------------------------------------------------------------



| |  | governmental monetary and fiscal policies, as well as legislative and regulatory changes, including banking, securities and tax laws and regulations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets
and liabilities;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | credit risks of borrowers;
| | - | --------------------------



| |  | the effects of competition from a wide variety of local, regional, national, and other providers of financial, investment, and insurance services;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the failure of assumptions underlying the establishment of allowances for loan losses and other estimates;
| | - | ----------------------------------------------------------------------------------------------------------



| |  | the risks of mergers and acquisitions, including, without limitation, the related costs, including integrating operations and personnel as part of these transactions and the failure
to achieve expected gains, revenue growth and/or expense savings from such transactions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in accounting rules, policies and practices;
| | - | ----------------------------------------------------



| |  | changes in technology and/or products  especially those that result in increased costs to us or less benefits to us than we had expected;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | the effects of war or other conflict, acts of terrorism or other catastrophic events; and
| | - | -----------------------------------------------------------------------------------------



| |  | other factors and risks described in any of our subsequent reports that we make with the Securities and Exchange Commission (the Commission) under the Exchange Act.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



All written or oral forward-looking statements
that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice. Our forward-looking statements apply only as of the date of this report or the respective date of the document from which they are
incorporated herein by reference. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made,
whether as a result of new information, future events or otherwise.



1



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##### Table of Contents

MAIN STREET BANKS, INC.

TABLE OF CONTENTS



FORM 10-Q

September 30, 2004



|                              |  |                                                                                                                     |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                     |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                                    
|                              |  |                                                                                                                    
|Item 1.                       |  | Financial Statements                                                                                                |  |     
|                              |  |                                                                                                                    
|                              |  | Consolidated Balance Sheets September 30, 2004 (unaudited), December 31, 2003 and September 30, 2003 (unaudited)    |  | 3   
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of Income (unaudited) Three and Nine Months Ended September 30, 2004 and 2003               |  | 4   
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of Comprehensive Income (unaudited) Three and Nine Months Ended September 30, 2004 and 2003 |  | 5   
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of Cash Flows (unaudited) Nine Months ended September 30, 2004 and 2003                     |  | 6   
|                              |  |                                                                                                                    
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                                              |  | 7   
|                              |  |                                                                                                                    
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                               |  | 13  
|                              |  |                                                                                                                    
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                          |  | 23  
|                              |  |                                                                                                                    
|Item 4.                       |  | Controls and Procedures                                                                                             |  | 23  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                                    
|                              |  |                                                                                                                    
|Item 1.                       |  | Legal Proceedings                                                                                                   |  | 24  
|                              |  |                                                                                                                    
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 24  
|                              |  |                                                                                                                    
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                     |  | 24  
|                              |  |                                                                                                                    
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                 |  | 24  
|                              |  |                                                                                                                    
|Item 5.                       |  | Other Information                                                                                                   |  | 24  
|                              |  |                                                                                                                    
|Item 6.                       |  | Exhibits                                                                                                            |  | 24  
|                              |  |                                                                                                                    
|                              |  | Signatures                                                                                                          |  | 25  
|                              |  |                                                                                                                    
|                              |  | Exhibits:                                                                                                           |  |     
|                              |  |                                                                                                                    
|                              |  | Exhibit 31.1 Certification of Chief Executive Officer                                                               |  | 26  
|                              |  |                                                                                                                    
|                              |  | Exhibit 31.2 Certification of Chief Financial Officer                                                               |  | 27  
|                              |  |                                                                                                                    
|                              |  | Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act             |  | 28  
|                              |  |                                                                                                                    
|                              |  | Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act             |  | 29  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements



Main Street Banks, Inc.

Consolidated Balance Sheets

(dollars in thousands)



|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | --------- | - | ----------------- | - | --------- | ------------------------------ |  | - | --------- | -
|                                                                                                                                                                                                          |  | (Unaudited) September 30, 2004 |           |   | December 31, 2003 |   |           | (Unaudited) September 30, 2003 | 
|Assets                                                                                                                                                                                                    |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Cash and due from banks                                                                                                                                                                                   |  | $                              | 55,719    |   |                   | $ | 39,839    |                                |  | $ | 39,560    |  
|Interest-bearing deposits in banks                                                                                                                                                                        |  |                                | 1,058     |   |                   |   | 1,021     |                                |  |   | 693       |  
|Federal funds sold and securities purchased under agreements to resell                                                                                                                                    |  |                                | 24,410    |   |                   |   | 31,820    |                                |  |   | 15,920    |  
|Investment securities available for sale (amortized cost of $280,785, $242,872, and $243,621 at September 30, 2004, December 31, 2003 and
September 30, 2003, respectively)                               |  |                                | 282,815   |   |                   |   | 247,392   |                                |  |   | 247,867   |  
|Investment securities held to maturity (fair value of $11,386, $10,800, and $743 at September 30, 2004, December 31, 2003 and September 30,
2003, respectively)                                           |  |                                | 11,835    |   |                   |   | 10,788    |                                |  |   | 688       |  
|Other investments                                                                                                                                                                                         |  |                                | 23,040    |   |                   |   | 19,651    |                                |  |   | 17,082    |  
|Mortgage loans held for sale                                                                                                                                                                              |  |                                | 6,932     |   |                   |   | 5,671     |                                |  |   | 6,490     |  
|Loans, net of unearned income                                                                                                                                                                             |  |                                | 1,653,616 |   |                   |   | 1,443,326 |                                |  |   | 1,411,951 |  
|Allowance for loan losses                                                                                                                                                                                 |  |                                | (24,256   | ) |                   |   | (21,152   | )                              |  |   | (20,765   | )
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Loans, net                                                                                                                                                                                                |  |                                | 1,629,360 |   |                   |   | 1,422,174 |                                |  |   | 1,391,186 |  
|Premises and equipment, net                                                                                                                                                                               |  |                                | 52,505    |   |                   |   | 42,761    |                                |  |   | 41,726    |  
|Other real estate                                                                                                                                                                                         |  |                                | 1,082     |   |                   |   | 1,845     |                                |  |   | 1,367     |  
|Accrued interest receivable                                                                                                                                                                               |  |                                | 9,243     |   |                   |   | 8,181     |                                |  |   | 8,069     |  
|Goodwill and other intangible assets                                                                                                                                                                      |  |                                | 103,392   |   |                   |   | 96,237    |                                |  |   | 94,920    |  
|Bank owned life insurance                                                                                                                                                                                 |  |                                | 41,528    |   |                   |   | 35,773    |                                |  |   | 35,275    |  
|Other assets                                                                                                                                                                                              |  |                                | 15,474    |   |                   |   | 8,612     |                                |  |   | 10,275    |  
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Total assets                                                                                                                                                                                              |  | $                              | 2,258,393 |   |                   | $ | 1,971,765 |                                |  | $ | 1,911,118 |  
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Liabilities                                                                                                                                                                                               |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Deposits:                                                                                                                                                                                                 |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Noninterest-bearing demand                                                                                                                                                                                |  | $                              | 236,809   |   |                   | $ | 228,610   |                                |  | $ | 224,032   |  
|Interest-bearing demand and money market                                                                                                                                                                  |  |                                | 584,997   |   |                   |   | 482,775   |                                |  |   | 468,009   |  
|Savings                                                                                                                                                                                                   |  |                                | 46,647    |   |                   |   | 49,832    |                                |  |   | 44,644    |  
|Time deposits of $100,000 or more                                                                                                                                                                         |  |                                | 355,161   |   |                   |   | 254,422   |                                |  |   | 254,152   |  
|Other time deposits                                                                                                                                                                                       |  |                                | 406,672   |   |                   |   | 442,764   |                                |  |   | 446,804   |  
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Total deposits                                                                                                                                                                                            |  |                                | 1,630,286 |   |                   |   | 1,458,403 |                                |  |   | 1,437,641 |  
|Accrued interest payable                                                                                                                                                                                  |  |                                | 3,489     |   |                   |   | 3,020     |                                |  |   | 3,343     |  
|Federal Home Loan Bank advances                                                                                                                                                                           |  |                                | 226,204   |   |                   |   | 210,605   |                                |  |   | 159,739   |  
|Federal funds purchased and securities sold under repurchase agreements                                                                                                                                   |  |                                | 115,192   |   |                   |   | 43,859    |                                |  |   | 61,575    |  
|Junior subordinated debentures                                                                                                                                                                            |  |                                | 51,547    |   |                   |   |          |                                |  |   |          |  
|Trust preferred securities                                                                                                                                                                                |  |                                |          |   |                   |   | 50,000    |                                |  |   | 50,000    |  
|Other liabilities                                                                                                                                                                                         |  |                                | 9,353     |   |                   |   | 5,335     |                                |  |   | 4,754     |  
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Total liabilities                                                                                                                                                                                         |  |                                | 2,036,071 |   |                   |   | 1,771,222 |                                |  |   | 1,717,052 |  
|Shareholders Equity                                                                                                                                                                                      |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Common stock-no par value per share; 50,000,000 shares authorized; 19,457,741, 18,981,340 and 18,933,178 shares outstanding at September 30,
2004, December 31, 2003 and September 30, 2003, respectively |  |                                | 108,197   |   |                   |   | 100,876   |                                |  |   | 99,455    |  
|Retained earnings                                                                                                                                                                                         |  |                                | 121,718   |   |                   |   | 104,539   |                                |  |   | 99,133    |  
|Accumulated other comprehensive income, net of tax                                                                                                                                                        |  |                                | 1,196     |   |                   |   | 3,917     |                                |  |   | 4,267     |  
|Treasury stock, at cost, 564,082 shares at September 30, 2004, December 31, 2003 and September 30, 2003, respectively                                                                                     |  |                                | (8,789    | ) |                   |   | (8,789    | )                              |  |   | (8,789    | )
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Total shareholders equity                                                                                                                                                                                |  |                                | 222,322   |   |                   |   | 200,543   |                                |  |   | 194,066   |  
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                                |  | $                              | 2,258,393 |   |                   | $ | 1,971,765 |                                |  | $ | 1,911,118 |  
|                                                                                                                                                                                                          |  |                                |           |   |                   |   |           |                                |  |   |           |  



See accompanying notes to
consolidated financial statements



3



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Income (Unaudited)

(dollars in thousands except per share data)



