##### 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, 2005



Commission file number 000-25128



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LOGO

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.)
|                                         | 
|3500 Lenox Road, Atlanta, GA             |  | 30326                               
|(Address of principal executive offices) |  | (Zip Code)                          



770-786-3441

(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 ̈



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes ̈No  x



As of October 31, 2005, registrant had outstanding 21,477,563 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 expected 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, 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, 2005



|                              |  |                                                                                                                     |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                     |  | Page
|PART I.
FINANCIAL INFORMATION |  |                                                                                                                    
|                              |  |                                                                                                                    
|Item 1.                       |  | Financial Statements                                                                                                |  |     
|                              |  |                                                                                                                    
|                              |  | Consolidated Balance Sheets September 30, 2005 (unaudited) and December 31, 2004                                    |  | 3   
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of Income (unaudited) Three and Nine Months Ended September 30, 2005 and 2004               |  | 4   
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of Comprehensive Income (unaudited) Three and Nine Months Ended September 30, 2005 and 2004 |  | 5   
|                              |  |                                                                                                                    
|                              |  | Consolidated Statements of Cash Flows (unaudited) Nine Months ended September 30, 2005 and 2004                     |  | 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  



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, 2005 |           |   | December 31, 2004 |  
|Assets                                                                                                                                                                    |  |                                |           |   |                   |   |           |  
|Cash and due from banks                                                                                                                                                   |  | $                              | 50,441    |   |                   | $ | 35,090    |  
|Interest-bearing deposits in banks                                                                                                                                        |  |                                | 649       |   |                   |   | 318       |  
|Federal funds sold and securities purchased under agreements to resell                                                                                                    |  |                                | 33,250    |   |                   |   | 35,813    |  
|Investment securities available for sale (amortized cost of $314,840 and $314,557 at September 30, 2005 and December 31, 2004,
respectively)                              |  |                                | 311,777   |   |                   |   | 315,521   |  
|Investment securities held to maturity (fair value of $14,797 and $11,260 at September 30, 2005 and December 31, 2004,
respectively)                                      |  |                                | 15,110    |   |                   |   | 11,716    |  
|Other investments                                                                                                                                                         |  |                                | 26,695    |   |                   |   | 23,782    |  
|Mortgage loans held for sale                                                                                                                                              |  |                                | 7,119     |   |                   |   | 4,563     |  
|Loans, net of unearned income                                                                                                                                             |  |                                | 1,792,268 |   |                   |   | 1,699,035 |  
|Allowance for loan losses                                                                                                                                                 |  |                                | (25,118   | ) |                   |   | (25,191   | )
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  
|Loans, net                                                                                                                                                                |  |                                | 1,767,150 |   |                   |   | 1,673,844 |  
|Premises and equipment, net                                                                                                                                               |  |                                | 52,627    |   |                   |   | 53,470    |  
|Other real estate                                                                                                                                                         |  |                                | 5,898     |   |                   |   | 2,141     |  
|Accrued interest receivable                                                                                                                                               |  |                                | 10,150    |   |                   |   | 9,763     |  
|Goodwill and other intangible assets                                                                                                                                      |  |                                | 102,107   |   |                   |   | 102,170   |  
|Bank owned life insurance                                                                                                                                                 |  |                                | 58,976    |   |                   |   | 42,056    |  
|Due from broker                                                                                                                                                           |  |                                | 14,635    |   |                   |   |          |  
|Other assets                                                                                                                                                              |  |                                | 16,983    |   |                   |   | 16,195    |  
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  
|Total assets                                                                                                                                                              |  | $                              | 2,473,567 |   |                   | $ | 2,326,442 |  
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  
|Liabilities                                                                                                                                                               |  |                                |           |   |                   |   |           |  
|Deposits:                                                                                                                                                                 |  |                                |           |   |                   |   |           |  
|Noninterest-bearing demand                                                                                                                                                |  | $                              | 256,517   |   |                   | $ | 224,958   |  
|Interest-bearing demand and money market                                                                                                                                  |  |                                | 654,597   |   |                   |   | 658,088   |  
|Savings                                                                                                                                                                   |  |                                | 41,349    |   |                   |   | 46,999    |  
|Time deposits of $100,000 or more                                                                                                                                         |  |                                | 394,534   |   |                   |   | 370,658   |  
|Other time deposits                                                                                                                                                       |  |                                | 422,963   |   |                   |   | 409,507   |  
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  
|Total deposits                                                                                                                                                            |  |                                | 1,769,960 |   |                   |   | 1,710,210 |  
|Accrued interest payable                                                                                                                                                  |  |                                | 5,152     |   |                   |   | 3,955     |  
|Federal Home Loan Bank advances                                                                                                                                           |  |                                | 198,169   |   |                   |   | 201,070   |  
|Federal funds purchased and securities sold under repurchase agreements                                                                                                   |  |                                | 147,189   |   |                   |   | 73,368    |  
|Subordinated debentures                                                                                                                                                   |  |                                | 51,547    |   |                   |   | 51,547    |  
|Other liabilities                                                                                                                                                         |  |                                | 9,700     |   |                   |   | 7,329     |  
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                         |  |                                | 2,181,717 |   |                   |   | 2,047,479 |  
|                                                                                                                                                                          |  |                               
|Shareholders Equity                                                                                                                                                      |  |                                |           |   |                   |   |           |  
|Common stock-no par value per share; 50,000,000 shares authorized; 22,029,645 and 21,229,545 shares outstanding at September 30, 2005 and
December 31, 2004, respectively |  |                                | 163,656   |   |                   |   | 161,517   |  
|Treasury stock, at cost, 564,082 shares at September 30, 2005 and December 31, 2004                                                                                       |  |                                | (8,789    | ) |                   |   | (8,789    | )
|Retained earnings                                                                                                                                                         |  |                                | 140,395   |   |                   |   | 126,448   |  
|Accumulated other comprehensive loss, net of tax                                                                                                                          |  |                                | (3,412    | ) |                   |   | (213      | )
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  
|Total shareholders equity                                                                                                                                                |  |                                | 291,850   |   |                   |   | 278,963   |  
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  
|Total liabilities and shareholders equity                                                                                                                                |  | $                              | 2,473,567 |   |                   | $ | 2,326,442 |  
|                                                                                                                                                                          |  |                                |           |   |                   |   |           |  



See accompanying
notes to consolidated financial statements



3



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Income

(dollars and shares in thousands except per share data)



