##### 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 June 30, 2004



Commission file number 000-25128



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MAIN STREET BANKS, INC.

(Exact name of registrant as specified in its
charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|Georgia                  |  | 58-2104977                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|676 Chastain Road, Kennesaw, GA          |  | 30144     
|(Address of principal executive offices) |  | (Zip Code)



770-422-2888

(Registrants telephone number)



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



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



As of July 30thregistrant had outstanding 19,409,884 shares of common stock.



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##### Table of Contents

MAIN STREET BANKS, INC.

TABLE OF CONTENTS



FORM 10-Q

June 30, 2004



|                              |  |                                                                                                               |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                               |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                              
|Item 1.                       |  | Financial Statements                                                                                          |  |     
|                              |  |                                                                                                              
|                              |  | Consolidated Balance Sheets June 30, 2004 (unaudited), December 31, 2003 and June 30, 2003 (unaudited)        |  | 2   
|                              |  |                                                                                                              
|                              |  | Consolidated Statements of Income (unaudited) Three and Six Months Ended June 30, 2004 and 2003               |  | 3   
|                              |  |                                                                                                              
|                              |  | Consolidated Statements of Comprehensive Income (unaudited) Three and Six Months Ended June 30, 2004 and 2003 |  | 4   
|                              |  |                                                                                                              
|                              |  | Consolidated Statements of Cash Flows (unaudited) Six Months ended June 30, 2004 and 2003                     |  | 5   
|                              |  |                                                                                                              
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                                        |  | 6   
|                              |  |                                                                                                              
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                         |  | 11  
|                              |  |                                                                                                              
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | 22  
|                              |  |                                                                                                              
|Item 4.                       |  | Controls and Procedures                                                                                       |  | 22  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                              
|Item 1.                       |  | Legal Proceedings                                                                                             |  | 23  
|                              |  |                                                                                                              
|Item 2.                       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                              |  | 23  
|                              |  |                                                                                                              
|Item 3.                       |  | Defaults Upon Senior Securities                                                                               |  | 23  
|                              |  |                                                                                                              
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                           |  | 23  
|                              |  |                                                                                                              
|Item 5.                       |  | Other Information                                                                                             |  | 23  
|                              |  |                                                                                                              
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                              |  | 24  
|                              |  |                                                                                                              
|                              |  | Signatures                                                                                                    |  | 25  
|                              |  |                                                                                                              
|                              |  | Exhibits:                                                                                                     |  |     
|                              |  |                                                                                                              
|                              |  | Exhibit 31.1 Certification of Chief Executive Officer                                                         |  |     
|                              |  |                                                                                                              
|                              |  | Exhibit 31.2 Certification of Chief Financial Officer                                                         |  |     
|                              |  |                                                                                                              
|                              |  | Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act       |  |     
|                              |  |                                                                                                              
|                              |  | Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act       |  |     
|                              |  |                                                                                                              
|                              |  | Exhibit 99.1 Comments Concerning Forward Looking Statements                                                   |  |     