|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|---------------------------------------------------- |  | -------------------------------- | ---------- | ------------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                     |  | Three months ended September 30, |            | Nine months ended September 30,
|                                                     |  | 2004                             |            | 2003                            |   | 2004       |  | 2003
|                                                     |  | (unaudited)                      |            | (unaudited)                    
|Interest income:                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Loans, including fees                                |  | $                                | 26,736     |                                 | $ | 23,775     |  | $    | 76,991     |  | $ | 64,127    
|Investment securities:                               |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Taxable                                              |  |                                  | 2,498      |                                 |   | 1,952      |  |      | 7,107      |  |   | 6,172     
|Non-taxable                                          |  |                                  | 365        |                                 |   | 414        |  |      | 1,172      |  |   | 1,294     
|Federal funds sold and other short-term investments  |  |                                  | 9          |                                 |   | 4          |  |      | 43         |  |   | 71        
|Interest-bearing deposits in banks                   |  |                                  | 6          |                                 |   | 5          |  |      | 15         |  |   | 19        
|Other investments                                    |  |                                  | 238        |                                 |   | 160        |  |      | 682        |  |   | 303       
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Total interest income                                |  |                                  | 29,852     |                                 |   | 26,310     |  |      | 86,010     |  |   | 71,986    
|Interest expense:                                    |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Interest-bearing demand and money market             |  |                                  | 1,765      |                                 |   | 1,534      |  |      | 4,916      |  |   | 4,447     
|Savings                                              |  |                                  | 62         |                                 |   | 81         |  |      | 224        |  |   | 259       
|Time deposits                                        |  |                                  | 4,757      |                                 |   | 1,911      |  |      | 13,690     |  |   | 5,048     
|Other time deposits                                  |  |                                  | 185        |                                 |   | 2,378      |  |      | 305        |  |   | 6,676     
|Federal funds purchased                              |  |                                  | 561        |                                 |   | 19         |  |      | 929        |  |   | 40        
|Federal Home Loan Bank advances                      |  |                                  | 876        |                                 |   | 680        |  |      | 2,407      |  |   | 1,474     
|Interest expense on junior subordinated debentures   |  |                                  | 637        |                                 |   | 580        |  |      | 1,787      |  |   | 873       
|Other interest expense                               |  |                                  | 176        |                                 |   | 362        |  |      | 773        |  |   | 1,140     
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Total interest expense                               |  |                                  | 9,019      |                                 |   | 7,545      |  |      | 25,031     |  |   | 19,957    
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Net interest income                                  |  |                                  | 20,833     |                                 |   | 18,765     |  |      | 60,979     |  |   | 52,029    
|Provision for loan losses                            |  |                                  | 1,603      |                                 |   | 1,146      |  |      | 4,474      |  |   | 3,994     
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Net interest income after provision for loan losses  |  |                                  | 19,230     |                                 |   | 17,619     |  |      | 56,505     |  |   | 48,035    
|Non-interest income:                                 |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Service charges on deposit accounts                  |  |                                  | 2,165      |                                 |   | 2,092      |  |      | 6,069      |  |   | 5,690     
|Other customer service fees                          |  |                                  | 277        |                                 |   | 389        |  |      | 986        |  |   | 1,148     
|Mortgage banking income                              |  |                                  | 810        |                                 |   | 1,118      |  |      | 2,552      |  |   | 2,630     
|Investment agency commissions                        |  |                                  | 134        |                                 |   | 89         |  |      | 634        |  |   | 233       
|Insurance agency income                              |  |                                  | 2,515      |                                 |   | 1,189      |  |      | 7,657      |  |   | 3,605     
|Income from SBA lending                              |  |                                  | 1,270      |                                 |   | 406        |  |      | 2,124      |  |   | 1,290     
|Income on bank owned life insurance                  |  |                                  | 522        |                                 |   | 748        |  |      | 1,903      |  |   | 1,672     
|Investment securities gains, net                     |  |                                  | 317        |                                 |   | 301        |  |      | 1,170      |  |   | 617       
|Other income                                         |  |                                  | 217        |                                 |   | 204        |  |      | 1,129      |  |   | 562       
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Total non-interest income                            |  |                                  | 8,227      |                                 |   | 6,536      |  |      | 24,224     |  |   | 17,447    
|Non-interest expense:                                |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Salaries and other compensation                      |  |                                  | 8,000      |                                 |   | 6,799      |  |      | 23,729     |  |   | 18,618    
|Employee benefits                                    |  |                                  | 1,170      |                                 |   | 1,284      |  |      | 4,330      |  |   | 3,536     
|Net occupancy and equipment expense                  |  |                                  | 2,091      |                                 |   | 1,773      |  |      | 6,159      |  |   | 4,657     
|Data processing fees                                 |  |                                  | 326        |                                 |   | 450        |  |      | 1,106      |  |   | 1,201     
|Professional services                                |  |                                  | 716        |                                 |   | 825        |  |      | 1,934      |  |   | 1,787     
|Communications & supplies                            |  |                                  | 1,027      |                                 |   | 983        |  |      | 3,106      |  |   | 2,568     
|Marketing expense                                    |  |                                  | 347        |                                 |   | 199        |  |      | 1,074      |  |   | 781       
|Regulatory agency assessments                        |  |                                  | 196        |                                 |   | 73         |  |      | 383        |  |   | 241       
|Amortization of intangible assets                    |  |                                  | 122        |                                 |   | 107        |  |      | 385        |  |   | 258       
|Other expense                                        |  |                                  | 1,904      |                                 |   | 1,875      |  |      | 6,145      |  |   | 4,659     
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Total non-interest expense                           |  |                                  | 15,899     |                                 |   | 14,368     |  |      | 48,351     |  |   | 38,306    
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Income before income taxes                           |  |                                  | 11,558     |                                 |   | 9,787      |  |      | 32,378     |  |   | 27,176    
|Income tax expense                                   |  |                                  | 3,294      |                                 |   | 2,669      |  |      | 9,126      |  |   | 7,923     
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Net income                                           |  | $                                | 8,264      |                                 | $ | 7,118      |  | $    | 23,252     |  | $ | 19,253    
|                                                     |  |                                  |            |                                 |   |            |  |      |            |  |   |           
|Earnings per share - Basic                           |  | $                                | 0.43       |                                 | $ | 0.38       |  | $    | 1.20       |  | $ | 1.10      
|Earnings per share - Diluted                         |  | $                                | 0.41       |                                 | $ | 0.36       |  | $    | 1.16       |  | $ | 1.06      
|Dividends declared per share                         |  | $                                | 0.135      |                                 | $ | 0.120      |  | $    | 0.405      |  | $ | 0.360     
|Weighted average common shares outstanding - Basic   |  |                                  | 19,428,145 |                                 |   | 18,913,088 |  |      | 19,353,729 |  |   | 17,512,489
|Weighted average common shares outstanding - Diluted |  |                                  | 20,015,560 |                                 |   | 19,602,219 |  |      | 19,972,391 |  |   | 18,186,159



4



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)



|                                                                      |  |                    |        |   |                   |   |        |                    |  |   |                    |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | ------------------ |  | - | ------------------ | - |  | - | ------ | -
|                                                                      |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                      |  | September 30,2004  |        |   | September 30,2003 |   |        | September 30, 2004 |  |   | September 30, 2003 |  
|                                                                      |  | (unaudited)        |        |   | (unaudited)       |  
|Net income                                                            |  | $                  | 8,264  |   |                   | $ | 7,118  |                    |  | $ | 23,252             |   |  | $ | 19,253 |  
|                                                                      |  |                    |        |  
|Other comprehensive income, net of tax:                               |  |                    |        |   |                   |   |        |                    |  |   |                    |   |  |   |        |  
|Unrealized gains (losses) on securities available for sale            |  |                    | 3,278  |   |                   |   | (2,126 | )                  |  |   | (872               | ) |  |   | (1,506 | )
|Unrealized gains (losses) on derivative contracts                     |  |                    | 892    |   |                   |   | 399    |                    |  |   | (1,077             | ) |  |   | 619    |  
|Less reclassification adjustment for net gains included in net income |  |                    | (209   | ) |                   |   | (199   | )                  |  |   | (772               | ) |  |   | (407   | )
|                                                                      |  |                    |        |   |                   |   |        |                    |  |   |                    |   |  |   |        |  
|Comprehensive income                                                  |  | $                  | 12,225 |   |                   | $ | 5,192  |                    |  | $ | 20,531             |   |  | $ | 17,959 |  
|                                                                      |  |                    |        |   |                   |   |        |                    |  |   |                    |   |  |   |        |  



5



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)



|                                                                                  |  |                                 |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine months ended September 30, |         
|                                                                                  |  | 2004                            |          |   | 2003 |  
|                                                                                  |  | (Unaudited)                     |         
|Operating activities                                                              |  |                                 |          |   |      |   |          |  
|Net income                                                                        |  |                                 | 23,252   |   |      |   | 19,253   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |          |   |      |   |          |  
|Provision for loan losses                                                         |  |                                 | 4,474    |   |      |   | 3,994    |  
|Depreciation and amortization of premises and equipment                           |  |                                 | 2,922    |   |      |   | 2,236    |  
|Amortization of intangible assets                                                 |  |                                 | 386      |   |      |   | 258      |  
|Loss on sales of other real estate                                                |  |                                 | 454      |   |      |   | 149      |  
|Investment securities gains                                                       |  |                                 | (1,170   | ) |      |   | (617     | )
|Net amortization of investment securities                                         |  |                                 | 1,027    |   |      |   | 1,190    |  
|Net accretion of loans purchased                                                  |  |                                 | (132     | ) |      |   | (23      | )
|Loss on sales of premises and equipment                                           |  |                                 | 473      |   |      |   | 91       |  
|Net (increase) decrease in mortgage loans held for sale                           |  |                                 | (1,261   | ) |      |   | 1,685    |  
|Gain on mortgage loan sales                                                       |  |                                 | (989     | ) |      |   | (2,630   | )
|Gains on sales of SBA loans                                                       |  |                                 | (2,124   | ) |      |   | (1,290   | )
|Deferred income tax provision                                                     |  |                                 | 1,442    |   |      |   | 2,214    |  
|Deferred net loan fees (cost amortization)                                        |  |                                 | (1,749   | ) |      |   | (554     | )
|Vesting in restricted stock award plan                                            |  |                                 | 549      |   |      |   | 347      |  
|Changes in operating assets and liabilities:                                      |  |                                 |          |   |      |   |          |  
|Increase in accrued interest receivable                                           |  |                                 | (1,061   | ) |      |   | (566     | )
|Increase cash surrender value of bank-owned life insurance                        |  |                                 | (755     | ) |      |   | (922     | )
|Increase (decrease) in accrued interest payable                                   |  |                                 | 468      |   |      |   | (1,132   | )
|Increase in prepaid expenses                                                      |  |                                 | (3,103   | ) |      |   | (1,996   | )
|Other                                                                             |  |                                 | 3,307    |   |      |   | (1,704   | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                                 | 26,410   |   |      |   | 19,983   |  
|Investing activities                                                              |  |                                 |          |   |      |   |          |  
|Purchases of investment securities available for sale                             |  |                                 | (123,645 | ) |      |   | (129,730 | )
|Purchases of investment securities held to maturity                               |  |                                 | (1,210   | ) |      |   |         |  
|Purchases of other investments                                                    |  |                                 | (3,389   | ) |      |   | (11,754  | )
|Maturities, paydowns and calls of investment securities available for sale        |  |                                 | 30,528   |   |      |   | 65,398   |  
|Proceeds from sales of investment securities available for sale                   |  |                                 | 54,345   |   |      |   | 19,620   |  
|Net increase in loans funded                                                      |  |                                 | (343,430 | ) |      |   | (268,454 | )
|Proceeds from the sale of loans held for sale                                     |  |                                 | 133,140  |   |      |   | 126,902  |  
|Purchase of bank-owned life insurance                                             |  |                                 | (5,000   | ) |      |   |         |  
|Purchases of premises and equipment                                               |  |                                 | (13,349  | ) |      |   | (7,165   | )
|Proceeds from sales of premises and equipment                                     |  |                                 | 106      |   |      |   | 8        |  
|Proceeds from sales of other real estate                                          |  |                                 | 1,612    |   |      |   | 2,408    |  
|Improvements to other real estate                                                 |  |                                 | (175     | ) |      |   | (195     | )
|Net cash paid for acquisitions                                                    |  |                                 |         |   |      |   | (32,994  | )
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                                 | (270,467 | ) |      |   | (235,956 | )
|Financing activities                                                              |  |                                 |          |   |      |   |          |  
|Net increase in demand and savings accounts                                       |  |                                 | 107,236  |   |      |   | 70,163   |  
|Increase (decrease) in time deposits                                              |  |                                 | 64,647   |   |      |   | (43,646  | )
|Increase in Federal Funds purchased                                               |  |                                 | 2,333    |   |      |   | 13,909   |  
|Increase in Federal Home Loan Bank advances                                       |  |                                 | 84,599   |   |      |   | 94,739   |  
|Proceeds from the issuance of junior subordinated debentures                      |  |                                 |         |   |      |   | 44,845   |  
|Dividends paid                                                                    |  |                                 | (7,833   | ) |      |   | (6,084   | )
|Purchase of treasury stock                                                        |  |                                 |         |   |      |   | (1,930   | )
|Proceeds from issuance of common stock                                            |  |                                 | 1,582    |   |      |   |         |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                                 | 252,564  |   |      |   | 171,996  |  
|Net increase (decrease) in cash and cash equivalents                              |  |                                 | 8,507    |   |      |   | (43,977  | )
|Cash and cash equivalents at beginning of period                                  |  |                                 | 72,680   |   |      |   | 100,150  |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                               | 81,187   |   |      | $ | 56,173   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Supplemental disclosures of cash flow information                                 |  |                                 |          |   |      |   |          |  
|Cash paid during the period for:                                                  |  |                                 |          |   |      |   |          |  
|Interest                                                                          |  | $                               | 17,864   |   |      | $ | 16,614   |  
|Income taxes, net                                                                 |  |                                 | 10,226   |   |      |   | 8,200    |  
|Supplemental disclosures of noncash transactions                                  |  |                                 |          |   |      |   |          |  
|Loans transferred to other real estate acquired through foreclosure               |  | $                               | 3,857    |   |      | $ | 3,496    |  



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##### Table of Contents

Main Street Banks, Inc.