|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|---------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                     |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|                                                     |  | 2005                            |        |                                | 2004 |   | 2005   |  |   | 2004   
|                                                     |  | (unaudited)                     |        | (unaudited)                   
|Interest income:                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Loans, including fees                                |  | $                               | 33,102 |                                |      | $ | 26,736 |  | $ | 94,808  |   |  | $ | 76,991
|Investment securities:                               |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Taxable                                              |  |                                 | 2,996  |                                |      |   | 2,498  |  |   | 8,505   |   |  |   | 7,107 
|Non-taxable                                          |  |                                 | 360    |                                |      |   | 365    |  |   | 1,040   |   |  |   | 1,172 
|Federal funds sold and other short-term investments  |  |                                 | 4      |                                |      |   | 9      |  |   | 79      |   |  |   | 43    
|Interest-bearing deposits in banks                   |  |                                 | 18     |                                |      |   | 6      |  |   | 42      |   |  |   | 15    
|Other investments                                    |  |                                 | 298    |                                |      |   | 238    |  |   | 725     |   |  |   | 682   
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Total interest income                                |  |                                 | 36,778 |                                |      |   | 29,852 |  |   | 105,199 |   |  |   | 86,010
|Interest expense:                                    |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Interest-bearing demand and money market             |  |                                 | 3,576  |                                |      |   | 1,765  |  |   | 10,720  |   |  |   | 4,916 
|Savings                                              |  |                                 | 69     |                                |      |   | 62     |  |   | 197     |   |  |   | 224   
|Time deposits                                        |  |                                 | 6,605  |                                |      |   | 4,757  |  |   | 17,546  |   |  |   | 13,690
|Other time deposits                                  |  |                                 | 44     |                                |      |   | 185    |  |   | 128     |   |  |   | 305   
|Federal funds purchased and repurchase agreements    |  |                                 | 1,289  |                                |      |   | 737    |  |   | 2,613   |   |  |   | 1,702 
|Federal Home Loan Bank advances                      |  |                                 | 1,568  |                                |      |   | 876    |  |   | 4,202   |   |  |   | 2,407 
|Interest expense on junior subordinated debentures   |  |                                 | 888    |                                |      |   | 637    |  |   | 2,463   |   |  |   | 1,787 
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Total interest expense                               |  |                                 | 14,039 |                                |      |   | 9,019  |  |   | 37,869  |   |  |   | 25,031
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Net interest income                                  |  |                                 | 22,739 |                                |      |   | 20,833 |  |   | 67,330  |   |  |   | 60,979
|Provision for loan losses                            |  |                                 | 790    |                                |      |   | 1,603  |  |   | 7,049   |   |  |   | 4,474 
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Net interest income after provision for loan losses  |  |                                 | 21,949 |                                |      |   | 19,230 |  |   | 60,281  |   |  |   | 56,505
|Non-interest income:                                 |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Service charges on deposit accounts                  |  |                                 | 2,229  |                                |      |   | 2,165  |  |   | 6,278   |   |  |   | 6,069 
|Other customer service fees                          |  |                                 | 405    |                                |      |   | 277    |  |   | 1,107   |   |  |   | 986   
|Mortgage banking income                              |  |                                 | 706    |                                |      |   | 810    |  |   | 2,079   |   |  |   | 2,552 
|Investment agency commissions                        |  |                                 | 68     |                                |      |   | 134    |  |   | 617     |   |  |   | 634   
|Insurance agency income                              |  |                                 | 2,628  |                                |      |   | 2,515  |  |   | 8,151   |   |  |   | 7,657 
|Income from SBA lending                              |  |                                 | 1,039  |                                |      |   | 1,270  |  |   | 3,407   |   |  |   | 2,124 
|Income on bank owned life insurance                  |  |                                 | 705    |                                |      |   | 522    |  |   | 1,920   |   |  |   | 1,903 
|Investment securities (losses) gains, net            |  |                                 | (272   | )                              |      |   | 317    |  |   | (25     | ) |  |   | 1,170 
|Other income                                         |  |                                 | 178    |                                |      |   | 217    |  |   | 563     |   |  |   | 1,129 
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Total non-interest income                            |  |                                 | 7,686  |                                |      |   | 8,227  |  |   | 24,097  |   |  |   | 24,224
|Non-interest expense:                                |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Salaries and other compensation                      |  |                                 | 8,856  |                                |      |   | 8,000  |  |   | 25,137  |   |  |   | 23,729
|Employee benefits                                    |  |                                 | 1,394  |                                |      |   | 1,170  |  |   | 4,312   |   |  |   | 4,330 
|Net occupancy and equipment expense                  |  |                                 | 2,089  |                                |      |   | 2,091  |  |   | 6,255   |   |  |   | 6,159 
|Data processing fees                                 |  |                                 | 546    |                                |      |   | 326    |  |   | 1,551   |   |  |   | 1,106 
|Professional services                                |  |                                 | 690    |                                |      |   | 716    |  |   | 1,988   |   |  |   | 1,934 
|Communications & supplies                            |  |                                 | 958    |                                |      |   | 1,027  |  |   | 2,908   |   |  |   | 3,106 
|Marketing expense                                    |  |                                 | 270    |                                |      |   | 347    |  |   | 812     |   |  |   | 1,074 
|Regulatory agency assessments                        |  |                                 | 103    |                                |      |   | 196    |  |   | 315     |   |  |   | 383   
|Amortization of intangible assets                    |  |                                 | 131    |                                |      |   | 122    |  |   | 390     |   |  |   | 385   
|Other expense                                        |  |                                 | 2,195  |                                |      |   | 1,904  |  |   | 7,090   |   |  |   | 6,145 
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Total non-interest expense                           |  |                                 | 17,232 |                                |      |   | 15,899 |  |   | 50,758  |   |  |   | 48,351
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Income before income taxes                           |  |                                 | 12,403 |                                |      |   | 11,558 |  |   | 33,620  |   |  |   | 32,378
|Income tax expense                                   |  |                                 | 3,865  |                                |      |   | 3,294  |  |   | 11,093  |   |  |   | 9,126 
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|Net income                                           |  | $                               | 8,538  |                                |      | $ | 8,264  |  | $ | 22,527  |   |  | $ | 23,252
|                                                     |  |                                 |        |                                |      |   |        |  |   |         |   |  |   |       
|                                                     |  |                                 |        |                               
|Earnings per share - Basic                           |  | $                               | 0.40   |                                |      | $ | 0.43   |  | $ | 1.05    |   |  | $ | 1.20  
|Earnings per share - Diluted                         |  | $                               | 0.39   |                                |      | $ | 0.41   |  | $ | 1.03    |   |  | $ | 1.16  
|Dividends declared per share                         |  | $                               | 0.1525 |                                |      | $ | 0.1350 |  | $ | 0.4575  |   |  | $ | 0.4050
|Weighted average common shares outstanding - Basic   |  |                                 | 21,432 |                                |      |   | 19,428 |  |   | 21,362  |   |  |   | 19,354
|Weighted average common shares outstanding - Diluted |  |                                 | 21,972 |                                |      |   | 20,016 |  |   | 21,801  |   |  |   | 19,972



See accompanying
notes to consolidated financial statements



4



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Comprehensive Income

(dollars in thousands)



|                                                                               |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |        |  
|------------------------------------------------------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------ | ----------------- |  | - | ----------------- | - |  | - | ------ | -
|                                                                               |  | Three Months Ended |        |   | Nine Months Ended |  
|                                                                               |  | September 30,2005  |        |   | September 30,2004 |   |        | September 30,2005 |  |   | September 30,2004 |  
|                                                                               |  | (unaudited)        |       
|Net income                                                                     |  | $                  | 8,538  |   |                   | $ | 8,264  |                   |  | $ | 22,527            |   |  | $ | 23,252 |  
|                                                                               |  |                    |        |  
|Other comprehensive income, net of tax:                                        |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |        |  
|Unrealized (losses) gains on securities available for sale                     |  |                    | (1,687 | ) |                   |   | 3,278  |                   |  |   | (2,775            | ) |  |   | (872   | )
|Unrealized (losses) gains on derivative contracts                              |  |                    | (62    | ) |                   |   | 892    |                   |  |   | (441              | ) |  |   | (1,077 | )
|Less reclassification adjustment for net gains (losses) included in net income |  |                    | 180    |   |                   |   | (209   | )                 |  |   | 17                |   |  |   | (772   | )
|                                                                               |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |        |  
|Comprehensive income                                                           |  | $                  | 6,969  |   |                   | $ | 12,225 |                   |  | $ | 19,328            |   |  | $ | 20,531 |  
|                                                                               |  |                    |        |   |                   |   |        |                   |  |   |                   |   |  |   |        |  