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) June 30, 2004 |           |   | December 31, 2003 |   |           | (Unaudited) June 30, 2003 | 
|Assets                                                                                                                                                                                          |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Cash and due from banks                                                                                                                                                                         |  | $                         | 42,091    |   |                   | $ | 39,839    |                           |  | $ | 43,329    |  
|Interest-bearing deposits in banks                                                                                                                                                              |  |                           | 1,078     |   |                   |   | 1,021     |                           |  |   | 1,437     |  
|Federal funds sold and securities purchased under agreements to resell                                                                                                                          |  |                           | 713       |   |                   |   | 31,820    |                           |  |   | 6,453     |  
|Investment securities available for sale (amortized cost of $274,994, $242,872, and $282,928 at June 30, 2004, December 31, 2003 and June 30,
2003, respectively)                               |  |                           | 272,597   |   |                   |   | 247,392   |                           |  |   | 290,424   |  
|Investment securities held to maturity (fair value of $11,701, $10,800, and $752 at June 30, 2004, December 31, 2003 and June 30, 2003,
respectively)                                           |  |                           | 11,998    |   |                   |   | 10,788    |                           |  |   | 688       |  
|Other investments                                                                                                                                                                               |  |                           | 23,877    |   |                   |   | 19,651    |                           |  |   | 9,140     |  
|Mortgage loans held for sale                                                                                                                                                                    |  |                           | 6,221     |   |                   |   | 5,671     |                           |  |   | 6,927     |  
|Loans, net of unearned income                                                                                                                                                                   |  |                           | 1,594,291 |   |                   |   | 1,443,326 |                           |  |   | 1,382,762 |  
|Allowance for loan losses                                                                                                                                                                       |  |                           | (23,119   | ) |                   |   | (21,152   | )                         |  |   | (20,272   | )
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Loans, net                                                                                                                                                                                      |  |                           | 1,571,172 |   |                   |   | 1,422,174 |                           |  |   | 1,362,490 |  
|Premises and equipment, net                                                                                                                                                                     |  |                           | 48,391    |   |                   |   | 42,761    |                           |  |   | 38,467    |  
|Other real estate                                                                                                                                                                               |  |                           | 1,915     |   |                   |   | 1,845     |                           |  |   | 1,065     |  
|Accrued interest receivable                                                                                                                                                                     |  |                           | 9,060     |   |                   |   | 8,181     |                           |  |   | 8,116     |  
|Goodwill and other intangible assets                                                                                                                                                            |  |                           | 103,515   |   |                   |   | 96,237    |                           |  |   | 94,826    |  
|Bank owned life insurance                                                                                                                                                                       |  |                           | 41,006    |   |                   |   | 35,773    |                           |  |   | 34,527    |  
|Other assets                                                                                                                                                                                    |  |                           | 13,531    |   |                   |   | 8,612     |                           |  |   | 8,311     |  
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Total assets                                                                                                                                                                                    |  | $                         | 2,147,165 |   |                   | $ | 1,971,765 |                           |  | $ | 1,906,200 |  
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Liabilities                                                                                                                                                                                     |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Deposits:                                                                                                                                                                                       |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Noninterest-bearing demand                                                                                                                                                                      |  | $                         | 232,319   |   |                   | $ | 228,610   |                           |  | $ | 214,558   |  
|Interest-bearing demand and money market                                                                                                                                                        |  |                           | 540,654   |   |                   |   | 482,775   |                           |  |   | 460,163   |  
|Savings                                                                                                                                                                                         |  |                           | 46,656    |   |                   |   | 49,832    |                           |  |   | 46,434    |  
|Time deposits of $100,000 or more                                                                                                                                                               |  |                           | 288,267   |   |                   |   | 254,422   |                           |  |   | 256,907   |  
|Other time deposits                                                                                                                                                                             |  |                           | 458,394   |   |                   |   | 442,764   |                           |  |   | 427,528   |  
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Total deposits                                                                                                                                                                                  |  |                           | 1,566,290 |   |                   |   | 1,458,403 |                           |  |   | 1,405,590 |  
|Accrued interest payable                                                                                                                                                                        |  |                           | 3,284     |   |                   |   | 3,020     |                           |  |   | 3,445     |  
|Federal Home Loan Bank advances                                                                                                                                                                 |  |                           | 166,338   |   |                   |   | 210,605   |                           |  |   | 167,873   |  
|Federal funds purchased and securities sold under repurchase agreements                                                                                                                         |  |                           | 142,325   |   |                   |   | 43,859    |                           |  |   | 39,815    |  
|Subordinated debentures                                                                                                                                                                         |  |                           | 51,547    |   |                   |   |          |                           |  |   |          |  
|Trust preferred securities                                                                                                                                                                      |  |                           |          |   |                   |   | 50,000    |                           |  |   | 50,000    |  
|Other liabilities                                                                                                                                                                               |  |                           | 5,414     |   |                   |   | 5,335     |                           |  |   | 48,782    |  
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Total liabilities                                                                                                                                                                               |  |                           | 1,935,198 |   |                   |   | 1,771,222 |                           |  |   | 1,715,505 |  
|Shareholders Equity                                                                                                                                                                            |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Common stock-no par value per share; 50,000,000 shares authorized; 19,381,000, 18,981,340 and 18,888,732 shares outstanding at June 30, 2004,
December 31, 2003 and June 30, 2003, respectively |  |                           | 107,447   |   |                   |   | 100,876   |                           |  |   | 99,007    |  
|Retained earnings                                                                                                                                                                               |  |                           | 116,073   |   |                   |   | 104,539   |                           |  |   | 94,282    |  
|Accumulated other comprehensive income, net of tax                                                                                                                                              |  |                           | (2,764    | ) |                   |   | 3,917     |                           |  |   | 6,193     |  
|Treasury stock, at cost, 564,082 shares at June 30, 2004, December 31, 2003 and June 30, 2003, respectively                                                                                     |  |                           | (8,789    | ) |                   |   | (8,789    | )                         |  |   | (8,787    | )
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Total shareholders equity                                                                                                                                                                      |  |                           | 211,967   |   |                   |   | 200,543   |                           |  |   | 190,695   |  
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  
|Total liabilities and shareholders equity                                                                                                                                                      |  | $                         | 2,147,165 |   |                   | $ | 1,971,765 |                           |  | $ | 1,906,200 |  
|                                                                                                                                                                                                |  |                           |           |   |                   |   |           |                           |  |   |           |  