Notes to Consolidated Financial Statements

(Unaudited)



Note A  Significant Accounting Policies



Basis of Presentation: The unaudited consolidated financial statements include the accounts of the parent company Main Street Banks, Inc.
(Company) and its direct and indirect wholly owned subsidiaries, Main Street Bank (Bank), Main Street Insurance Services, Inc. (MSII), Piedmont Settlement Services, Inc. (Piedmont) and MSB Payroll
Solutions, LLC. All significant inter-company transactions and balances have been eliminated in consolidation.



The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally
accepted in the United States, followed within the financial services industry for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not
include all of the information and notes required for complete financial statement presentation. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the
financial position and results of operations for interim periods have been included.



The results of operations for the three-month and nine-month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004, or for any other
period. These financial statements and related Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and notes thereto for the
year ended December 31, 2003, included in the Companys Annual Report on Form 10-K.



Certain previously reported amounts have been reclassified to conform to current financial statement presentation. These reclassifications had no effect on net income or stockholders equity.



Note B - Acquisitions



On January 2, 2004, MSII acquired substantially all of the assets of Banks
Moneyhan Hayes Insurance Agency, Inc. (BMIA), an insurance agency headquartered in Conyers, Georgia. This acquisition provided MSII with an opportunity to expand its market share in Clarke and Rockdale Counties, Georgia. The transaction
was accounted for as a purchase business combination and accordingly, the results of operations of BMIA are included from the acquisition date. The Company issued 271,109 shares of its common stock as consideration. The purchase price was based on
the market value of the 271,109 shares issued at the closing market price of the Companys common stock of $25.82 on December 5, 2003, the date the acquisition was announced. The Company allocated the purchase price among the BMIA assets
acquired and liabilities assumed based on their fair values at the time the merger was consummated and the remainder of the purchase price was allocated to identifiable intangibles and goodwill. Goodwill of $4.7 million and Intangible Assets of $2.8
million were created as a result of the transaction. Due to the S Corporation status of BMIA, the Company also acquired $450 thousand of negative equity with this acquisition which was recorded as goodwill. Intangible assets include covenants not to
compete and customer lists and will be amortized over a 5 to 15 year period. The Company estimates that $212,000 of the amortization expense for these intangible assets will be deductible for tax purposes in 2004. This acquisition also includes an
earn-out provision which is based upon future revenue and earnings goals, for a period of five years. The maximum potential for future undiscounted payments the Company could be required to make under this earn-out provision
is $1.2 million. The earn-out will be booked as additional Goodwill in the amounts and at the times that it is deemed to be earned. Summarized below is an initial allocation of assets and liabilities acquired (in thousands):



|                          |  |   |      
|------------------------- |  | - | -----
|Assets acquired:          |  |   |      
|Cash and Cash equivalents |  | $ | 180  
|Other assets              |  |   | 33   
|Goodwill                  |  |   | 4,717
|Intangible Assets         |  |   | 2,781
|                          |  |   |      
|Total Assets              |  | $ | 7,711
|                          |  |   |      
|Liabilities acquired      |  |   |      
|Other Liabilities         |  |   | 711  
|                          |  |   |      
|Total Liabilities         |  | $ | 711  
|                          |  |   |      



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On May 22, 2003, the Company completed its acquisition of First Colony Bancshares, Inc., parent of First
Colony Bank, a $320 million asset bank headquartered in Alpharetta, Georgia. The merger provides Main Street with a natural extension of its Atlanta community bank franchise into Roswell, Alpharetta and nearby areas of north Fulton County, Georgia.
The transaction was accounted for as a purchase business combination and accordingly, the results of operations of First Colony Bank are included from the acquisition date. The Company allocated the purchase price among the First Colony assets
acquired and liabilities assumed based on their fair values at the time the merger was consummated and the remainder of the purchase price was allocated to identifiable intangibles and goodwill. Main Street issued 2.6 million shares of its common
stock and paid $45.0 million in cash in exchange for all outstanding shares of First Colony Bancshares. The value of the 2.6 million shares issued was determined based on the Companys closing market price of $19.61 on December 11, 2002, the
date the acquisition was announced. Core deposit intangible assets of $1.9 million and Goodwill of $72.9 million were created as a result of the transaction. The core deposit intangible assets will be amortized over 10 years. None of the resulting
goodwill is deductible for federal income tax purposes. The Company estimates that $1.3 million of previously existing core deposit intangibles recorded by First Colony will be deductible for federal income tax purposes in future years. Summarized
below is an initial allocation of assets and liabilities acquired (in thousands):



|                          |  |   |        
|------------------------- |  | - | -------
|Assets acquired:          |  |   |        
|Cash and Cash equivalents |  | $ | 24,048 
|Loans                     |  |   | 283,661
|Other assets              |  |   | 17,894 
|Goodwill                  |  |   | 72,962 
|Other intangibles         |  |   | 1,877  
|                          |  |   |        
|Total Assets              |  | $ | 400,442
|                          |  |   |        
|Liabilities acquired      |  |   |        
|Deposits                  |  |   | 282,195
|Other Liabilities         |  |   | 17,567 
|                          |  |   |        
|Total Liabilities         |  | $ | 299,762
|                          |  |   |        



On August 4, 2003, the
Company, through an intermediate subsidiary, completed the acquisition of the remaining 50% interest from the other partners of Piedmont Settlement Services, L.L.P., a Pennsylvania limited liability partnership. The assets and liabilities of the
Pennsylvania partnership were subsequently transferred to Piedmont Settlement Services, Inc., a wholly owned subsidiary of the Company. The purchase price for this acquisition was $183,500. There were no goodwill or intangible assets created as a
result of this acquisition. The transaction has been accounted for as a purchase and accordingly, the results of operations of Piedmont are included from the acquisition date.



In accordance with FAS 141 the following table presents unaudited summary information on a pro forma basis as if these
acquisitions had occurred as of the beginning of each of the periods presented. The proforma information does not necessarily reflect the results of operations that would have occurred if the acquisitions had occurred at the beginning of the periods
presented or of any results which may be expected to occur in the future.



|                                                    |  |                    |        |            |   |       
|--------------------------------------------------- |  | ------------------ | ------ | ---------- | - | ------
|                                                    |  | September 30, 2003
|                                                    |  | Threemonths        |        | Ninemonths
|Net interest income                                 |  | $                  | 18,765 |            | $ | 55,074
|Net interest income after provision for loan losses |  |                    | 17,619 |            |   | 50,780
|Net income                                          |  |                    | 7,262  |            |   | 21,311
|                                                    |  |                   
|Earning per share - basic                           |  | $                  | 0.38   |            | $ | 1.20  
|Earnings per share - diluted                        |  | $                  | 0.37   |            | $ | 1.15  



Note C - Current
Accounting Developments



In January 2003, the FASB issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.FIN 46 states that if a business enterprise is the primary beneficiary of a variable interest entity, the assets, liabilities and results of the
activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in
a variable interest entity to decide whether to consolidate the entity. FIN 46 also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among
parties involved. Variable interest entities that effectively disperse risks will be consolidated unless a single party holds an interest or combination



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of interests that effectively recombines risks that were previously dispersed. Due to the significant implementation
concerns, the FASB revised Interpretation No. 46 (FIN46R) in December 2003. Management has evaluated the Companys investment in variable interest entities and potential variable interest entities or transactions, particularly in
trust preferred securities structures because these entities constitute the Companys primary exposure.



The Company determined that certain trusts created by it to issue trust preferred securities required deconsolidation due to the provisions of FIN 46R.
Accordingly, as of March 31, 2004, the Company was required to deconsolidate these trusts. The deconsolidation required the Company to remove $50.0 million in trust preferred securities from its consolidated financial statements and to record junior
subordinated debentures payable to these trusts of $51.5 million and record the Companys investment in the trusts of $1.5 million in other assets. The trust preferred securities had been counted as Tier 1 capital for regulatory purposes as
minority interests in consolidated subsidiaries. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in Tier 1
capital for regulatory capital purposes until further notice, even though the trusts that issued the trust preferred securities were not consolidated with their parent bank holding companies under FIN 46. On May 6, 2004, the Federal Reserve proposed
changes to its capital adequacy rules that would continue to include limited amounts of qualified trust preferred securities as Tier 1 capital, notwithstanding the change in GAAP resulting from FIN 46 and FIN 46R.



Currently, other than the impact described above from the deconsolidation of
the trust preferred securities, the adoption of FIN 46 and FIN 46R has not had a material impact on the financial condition or the operating results of the Company. Prior periods have not been restated for this change in accounting methods.



Note D - Earnings per Common Share



The Company accounts for earnings per share in accordance with FASB
Statement No. 128, Earnings Per Share (Statement 128). Basic earnings per share (EPS) is computed by dividing net income available to common shareholders by the weighted average common shares outstanding for the
period. Diluted EPS is calculated by adding to the shares outstanding the additional net effect of employee stock options that could be exercised into common shares. The computation of diluted earnings per share is as follows:



|                                 |  |                                              |            |                    |   |                    |  |                    |            |  |   |           
|-------------------------------- |  | -------------------------------------------- | ---------- | ------------------ | - | ------------------ |  | ------------------ | ---------- |  | - | ----------
|                                 |  | Three months ended                           |            | Nine months ended 
|                                 |  | September 30, 2004                           |            | September 30, 2003 |   | September 30, 2004 |  | September 30, 2003
|                                 |  | (Amounts in thousands except per share data)
|Basic and diluted net income     |  | $                                            | 8,264      |                    | $ | 7,118              |  | $                  | 23,252     |  | $ | 19,253    
|Basic earnings per share         |  | $                                            | 0.43       |                    | $ | 0.38               |  | $                  | 1.20       |  | $ | 1.10      
|Diluted earnings per share       |  | $                                            | 0.41       |                    | $ | 0.36               |  | $                  | 1.16       |  | $ | 1.06      
|                                 |  |                                              |            |                   
|Basic weighted average shares    |  |                                              | 19,428,145 |                    |   | 18,913,088         |  |                    | 19,353,729 |  |   | 17,512,489
|Effect of Employee Stock Options |  |                                              | 587,415    |                    |   | 689,131            |  |                    | 618,662    |  |   | 673,670   
|                                 |  |                                              |            |                    |   |                    |  |                    |            |  |   |           
|Diluted weighted average shares  |  |                                              | 20,015,560 |                    |   | 19,602,219         |  |                    | 19,972,391 |  |   | 18,186,159
|                                 |  |                                              |            |                    |   |                    |  |                    |            |  |   |           



Note E 
Commitments and Contingencies



The Company is a party to
financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.



The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company
uses the same credit policies in making commitments and conditional obligations as are used for on-balance-sheet instruments.



Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.



The Company issues standby letters
of credit, which are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and



9



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##### Table of Contents

expire in decreasing amounts with terms ranging from one to four years. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary. The fair value of these standby letters
of credit was $80 thousand at September 30, 2004. This amount was not recorded in the balance sheet as a liability in accordance with FIN 45 due to the immateriality of the amount.



The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, residential real estate,
and income-producing commercial properties on those commitments for which collateral is deemed necessary.



The following represents the Companys commitments to extend credit and standby letters of credit:



|                             |  |                                    |         |      |   |        
|---------------------------- |  | ---------------------------------- | ------- | ---- | - | -------
|                             |  | For the Period Ended September 30,
|                             |  | 2004                               |         | 2003
|                             |  | (Dollars in Thousands)            
|Commitments to extend credit |  | $                                  | 342,696 |      | $ | 256,510
|Standby letters of credit    |  |                                    | 8,835   |      |   | 5,413  



Note F - Loans



Loans are stated at the principal amounts outstanding
reduced by purchase discounts, deferred net loan fees and costs, and unearned income. Interest income on loans is generally recognized over the terms of the loans based on the unpaid daily principal amount outstanding. If the collectibility of
interest appears doubtful, the accrual thereof is discontinued. When accrual of interest is discontinued, all current period unpaid interest is reversed. Interest income on such loans is subsequently recognized only to the extent cash payments are
received, the full recovery of principal is anticipated, or after full principal has been recovered when collection of principal is in question.