See accompanying
notes to consolidated financial statements



5



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)



|                                                                                  |  |                                 |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Nine months ended September 30, |         
|                                                                                  |  | 2005                            |          |   | 2004 |  
|                                                                                  |  | (Unaudited)                     |         
|Operating activities                                                              |  |                                 |          |   |      |   |          |  
|Net income                                                                        |  | $                               | 22,527   |   |      |   | 23,252   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |          |   |      |   |          |  
|Provision for loan losses                                                         |  |                                 | 7,049    |   |      |   | 4,474    |  
|Depreciation and amortization of premises and equipment                           |  |                                 | 2,844    |   |      |   | 2,922    |  
|Amortization of intangible assets                                                 |  |                                 | 390      |   |      |   | 385      |  
|Loss on sales of other real estate                                                |  |                                 | 446      |   |      |   | 454      |  
|Investment securities losses (gains), net                                         |  |                                 | 25       |   |      |   | (1,170   | )
|Net amortization of investment securities                                         |  |                                 | 729      |   |      |   | 1,027    |  
|Net accretion of loans purchased                                                  |  |                                 | (11      | ) |      |   | (132     | )
|Loss on sales of premises and equipment                                           |  |                                 | 721      |   |      |   | 473      |  
|Net change in mortgage loans held for sale                                        |  |                                 | (2,556   | ) |      |   | (1,261   | )
|Gain on mortgage loan sales                                                       |  |                                 | (823     | ) |      |   | (989     | )
|Gains on sales of SBA loans                                                       |  |                                 | (2,603   | ) |      |   | (2,124   | )
|Deferred income tax provision                                                     |  |                                 | (59      | ) |      |   | 1,442    |  
|Deferred net loan fees (cost amortization)                                        |  |                                 | (114     | ) |      |   | (1,749   | )
|Vesting in restricted stock award plan                                            |  |                                 | 522      |   |      |   | 549      |  
|Changes in operating assets and liabilities:                                      |  |                                 |          |   |      |   |          |  
|Increase in accrued interest receivable                                           |  |                                 | (387     | ) |      |   | (1,061   | )
|Increase cash surrender value of bank-owned life insurance                        |  |                                 | (1,920   | ) |      |   | (755     | )
|Increase in accrued interest payable                                              |  |                                 | 1,197    |   |      |   | 468      |  
|Increase in other assets                                                          |  |                                 | (139     | ) |      |   | (3,103   | )
|Other                                                                             |  |                                 | (1,697   | ) |      |   | 3,308    |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  | $                               | 26,141   |   |      |   | 26,410   |  
|Investing activities                                                              |  |                                 |          |   |      |   |          |  
|Purchases of investment securities available for sale                             |  |                                 | (79,717  | ) |      |   | (123,645 | )
|Purchases of investment securities held to maturity                               |  |                                 | (4,700   | ) |      |   | (1,210   | )
|Maturities and calls of investment securities held to maturity                    |  |                                 | 1,306    |   |      |   |         |  
|Decrease (increase) in other investments                                          |  |                                 | 4,783    |   |      |   | (3,389   | )
|Maturities, paydowns and calls of investment securities available for sale        |  |                                 | 34,681   |   |      |   | 30,528   |  
|Proceeds from sales of investment securities available for sale                   |  |                                 | 29,445   |   |      |   | 54,345   |  
|Net increase in loans funded                                                      |  |                                 | (105,684 | ) |      |   | (210,290 | )
|Purchase of bank-owned life insurance                                             |  |                                 | (15,000  | ) |      |   | (5,000   | )
|Purchases of premises and equipment                                               |  |                                 | (3,277   | ) |      |   | (13,349  | )
|Proceeds from sales of premises and equipment                                     |  |                                 | 555      |   |      |   | 106      |  
|Proceeds from sales of other real estate                                          |  |                                 | 1,967    |   |      |   | 1,612    |  
|Improvements to other real estate                                                 |  |                                 | (727     | ) |      |   | (175     | )
|Net cash paid for acquisitions                                                    |  |                                 | (200     | ) |      |   |         |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash used in investing activities                                             |  | $                               | (136,568 | ) |      |   | (270,467 | )
|Financing activities                                                              |  |                                 |          |   |      |   |          |  
|Net increase in demand and savings accounts                                       |  |                                 | 22,418   |   |      |   | 107,236  |  
|Increase in time deposits                                                         |  |                                 | 37,332   |   |      |   | 64,647   |  
|Increase in Federal Funds purchased                                               |  |                                 | 73,821   |   |      |   | 2,333    |  
|(Decrease) increase in Federal Home Loan Bank advances                            |  |                                 | (2,901   | ) |      |   | 84,599   |  
|Dividends paid                                                                    |  |                                 | (9,118   | ) |      |   | (7,833   | )
|Proceeds from issuance of common stock                                            |  |                                 | 1,994    |   |      |   | 1,582    |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  | $                               | 123,546  |   |      |   | 252,564  |  
|Net increase in cash and cash equivalents                                         |  |                                 | 13,119   |   |      |   | 8,507    |  
|Cash and cash equivalents at beginning of period                                  |  |                                 | 71,221   |   |      |   | 72,680   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                               | 84,340   |   |      | $ | 81,187   |  
|                                                                                  |  |                                 |          |   |      |   |          |  
|Supplemental disclosures of cash flow information                                 |  |                                 |          |   |      |   |          |  
|Cash paid during the period for:                                                  |  |                                 |          |   |      |   |          |  
|Interest                                                                          |  | $                               | 36,672   |   |      | $ | 17,864   |  
|Income taxes                                                                      |  |                                 | 8,901    |   |      |   | 10,226   |  
|Supplemental disclosures of noncash transactions                                  |  |                                 |          |   |      |   |          |  
|Loans transferred to other real estate acquired through foreclosure               |  | $                               | 5,443    |   |      | $ | 3,857    |  



See accompanying
notes to consolidated financial statements



6



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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 intercompany transactions and balances have been eliminated in consolidation.



The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with U.S. generally accepted accounting
principles, 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 and nine month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005, or for any other period. These
financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2004, 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 - Acquisition



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 acquisition 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.
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 2005. 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 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 the 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  
|                          |  |   |      



During the nine months
ended September 30, 2005, MSII booked an additional $0.3 million in goodwill as a result of the earn-out provision.



7



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##### Table of Contents

Note C  Other Accounting Matters



The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 123 (Revised 2004) (SFAS No. 123R), Share-Based Payment, in December 2004. SFAS No. 123R is a revision of FASB Statement 123, Accounting for
Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award.



In April 2005, the Securities and Exchange Commission (SEC) announced that it would provide for a phased-in implementation process for SFAS
No. 123R. The SEC would require that registrants adopt Statement 123Rs fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after September 15, 2005. The
Company has elected to adopt SFAS No. 123R beginning in January 2006. The adoption of this statement is expected to reduce net income in 2006 by approximately $0.7 million or $.03 per share.



Note D - Earnings per Common Share



The Company accounts for earnings per share in accordance with FASB
Statement No. 128, Earnings Per Share. 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 30,2005                            |        | September 30,2004 |   | September 30,2005 |  | September 30,2004
|                                 |  | (Amounts in thousands except per share data)
|Basic and diluted net income     |  | $                                            | 8,538  |                   | $ | 8,264             |  | $                 | 22,527 |  | $ | 23,252
|Basic earnings per share         |  | $                                            | 0.40   |                   | $ | 0.43              |  | $                 | 1.05   |  | $ | 1.20  
|Diluted earnings per share       |  | $                                            | 0.39   |                   | $ | 0.41              |  | $                 | 1.03   |  | $ | 1.16  
|                                 |  |                                              |        |                  
|Basic weighted average shares    |  |                                              | 21,432 |                   |   | 19,428            |  |                   | 21,362 |  |   | 19,354
|Effect of employee stock options |  |                                              | 540    |                   |   | 588               |  |                   | 439    |  |   | 618   
|                                 |  |                                              |        |                   |   |                   |  |                   |        |  |   |       
|Diluted weighted average shares  |  |                                              | 21,972 |                   |   | 20,016            |  |                   | 21,801 |  |   | 19,972



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 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.



8



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##### Table of Contents

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:



|                             |  |                        |         |                  |   |        
|---------------------------- |  | ---------------------- | ------- | ---------------- | - | -------
|                             |  | September 30,2005      |         | December 31,2004
|                             |  | (Dollars in Thousands)
|Commitments to extend credit |  | $                      | 401,314 |                  | $ | 378,386
|Standby letters of credit    |  |                        | 6,305   |                  |   | 7,513  



Note F - Loans



Loans are stated at the principal amounts outstanding
adjusted for purchase premiums / 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 commercial 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 three loans totaling $1.7 million in principal amount during the quarter ended September 30, 2005 subject
to the recourse provision.