See accompanying notes to
consolidated financial statements



2



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Income (Unaudited)

(dollars in thousands except per share data)



|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|---------------------------------------------------- |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                                     |  | Three months ended June 30, |            | Six months ended June 30,
|                                                     |  | 2004                        |            | 2003                      |   | 2004       |  | 2003
|                                                     |  | (unaudited)                 |            | (unaudited)              
|Interest income:                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Loans, including fees                                |  | $                           | 25,474     |                           | $ | 21,419     |  | $    | 50,256     |  | $ | 40,353    
|Investment securities:                               |  |                             |            |                           |   |            |  |      |            |  |   |           
|Taxable                                              |  |                             | 2,362      |                           |   | 2,145      |  |      | 4,609      |  |   | 4,220     
|Non-taxable                                          |  |                             | 389        |                           |   | 442        |  |      | 806        |  |   | 880       
|Federal funds sold and other short-term investments  |  |                             | 3          |                           |   | 10         |  |      | 34         |  |   | 66        
|Interest-bearing deposits in banks                   |  |                             | 5          |                           |   | 5          |  |      | 10         |  |   | 15        
|Other investments                                    |  |                             | 237        |                           |   | 111        |  |      | 443        |  |   | 143       
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Total interest income                                |  |                             | 28,470     |                           |   | 24,132     |  |      | 56,158     |  |   | 45,677    
|Interest expense:                                    |  |                             |            |                           |   |            |  |      |            |  |   |           
|Interest-bearing demand and money market             |  |                             | 1,829      |                           |   | 1,528      |  |      | 3,151      |  |   | 2,914     
|Savings                                              |  |                             | 74         |                           |   | 88         |  |      | 162        |  |   | 178       
|Time deposits                                        |  |                             | 4,471      |                           |   | 3,068      |  |      | 8,934      |  |   | 7,251     
|Other time deposits                                  |  |                             | 64         |                           |   | 86         |  |      | 120        |  |   | 185       
|Federal funds purchased                              |  |                             | 333        |                           |   | 8          |  |      | 368        |  |   | 21        
|Federal Home Loan Bank advances                      |  |                             | 664        |                           |   | 564        |  |      | 1,530      |  |   | 794       
|Interest expense on subordined debentures            |  |                             | 575        |                           |   | 237        |  |      | 1,150      |  |   | 292       
|Other interest expense                               |  |                             | 241        |                           |   | 364        |  |      | 597        |  |   | 778       
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Total interest expense                               |  |                             | 8,251      |                           |   | 5,943      |  |      | 16,012     |  |   | 12,413    
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Net interest income                                  |  |                             | 20,219     |                           |   | 18,189     |  |      | 40,146     |  |   | 33,264    
|Provision for loan losses                            |  |                             | 1,310      |                           |   | 1,801      |  |      | 2,871      |  |   | 2,848     
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Net interest income after provision for loan losses  |  |                             | 18,909     |                           |   | 16,388     |  |      | 37,275     |  |   | 30,416    
|Non-interest income:                                 |  |                             |            |                           |   |            |  |      |            |  |   |           
|Service charges on deposit accounts                  |  |                             | 2,023      |                           |   | 1,857      |  |      | 3,904      |  |   | 3,598     
|Other customer service fees                          |  |                             | 352        |                           |   | 395        |  |      | 709        |  |   | 760       
|Mortgage banking income                              |  |                             | 860        |                           |   | 865        |  |      | 1,743      |  |   | 1,512     
|Investment agency commissions                        |  |                             | 185        |                           |   | 61         |  |      | 500        |  |   | 144       
|Insurance agency income                              |  |                             | 2,371      |                           |   | 1,236      |  |      | 5,142      |  |   | 2,416     
|Income from SBA lending                              |  |                             | 368        |                           |   | 505        |  |      | 854        |  |   | 884       
|Income on bank owned life insurance                  |  |                             | 559        |                           |   | 462        |  |      | 1,381      |  |   | 924       
|Investment securities gains                          |  |                             | 549        |                           |   | 132        |  |      | 853        |  |   | 316       
|Other income                                         |  |                             | 152        |                           |   | 122        |  |      | 173        |  |   | 357       
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Total non-interest income                            |  |                             | 7,419      |                           |   | 5,635      |  |      | 15,259     |  |   | 10,911    
|Non-interest expense:                                |  |                             |            |                           |   |            |  |      |            |  |   |           
|Salaries and other compensation                      |  |                             | 7,688      |                           |   | 6,203      |  |      | 15,730     |  |   | 11,818    
|Employee benefits                                    |  |                             | 1,520      |                           |   | 1,049      |  |      | 3,160      |  |   | 2,253     
|Net occupancy and equipment expense                  |  |                             | 2,208      |                           |   | 1,528      |  |      | 4,068      |  |   | 2,884     
|Data processing fees                                 |  |                             | 224        |                           |   | 442        |  |      | 781        |  |   | 752       
|Professional services                                |  |                             | 583        |                           |   | 586        |  |      | 1,022      |  |   | 962       
|Communications & supplies                            |  |                             | 1,028      |                           |   | 757        |  |      | 2,079      |  |   | 1,584     
|Marketing expense                                    |  |                             | 357        |                           |   | 427        |  |      | 727        |  |   | 446       
|Regulatory agency assessments                        |  |                             | 101        |                           |   | 106        |  |      | 192        |  |   | 167       
|Amortization of intangible assets                    |  |                             | 122        |                           |   | 91         |  |      | 262        |  |   | 151       
|Other expense                                        |  |                             | 2,303      |                           |   | 1,641      |  |      | 3,693      |  |   | 2,921     
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Total non-interest expense                           |  |                             | 16,134     |                           |   | 12,830     |  |      | 31,714     |  |   | 23,938    
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Income before income taxes                           |  |                             | 10,194     |                           |   | 9,193      |  |      | 20,820     |  |   | 17,389    
|Income tax expense                                   |  |                             | 2,803      |                           |   | 2,809      |  |      | 5,832      |  |   | 5,255     
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Net income                                           |  | $                           | 7,391      |                           | $ | 6,384      |  | $    | 14,988     |  | $ | 12,134    
|                                                     |  |                             |            |                           |   |            |  |      |            |  |   |           
|Earnings per share - Basic                           |  | $                           | 0.38       |                           | $ | 0.37       |  | $    | 0.78       |  | $ | 0.72      
|Earnings per share - Diluted                         |  | $                           | 0.37       |                           | $ | 0.35       |  | $    | 0.75       |  | $ | 0.70      
|Dividends declared per share                         |  | $                           | 0.135      |                           | $ | 0.120      |  | $    | 0.270      |  | $ | 0.240     
|Weighted average common shares outstanding - Basic   |  |                             | 19,351,343 |                           |   | 17,374,719 |  |      | 19,316,112 |  |   | 16,769,565
|Weighted average common shares outstanding - Diluted |  |                             | 19,974,058 |                           |   | 18,059,948 |  |      | 19,948,822 |  |   | 17,426,778