A substantial portion of the Companys loans are secured by real estate in northeast Georgia communities, primarily in Barrow, Clarke, Cobb, DeKalb,
Forsyth, Fulton, Gwinnett, Newton, Rockdale, and Walton counties. In addition, a substantial portion of real estate acquired through foreclosure consists of single-family residential properties and land located in these same markets. The ultimate
collectibility of a substantial portion of the Companys loan portfolio and the recovery of a substantial portion of the carrying amount of real estate are susceptible to changes in economic and market conditions in northeast Georgia.



The Company occasionally sells the guaranteed portion of Small
Business Administration (SBA) loans to third parties and retains the servicing rights for these loans. The Company has limited recourse related to these sales if a loan sold by the Bank defaults within 90 days of sale. The servicing
asset for the sold portion of the SBA loans is included in Loans, net of unearned income. The Company repurchased one loan for $240 thousand in June, 2004.



The Company evaluates loans for impairment when a loan is risk rated as substandard or doubtful. The Company measures impairment based upon the present
value of the loans expected future cash flows discounted at the loans effective interest rate, except where foreclosure or liquidation is probable or when the primary source of repayment is provided by real estate collateral. In these
circumstances, impairment is measured based upon the estimated fair value of the collateral. In addition, in certain circumstances, impairment may be based on the loans observable estimated fair value. Impairment with regard to substantially
all of the Companys impaired loans has been measured based on the estimated fair value of the underlying collateral. The Companys policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy. At the
time the contractual payments on a loan are deemed to be uncollectible, the Companys policy is to record a charge-off against the Allowance for Loan Losses.



Nonperforming assets include loans classified as nonaccrual or renegotiated and foreclosed real estate. It is the general
policy of the Company to stop accruing interest income and place the recognition of interest on a cash basis when any commercial, industrial or commercial real estate loan is 90 days or more past due as to principal or interest and/or the ultimate
collection of either is in doubt, unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Accrual of interest income on consumer loans, including residential real estate loans, is
suspended when any payment of principal or interest, or both, is more than 120 days delinquent. When a loan is placed on nonaccrual status, any interest previously accrued but not collected is reversed against current income unless the collateral
for the loan is sufficient to cover the accrued interest or a guarantor assures payment of interest.



10



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##### Table of Contents

The following table represents the composition of the Companys loan portfolio:



|                                              |  |                        |           |   |                  |   |           |                    |  |   |           |  
|--------------------------------------------- |  | ---------------------- | --------- | - | ---------------- | - | --------- | ------------------ |  | - | --------- | -
|                                              |  | September 30,2004      |           |   | December 31,2003 |   |           | September 30, 2003 | 
|                                              |  | (Dollars in thousands) |          
|Loans                                         |  |                        |           |   |                  |   |           |                    |  |   |           |  
|Commercial and industrial                     |  | $                      | 129,791   |   |                  | $ | 118,243   |                    |  | $ | 120,509   |  
|Real estate construction                      |  |                        | 379,468   |   |                  |   | 304,046   |                    |  |   | 332,972   |  
|Residential mortgage                          |  |                        | 284,648   |   |                  |   | 269,358   |                    |  |   | 262,686   |  
|Real estate - other                           |  |                        | 826,434   |   |                  |   | 711,209   |                    |  |   | 654,262   |  
|Consumer and other                            |  |                        | 35,903    |   |                  |   | 41,650    |                    |  |   | 42,206    |  
|                                              |  |                        |           |   |                  |   |           |                    |  |   |           |  
|Total loans receivable                        |  |                        | 1,656,244 |   |                  |   | 1,444,506 |                    |  |   | 1,412,635 |  
|Less:                                         |  |                        |           |   |                  |   |           |                    |  |   |           |  
|Purchase premium                              |  |                        | 1,261     |   |                  |   | 981       |                    |  |   | (86       | )
|Deferred net loan fees                        |  |                        | (3,870    | ) |                  |   | (2,121    | )                  |  |   | (548      | )
|Unearned income                               |  |                        | (19       | ) |                  |   | (40       | )                  |  |   | (50       | )
|Allowance for loan losses                     |  |                        | (24,256   | ) |                  |   | (21,152   | )                  |  |   | (20,765   | )
|                                              |  |                        |           |   |                  |   |           |                    |  |   |           |  
|Loans, net                                    |  | $                      | 1,629,360 |   |                  | $ | 1,422,174 |                    |  | $ | 1,391,186 |  
|                                              |  |                        |           |   |                  |   |           |                    |  |   |           |  
|Mortgage loans held for sale                  |  | $                      | 6,932     |   |                  | $ | 5,671     |                    |  | $ | 6,490     |  
|Composition of loan portfolio as a percentage |  |                        |           |   |                  |   |           |                    |  |   |           |  
|Commercial and industrial                     |  |                        | 7.84      | % |                  |   | 8.18      | %                  |  |   | 8.53      | %
|Real estate construction                      |  |                        | 22.91     | % |                  |   | 21.05     | %                  |  |   | 23.57     | %
|Residential mortgage                          |  |                        | 17.19     | % |                  |   | 18.65     | %                  |  |   | 18.60     | %
|Real estate - other                           |  |                        | 49.90     | % |                  |   | 49.25     | %                  |  |   | 46.32     | %
|Consumer and other                            |  |                        | 2.16      | % |                  |   | 2.87      | %                  |  |   | 2.98      | %
|                                              |  |                        |           |   |                  |   |           |                    |  |   |           |  
|Total loans receivable                        |  |                        | 100.00    | % |                  |   | 100.00    | %                  |  |   | 100.00    | %
|                                              |  |                        |           |   |                  |   |           |                    |  |   |           |  



The Company increased
by $689 thousand the value of loans that were acquired in the First Colony Bancshares, Inc. acquisition as part of the purchase accounting adjustments, which is reflected in the loan amounts above. The Bank also has a purchase discount booked from
the acquisition of First Federal Savings Bank in 1993. These balances are being amortized monthly on a basis that approximates a level yield.



Note G - Stock Options and Long-term Compensation Plans



The Company has elected to follow Accounting Principles Board Opinion No. 25 Accounting for Stock issued to Employees (APB 25) and
related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Companys employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense
is recognized.



Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No.148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based
employee compensation. The pro-forma disclosure below uses the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.



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##### Table of Contents

For purposes of pro forma disclosures, the estimated fair value of the options granted is amortized to
expense over the options vesting period. The Companys pro forma information follows (in thousands except per share data):



|                                    |  |                    |       |   |                   |   |       |                   |  |   |                    |   |  |   |        |  
|----------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | ----------------- |  | - | ------------------ | - |  | - | ------ | -
|                                    |  | Three months ended |       |   | Nine months ended |  
|                                    |  | September 30,2004  |       |   | September 30,2003 |   |       | September 30,2004 |  |   | September 30, 2003 |  
|Net income                          |  | $                  | 8,264 |   |                   | $ | 7,118 |                   |  | $ | 23,252             |   |  | $ | 19,253 |  
|Earnings per share - Basic          |  |                    | 0.43  |   |                   |   | 0.38  |                   |  |   | 1.20               |   |  |   | 1.10   |  
|Earnings per share - Diluted        |  |                    | 0.41  |   |                   |   | 0.36  |                   |  |   | 1.16               |   |  |   | 1.06   |  
|                                    |  |                    |       |  
|Compensation cost - Fair Value      |  |                    | 135   |   |                   |   | 240   |                   |  |   | 452                |   |  |   | 719    |  
|Less: Tax Effect                    |  |                    | (46   | ) |                   |   | (82   | )                 |  |   | (154               | ) |  |   | (244   | )
|                                    |  |                    |       |   |                   |   |       |                   |  |   |                    |   |  |   |        |  
|Net compensation costs - Fair Value |  |                    | 89    |   |                   |   | 158   |                   |  |   | 298                |   |  |   | 475    |  
|                                    |  |                    |       |  
|Net Income, Pro-forma               |  |                    | 8,175 |   |                   |   | 6,960 |                   |  |   | 22,954             |   |  |   | 18,778 |  
|Earnings per share - Basic          |  |                    | 0.42  |   |                   |   | 0.37  |                   |  |   | 1.19               |   |  |   | 1.07   |  
|Earnings per share - Diluted        |  |                    | 0.41  |   |                   |   | 0.36  |                   |  |   | 1.15               |   |  |   | 1.03   |  



Note H 
Goodwill and Other Intangible Assets



The adoption of
Statement of Financial Accounting Standards No. 142 (SFAS 142) resulted in the Company no longer amortizing goodwill. Prior to 2002, goodwill was amortized over periods ranging from 10 to 15 years. The Company tests goodwill and
intangible assets for impairment annually. Goodwill is assigned to each individual acquisition on a stand alone basis. The fair value of each reporting unit was estimated using the expected present value of future cash flows. The adoption of SFAS
142 had no material impact on the financial condition or operating results of the Company.



Intangible assets related to capital lease rights are being amortized over the term of the related lease using the straight-line method. Core deposit intangible assets are amortized over a period of 5 to 20 years. All
other intangible assets are being amortized over a 15 year period using the straight-line method.



The Company recognized amortization expense on intangible assets for the nine month periods ending September 30, 2004 and 2003 of $384,992 and $257,698,
respectively.



Goodwill and other intangible assets at
September 30, 2004 and 2003 are as follows:



|                                   |  |                        |         |   |      |   |        |  
|---------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------ | -
|                                   |  | September 30,          |        
|                                   |  | 2004                   |         |   | 2003 |  
|                                   |  | (Dollars in thousands) |        
|Goodwill                           |  | $                      | 99,400  |   |      | $ | 93,292 |  
|Intangible assets                  |  |                        |         |   |      |   |        |  
|Core deposit intangibles           |  |                        | 3,221   |   |      |   | 3,221  |  
|Existing expirations               |  |                        | 2,812   |   |      |   | 310    |  
|Covanents not to compete           |  |                        | 355     |   |      |   | 259    |  
|Lease rights                       |  |                        | 248     |   |      |   | 248    |  
|                                   |  |                        |         |   |      |   |        |  
|                                   |  |                        | 106,036 |   |      |   | 97,330 |  
|Accumulated amortization           |  |                        | (2,644  | ) |      |   | (2,410 | )
|                                   |  |                        |         |   |      |   |        |  
|Net goodwill and intangible assets |  | $                      | 103,392 |   |      | $ | 94,920 |  
|                                   |  |                        |         |   |      |   |        |  



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following is managements discussion and analysis of certain significant factors which have affected the Companys financial position at
September 30, 2004 as compared to December 31, 2003 and operating results for the three and nine month periods ended September 30, 2004 as compared to the three and nine month periods ended September 30, 2003. These comments should be read in
conjunction with the Companys unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.



Overview



The Companys total assets increased $286.6 million or 14.54% since December 2003. Federal funds sold decreased $7.4 million primarily due to an
increase in loan demand. Loans increased 14.57% or $210.3 million since December 2003, while the investment portfolio increased $35.4 million. Goodwill and intangible assets increased by $7.1 million, as a result of the BMIA acquisition. Total
deposits increased by 11.79% or $171.9 million due primarily to an ongoing deposit campaign, use of brokered and national deposits, and seasonal increase in government deposits.



Return on average equity for the three and nine months ended September 30, 2004 was 15.16% and 14.56% on average equity of
$218.1 million and $214.9 million, respectively. This compares to 15.02% and 16.20% on average equity of $189.6 million and $159.2 million for the same periods in 2003. Return on average assets for the three and nine months ended September 30, 2004
was 1.52% and 1.51%. This compares to 1.52% and 1.59% for the same periods in 2003.



During the second quarter of 2004, the Company completed its conversion to a new operating system platform. The conversion replaced a number of different independent systems with one fully integrated processing
platform. This was done to improve reporting and processing efficiencies. Preparation for the system conversion has been ongoing for the past two years. During that time the Company has capitalized most of the cost associated with the conversion
into premises and equipment on our balance sheet. Other related items were expensed as they were incurred and will not be capitalized. It was also necessary for the Company to write-off the remaining book balance of software and hardware systems
that were no longer necessary due to the conversion. Fixed assets increased $2.7 million in 2004 due to the conversion to the new system.