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, foreclosed real estate, and other property. It is the 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. On an exception basis the Company will continue to accrue interest on loans
90 days or more past due when collection of both principal and interest is assured by way of sufficient collateral, 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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##### Table of Contents

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



|                                              |  |                        |           |   |                   |   |           |  
|--------------------------------------------- |  | ---------------------- | --------- | - | ----------------- | - | --------- | -
|                                              |  | September 30, 2005     |           |   | December 31, 2004 |  
|                                              |  | (Dollars in thousands) |          
|Loans                                         |  |                        |           |   |                   |   |           |  
|Commercial and industrial                     |  | $                      | 128,193   |   |                   | $ | 127,476   |  
|Real estate construction                      |  |                        | 459,581   |   |                   |   | 401,815   |  
|Residential mortgage                          |  |                        | 286,918   |   |                   |   | 288,703   |  
|Commercial real estate                        |  |                        | 881,887   |   |                   |   | 846,945   |  
|Consumer and other                            |  |                        | 39,125    |   |                   |   | 36,967    |  
|                                              |  |                        |           |   |                   |   |           |  
|Total loans receivable                        |  |                        | 1,795,704 |   |                   |   | 1,701,906 |  
|Less:                                         |  |                        |           |   |                   |   |           |  
|Purchase premium                              |  |                        | 159       |   |                   |   | (527      | )
|Deferred net loan fees                        |  |                        | 3,277     |   |                   |   | 3,390     |  
|Unearned income                               |  |                        |          |   |                   |   | 8         |  
|                                              |  |                        |           |   |                   |   |           |  
|Loans net of unearned income                  |  |                        | 1,792,268 |   |                   |   | 1,699,035 |  
|Allowance for loan losses                     |  |                        | (25,118   | ) |                   |   | (25,191   | )
|                                              |  |                        |           |   |                   |   |           |  
|Loans, net                                    |  | $                      | 1,767,150 |   |                   | $ | 1,673,844 |  
|                                              |  |                        |           |   |                   |   |           |  
|Mortgage loans held for sale                  |  | $                      | 7,119     |   |                   | $ | 4,563     |  
|Composition of loan portfolio as a percentage |  |                        |           |   |                   |   |           |  
|Commercial and industrial                     |  |                        | 7.14      | % |                   |   | 7.49      | %
|Real estate construction                      |  |                        | 25.59     | % |                   |   | 23.61     | %
|Residential mortgage                          |  |                        | 15.98     | % |                   |   | 16.96     | %
|Commercial Real estate                        |  |                        | 49.11     | % |                   |   | 49.76     | %
|Consumer and other                            |  |                        | 2.18      | % |                   |   | 2.18      | %
|                                              |  |                        |           |   |                   |   |           |  
|Total loans receivable                        |  |                        | 100.00    | % |                   |   | 100.00    | %
|                                              |  |                        |           |   |                   |   |           |  



At September 30,
2005 the Company has a remaining market value adjustment on loans that were acquired in the First Colony Bancshares, Inc., acquisition of $0.3 million which is reflected in the loan amounts above. The balance is being amortized monthly.



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. As mentioned in Note C, the company expects to
adopt FAS 123R, a revision of FAS 123, in January 2006.



10



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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 30,2005                    |       |   | September 30,2004 |   |       | September 30,2005 |  |   | September 30,2004 |  
|                                       |  | (in thousands except per share data) |      
|Net income                             |  | $                                    | 8,538 |   |                   | $ | 8,264 |                   |  | $ | 22,527            |   |  | $ | 23,252 |  
|Earnings per share - Basic             |  |                                      | 0.40  |   |                   |   | 0.43  |                   |  |   | 1.05              |   |  |   | 1.20   |  
|Earnings per share - Diluted           |  |                                      | 0.39  |   |                   |   | 0.41  |                   |  |   | 1.03              |   |  |   | 1.16   |  
|Compensation cost - Fair Value         |  |                                      | 363   |   |                   |   | 294   |                   |  |   | 966               |   |  |   | 904    |  
|Less: Tax Effect                       |  |                                      | (20   | ) |                   |   | (14   | )                 |  |   | (54               | ) |  |   | (43    | )
|                                       |  |                                      |       |   |                   |   |       |                   |  |   |                   |   |  |   |        |  
|Net compensation costs - Fair Value    |  |                                      | 343   |   |                   |   | 280   |                   |  |   | 912               |   |  |   | 861    |  
|Net Income, Pro-forma                  |  |                                      | 8,195 |   |                   |   | 7,984 |                   |  |   | 21,615            |   |  |   | 22,391 |  
|Pro-forma earnings per share - Basic   |  |                                      | 0.38  |   |                   |   | 0.41  |                   |  |   | 1.01              |   |  |   | 1.16   |  
|Pro-forma earnings per share - Diluted |  |                                      | 0.37  |   |                   |   | 0.40  |                   |  |   | 0.99              |   |  |   | 1.12   |  



Note H 
Goodwill and Other Intangible Assets



Goodwill is not
amortized, but rather is assessed at least annually for impairment and any such impairment will be recognized in the period identified.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 5 to 15 year periods using the straight-line method.



The Company recognized amortization expense on intangible assets for the
three month periods ending September 30, 2005 and 2004 of $131 thousand and $122 thousand, respectively. Amortization expense for the nine month periods ending September 30, 2005 and 2004 was $390 thousand and $385 thousand, respectively.



Goodwill and other intangible assets at September 30,
2005 and 2004 are as follows:



|                                     |  |                        |         |   |                  |   |         |  
|------------------------------------ |  | ---------------------- | ------- | - | ---------------- | - | ------- | -
|                                     |  | September 30,2005      |         |   | December 31,2004 |  
|                                     |  | (Dollars in thousands) |        
|Goodwill                             |  | $                      | 98,620  |   |                  | $ | 98,300  |  
|Intangible assets                    |  |                        |         |   |                  |   |         |  
|Core deposit intangibles             |  |                        | 1,877   |   |                  |   | 1,877   |  
|Customer intangibles                 |  |                        | 2,612   |   |                  |   | 2,937   |  
|Covenants not to compete             |  |                        | 250     |   |                  |   | 372     |  
|Lease rights                         |  |                        | 248     |   |                  |   | 248     |  
|                                     |  |                        |         |   |                  |   |         |  
|Total goodwill and intangible assets |  |                        | 103,607 |   |                  |   | 103,734 |  
|Accumulated amortization             |  |                        | (1,500  | ) |                  |   | (1,564  | )
|                                     |  |                        |         |   |                  |   |         |  
|Net goodwill and intangible assets   |  | $                      | 102,107 |   |                  | $ | 102,170 |  
|                                     |  |                        |         |   |                  |   |         |  



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##### Table of Contents

Selected Financial Data



The following table sets forth selected unaudited financial data as of and for the three and nine month periods ending
September 30, 2005 and 2004. 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 selected historical financial data as of and for the three and nine month periods ended September 30, 2005 and 2004 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 and nine month periods ended
September 30, 2005 are not necessarily indicative of results on an annualized basis or for any future period.