3



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)



|                                                                      |  |                    |        |   |                  |   |       |               |  |   |               |   |  |   |        |  
|--------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ----- | ------------- |  | - | ------------- | - |  | - | ------ | -
|                                                                      |  | Three Months Ended |        |   | Six Months Ended |  
|                                                                      |  | June 30, 2004      |        |   | June 30, 2003    |   |       | June 30, 2004 |  |   | June 30, 2003 |  
|                                                                      |  | (unaudited)        |        |   | (unaudited)      |  
|Net income                                                            |  | $                  | 7,391  |   |                  | $ | 6,384 |               |  | $ | 14,988        |   |  | $ | 12,134 |  
|                                                                      |  |                    |        |  
|Other comprehensive income (loss), net of tax:                        |  |                    |        |   |                  |   |       |               |  |   |               |   |  |   |        |  
|Unrealized (losses) gains on securities available for sale            |  |                    | (5,521 | ) |                  |   | 1,247 |               |  |   | (4,150        | ) |  |   | 620    |  
|Unrealized (losses) gains on derivative contracts                     |  |                    | (2,631 | ) |                  |   | 282   |               |  |   | (1,969        | ) |  |   | 220    |  
|Less reclassification adjustment for net gains included in net income |  |                    | (362   | ) |                  |   | (87   | )             |  |   | (563          | ) |  |   | (209   | )
|                                                                      |  |                    |        |   |                  |   |       |               |  |   |               |   |  |   |        |  
|Comprehensive (loss) income                                           |  | $                  | (1,123 | ) |                  | $ | 7,826 |               |  | $ | 8,306         |   |  | $ | 12,765 |  
|                                                                      |  |                    |        |   |                  |   |       |               |  |   |               |   |  |   |        |  