The Company eliminated 38 staff positions on June 10, 2004. The Company eliminated these 38 positions mainly due to recent acquisitions and anticipated
efficiencies made available through the core system conversion and other productivity initiatives implemented during the quarter. The Bank also reorganized other positions within the Company in order to improve efficiencies. All affected employees
were paid through June 30, 2004 including the payment of severance packages and accrued benefits. The effect of the elimination of 38 positions and subsequent payouts increased compensation expense for the second quarter by $332,000.



From time to time, the Company sells the guaranteed portion of SBA loans to
third parties. During the third quarter of 2004, the Company sold SBA loans totaling $15.35 million and recognized a gain on the sale of these SBA loans of $1.26 million. For the nine month period, the Company has recognized a gain of $2.10 million
on the sale of SBA loans.



As part of normal business
processes, the Company will, from time to time, sell investment securities available for sale and recognize the associated gain or loss as part of non-interest income. During the third quarter, the Company sold investment securities available for
sale totaling $26.3 million and recognized a gain on the sale of these securities of $317,486. The weighted average coupon rate on the securities sold was 5.197%. For the nine month period, the Company has recognized a gain on the sale of securities
of $1.2 million.



The Company acquired BMIA on January 2, 2004.
During the third quarter of 2004, the business generated by BMIA increased insurance agency income by $1.1 million over the corresponding period in 2003. For the first nine months of 2004, insurance agency income has increased $3.2 million over the
corresponding period in 2003, primarily as a result of the BMIA acquisition.



The nine month results in 2003 include the effect of the First Colony acquisition for only the four months following the completion of the acquisition in May 2003.



During 2004 the Company plans many facility changes. The Company moved into
new prototype banking facilities in Roswell and Winder, Georgia and plans to move into a third prototype banking facility in Conyers, Georgia during the fourth quarter. The Company also has plans to open a new facility in the Midtown section of
Atlanta, Georgia and close an existing facility in Lilburn, Georgia during the fourth quarter.



13



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##### Table of Contents

Selected Financial Data



The following table sets forth unaudited selected financial data as of and for the three and nine month periods ending
September 30, 2004 and 2003. This data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in our Managements Discussion and Analysis of Financial Condition and
Results of Operations. The acquisition of First Colony Bancshares, Inc. on May 22, 2003 has significantly affected the comparability of Selected Financial Data for the nine month period. Specifically, since this acquisition was accounted for
using the purchase method, the assets were recorded at their fair values and the excess purchase price over the net fair value of the assets was recorded as goodwill and intangibles and the results of operations for this business have been included
in the Companys results since the date this acquisition was completed in May 2003. Discussions of this acquisition can be found in Note B  Acquisitions in the Notes to Consolidated Financial Statements of this Report on Form 10-Q.
The selected historical financial data as of and for the three and nine month periods ended September 30, 2004 and 2003 are derived from our unaudited financial statements and related notes. In the opinion of our management, this information
reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of this data as of those dates and for those periods. Results for the three-month and nine-month periods ended September 30, 2004, are not
necessarily indicative of results on an annualized basis or for any future period.



|                                                |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------- |  | ------------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                |  | Three months ended September 30,      |            |   | Nine months ended September 30, |  
|                                                |  | 2004                                  |            |   | 2003                            |   |            | 2004 |  |   | 2003       |  
|                                                |  | (Unaudited)                           |           
|                                                |  | (in thousdands except per share data) |           
|RESULTS OF OPERATIONS                           |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net interest income                             |  | $                                     | 20,833     |   |                                 | $ | 18,765     |      |  | $ | 60,979     |   |  | $ | 52,029     |  
|Net interest income (tax equivalent)            |  |                                       | 21,077     |   |                                 |   | 19,036     |      |  |   | 61,769     |   |  |   | 52,874     |  
|Provision for loan losses                       |  |                                       | 1,603      |   |                                 |   | 1,145      |      |  |   | 4,474      |   |  |   | 3,994      |  
|Non-interest income                             |  |                                       | 7,822      |   |                                 |   | 6,536      |      |  |   | 23,080     |   |  |   | 17,447     |  
|Non-interest expense                            |  |                                       | 15,494     |   |                                 |   | 14,368     |      |  |   | 47,207     |   |  |   | 38,306     |  
|Net income                                      |  |                                       | 8,264      |   |                                 |   | 7,118      |      |  |   | 23,252     |   |  |   | 19,253     |  
|SELECTED AVERAGE BALANCES                       |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Loans, net of unearned income                   |  | $                                     | 1,620,436  |   |                                 | $ | 1,389,998  |      |  | $ | 1,547,700  |   |  | $ | 1,204,568  |  
|Investment securities                           |  |                                       | 288,443    |   |                                 |   | 249,175    |      |  |   | 277,423    |   |  |   | 241,351    |  
|Earning Assets                                  |  |                                       | 1,940,675  |   |                                 |   | 1,660,522  |      |  |   | 1,862,913  |   |  |   | 1,467,296  |  
|Total assets                                    |  |                                       | 2,176,797  |   |                                 |   | 1,869,759  |      |  |   | 2,089,597  |   |  |   | 1,623,571  |  
|Deposits                                        |  |                                       | 1,584,819  |   |                                 |   | 1,423,029  |      |  |   | 1,532,726  |   |  |   | 1,267,826  |  
|Shareholders equity                            |  |                                       | 218,058    |   |                                 |   | 189,592    |      |  |   | 214,903    |   |  |   | 159,203    |  
|PERIOD-END BALANCES                             |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Loans, net of unearned income                   |  | $                                     | 1,653,616  |   |                                 | $ | 1,411,951  |      |  | $ | 1,653,616  |   |  | $ | 1,411,951  |  
|Earning Assets                                  |  |                                       | 2,003,706  |   |                                 |   | 1,700,691  |      |  |   | 2,003,706  |   |  |   | 1,700,691  |  
|Total assets                                    |  |                                       | 2,258,393  |   |                                 |   | 1,911,118  |      |  |   | 2,258,393  |   |  |   | 1,911,118  |  
|Deposits                                        |  |                                       | 1,630,286  |   |                                 |   | 1,437,641  |      |  |   | 1,630,286  |   |  |   | 1,437,641  |  
|Long-term obligations *                         |  |                                       | 277,751    |   |                                 |   | 209,739    |      |  |   | 277,751    |   |  |   | 209,739    |  
|Shareholders equity                            |  |                                       | 222,322    |   |                                 |   | 194,066    |      |  |   | 222,322    |   |  |   | 194,066    |  
|PER COMMON SHARE                                |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Earnings per share - Basic                      |  | $                                     | 0.43       |   |                                 | $ | 0.38       |      |  | $ | 1.20       |   |  | $ | 1.10       |  
|Earning per share - Diluted                     |  | $                                     | 0.41       |   |                                 | $ | 0.36       |      |  | $ | 1.16       |   |  | $ | 1.06       |  
|Book value per share at end of period           |  | $                                     | 10.94      |   |                                 | $ | 10.25      |      |  | $ | 10.94      |   |  | $ | 10.25      |  
|End of period shares outstanding                |  |                                       | 20,021,823 |   |                                 |   | 18,933,178 |      |  |   | 20,021,823 |   |  |   | 18,933,178 |  
|Weighted average shares outstanding             |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic                                           |  |                                       | 19,428,145 |   |                                 |   | 18,913,088 |      |  |   | 19,353,729 |   |  |   | 17,512,489 |  
|Diluted                                         |  |                                       | 20,015,560 |   |                                 |   | 19,602,219 |      |  |   | 19,972,391 |   |  |   | 18,186,159 |  
|STOCK PERFORMANCE                               |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Market Price:                                   |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Closing                                         |  | $                                     | 30.60      |   |                                 | $ | 25.02      |      |  | $ | 30.60      |   |  | $ | 25.02      |  
|High                                            |  |                                       | 30.60      |   |                                 |   | 26.00      |      |  |   | 30.60      |   |  |   | 26.00      |  
|Low                                             |  |                                       | 26.46      |   |                                 |   | 23.37      |      |  |   | 24.90      |   |  |   | 18.45      |  
|Trading volume                                  |  |                                       | 1,755,400  |   |                                 |   | 1,022,400  |      |  |   | 5,469,100  |   |  |   | 3,529,200  |  
|Cash dividends per share                        |  | $                                     | 0.135      |   |                                 | $ | 0.120      |      |  | $ | 0.405      |   |  | $ | 0.360      |  
|Dividend payout ratio                           |  |                                       | 32.70      | % |                                 |   | 33.05      | %    |  |   | 34.79      | % |  |   | 34.01      | %
|Price to earnings                               |  |                                       | 18.63      |   |                                 |   | 17.37      |      |  |   | 19.68      |   |  |   | 17.68      |  
|Price to book value                             |  |                                       | 2.76       |   |                                 |   | 2.44       |      |  |   | 2.80       |   |  |   | 2.44       |  
|PERFORMANCE RATIOS                              |  |                                       |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Return on average assets                        |  |                                       | 1.52       | % |                                 |   | 1.52       | %    |  |   | 1.51       | % |  |   | 1.59       | %
|Return on average equity                        |  |                                       | 15.16      | % |                                 |   | 15.02      | %    |  |   | 14.56      | % |  |   | 16.20      | %
|Average loans as percentage of average deposits |  |                                       | 102.25     | % |                                 |   | 97.68      | %    |  |   | 100.31     | % |  |   | 95.00      | %
|Net interest margin (tax equivalent)            |  |                                       | 4.32       | % |                                 |   | 4.55       | %    |  |   | 4.43       | % |  |   | 4.82       | %
|Average equity to average assets                |  |                                       | 10.02      | % |                                 |   | 10.14      | %    |  |   | 10.28      | % |  |   | 9.81       | %
|Efficiency ratio                                |  |                                       | 54.07      | % |                                 |   | 56.79      | %    |  |   | 56.16      | % |  |   | 55.14      | %

---

|* | Long-term obligations include Federal Home Loan Bank advances and junior subordinated debentures.
|- | -------------------------------------------------------------------------------------------------



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##### Table of Contents

Results of Operations for the Three Months Ended September 30, 2004 and 2003



Interest Income



Interest income for the three months ended September 30, 2004 was $29.9
million, an increase of $3.6 million, or 13.69% compared to $26.3 million for the same period in 2003. Interest on federal funds sold decreased due to the Companys decision to use the funds to fund loan growth. Average earning assets for the
three month period increased $0.2 billion, or 11.76% to $1.9 billion as of September 30, 2004 compared to $1.7 billion as of September 30, 2003. Yield on average earning assets decreased 23 basis points to 6.12% from 6.35% for the quarters ended
September 30, 2004 and 2003, respectively as a result of a shift in the Companys loan mix from short-term fixed rate loans to variable rate loans of like maturity.



Interest Expense



Interest expense on deposits and other borrowings for the three months ended September 30, 2004 was $9.0 million, a $1.5
million, or 19.53% increase from September 30, 2003. While average interest bearing liabilities increased $0.2 billion, or 11.76% to $1.9 billion for the three months ended September 30, 2004 compared to $1.7 billion for the three months ended
September 30, 2003, the yield on average interest bearing liabilities increased 4 basis points to 1.84% from 1.80% as of September 30, 2004 and 2003, respectively. The increase is due to the increased cost of funding loan growth through brokered
certificates of deposits, Federal Home Loan Bank advances and Federal funds purchased.



Net Interest Income



Net interest income for the three months ended September 30, 2004 increased $2.0 million, or 10.64% to $20.8 million compared to $18.8 million for the same period ending September 30, 2003. The increase was mainly
attributable to growth. The Companys net interest margin decreased to 4.32% for the three months ended September 30, 2004 compared to 4.55% as of September 30, 2003.



Provision for Loan Losses



The provision for loan losses was $1.6 million for the three months ended September 30, 2004 as compared to $1.1 million for
the three months ended September 30, 2003. The increase was due to loan growth as many of the asset indicators used to determine the adequacy of the loan loss reserve have continued to improve since December of 2003. These factors include changes in
the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries and current economic
conditions. Management believes that the overall real estate market conditions in metropolitan Atlanta appear to be stable to improving and the national economy improved during the most recent quarter. Management believes that the present allowance
for loan losses was adequate at September 30, 2004.