|                                                |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|----------------------------------------------- |  | ------------------------------------------------ | --------- | - | ------------------------------ | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                |  | Three months endedSeptember 30,                  |           |   | Nine months endedSeptember 30, |  
|                                                |  | 2005                                             |           |   | 2004                           |   |           | 2005 |  |   | 2004      |  
|                                                |  | (unaudited) (in thousands except per share data) |          
|RESULTS OF OPERATIONS                           |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Net interest income                             |  | $                                                | 22,739    |   |                                | $ | 20,833    |      |  | $ | 67,330    |   |  | $ | 60,979    |  
|Net interest income (tax equivalent)            |  |                                                  | 22,924    |   |                                |   | 21,077    |      |  |   | 67,865    |   |  |   | 61,769    |  
|Provision for loan losses                       |  |                                                  | 790       |   |                                |   | 1,603     |      |  |   | 7,049     |   |  |   | 4,474     |  
|Non-interest income                             |  |                                                  | 7,686     |   |                                |   | 8,227     |      |  |   | 24,097    |   |  |   | 24,224    |  
|Non-interest expense                            |  |                                                  | 17,232    |   |                                |   | 15,899    |      |  |   | 50,758    |   |  |   | 48,351    |  
|Net income                                      |  |                                                  | 8,538     |   |                                |   | 8,264     |      |  |   | 22,527    |   |  |   | 23,252    |  
|SELECTED AVERAGE BALANCES                       |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Loans, net of unearned income                   |  | $                                                | 1,767,745 |   |                                | $ | 1,620,436 |      |  | $ | 1,753,001 |   |  | $ | 1,547,700 |  
|Investment securities                           |  |                                                  | 333,343   |   |                                |   | 288,443   |      |  |   | 319,916   |   |  |   | 277,423   |  
|Earning assets                                  |  |                                                  | 2,136,601 |   |                                |   | 1,940,675 |      |  |   | 2,109,418 |   |  |   | 1,862,913 |  
|Total assets                                    |  |                                                  | 2,397,790 |   |                                |   | 2,176,797 |      |  |   | 2,363,720 |   |  |   | 2,089,597 |  
|Deposits                                        |  |                                                  | 1,704,822 |   |                                |   | 1,584,819 |      |  |   | 1,712,191 |   |  |   | 1,532,726 |  
|Shareholders equity                            |  |                                                  | 289,697   |   |                                |   | 218,058   |      |  |   | 284,957   |   |  |   | 214,903   |  
|PERIOD-END BALANCES                             |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Loans, net of unearned income                   |  | $                                                | 1,792,268 |   |                                | $ | 1,653,616 |      |  | $ | 1,792,268 |   |  | $ | 1,653,616 |  
|Earning assets                                  |  |                                                  | 2,188,738 |   |                                |   | 2,003,706 |      |  |   | 2,188,738 |   |  |   | 2,003,706 |  
|Total assets                                    |  |                                                  | 2,473,567 |   |                                |   | 2,258,393 |      |  |   | 2,473,567 |   |  |   | 2,258,393 |  
|Deposits                                        |  |                                                  | 1,769,960 |   |                                |   | 1,630,286 |      |  |   | 1,769,960 |   |  |   | 1,630,286 |  
|Long-term obligations *                         |  |                                                  | 249,716   |   |                                |   | 277,751   |      |  |   | 249,716   |   |  |   | 277,751   |  
|Shareholders equity                            |  |                                                  | 291,850   |   |                                |   | 222,322   |      |  |   | 291,850   |   |  |   | 222,322   |  
|PER COMMON SHARE                                |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Earnings per share - Basic                      |  | $                                                | 0.40      |   |                                | $ | 0.43      |      |  | $ | 1.05      |   |  | $ | 1.20      |  
|Earning per share - Diluted                     |  | $                                                | 0.39      |   |                                | $ | 0.41      |      |  | $ | 1.03      |   |  | $ | 1.16      |  
|Book value per share at end of period           |  | $                                                | 13.60     |   |                                | $ | 11.77     |      |  | $ | 13.60     |   |  | $ | 11.77     |  
|End of period shares outstanding                |  |                                                  | 21,465    |   |                                |   | 18,894    |      |  |   | 21,465    |   |  |   | 18,894    |  
|Weighted average shares outstanding             |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Basic                                           |  |                                                  | 21,432    |   |                                |   | 19,428    |      |  |   | 21,362    |   |  |   | 19,354    |  
|Diluted                                         |  |                                                  | 21,972    |   |                                |   | 20,016    |      |  |   | 21,801    |   |  |   | 19,972    |  
|STOCK PERFORMANCE                               |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Market Price:                                   |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Closing                                         |  | $                                                | 26.80     |   |                                | $ | 30.60     |      |  | $ | 26.80     |   |  | $ | 30.60     |  
|High                                            |  |                                                  | 28.50     |   |                                |   | 30.60     |      |  |   | 35.34     |   |  |   | 30.60     |  
|Low                                             |  |                                                  | 25.05     |   |                                |   | 26.46     |      |  |   | 21.95     |   |  |   | 24.90     |  
|Trading volume                                  |  |                                                  | 2,789     |   |                                |   | 1,755     |      |  |   | 10,855    |   |  |   | 5,469     |  
|Cash dividends per share                        |  | $                                                | 0.1525    |   |                                | $ | 0.1350    |      |  | $ | 0.4575    |   |  | $ | 0.4050    |  
|Dividend payout ratio                           |  |                                                  | 39.10     | % |                                |   | 32.93     | %    |  |   | 44.42     | % |  |   | 34.91     | %
|Price to trailing twelve months earnings        |  |                                                  | 19.00     |   |                                |   | 16.86     |      |  |   | 18.60     |   |  |   | 16.86     |  
|Price to book value                             |  |                                                  | 1.97      |   |                                |   | 2.60      |      |  |   | 1.97      |   |  |   | 2.60      |  
|PERFORMANCE RATIOS                              |  |                                                  |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|Return on average assets                        |  |                                                  | 1.42      | % |                                |   | 1.52      | %    |  |   | 1.27      | % |  |   | 1.49      | %
|Return on average equity                        |  |                                                  | 11.79     | % |                                |   | 15.16     | %    |  |   | 10.54     | % |  |   | 14.47     | %
|Average loans as percentage of average deposits |  |                                                  | 103.69    | % |                                |   | 102.25    | %    |  |   | 102.38    | % |  |   | 100.98    | %
|Net interest margin (tax equivalent)            |  |                                                  | 4.26      | % |                                |   | 4.31      | %    |  |   | 4.30      | % |  |   | 4.43      | %
|Average equity to average assets                |  |                                                  | 12.08     | % |                                |   | 10.02     | %    |  |   | 12.06     | % |  |   | 10.28     | %
|Efficiency ratio                                |  |                                                  | 56.64     | % |                                |   | 54.71     | %    |  |   | 55.52     | % |  |   | 56.75     | %

---

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



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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, 2005 as compared to December 31, 2004 and operating results for the three and nine month periods ended September 30, 2005 as
compared to the three and nine month periods ended September 30, 2004. 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 $147.1 million or 6.3% since
December 2004. Loans increased 5.6% or $93.3 million since December 2004, primarily in commercial real estate and real estate construction loans. Total deposits increased by 3.5% or $59.8 million due to a campaign for checking accounts.



Net income was $8.5 million for the three months ended September 30,
2005 compared to $8.3 million in the third quarter of 2004. Diluted earnings per share for the third quarter of 2005 were $0.39 versus $0.41 for the third quarter of 2004. Net income for the nine months ended September 30, 2005 was $22.5
million compared to $23.3 million in the same period of 2004. Diluted earnings per share for the nine months ended September 30, 2005 were $1.03 versus $1.16 for the nine months ended September 30, 2004.



Return on average equity for the three and nine months ended
September 30, 2005 was 11.79% and 10.54% on average equity of $289.7 million and $285.0 million, respectively. This compares to 15.16% and 14.47% on average equity of $218.1 million and $214.9 million for the same period in 2004. Return on
average assets for the three and nine months ended September 30, 2005 was 1.42% and 1.27%. This compares to 1.52% and 1.49% for the same period in 2004.



Summary



During the first nine months of 2005 there have been several events that occurred that had an impact on the financial performance of the Company:



Elevated charge-offs in a problem loan
portfolio - The Company performed a comprehensive review of a problem loan portfolio originated by a former lending officer. This problem portfolio was first identified and announced in November 2004. With the assistance of a nationally
recognized auditing and consulting firm, the Company conducted a review and identified $4.0 million in charge-offs in the problem portfolio that were charged-off in the first and second quarters of 2005.