4



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##### Table of Contents

Main Street Banks, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)



|                                                                                  |  |                           |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Six months ended June 30, |         
|                                                                                  |  | 2004                      |          |   | 2003 |  
|                                                                                  |  | (Unaudited)               |         
|Operating activities                                                              |  |                           |          |   |      |   |          |  
|Net income                                                                        |  |                           | 14,988   |   |      | $ | 12,134   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          |   |      |   |          |  
|Provision for loan losses                                                         |  |                           | 2,871    |   |      |   | 2,848    |  
|Depreciation and amortization of premises and equipment                           |  |                           | 2,070    |   |      |   | 1,409    |  
|Amortization of intangible assets                                                 |  |                           | 263      |   |      |   | 151      |  
|Loss on sales of other real estate                                                |  |                           | 160      |   |      |   | 75       |  
|Investment securities gains                                                       |  |                           | (853     | ) |      |   | (316     | )
|Net amortization of investment securities                                         |  |                           | 736      |   |      |   | 651      |  
|Net accretion of loans purchased                                                  |  |                           | (12      | ) |      |   | (19      | )
|Loss on sales of premises and equipment                                           |  |                           | 544      |   |      |   | 83       |  
|Net (increase) decrease in mortgage loans held for sale                           |  |                           | (550     | ) |      |   | 1,249    |  
|Gain on mortgage loan sales                                                       |  |                           | (1,743   | ) |      |   | (1,512   | )
|Gains on sales of SBA loans                                                       |  |                           | (854     | ) |      |   | (884     | )
|Deferred income tax provision                                                     |  |                           | 3,468    |   |      |   | 1,482    |  
|Deferred net loan fees (cost amortization)                                        |  |                           | (998     | ) |      |   | (359     | )
|Vesting in restricted stock award plan                                            |  |                           | 360      |   |      |   | 201      |  
|Increase in accrued interest receivable                                           |  |                           | (878     | ) |      |   | (613     | )
|Increase cash surrender value of bank-owned life insurance                        |  |                           | (233     | ) |      |   | (825     | )
|Increase (decrease) in accrued interest payable                                   |  |                           | 264      |   |      |   | (1,030   | )
|Increase in prepaid expenses                                                      |  |                           | (3,103   | ) |      |   | (610     | )
|Other                                                                             |  |                           | (1,479   | ) |      |   | 3,120    |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                           | 15,021   |   |      |   | 17,235   |  
|                                                                                  |  |                          
|Investing activities                                                              |  |                           |          |   |      |   |          |  
|Purchases of investment securities available for sale                             |  |                           | (82,794  | ) |      |   | (78,581  | )
|Purchases of investment securities held to maturity                               |  |                           | (1,210   | ) |      |   |         |  
|Purchases of other investments                                                    |  |                           | (4,226   | ) |      |   | (5,440   | )
|Maturities, paydowns and calls of investment securities available for sale        |  |                           | 21,871   |   |      |   | 8,512    |  
|Proceeds from sales of investment securities available for sale                   |  |                           | 28,065   |   |      |   | 15,387   |  
|Net increase in loans funded                                                      |  |                           | (150,965 | ) |      |   | (107,523 | )
|Purchase of bank-owned life insurance                                             |  |                           | (5,000   | ) |      |   |         |  
|Purchases of premises and equipment                                               |  |                           | (8,106   | ) |      |   | (6,384   | )
|Purchase of treasury stock                                                        |  |                           |         |   |      |   | (1,929   | )
|Proceeds from sales of premises and equipment                                     |  |                           | 105      |   |      |   | 8        |  
|Proceeds from sales of other real estate                                          |  |                           | 902      |   |      |   | 2,145    |  
|Improvements to other real estate                                                 |  |                           | (166     | ) |      |   | (169     | )
|Net cash paid for acquisitions                                                    |  |                           |         |   |      |   | (22,284  | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                           | (201,524 | ) |      |   | (196,258 | )
|                                                                                  |  |                          
|Financing activities                                                              |  |                           |          |   |      |   |          |  
|Net increase in demand and savings accounts                                       |  |                           | 58,413   |   |      |   | 54,633   |  
|Increase (decrease) in time deposits                                              |  |                           | 49,475   |   |      |   | (14,999  | )
|Increase (decrease) in federal funds purchased                                    |  |                           | 29,466   |   |      |   | (8,082   | )
|Increase in Federal Home Loan Bank advances                                       |  |                           | 24,733   |   |      |   | 102,873  |  
|Dividends paid                                                                    |  |                           | (5,213   | ) |      |   | (3,817   | )
|Proceeds from issuance of common stock                                            |  |                           | 831      |   |      |   |         |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                           | 157,705  |   |      |   | 130,608  |  
|Net decrease in cash and cash equivalents                                         |  |                           | (28,798  | ) |      |   | (48,415  | )
|Cash and cash equivalents at beginning of period                                  |  |                           | 72,680   |   |      |   | 99,634   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                         | 43,882   |   |      | $ | 51,219   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Supplemental disclosures of cash flow information                                 |  |                           |          |   |      |   |          |  
|Cash paid during the period for:                                                  |  |                           |          |   |      |   |          |  
|Interest                                                                          |  | $                         | 9,517    |   |      | $ | 8,967    |  
|Income taxes, net                                                                 |  |                           | 7,110    |   |      |   | 6,400    |  
|Supplemental disclosures of noncash transactions                                  |  |                           |          |   |      |   |          |  
|Loans transferred to other real estate acquired through foreclosure               |  | $                         | 3,122    |   |      | $ | 2,388    |  



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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 wholly owned subsidiaries, Main Street Bank (the Bank) Main Street Insurance Services, Inc. (MSII), Piedmont Settlement Services, Inc. (Piedmont) and MSB Payroll Solutions, LLC. All
significant inter-company transactions and balances have been eliminated in consolidation.