Non-interest Income



Non-interest income was $8.2 million for the three months ended September 30, 2004 an increase of $1.7 million, or 26.15% compared to $6.5 million for the three months ended September 30, 2003. The major components of the increase were
insurance agency income, gain on sales of investment securities and income from the sale of SBA loans. Insurance agency income increased $1.3 million, or 108.33% to $2.5 million from $1.2 million for the three months ended September 30, 2004 and
2003, respectively, due primarily to the acquisition of BMIA in January of 2004. The income from the sale of SBA loans increased $0.9 million, or 225.00% to $1.3 million from $0.4 million for the three months ended September 30, 2004 and 2003,
respectively. A gain on sales of investment securities of $317,486 was recognized for the three months ended September 30, 2004, compared to $301,000 for the three month period ended September 30, 2003.



Non-interest Expense



Non-interest expense increased $1.5 million or 10.42% to $15.9 million from
$14.4 million for the three months ended September 30, 2004 and 2003, respectively. Salaries were $8.0 million, an increase of $1.2 million, or 17.65% from the three months ended September 30, 2003. The Companys efficiency ratio was 54.07% for
the three months ended September 30, 2004 compared to 56.79% for the three months ended September 30, 2003.



Income Taxes



The amount of income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, and the amount of other nondeductible
amortization expenses. For the three months ended September 30, 2004 and 2003, the provision for taxes was $3.3 million and $2.7 million, respectively. The effective tax rate for the three months ended September 30, 2004 was 28.50% compared to
27.27% for the same period in 2003.



15



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##### Table of Contents

Results of Operations for the Nine Months Ended September 30, 2004 and 2003



Interest Income



Interest income for the nine months ended September 30, 2004 was $86.0
million, an increase of $14.0 million, or 19.44% compared to $72.0 million for the same period in 2003. The increase is mainly attributable to the acquisition of First Colony and net loan growth of $241.7 million from September 30, 2003 to September
30, 2004. Interest on federal funds sold decreased due to the Companys decision to make additional loans at higher yields than federal funds. Average earning assets for the nine month period increased $0.4 billion to $1.9 billion as of
September 30, 2004 compared to $1.5 billion as of September 30, 2003. Yield on average earning assets decreased 47 basis points to 6.17% from 6.64% for the nine months ended September 30, 2004 and 2003, respectively as a result of a shift in the
Companys loan mix from short-term fixed rate loans to variable rate loans of like maturity.



Interest Expense



Interest expense on deposits and other borrowings for the nine months ended September 30, 2004 was $25.0 million, a $5.0 million, or 25.00% increase from
September 30, 2003. The increase is mainly attributable to the acquisition of First Colony in May 2003 and organic deposit growth. While average interest bearing liabilities increased $0.4 billion to $1.9 billion for the nine months ended September
30, 2004 compared to $1.5 billion for the nine months ended September 30, 2003, the yield on average interest bearing liabilities decreased 5 basis points to 1.79% from 1.84% as of September 30, 2004 and 2003, respectively. The increase is due to
the increased cost of funding loan growth through brokered certificates of deposits, Federal Home Loan Bank advances and Federal funds purchased.



Net Interest Income



Net interest income for the nine months ended September 30, 2004 increased $9.0 million, or 17.31% to $61.0 million compared to $52.0 million for the same
period ending September 30, 2003. The increase was mainly attributable to growth in the loan portfolio, both from the First Colony acquisition in May 2003 and from organic growth. The Companys net interest margin decreased to 4.43% for the
nine months ended September 30, 2004 compared to 4.82% as of September 30, 2003.



Provision for Loan Losses



The provision for loan losses was $4.5 million for the nine months ended September 30, 2004 as compared to $4.0 million for the nine months ended September 30, 2003. The increase was due to loan growth as many of the
asset factors used to determine this provision and the adequacy of the loan loss reserve have continued to improve since December of 2003. These factors include changes in the size and character of the loan portfolio, changes in nonperforming and
past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries and current economic conditions. Management believes that overall real estate market conditions in
metropolitan Atlanta appear to be stable to improving and the national economy improved during the third quarter of 2004. Management believes that the present allowance for loan losses was adequate at September 30, 2004.



Non-interest Income



Non-interest income was $24.2 million for the nine months ended September
30, 2004 an increase of $6.8 million, or 39.08% compared to $17.4 million for the nine months ended September 30, 2003. The major components of the increase were insurance agency income, gain on sales of investment securities and income from the
sale of SBA loans. Insurance agency income increased $4.1 million, or 113.89% to $7.7 million from $3.6 million for the nine months ended September 30, 2004 and 2003, respectively due primarily to the acquisition of BMIA in January 2004. Income from
bank owned life insurance increased $0.2 million, or 11.76% to $1.9 million from $1.7 million for the nine months ended September 30, 2004 and 2003, respectively. Income from the sale of SBA loans increased $0.8 million, or 61.54% to $2.1 million
from $1.3 million for the nine months ended September 30, 2004 and 2003, respectively. A gain on sales of investment securities of $1.2 million was recognized for the nine months ended September 30, 2004, compared to $0.6 million for the nine month
period ended September 30, 2003.



Non-interest Expense



Non-interest expense increased $8.9 million or 26.37%
to $48.4 million from $38.3 million for the nine months ended September 30, 2004 and 2003, respectively. The increase was largely attributable to the acquisition of First Colony in May 2003 and the additional expenses associated with the elimination
of 38 positions in June of 2004. Salaries were $23.7 million, an increase of $5.1 million, or 27.42% from the nine months ended September 30, 2003. The Companys efficiency ratio was 56.16% for the nine months ended September 30, 2004 compared
to 55.14% for the nine months ended September 30, 2003.



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Income Taxes



The amount of income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, and the
amount of other nondeductible amortization expenses. For the nine months ended September 30, 2004, the provision for taxes was $9.1 million, an increase of $1.2 million from the $7.9 million provided for in the same period in 2003. The effective tax
rate for the nine months ended September 30, 2004 was 28.19% compared to 29.15% for the same period in 2003. The effective tax rate for the nine months ending September 30, 2004 is lower than for the same period in 2003 due to a tax refund received
in 2004 that has been credited against the income tax expense for 2004.



Capital



Capital management consists of
providing equity to support both current and anticipated future operations. The Company is subject to capital adequacy requirements imposed by the Federal Reserve Board and the Georgia Department of Banking and Finance (Georgia
Department) and the Bank is subject to capital adequacy requirements imposed by the FDIC and the Georgia Department of Banking and Finance.



The Federal Reserve Board, the FDIC, and the Georgia department have adopted risk-based capital requirements for assessing bank holding company and bank
capital adequacy. These standards define and establish minimum capital requirements in relation to assets and off-balance sheet exposure, adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory
capital requirements more sensitive to differences in risk profiles among bank holding companies and banks, and to account for off-balance sheet exposure.



The guideline for a minimum ratio of capital to risk-weighted assets (including certain off- balance-sheet activities, such as standby letters of credit)
is 8%. At least half of the total capital must consist of Tier 1 Capital, which includes common equity, retained earnings and a limited amount of qualifying preferred stock and qualifying trust preferred securities, less goodwill. The remainder may
consist of non-qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt and intermediate term preferred stock and up to 45% of the pretax unrealized holding gains on available-for-sale
equity securities with readily determinable market values that are prudently valued, and a limited amount of any loan loss allowance (Tier 2 Capital and, together with Tier 1 Capital, Total Capital).



In addition, the federal agencies have established minimum leverage ratio
guidelines for bank holding companies and state banks, which provide for a minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets (leverage ratio) equal to 3%, plus an additional cushion of 1.0% to 2.0%, if the
institution has less than the highest regulatory rating. The guidelines also provide that institutions experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets. Higher capital may be required in individual cases, depending upon a bank holding companys risk profile. All bank holding companies and banks are expected to hold capital
commensurate with the level and nature of their risks, including the volume and severity of their problem loans. Lastly, the Federal Reserves guidelines indicate that the Federal Reserve will continue to consider a Tangible Tier 1
Leverage Ratio (deducting all intangibles) in evaluating proposals for expansion or new activity.



The capital measures used by the federal banking regulators are the Total Capital ratio, the Tier 1 Capital ratio, and the leverage ratio. Under the
regulations, a bank holding company or a bank will be (i) well capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to any written agreement,
order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure.



The Georgia Department has adopted generally the same definitions for capital adequacy as the Federal Reserve and the FDIC.
Under Georgia Department policies, Georgia state banks must maintain not less than 4.5% Tier 1 capital, and generally most institutions will require at least 5.5% Tier 1 capital. Additional capital may be required based on the Georgia
Departments consideration of the quality, type and diversification of assets, current and historical earnings, provisions for liquidity with particular emphasis on asset/liability mismatches and sensitivity to market risks in the asset
portfolios, the quality of management, and the existence of other activities that may expose the institution to risk, including the degree of leverage and risk undertaken by any parent company or affiliates. Further, the Georgia Departments
policies generally require that Georgia bank holding companies maintain a Tier 1 capital ratio of 4.0%, although higher ratios are required for holding companies experiencing or anticipating higher growth, and for those companies with significant
financial or operational weaknesses, or higher risk profiles.



The Federal Reserve, the FDIC and the Georgia Department have not advised the Company or the Bank of any specific minimum capital ratios applicable to them.



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At September 30, 2004, the Company and the Bank were well capitalized for regulatory purposes. The
following table provides a comparison of the Companys and the Banks leverage and risk-weighted capital ratios as of September 30, 2004 to the minimum and well-capitalized regulatory standards:



|                           |  |         |   |  |       |   |  |                 |    |  |                  |  
|-------------------------- |  | ------- | - |  | ----- | - |  | --------------- | -- |  | ---------------- | -
|                           |  | Company |   |  | Bank  |   |  | MinimumRequired |    |  | Well Capitalized |  
|Leverage ratio             |  | 8.01    | % |  | 7.75  | % |  | 4.00            | %* |  | 5.00             | %
|Risk based capital ratios: |  |         |   |  |       |   |  |                 |    |  |                  |  
|Tier 1 risk based capital  |  | 8.90    | % |  | 9.05  | % |  | 4.00            | %  |  | 6.00             | %
|Total risk-based capital   |  | 10.72   | % |  | 10.31 | % |  | 8.00            | %  |  | 10.00            | %

---

|* | 4.5% to 5.5% for Georgia Department purposes
|- | --------------------------------------------



In December 2003, the Board of Directors approved the filing of a $100.0 million universal shelf registration statement. The Companys registration
statement on Form S-3 became effective on January 15, 2004. On October 1, 2004, the Company announced its plans to offer for sale in an underwritten public offering approximately $50 million of its common stock within the next 90 days pursuant to
its effective universal shelf registration statement in order to provide capital to support anticipated future growth.



Loans and Allowance for Loan Losses



At September 30, 2004, loans, net of unearned income, were $1.654 billion, an increase of $0.242 billion or 17.14% over net loans at December 31, 2003 of
$1.412 billion. The growth in the loan portfolio was attributable to a consistent focus on quality loan production and strong loan markets in the state. Residential mortgage and commercial real estate loans increased $130.5 million or 13.31% from
December 31, 2003 while real estate construction loans increased $75.4 million or 24.81% over the same period. The Company continues to monitor the composition of the loan portfolio to evaluate the adequacy of the allowance for loan losses in light
of changes in the economic environment on the loan portfolio.



The Company primarily focuses on the following loan categories: (1) commercial and industrial, (2) real estate construction, (3) residential mortgage, (4) commercial real estate, and (5) consumer loans. The Companys management has
strategically located its branches in high growth markets and has taken advantage of a surge in residential and industrial growth in metropolitan Atlanta.



The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The provision for loan
losses is based on managements evaluation of the size and composition of the loan portfolio, the level of non-performing and past due loans, historical trends of charged-off loans and recoveries, prevailing economic conditions and other
factors management deems appropriate. The Companys management has established an allowance for loan losses which it believes is adequate for the risk of loss inherent in the loan portfolio. Based on a credit evaluation of the loan portfolio,
management presents a quarterly review of the allowance for loan losses to the Companys Board of Directors. The review that management has developed primarily focuses on risk by evaluating the level of loans in certain risk categories. These
categories have also been established by management and take the form of loan grades. These loan grades closely mirror regulatory classification guidelines and include pass loan categories 1 through 4 and special mention, substandard, doubtful, and
loss categories of 5 through 8, respectively. By grading the loan portfolio in this manner the Companys management is able to effectively evaluate the portfolio by risk, which management believes is the most effective way to analyze the loan
portfolio and thus analyze the adequacy of the allowance for loan losses. Management also reviews charge-offs and recoveries on a monthly basis to identify trends.