Write-off of assets - The Company combined the operations of
its loan settlement services subsidiary, Piedmont Settlement Services, including the staff and systems, into the Bank to aid in the centralization of consumer loan document preparation and to improve corporate efficiency. The associated assets in
this subsidiary were written off in the second quarter. The Company recognized a loss of $0.4 million during the second quarter of 2005.



The Companys first quarter results were also impacted by a $0.5 million loss for the replacement of a banking center in Conyers, Georgia. This
center was demolished to provide for the opening of a newly constructed full-service banking center.



Additional income tax expenses  Based upon an analysis of its income tax position, the Companys income tax expense includes an
additional income tax provision of $0.6 million in the second quarter. The Company expects its effective tax rate to be approximately 31% for the remainder of 2005.



Sale of 504 SBA loans - Income from SBA lending was higher than normal due to the sale, in the second quarter
of 2005, of $10.2 million in loans from the SBA 504 program. Loans originated under this program are initially retained by the Company and are periodically sold in bulk after certain seasoning requirements. The Company recognized a net gain on this
sale of $0.5 million.



High Performance Checking
campaign - The Companys free consumer checking program, High Performance Checking, was launched in late March 2005 and is enhancing growth in checking balances and fee income. During 2005, the Company continued to emphasize low cost
core deposits through its High Performance Checking program.



Increased professional services expense  The Company has incurred $0.4 million in additional professional services expense related to accounting, legal and consultant services. These services were necessary to complete
the review of the problem loan portfolio, an income tax review, and to aid in the remediation of material weaknesses identified during the Companys assessment of compliance with the requirements of internal control reporting and Sarbanes-Oxley
Section 404. Such expenses should continue, at a lower rate, in the fourth quarter.



13



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##### Table of Contents

Purchase of additional BOLI During the first quarter of 2005 the Company purchased
$15.0 million in additional Bank Owned Life Insurance. It is estimated that this transaction will generate an additional $0.6 million in revenue in 2005 that will be used to fund employee benefit programs.



Results of Operations for the Three Months Ended September 30, 2005 and 2004



Interest Income



Interest income for the three months ended September 30, 2005 was $36.8
million, an increase of $6.9 million, or 23.2% compared to $29.9 million for the same period in 2004. Average earning assets for the three month period increased $195.9 million, or 10.1% to $2.1 billion as of September 30, 2005 compared to $1.9
billion as of September 30, 2004. Yield on earning assets increased 74 basis points to 6.89% from 6.15% between the quarters ended September 30, 2005 and 2004, as a result of rising interest rates and asset pricing discipline.



Interest Expense



Interest expense on deposits and other borrowings for the three months ended
September 30, 2005 was $14.0 million, representing a $5.0 million, or 56.4% increase from the three months ended September 30, 2004. While average interest bearing liabilities increased $143 million, or 8.4% to $1.8 billion for the three
months ended September 30, 2005 compared to $1.7 billion for the three months ended September 30, 2004, the rate on average interest bearing liabilities increased 91basis points to 3.02% for the third quarter of 2005 from 2.11% for the
third quarter of 2004. The increase is due to rising interest rates on all funding sources and competition in the Atlanta market for deposits.



Net Interest Income



Net interest income for the three months ended September 30, 2005 increased $1.9 million, or 9.1% to $22.7 million compared to $20.8 million for the
same period ending September 30, 2004. The increase was mainly attributable to growth in balances, improved asset pricing, and wider spreads on core deposit funding. The Companys net interest margin decreased to 4.26% for the three months
ended September 30, 2005 compared to 4.31% for the three months ended September 30, 2004.



Provision for Loan Losses



The provision for loan losses was $0.8 million for the three months ended September 30, 2005 as compared to $1.6 million for the three months ended
September 30, 2004. The lower provision was primarily due to lower net charge offs and a reduction in the allowance for loan losses to 1.4% of loans as called for by the methodology used internally to estimate the appropriate level for the
allowance. The Executive Review Committee monitors quality asset indicators to determine the adequacy of the loan loss reserve. 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 and related specific reserves, concentrations of loans to specific borrowers or industries and current economic conditions. Management believes that the allowance for loan
losses was adequate at September 30, 2005.



Non-interest Income



Non-interest
income was $7.7 million for the three months ended September 30, 2005, a decrease of $0.5 million, or 6.6% compared to $8.2 million for the three months ended September 30, 2004. The decrease is due primarily to the impact of a loss on the
sale of securities of $0.3 million for the quarter, compared to a gain of $0.3 million for the three months ending September 30, 2004.



Non-interest Expense



Non-interest expense increased $1.3 million or 8.4% to $17.2 million from $15.9 million for the three months ended September 30, 2005 and 2004,
respectively. Salaries were $8.9 million, an increase of $0.9 million, or 10.7% from the three months ended September 30, 2004. The Companys full-time equivalent employees increased by 27 to 528 as of September 30, 2005 from 501 as
of September 30, 2004. The Companys efficiency ratio was 56.6% for the three months ended September 30, 2005 compared to 54.7% for the three months ended September 30, 2004.



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 nondeductible expenses. For the three months ended September 30, 2005 and 2004, the provision for taxes was $3.9 million and $3.3 million, respectively. The effective tax rate for the
three months ended September 30, 2005 was 31.2% compared to 28.5% for the same period in 2004. This effective rate increase is due to changes in the level of tax-advantaged loans and investments and is impacted by federal and state tax planning
strategies.



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##### Table of Contents

Results of Operations for the Nine Months Ended September 30, 2005 and 2004



Interest Income



Interest income for the nine months ended September 30, 2005 was $105.2
million, an increase of $19.2 million, or 22.3% compared to $86.0 million for the same period in 2004. Average earning assets for the nine month period ending September 30, 2005 increased $246.5 million, or 13.2% to $2.1 billion compared to
$1.9 billion for the nine month period ending September 30, 2004. Yield on average earning assets increased 49 basis points to 6.65% from 6.16% between the nine month periods ended September 30, 2005 and 2004, as a result of rising
interest rates and asset pricing discipline.



Interest
Expense



Interest expense on deposits and other
borrowings for the nine months ended September 30, 2005 was $37.9 million, a $12.8 million, or 51.3% increase from September 30, 2004. While average interest bearing liabilities increased $190.0 million, or 10.5% to $1.8 billion for the
nine months ended September 30, 2005 compared to $1.6 billion for the nine months ended September 30, 2004, the cost of average interest bearing liabilities increased 73 basis points to 2.78% from 2.05%. The increase is due primarily to
rising interest rates on all funding sources and competition in the Atlanta market for deposits.



Net Interest Income



Net interest income for the nine months ended September 30, 2005 increased $6.4 million, or 10.4% to $67.3 million, compared to $61.0 million for the
same period ending September 30, 2004. The increase was mainly attributable to growth in balances, improved asset pricing and wider spreads on core deposit funding. The Companys net interest margin decreased to 4.30% for the nine months
ended September 30, 2005 compared to 4.43% as of September 30, 2004.



Provision for Loan Losses



The provision for loan losses was $7.0 million for the nine months ended September 30, 2005 compared to $4.5 million for the nine months ended September 30, 2004. The increase was primarily due to
identification of additional impairment in a former loan officers portfolio and loan growth offset in part by a reduction in the allowance for loan losses to 1.4% of loans as called for by the methodology used internally to estimate the
appropriate level for the allowance. The Executive Review Committee monitors asset quality indicators to determine the adequacy of the loan loss reserve. 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 and related specific reserves, concentrations of loans to specific borrowers or industries and current economic conditions. Management believes
that the allowance for loan losses was adequate at September 30, 2005.



Non-interest Income



Non-interest income was $24.1 million for the nine months ended September 30, 2005 as compared to $24.2 million for the nine months ended September 30, 2004. Insurance agency income increased $0.5 million, or 6.5% to $8.2 million
from $7.7 million for the nine months ended September 30, 2005 and 2004, respectively. The income from the sale of SBA loans increased $1.3 million, or 60.4% to $3.4 million from $2.1 million for the nine months ended September 30, 2005
and 2004, respectively. These increases were offset by higher losses on the sale of securities and a decrease in mortgage banking income. Securities gains were $1.2 million for the nine months ending September 30, 2004 as compared to a de
minimus loss for the same period in 2005. Mortgage banking income decreased $0.5 million or 18.5% from $2.6 million to $2.1 million for the nine months ended September 30, 2005 and 2004, respectively.