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



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



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



Note B - Acquisitions



On January 2, 2004, MSII acquired substantially all of the assets of Banks Moneyhan Hayes Insurance Agency, Inc. (BMIA), an insurance agency
headquartered in Conyers, Georgia. 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 value of the 271,109 shares issued was determined based on the Companys closing market price of $25.82 on December 5, 2003, the date the acquisition was announced. Goodwill of $4.7 million and Intangible Assets of $2.8
million were created as a result of the transaction. Intangible assets will be amortized over a 15 year period. This acquisition also includes an earn-out provision of $1.2 million to be paid in 5 annual installments of $240,000 if
certain annual performance criteria are met. Summarized below is an initial allocation of assets and liabilities acquired (in thousands):



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



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##### Table of Contents

On May 22, 2003, the Company completed its acquisition of First Colony Bancshares, Inc., parent of First
Colony Bank, a $320 million asset bank headquartered in Alpharetta, Georgia. The transaction was accounted for as a purchase business combination and accordingly, the results of operations of First Colony Bank are included from the acquisition date.
The Company issued 2.6 million shares of its common stock and paid $45.0 million in cash in exchange for all outstanding shares of First Colony Bancshares. The value of the 2.6 million shares issued was determined based on the Companys closing
market price of $19.61 on December 11, 2002, the date the acquisition was announced. Goodwill and Intangible Assets of $74.8 million were created as a result of the transaction. Summarized below is an allocation of assets and liabilities acquired
(in thousands):



|                               |  |   |        
|------------------------------ |  | - | -------
|Assets acquired:               |  |   |        
|Cash and Cash equivalents      |  | $ | 24,048 
|Loans                          |  |   | 283,661
|Other assets                   |  |   | 17,894 
|Goodwill and other intangibles |  |   | 74,839 
|                               |  |   |        
|Total Assets                   |  | $ | 400,442
|                               |  |   |        
|Liabilities acquired           |  |   |        
|Deposits                       |  |   | 282,195
|Other Liabilities              |  |   | 17,567 
|                               |  |   |        
|Total Liabilities              |  | $ | 299,762
|                               |  |   |        



On August 4, 2003, the
Company, through an intermediate subsidiary, completed the acquisition of the remaining 50% interest from the other partners of Piedmont Settlement Services, L.L.P., a Pennsylvania limited liability partnership. The assets and liabilities of the
Pennsylvania partnership were subsequently transferred to the intermediate subsidiary, which changed its name to Piedmont Settlement Services, Inc. The purchase price for this acquisition was $183,500. The transaction has been accounted for as a
purchase and accordingly, the results of operations of Piedmont are included from the acquisition date.



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



|                                                    |  |                                              |        |            |   |       
|--------------------------------------------------- |  | -------------------------------------------- | ------ | ---------- | - | ------
|                                                    |  | June 30, 2003                               
|                                                    |  | Three months                                 |        | Six months
|                                                    |  | (Dollars in thousands except per share data)
|Net interest income                                 |  | $                                            | 24,132 |            | $ | 48,722
|Net interest income after provision for loan losses |  |                                              | 16,388 |            |   | 33,161
|Net income                                          |  |                                              | 6,595  |            |   | 14,048
|Earning per share - basic                           |  | $                                            | 0.37   |            | $ | 0.82  
|Earnings per share - diluted                        |  | $                                            | 0.36   |            | $ | 0.79  



Note C - Current Accounting
Developments



In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities.FIN 46 states that if a business enterprise is the primary beneficiary of a variable interest entity, the assets, liabilities and results of the
activities of the variable interest entity should be included in the consolidated financial statements of the business enterprise. This interpretation explains how to identify variable interest entities and how an enterprise assesses its interest in
a variable interest entity to decide whether to consolidate the entity. FIN 46 also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among
parties involved. Variable interest entities that effectively disperse risks will be consolidated unless a single party holds an interest or combination of interests that effectively recombines risks that were previously dispersed. Due to the
significant implementation concerns, the FASB revised Interpretation No. 46 (FIN46R) in December 2003. Management has evaluated the Companys investment in variable interest entities and potential variable interest entities or
transactions, particularly in trust preferred securities structures because these entities constitute the Companys primary exposure.