The Companys risk management processes include a loan review program to evaluate the credit risk in the loan portfolio
and insure credit grade accuracy. The credit review department is independent of the loan function and reports to the Executive Vice President of Risk Management. Through the loan review process, the Company maintains a classified loan watch list
which, along with the delinquency report of loans, serves as a tool to assist management in assessing the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as substandard are those
loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain financial ratios, uncertain repayment sources, deterioration in underlying collateral values, or poor financial condition which may
jeopardize recoverability of the debt. Loans classified as doubtful are those loans that have characteristics similar to substandard loans but have an increased risk of loss, or at least a portion of the loan may require being
charged-off. Loans classified as loss are those loans that are in the process of being charged-off.



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The allowance for loan losses is established by risk group as follows:



| |  | Large classified loans, nonaccrual loans and loans considered impaired are evaluated individually with specific reserves allocated based on managements review.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The remainder of the portfolio is allocated a portion of the allowance based on past loss experience and the economic conditions for the particular loan category. Allocation weights
are assigned based on the Companys historical loan loss experience in each loan category; although a higher allocation weight may be used if current conditions indicate that loan losses may exceed historical experience.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



When determining the adequacy of the allowance
for loan losses, management considers changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific
borrowers or industries and current economic conditions. Management does not believe these factors have significantly changed over the periods presented. Historically, we believe our estimates of the level of allowance for loan losses required have
been appropriate and our expectation is that the primary factors considered in the provision calculation will continue to be consistent with prior trends.



For the nine month period ending September 30, 2004, net charge-offs totaled $1.4 million or 0.11% (annualized) of average loans outstanding for the
period, net of unearned income, compared to $2.1 million or 0.19 % (annualized) in net charge-offs for the same period in 2003. The provision for loan losses for the nine months ended September 30, 2004 was $4.5 million compared to $4.0 million for
the same period in 2003. The allowance for loan losses totaled $24.3 million or 1.47% of total loans, net of unearned income at September 30, 2004, compared to $21.2 million or 1.47% of total loans at December 31, 2003.



The following table presents an analysis of the allowance for loan losses for
the nine-month periods ended September 30, 2004 and 2003:



|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | ------ | - |  | - | ------ | - |  | ------ | -
|                                                                         |  | Nine Months Ended September 30, |       
|                                                                         |  | 2004                            |        |   | 2003 |       
|                                                                         |  | (Dollars in thousands)          |        |   |      |       
|Balance of allowance for loan losses at beginning of period              |  | $                               | 21,152 |   |      |        |   |  | $ | 18,860 |   |  |        |  
|Provision charged to operating expense                                   |  |                                 | 4,474  |   |      |        |   |  |   | 3,994  |   |  |        |  
|Charge-offs:                                                             |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Commercial and industrial                                                |  |                                 | 501    |   |      | 20.78  | % |  |   | 1,344  |   |  | 56.05  | %
|Real estate - construction                                               |  |                                 | 503    |   |      | 20.86  | % |  |   |       |   |  | 0.00   | %
|Real estate - mortgage                                                   |  |                                 | 342    |   |      | 14.18  | % |  |   | 158    |   |  | 6.59   | %
|Real estate - other                                                      |  |                                 | 92     |   |      | 3.82   | % |  |   | 50     |   |  | 2.09   | %
|Consumer and other                                                       |  |                                 | 973    |   |      | 40.36  | % |  |   | 846    |   |  | 35.28  | %
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Total charge-offs                                                        |  |                                 | 2,411  |   |      | 100.00 | % |  |   | 2,398  |   |  | 100.00 | %
|Recoveries:                                                              |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Commercial and industrial                                                |  |                                 | 363    |   |      | 34.87  | % |  |   | 58     |   |  | 18.77  | %
|Real estate - construction                                               |  |                                 | 50     |   |      | 4.80   | % |  |   |       |   |  | 0.00   | %
|Real estate - mortgage                                                   |  |                                 | 179    |   |      | 17.20  | % |  |   | 51     |   |  | 16.50  | %
|Real estate - other                                                      |  |                                 | 32     |   |      | 3.07   | % |  |   |       |   |  | 0.00   | %
|Consumer and other                                                       |  |                                 | 417    |   |      | 40.06  | % |  |   | 200    |   |  | 64.72  | %
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Total recoveries                                                         |  |                                 | 1,041  |   |      | 100.00 | % |  |   | 309    |   |  | 100.00 | %
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Net charge-offs                                                          |  |                                 | 1,370  |   |      |        |   |  |   | 2,089  |   |  |        |  
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Balance of allowance for loan losses at end of period                    |  | $                               | 24,256 |   |      |        |   |  | $ | 20,765 |   |  |        |  
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Net annualized charge-offs (recoveries) as a percentage of average loans |  |                                 | 0.11   | % |      |        |   |  |   | 0.19   | % |  |        |  
|Reserve for loan losses as a percentage of loans at end of period        |  |                                 | 1.47   | % |      |        |   |  |   | 1.47   | % |  |        |  



Non-Performing
Assets



Nonperforming assets include loans classified as
nonaccrual or renegotiated and foreclosed real estate. It is the general policy of the Company to stop accruing interest income and place the recognition of interest on a cash basis when any commercial, industrial or commercial real estate loan is
90 days or more past due as to principal or interest and/or the ultimate collection of either is in doubt, unless collection of both principal and interest is assured by way of collateralization, guarantees or other security. Accrual of interest
income on consumer loans, including residential real estate loans, is suspended when any payment of principal or interest, or both, is more than 120 days delinquent. When a loan is placed on nonaccrual status, any interest previously accrued but not
collected is reversed against current income unless the collateral for the loan is sufficient to cover the accrued interest or a guarantor assures payment of interest.



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The Company has several procedures in place to assist management in maintaining the overall quality of
its loan portfolio. The Company has established written guidelines contained in its Lending Policy for the collection of past due loan accounts. These guidelines explain in detail the Companys policy on the collection of loans over 30, 60, and
90 days delinquent. Generally, loans over 90 days delinquent are placed in a non-accrual status.



However, if the loan is deemed to be in process of collection, it may be maintained on an accrual basis. The Companys management conducts continuous
training and communicates regularly with loan officers to make them aware of its lending policy and the collection policy contained therein. The Companys management has also staffed its collection department with properly trained staff to
assist lenders with collection efforts and to maintain records and develop reports on delinquent borrowers. Management is not aware of any loans that meet the definition of a troubled debt restructuring as of September 30, 2004. The Company records
real estate acquired through foreclosure at the lesser of the outstanding loan balance or the fair value at the time of foreclosure, less estimated costs to sell.



The Company usually disposes of real estate acquired through foreclosure within one year; however, if it is unable to
dispose of the foreclosed property, the propertys value is assessed annually and written down to its fair value less costs to sell.



Non-performing assets decreased by $6.8 million since December 31, 2003. The Bank was able to reduce its non-performing assets during the first three
quarters of 2004 through the sale of property securing our largest non-performing loan, refinance of another large non-performing loan by another bank, and the liquidation of collateral obtained through foreclosure.



The following table presents information regarding non-performing assets at
the dates indicated:



|                                                                                            |  |                        |       |   |                  |   |        |                    |  |   |        |  
|------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ---------------- | - | ------ | ------------------ |  | - | ------ | -
|                                                                                            |  | September 30,2004      |       |   | December 31,2003 |   |        | September 30, 2003 | 
|                                                                                            |  | (Dollars in thousands) |      
|Non-performing assets                                                                       |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Non-accrual loans                                                                           |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Commercial and industrial                                                                   |  | $                      | 368   |   |                  | $ | 2,821  |                    |  | $ | 1,535  |  
|Real estate - construction                                                                  |  |                        | 173   |   |                  |   | 2,281  |                    |  |   | 2,247  |  
|Real estate - mortgage                                                                      |  |                        | 568   |   |                  |   | 1,944  |                    |  |   | 1,667  |  
|Real estate - other                                                                         |  |                        | 3,559 |   |                  |   | 4,435  |                    |  |   | 4,902  |  
|Consumer and other                                                                          |  |                        | 62    |   |                  |   | 67     |                    |  |   | 504    |  
|Other real estate and repossessions                                                         |  |                        | 1,132 |   |                  |   | 1,940  |                    |  |   | 1,367  |  
|                                                                                            |  |                        |       |   |                  |   |        |                    |  |   |        |  
|Total non-performing assets                                                                 |  | $                      | 5,862 |   |                  | $ | 13,488 |                    |  | $ | 12,222 |  
|Loans past due 90 days or more and still accruing                                           |  | $                      | 1,990 |   |                  | $ | 1,923  |                    |  | $ | 3,407  |  
|Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income |  |                        | 0.12  | % |                  |   | 0.13   | %                  |  |   | 0.24   | %
|Ratio of non-performing assets to loans, net of unearned income and other real estate       |  |                        | 0.35  | % |                  |   | 0.95   | %                  |  |   | 0.86   | %



The Company had no
potential problem loans at September 30, 2004, December 31, 2003 and September 30, 2003. Potential problem loans are loans where known information about possible credit problems of borrowers has caused the Companys management to have serious
doubts as to the related borrowers ability to comply with present loan repayment terms and which may result in such loans becoming nonaccrual, past due or restructured loans.



Interest Rate Sensitivity and Liquidity



Asset Liability Management



The Companys primary market risk exposures are credit (as discussed previously), interest rate risk and to a lesser degree, liquidity risk. The Bank
operates under an Asset Liability and Risk Management policy approved by the Board of Directors of the Bank through the Asset and Liability Committee (ALCO). The policy outlines limits on interest rate risk in terms of changes in net
interest income and changes in the net market values of assets and liabilities over certain changes in interest rate environments. These measurements are made through a simulation model which projects the impact of changes in interest rates on the
Banks assets and liabilities. The policy also outlines responsibility for monitoring interest rate risk, and the process for the approval, implementation and monitoring of interest rate risk strategies to achieve the Banks interest rate
risk objectives.



The Banks ALCO is comprised of senior
officers of the Bank. The ALCO makes all tactical and strategic decisions with respect to the sources and uses of funds that may affect net interest income, including net interest spread and net interest margin. The ALCOs decisions are based
upon policies established by the Banks Board of Directors, which are designed to meet three goals: manage interest rate risk, improve interest rate spread and maintain adequate liquidity.



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The ALCO has developed a program of action which includes, among other things, the following: (i) selling
substantially all conforming, long-term, fixed rate mortgage originations, (ii) seeking to originate and retain for the portfolio shorter term, higher yielding loan products which meet the Companys underwriting criteria; and (iii) actively
managing the Companys interest rate risk exposure.



Interest Rate Risk



The normal course
of business activity exposes the Company to interest rate risk. Interest rate risk is managed within an overall asset and liability framework for the Company. The principal objectives of asset and liability management are to predict the sensitivity
of net interest spreads to potential changes in interest rates, control risk and enhance profitability. Funding positions are kept within predetermined limits designed to properly manage risk and liquidity. The Company employs sensitivity analysis
in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates. In addition, fluctuations in interest rates usually result in changes in the fair market value of the Companys
financial instruments, cash flows and net interest income. The Companys interest rate risk position is managed by ALCO.



The Company uses a simulation modeling process to measure interest rate risk and evaluate potential strategies. Interest rate scenario models are prepared
using software created and licensed from an outside vendor. The Companys net interest income simulation includes all financial assets and liabilities. This simulation measures both the term risk and basis risk in the Companys assets and
liabilities. Term risk in the result of repricing and maturity timing mismatches. This is caused when the rates of interest paid on deposits and other liabilities are changed at different times than when the rates of interest on loans and
investments change. Basis risk is caused by the differences in the amounts by which interest rates change from one instrument to another. The simulation also captures the option characteristics of products, such as caps and floors on floating rate
loans, the right to pre-pay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled through the use of primarily historical customer behavior and statistical analysis. Other interest
rate-related risks such as prepayment, basis and option risk are also considered. Simulation results quantify interest risk under various interest rate scenarios. Management then develops and implements appropriate strategies. ALCO has determined
that an acceptable level of interest rate risk would be for net interest income to decrease no more than 3.5% given a change in selected interest rates of 100 basis points over any 12-month period. The Board of Directors regularly reviews the
overall rate risk position and asset and liability management strategies.