Non-interest Expense



Non-interest expense increased $2.4 million or 5.0% to $50.8 million from
$48.4 million for the nine months ended September 30, 2005 and 2004, respectively. Salaries were $25.1 million, an increase of $1.4 million, or 5.9% from the nine months ended September 30, 2004. The Companys efficiency ratio was
55.5% for the nine months ended September 30, 2005 compared to 56.8% for the nine months ended September 30, 2004.



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 nondeductible expenses.
For the nine months ended September 30, 2005 and 2004, the provision for taxes was $11.1 million and $9.1 million, respectively. The effective tax rate for the nine months ended September 30, 2005 was 33.0% compared to 28.2% for the same
period in 2004. This effective rate increase is due to changes in the level of tax-advantaged loans and investments and is impacted by federal and state tax planning strategies.



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##### Table of Contents

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.



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 total capital to total
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 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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##### Table of Contents

At September 30, 2005, 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, 2005 to the minimum and well-capitalized regulatory standards:



|                           |  |         |   |  |       |   |  |                  |     |  |                  |  
|-------------------------- |  | ------- | - |  | ----- | - |  | ---------------- | --- |  | ---------------- | -
|                           |  | Company |   |  | Bank  |   |  | Minimum Required |     |  | Well Capitalized |  
|Leverage ratio             |  | 10.59   | % |  | 10.06 | % |  | 4.00             | %   |  | 5.00             | %
|Risk based capital ratios: |  |         |   |  |       |   |  |                  |     |  |                  |  
|Tier 1 risk based capital  |  | 12.20   | % |  | 11.67 | % |  | 4.00             | % * |  | 6.00             | %
|Total risk-based capital   |  | 13.45   | % |  | 12.92 | % |  | 8.00             | %   |  | 10.00            | %

---

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



Non-Performing Assets



Nonperforming assets include loans classified as non-accrual or renegotiated, foreclosed real estate and other property. 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 non-accrual 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.



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 90 days or more past due 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, 2005. 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 increased by $2.5 million to $17.0 million as of
September 30, 2005 as compared to December 31, 2004. The increase was attributable to loans made by a former loan officer and several smaller relationships that are generally well-secured by real estate in accordance with bank policy. The
collateral securing these loans is currently being sold or is in the process of foreclosure.



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##### Table of Contents

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



|                                                                                            |  |                        |        |   |                   |   |        |  
|------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ----------------- | - | ------ | -
|                                                                                            |  | September 30, 2005     |        |   | December 31, 2004 |  
|                                                                                            |  | (Dollars in thousands) |       
|Non-performing assets                                                                       |  |                        |       
|Non-accrual loans                                                                           |  |                        |        |   |                   |   |        |  
|Commercial and industrial                                                                   |  | $                      | 860    |   |                   | $ | 3,405  |  
|Real estate - construction                                                                  |  |                        | 725    |   |                   |   | 2,069  |  
|Real estate - mortgage                                                                      |  |                        | 3,266  |   |                   |   | 2,892  |  
|Commercial real estate                                                                      |  |                        | 6,161  |   |                   |   | 3,844  |  
|Consumer and other                                                                          |  |                        | 53     |   |                   |   | 45     |  
|Other real estate and repossessions                                                         |  |                        | 5,898  |   |                   |   | 2,166  |  
|                                                                                            |  |                        |        |   |                   |   |        |  
|Total non-performing assets                                                                 |  | $                      | 16,963 |   |                   | $ | 14,421 |  
|Loans past due 90 days or more and still accruing                                           |  | $                      | 3,551  |   |                   | $ | 5,658  |  
|Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income |  |                        | 0.20   | % |                   |   | 0.34   | %
|Ratio of non-performing assets to loans, net of unearned income and other real estate       |  |                        | 0.62   | % |                   |   | 0.85   | %



Loans and Allowance
for Loan Losses



At September 30, 2005, loans, net of
unearned income, were $1.8 billion, an increase of $93 million or 5.5% over net loans at December 31, 2004 of $1.7 billion. The growth in the loan portfolio was attributable to a consistent focus on quality loan production and strong loan
markets in our markets. Residential mortgage and commercial real estate loans increased $33.2 million or 2.9% from December 31, 2004 while real estate construction loans increased $57.8 million or 14.4%, 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 allowance 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 ensure 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.



18



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##### Table of Contents

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, 2005, net charge-offs totaled $7.1 million or .54% (annualized) of average loans outstanding for the
period, net of unearned income, compared to $1.4 million or .11% (annualized) in net charge-offs for the same period in 2004. The provision for loan losses for the nine months ended September 30, 2005 was $7.0 million compared to $4.5 million
for the same period in 2004. The allowance for loan losses totaled $25.1 million or 1.40% of total loans, net of unearned income at September 30, 2005, compared to $25.2 million or 1.48% of total loans at December 31, 2004. In its loan
loss reserve analysis, the Company establishes specific reserves for its large criticized loan relationships. During the first nine months of 2005, the Company took charge-offs against several loans that had large specific reserves established in
the fourth quarter of 2004. These charge-offs were concentrated in a problem loan portfolio extended by a loan officer who is no longer employed by the Company. The Companys percentage of loans in a criticized status has otherwise been stable
and is consistent with prior years. Economic conditions in the Companys market area continue to be favorable. Based on these factors and the elimination of large specific reserves through loan charge-offs, the Companys allowance for loan
losses as a percentage of loans declined.



The following table
presents an analysis of the allowance for loan losses for the nine-month periods ended September 30, 2005 and 2004:



|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | ------ | - |  | - | ------ | - |  | ------ | -
|                                                                         |  | Nine Months Ended September 30, |       
|                                                                         |  | 2005                            |        |   | 2004 |       
|                                                                         |  | (Dollars in thousands)          |       
|Balance of allowance for loan losses at beginning of period              |  | $                               | 25,191 |   |      |        |   |  | $ | 21,152 |   |  |        |  
|Provision charged to operating expense                                   |  |                                 | 7,049  |   |      |        |   |  |   | 4,474  |   |  |        |  
|Charge-offs:                                                             |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Commercial and industrial                                                |  |                                 | 2,937  |   |      | 33.18  | % |  |   | 501    |   |  | 20.78  | %
|Real estate - construction                                               |  |                                 | 157    |   |      | 1.77   | % |  |   | 503    |   |  | 20.86  | %
|Real estate - mortgage                                                   |  |                                 | 2,505  |   |      | 28.30  | % |  |   | 342    |   |  | 14.18  | %
|Real estate - other                                                      |  |                                 | 2,333  |   |      | 26.35  | % |  |   | 92     |   |  | 3.82   | %
|Consumer and other                                                       |  |                                 | 921    |   |      | 10.40  | % |  |   | 973    |   |  | 40.36  | %
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Total charge-offs                                                        |  |                                 | 8,853  |   |      | 100.00 | % |  |   | 2,411  |   |  | 100.00 | %
|Recoveries:                                                              |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Commercial and industrial                                                |  |                                 | 587    |   |      | 33.91  | % |  |   | 363    |   |  | 34.87  | %
|Real estate - construction                                               |  |                                 | 34     |   |      | 1.96   | % |  |   | 50     |   |  | 4.80   | %
|Real estate - mortgage                                                   |  |                                 | 584    |   |      | 33.74  | % |  |   | 179    |   |  | 17.20  | %
|Real estate - other                                                      |  |                                 | 269    |   |      | 15.54  | % |  |   | 32     |   |  | 3.07   | %
|Consumer and other                                                       |  |                                 | 257    |   |      | 14.85  | % |  |   | 417    |   |  | 40.06  | %
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Total recoveries                                                         |  |                                 | 1,731  |   |      | 100.00 | % |  |   | 1,041  |   |  | 100.00 | %
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Net charge-offs                                                          |  |                                 | 7,122  |   |      |        |   |  |   | 1,370  |   |  |        |  
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Balance of allowance for loan losses at end of period                    |  | $                               | 25,118 |   |      |        |   |  | $ | 24,256 |   |  |        |  
|                                                                         |  |                                 |        |   |      |        |   |  |   |        |   |  |        |  
|Net annualized charge-offs (recoveries) as a percentage of average loans |  |                                 | 0.54   | % |      |        |   |  |   | 0.11   | % |  |        |  
|Reserve for loan losses as a percentage of loans at end of period        |  |                                 | 1.40   | % |      |        |   |  |   | 1.43   | % |  |        |  



19



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##### Table of Contents

Interest Rate Sensitivity and Liquidity



Asset Liability Management



The Companys primary market risk exposures are credit (as discussed previously), interest rate risk and liquidity
risk. The Company operates under an Asset Liability and Risk Management policy created by the Asset and Liability Committee (ALCO) and approved by the Board of Directors. The policy outlines limits on interest rate risk in terms of
changes in net interest income and changes in the economic 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 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 Companys interest rate
risk objectives.



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



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 assess the sensitivity of net interest income to potential changes
in interest rates and enhance profitability in ways that promise sufficient reward for recognized and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is
properly managed. The Company employs sensitivity analysis in the form of a net interest income simulation to help characterize the potential volatility of net interest income to 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 and cash flows. 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. The
Companys net interest income simulation includes all financial assets and liabilities. This simulation measures both the mismatch risk and basis risk in the Companys assets and liabilities. 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 rate risk under various interest rate scenarios. Management
then develops and implements appropriate strategies. The Board of Directors regularly reviews the overall rate risk position and asset and liability management strategies.



In fiscal 2005, the Company will continue to face mismatch risk and basis risk and may be confronted with several risk
scenarios. If interest rates rise, net interest income may actually increase if deposit rates lag increases in market rates. The Company could, however, experience significant pressure on net interest income if there is a substantial increase in
deposit rates 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.



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 point 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, 2005:



|                         |  |                                              |   |  |                                             |  
|------------------------ |  | -------------------------------------------- | - |  | ------------------------------------------- | -
|Change in Interest Rates |  | Increase /(Decrease) in FMV of Balance Sheet |   |  | Increase /(Decrease) in Net Interest Income |  
|+ 100 basis points       |  | 5.37                                         |   |  | (0.61                                       | )
|- 100 basis points       |  | (6.38                                        | ) |  | (1.81                                       | )



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.



20



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##### Table of Contents

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, establish 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 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 the implied volatility of interest rates have 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, 2005. Market values have been
determined by published bid prices or bid quotations for interest rate swaps received from securities dealers. Amounts are in thousands.



Interest Rate Swaps



|                           |  |                 |  |          |  |          |         |         |      |   |             |      |   |               |       |   |             |   |        |  
|-------------------------- |  | --------------- |  | -------- |  | -------- | ------- | ------- | ---- | - | ----------- | ---- | - | ------------- | ----- | - | ----------- | - | ------ | -
|Type                       |  | TransactionDate |  | TermDate |  | Notional |         | PayRate |      |   | ReceiveRate |      |   | CurrentSpread |       |   | MarketValue |  
|Received Fixed Prime Swap  |  | Apr-03          |  | Apr-06   |  | $        | 50,000  |         | 6.25 | % |             | 5.26 | % |               | -0.99 | % |             | $ | (493   | )
|Received Fixed Prime Swap  |  | Aug-03          |  | Aug-06   |  | $        | 100,000 |         | 6.25 | % |             | 5.59 | % |               | -0.66 | % |             | $ | (1,376 | )
|                           |  |                 |  |          |  |          |         |         |      |   |             |      |   |               |       |   |             |   |        |  
|Total Received Fixed Swaps |  |                 |  |          |  | $        | 150,000 |         |      |   |             |      |   |               |       |   |             | $ | (1,869 | )
|                           |  |                 |  |          |  |          |         |         |      |   |             |      |   |               |       |   |             |   |        |  
|Total Derivative Positions |  |                 |  |          |  | $        | 150,000 |         |      |   |             |      |   |               |       |   |             | $ | (1,869 | )
|                           |  |                 |  |          |  |          |         |         |      |   |             |      |   |               |       |   |             |   |        |  



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##### Table of Contents

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. 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), purchases 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, 2005, the Company had $10.8 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, 2005, the Company had $39.8 million in
federal funds purchased and $100.0 million in FHLB overnight borrowings. Federal funds purchased lines total $55.0 million, of which $15.2 million was available to be drawn upon at September 30, 2005. 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 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.



The Company relies primarily on customer deposits,
securities sold under repurchase agreements and shareholders equity to fund interest-earning assets. The FHLB is also a major source of liquidity for the Bank. The FHLB allows member banks to borrow against their eligible collateral to satisfy
their liquidity requirements.



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 time deposits of $100,000 and over.



22



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##### Table of Contents

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 liquidity risk. The Company operates under
an Asset Liability and Risk Management policy created by the Asset and Liability Committee (ALCO) and approved by the Board of Directors. The policy outlines limits on interest rate risk in terms of changes in net interest income and
changes in the economic 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 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 Companys interest rate risk objectives.



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



With regard to the Companys
report on internal control over Financial Reporting issued as of December 31, 2004, based on the depth of expertise and experience now represented in the Companys financial management functions, Main Streets management believes that
it has made substantial progress in remediating the material internal control weakness it cited previously due to inadequate staffing and expertise in its financial functions.



The Company will make a final assessment, in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, of the
effectiveness of the disclosure controls and procedures and the effectiveness of the internal control environment as of December 31, 2005.



During the first nine months of 2005 the Company has made the following changes to internal controls over financial reporting to address the previously
disclosed material weakness related to staffing levels and expertise:



| |  |  | Hired David W. Brooks, II to serve as Chief Financial Officer
| | - |  | -------------------------------------------------------------



| |  |  | Hired Bob D. Doby Jr. to serve as Treasurer
| | - |  | -------------------------------------------



| |  |  | Hired William P. OHalloran to serve as interim Controller, until a permanent Controller is named.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Named David D. Duncan Senior Vice President, Management Reporting
| | - |  | -----------------------------------------------------------------



| |  |  | Contracted with a nationally recognized accounting and banking consultant to: analyze the Companys financial practices, policies and procedures, make recommendations for
improvement, and provide temporary personnel with expertise in accounting and financial controls until additional permanent personnel are hired.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provided internal training for income taxes and hired an independent third party to provide additional tax expertise for the Company
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Provided internal training and guidance for reconciliations and utilized an independent third party to provide additional expertise for improving the reconciliation process
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Established additional procedures and controls to ensure that the integrity of the financial review process was maintained while staffing levels and expertise were being remediated
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Utilized a third party vendor for asset/liability modeling
| | - |  | ----------------------------------------------------------



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##### Table of Contents

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.



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, the Company 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 2005.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS



|            |  |                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                            
|3.1         |  | Articles of Incorporation of Main Street Banks, 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 Banks, Inc. (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-78046 on Form S-4)                                                                                                                                                        
|            | 
|10.1        |  | Employment agreement dated June 1, 2005 between the Registrant and David W. Brooks, II. *                                                                                                                                                                                              
|            | 
|10.2        |  | Employment agreement dated September 15, 2005 between the Registrant and Gary S. Austin.*                                                                                                                                                                                              
|            | 
|10.3        |  | Employment agreement dated September 15, 2005 between the Registrant and Richard A. Blair.*                                                                                                                                                                                            
|            | 
|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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##### Table of Contents

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 7, 2005 |  | By:                     |  | /s/ William P. OHalloran        
|                       |  |                         |  | William P. OHalloran, Controller
|                       |  |                         |  | (Chief Accounting Officer)       



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