The Company uses three standard scenariosrates unchanged, rising rates, and declining ratesin analyzing interest rate sensitivity. The rising and declining rate scenarios cover a 100 basis points upward
and downward rate shock. The following table illustrates the expected effect a given interest rate shift would have on the fair market value of the Balance Sheet and the annualized projected net interest income of the Company as of September 30,
2004.



|                         |  |                                               |   |  |                                              |  
|------------------------ |  | --------------------------------------------- | - |  | -------------------------------------------- | -
|Change in Interest Rates |  | Increase / (Decrease) in FMV of Balance Sheet |   |  | Increase / (Decrease) in Net Interest Income |  
|+ 100 basis points       |  | 4.49                                          | % |  | 4.71                                         | %
|-  100 basis points      |  | -5.29                                         | % |  | -2.38                                        | %



These simulated
computations should not be relied upon as indicative of actual future results. Further, the computations do not contemplate certain actions that management may undertake in response to future changes in interest rates. This model indicates that the
Company is asset sensitive in that its assets will reprice faster in a rising rate environment than its interest sensitive liabilities. In 2004, the Federal Reserve has increased the federal funds rates 25 basis points in each of June, August and
September.



In fiscal 2004, the Company has continued to face
term risk and basis risk. If interest rates rise, net interest income may actually increase if interest on deposits and other liabilities lag increases in market rates. The Company could, however, experience significant pressure on net interest
income if there is a substantial increase in deposit of interest on deposits and other liabilities relative to market rates. A declining interest rate environment might result in a decrease in loan rates, while deposit rates remain relatively
stable, which could also create significant risk to net interest income. ALCOs subcommittee, the pricing committee, meets weekly to establish interest rates on loans and deposits and review interest rate sensitivity and liquidity positions.



Derivative Instruments and Hedging Activities



Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Accounting for Derivative Instruments and Hedging Activities
(SFAS 149), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133,
the Company records all derivatives on the balance sheet at fair value. Fair value is estimated based on published bid prices or bid quotations for interest rate swaps and floors received from securities dealers. The



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##### Table of Contents

accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge
the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.



For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized
in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings
when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes
in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.



Interest rate swaps are currently utilized by the Company to
hedge the interest rate risk associated with pools of loans that bear interest based upon the prime rate. The interest rate swaps synthetically convert the floating interest rate payments received on pools of assets bearing interest based upon the
prime rates to fixed interest receipts. The Company assesses hedge effectiveness and measures hedge ineffectiveness on a quarterly basis for each hedging relationship. The Company performs its effectiveness testing by comparing the present value of
the cumulative change in the variable interest payments on each swap to the present value of the cumulative change in the overall variable receipts on the underlying loans since the inception of the hedge. Hedge ineffectiveness is recognized to the
extent that the cumulative change on the swap exceeds the cumulative change on the hedged variable interest receipts on the loans. If the ratio of the cumulative changes in the variable interest payments on a swap to the cumulative changes in the
variable receipts on the underlying loans is outside of the range of 80% to 125%, the Company considers the hedging relationship to no longer be highly effective and would dedesignate the interest rate swap from its hedging relationship. Subsequent
changes in the value of the derivative would be remeasured directly through earnings.



The Companys objective in using derivatives is to add stability to interest income and/or interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this
objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts in exchange for variable-rate payments over the life of
the agreements without exchange of the underlying principal amount.



Market risk is the adverse effect that a change in interest rates or implied volatility rates has on the value of a financial instrument. The Company manages the market risk associated with interest rate contracts by establishing and
monitoring limits as to the types and degree of risk that may be undertaken.



The Companys derivatives activities are monitored by its ALCO as part of its risk-management oversight of the Companys treasury functions. The Companys ALCO is responsible for approving various
hedging strategies that are developed through its analysis of data from financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Companys overall interest rate risk
management and trading strategies.



The following chart
illustrates the Banks derivative positions as of September 30, 2004. Market values have been determined by published bid prices or bid quotations for interest rate swaps and floors received from securities dealers.



Interest Rate Swaps



|                                       |  |                 |  |          |  |          |             |            |      |   |             |      |   |               |       |   |              |   |          |  
|-------------------------------------- |  | --------------- |  | -------- |  | -------- | ----------- | ---------- | ---- | - | ----------- | ---- | - | ------------- | ----- | - | ------------ | - | -------- | -
|Type                                   |  | TransactionDate |  | TermDate |  | Notional |             | PayRate    |      |   | ReceiveRate |      |   | CurrentSpread |       |   | Market Value |  
|Received Fixed Prime Swap - amortizing |  | Apr-02          |  | Apr-05   |  | $        | 20,000,000  |            | 4.75 | % |             | 6.63 | % |               | 1.88  | % |              | $ | 173,994  |  
|Received Fixed Prime Swap              |  | Mar-03          |  | Mar-06   |  | $        | 50,000,000  |            | 4.75 | % |             | 5.26 | % |               | 0.51  | % |              | $ | (182,146 | )
|Received Fixed Prime Swap              |  | Aug-03          |  | Aug-06   |  | $        | 100,000,000 |            | 4.75 | % |             | 5.59 | % |               | 0.84  | % |              | $ | (83,959  | )
|                                       |  |                 |  |          |  |          |             |            |      |   |             |      |   |               |       |   |              |   |          |  
|Total Received Fixed Swaps             |  |                 |  |          |  | $        | 170,000,000 |            |      |   |             |      |   |               |       |   |              | $ | (92,111  | )
|                                       |  |                 |  |          |  |          |            
|Interest Rate Floors                   |  |                 |  |          |  |          |             |            |      |   |             |      |   |               |       |   |              |   |          |  
|Type                                   |  | TransactionDate |  | TermDate |  | Notional |             | StrikeRate |      |   | CurrentRate |      |   | CurrentSpread |       |   | Market Value |  
|Prime based Floor                      |  | Jun-03          |  | Jun-05   |  | $        | 100,000,000 |            | 3.75 | % |             | 4.75 | % |               | -1.00 | % |              | $ |         |  
|                                       |  |                 |  |          |  |          |             |            |      |   |             |      |   |               |       |   |              |   |          |  
|Total Interest Rate Floors             |  |                 |  |          |  | $        | 100,000,000 |            |      |   |             |      |   |               |       |   |              | $ |         |  
|                                       |  |                 |  |          |  |          |             |            |      |   |             |      |   |               |       |   |              |   |          |  
|Total Derivative Positions             |  |                 |  |          |  | $        | 270,000,000 |            |      |   |             |      |   |               |       |   |              | $ | (92,111  | )
|                                       |  |                 |  |          |  |          |             |            |      |   |             |      |   |               |       |   |              |   |          |  



Liquidity



Liquidity involves the
Companys ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis.



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During the past three years, the Companys liquidity needs have primarily been met by growth in deposits, advances
from Federal Home Loan Bank (FHLB), purchase of Federal funds, and capital from retained earnings and acquisitions. The FHLB allows member banks to borrow against their eligible collateral to satisfy their liquidity requirements. As of
September 30, 2004, the Company had $18.5 million available on its FHLB line based on current eligible collateral. Federal funds purchased and other short-term borrowings are additional sources of liquidity and, basically, represent the
Companys incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. As of September 30, 2004, the Company had $25.0 million in federal
funds lines. The Companys cash and federal funds sold and cash flows from amortizing investment and loan portfolios have generally created an adequate liquidity position. Executive management reviews liquidity monthly. This review is from a
regulatory as well as static and a four-quarter forecasted standpoint.



Market and public confidence in the financial strength of the Company and financial institutions in general will determine the Companys access to supplementary sources of liquidity. The Companys capital levels and asset quality
determine levels at which the Company can access supplementary funding sources.



Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. The Company has not received any recommendations from
regulatory authorities that would materially affect liquidity, capital resources or operations.



Maintaining a steady funding base is achieved by diversifying funding sources, competitively pricing deposit products, and extending the contractual
maturity of liabilities. This reduces the Companys exposure to roll over risk on deposits and limits reliance on volatile short-term purchased funds.



Short-term funding needs arise from funding of loan commitments and requests for new loans and from declines in deposits or other funding sources. The
Companys strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and low-cost funds. Core deposits include all deposits, except certificates of deposit of $100,000 and
over.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



The Companys primary market risk exposures are credit (as discussed previously), interest rate risk and to a lesser degree, liquidity risk. The Bank
has an Asset Liability and Risk Management policy approved by the Board of Directors of the Bank through the Asset and Liability Committee (ALCO). The policy outlines limits on interest rate risk in terms of changes in net interest
income and changes in the net market values of assets and liabilities over certain changes in interest rate environments. These measurements are made through a simulation model which projects the impact of changes in interest rates on the
Banks assets and liabilities. The policy also outlines responsibility for monitoring interest rate risk, and the process for the approval, implementation and monitoring of interest rate risk strategies to achieve the Banks interest rate
risk objectives.



The Banks ALCO is comprised of senior
officers of the Bank. The ALCO makes all tactical and strategic decisions with respect to the sources and uses of funds that may affect net interest income, including net interest spread and net interest margin. The ALCOs decisions are based
upon policies established by the Banks Board of Directors, which are designed to meet three goals: manage interest rate risk, improve interest rate spread and maintain adequate liquidity.



The ALCO has developed a program of action which includes, among other
things, the following: (i) selling substantially all conforming, long-term, fixed rate mortgage originations, (ii) originating and retaining for the portfolio shorter term, higher yielding loan products which meet the Companys underwriting
criteria; and (iii) actively managing the Companys interest rate risk exposure.



Additional information required by Item 305 of Regulation S-K is set forth under Item 2 of this report.



ITEM 4. CONTROLS AND PROCEDURES



Our Chief Executive Officer and Chief Financial Officer have evaluated the Companys disclosure controls and procedures as of the end of the quarterly period covered by this Form 10-Q and have concluded that the Companys
disclosure controls and procedures were effective as of that date in ensuring that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported within the time period required by the
SECs rules and forms. During the third quarter of 2004 the Company relied on a third party vendor for asset/liability modeling. There were no other changes in the Companys internal control over financial reporting that may have
materially affected, or that are reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II.  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



Neither the Company nor any of its subsidiaries are a party to, nor is any of their property the subject of, any material pending legal proceedings, other than ordinary routine proceedings incidental to the business of the Company. To the
Companys knowledge, no such material proceedings were threatened against it or its subsidiaries. From time to time, the Company and its subsidiaries are parties to legal proceedings in the ordinary course of business, after consultation with
legal counsel, does not anticipate that the current litigation matters will have a material adverse effect on the Companys financial position, results of operations or cash flows.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



No matter was submitted to a vote of security holders by solicitation of proxies or otherwise during the third quarter of 2004.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS



| | (a) | The following 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        |  | Employment agreement dated September 8, 2004 between the Registrant and Sam B Hay III (incorporated by reference to the Registrants Form 8-K filed with the Commission on September 15,
2004) *                                                                                      
|            | 
|10.2        |  | Employment agreement dated September 8, 2004 between the Registrant and Edward C. Milligan (incorporated by reference to the Registrants Form 8-K filed with the Commission on September
15, 2004) *                                                                                 
|            | 
|31.1        |  | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                      
|            | 
|31.2        |  | Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                      
|            | 
|32.1        |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                    
|            | 
|32.2        |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                    

---

|* | Denotes a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.
|- | ------------------------------------------------------------------------------------------------------------------



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SIGNATURES



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



|                       |  |                         |  |                                                         
|---------------------- |  | ----------------------- |  | --------------------------------------------------------
|                       |  | MAIN STREET BANKS, INC.
|                       |  |                        
|Date: November 8, 2004 |  | By:                     |  | /s/ EDWARD C. MILLIGAN                                  
|                       |  |                         |  | Edward C. Milligan, Chairman and Chief Executive Officer
|                       |  |                        
|Date: November 8, 2004 |  | By:                     |  | /s/ ROBERT D. MCDERMOTT                                 
|                       |  |                         |  | Robert D. McDermott, Chief Financial Officer            



25