7



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##### Table of Contents

The Company determined that certain trusts created by it to issue trust preferred securities required
deconsolidation due to the provisions of FIN 46R. Accordingly, as of March 31, 2004, the Company was required to deconsolidate these trusts. The deconsolidation required the Company to remove $50.0 million in trust preferred securities from the
consolidated statements and to record junior subordinated debentures payable to these trusts of $51.5 million and record the Companys investment in the trusts of $1.5 million in other assets. In July 2003, the Board of Governors of the Federal
Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in Tier 1 capital for regulatory capital purposes until further notice. The Federal Reserve intends to review the
regulatory implications of any accounting treatment changes and, if necessary, provide further guidance. However, there can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1
capital for regulatory purposes.



Currently, other than the
impact described above from the deconsolidation of the trust preferred securities, the adoption of FIN 46 and FIN 46R did not have a material impact on the financial condition or the operating results of the Company. Prior periods have not been
restated for this change in accounting methods. Interpretive guidance relating to FIN 46 and FIN 46R is continuing to evolve and the Companys management will continue to assess various aspects of consolidation and variable interest entity
accounting as additional interpretative guidance becomes available.



Note D
- Earnings per Common Share



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



|                                 |  |                                              |        |                  |   |               |  |               |        |  |   |       
|-------------------------------- |  | -------------------------------------------- | ------ | ---------------- | - | ------------- |  | ------------- | ------ |  | - | ------
|                                 |  | Three months ended                           |        | Six months ended
|                                 |  | June 30, 2004                                |        | June 30, 2003    |   | June 30, 2004 |  | June 30, 2003
|                                 |  | (Amounts in thousands except per share data)
|Basic and diluted net income     |  | $                                            | 7,391  |                  | $ | 6,384         |  | $             | 14,988 |  | $ | 12,134
|Basic earnings per share         |  | $                                            | 0.38   |                  | $ | 0.37          |  | $             | 0.78   |  | $ | 0.72  
|Diluted earnings per share       |  | $                                            | 0.37   |                  | $ | 0.35          |  | $             | 0.75   |  | $ | 0.70  
|                                 |  |                                              |        |                 
|Basic weighted average shares    |  |                                              | 19,351 |                  |   | 17,375        |  |               | 19,316 |  |   | 16,770
|Effect of Employee Stock Options |  |                                              | 623    |                  |   | 685           |  |               | 633    |  |   | 657   
|                                 |  |                                              |        |                  |   |               |  |               |        |  |   |       
|Diluted weighted average shares  |  |                                              | 19,974 |                  |   | 18,060        |  |               | 19,949 |  |   | 17,427
|                                 |  |                                              |        |                  |   |               |  |               |        |  |   |       



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s exposure to credit loss in the event of nonperformance by
the customer to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional
obligations as are used for on-balance-sheet instruments.



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##### Table of Contents

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



|                                         |  |                              |         |      |   |        
|---------------------------------------- |  | ---------------------------- | ------- | ---- | - | -------
|                                         |  | For the Period EndedJune 30,
|                                         |  | 2004                         |         | 2003
|                                         |  | (Dollars in Thousands)      
|Commitments to extend credit             |  | $                            | 296,104 |      | $ | 262,634
|Standby and commercial letters of credit |  |                              | 8,966   |      |   | 5,376  



Note F - Loans



Loans are stated at unpaid principal balances, net of unearned income and
deferred loan fees. Interest is accrued only if deemed collectible. The following table represents the composition of the Companys loan portfolio:



|                             |  |                        |           |   |                   |   |           |               |  |   |           |  
|---------------------------- |  | ---------------------- | --------- | - | ----------------- | - | --------- | ------------- |  | - | --------- | -
|                             |  | June 30, 2004          |           |   | December 31, 2003 |   |           | June 30, 2003 | 
|                             |  | (Dollars in thousands) |          
|Loans                        |  |                        |           |   |                   |   |           |               |  |   |           |  
|Commercial and industrial    |  | $                      | 132,379   |   |                   | $ | 118,243   |               |  | $ | 120,771   |  
|Real estate construction     |  |                        | 348,685   |   |                   |   | 304,046   |               |  |   | 349,509   |  
|Residential mortgage         |  |                        | 282,755   |   |                   |   | 269,358   |               |  |   | 254,249   |  
|Real estate - other          |  |                        | 795,114   |   |                   |   | 711,209   |               |  |   | 612,343   |  
|Consumer and other           |  |                        | 37,602    |   |                   |   | 41,650    |               |  |   | 46,179    |  
|                             |  |                        |           |   |                   |   |           |               |  |   |           |  
|Total loans receivable       |  |                        | 1,596,535 |   |                   |   | 1,444,506 |               |  |   | 1,383,051 |  
|Less:                        |  |                        |           |   |                   |   |           |               |  |   |           |  
|Purchase premium             |  |                        | 898       |   |                   |   | 981       |               |  |   | (91       | )
|Deferred net loan fees       |  |                        | (3,119    | ) |                   |   | (2,121    | )             |  |   | (136      | )
|Unearned income              |  |                        | (23       | ) |                   |   | (40       | )             |  |   | (62       | )
|Allowance for loan losses    |  |                        | (23,119   | ) |                   |   | (21,152   | )             |  |   | (20,272   | )
|                             |  |                        |           |   |                   |   |           |               |  |   |           |  
|Loans, net                   |  | $                      | 1,571,172 |   |                   | $ | 1,422,174 |               |  | $ | 1,362,490 |  
|                             |  |                        |           |   |                   |   |           |               |  |   |           |  
|Mortgage loans held for sale |  | $                      | 6,221     |   |                   | $ | 5,671     |               |  | $ | 6,927     |  
|                             |  |                        |          
|Commercial and industrial    |  |                        | 8.29      | % |                   |   | 8.18      | %             |  |   | 8.73      | %
|Real estate construction     |  |                        | 21.84     | % |                   |   | 21.05     | %             |  |   | 25.27     | %
|Residential mortgage         |  |                        | 17.71     | % |                   |   | 18.65     | %             |  |   | 18.38     | %
|Real estate - other          |  |                        | 49.80     | % |                   |   | 49.25     | %             |  |   | 44.27     | %
|Consumer and other           |  |                        | 2.36      | % |                   |   | 2.87      | %             |  |   | 3.35      | %
|                             |  |                        |           |   |                   |   |           |               |  |   |           |  
|Total loans receivable       |  |                        | 100.00    | % |                   |   | 100.00    | %             |  |   | 100.00    | %
|                             |  |                        |           |   |                   |   |           |               |  |   |           |  



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.



9



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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 |       |   | Six months ended |  
|                                    |  | June 30, 2004      |       |   | June 30, 2003    |   |       | June 30, 2004 |  |   | June 30,2003 |  
|Net income                          |  | $                  | 7,391 |   |                  | $ | 6,384 |               |  | $ | 14,988       |   |  | $ | 12,134 |  
|Earnings per share - Basic          |  |                    | 0.38  |   |                  |   | 0.37  |               |  |   | 0.78         |   |  |   | 0.72   |  
|Earnings per share - Diluted        |  |                    | 0.37  |   |                  |   | 0.35  |               |  |   | 0.75         |   |  |   | 0.70   |  
|Compensation cost - Fair Value      |  |                    | 166   |   |                  |   | 240   |               |  |   | 317          |   |  |   | 479    |  
|Less: Tax Effect                    |  |                    | (56   | ) |                  |   | (82   | )             |  |   | (108         | ) |  |   | (163   | )
|                                    |  |                    |       |   |                  |   |       |               |  |   |              |   |  |   |        |  
|Net compensation costs - Fair Value |  |                    | 109   |   |                  |   | 158   |               |  |   | 209          |   |  |   | 316    |  
|Net Income, Pro-forma               |  |                    | 7,282 |   |                  |   | 6,226 |               |  |   | 14,779       |   |  |   | 11,818 |  
|Earnings per share - Basic          |  |                    | 0.38  |   |                  |   | 0.36  |               |  |   | 0.77         |   |  |   | 0.70   |  
|Earnings per share - Diluted        |  |                    | 0.37  |   |                  |   | 0.34  |               |  |   | 0.74         |   |  |   | 0.68   |  



10



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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
June 30, 2004 as compared to December 31, 2003 and operating results for the three and six month periods ended June 30, 2004 as compared to the three and six month periods ended June 30, 2003. These comments should be read in conjunction with the
Companys unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.



Overview



The
Companys total assets increased $175.4 million or 8.90% since December 2003. Federal funds sold decreased $31.1 million primarily due to an increase in loan demand. Loans increased 10.46% or $151.0 million since December 2003, while the
investment portfolio increased $26.4 million. Goodwill increased by $7.1 million, as a result of the BMIA acquisition. Total deposits increased by 7.40% or $107.9 million due primarily to an ongoing deposit campaign, use of brokered and national
deposits, and seasonal public funds.



Return on average equity
for the three and six months ended June 30, 2004 was 13.8% and 14.1% on average equity of $215.1 million and $212.5 million, respectively. This compares to 16.5% and 16.8% on average equity of $154.8 million and $145.4 million for the same periods
in 2003. Return on average assets for the three and six months ended June 30, 2004 were 1.41% and 1.47%. This compares to 1.57% and 1.63% for the same periods in 2003.



During the second quarter of 2004 there were several events that occurred that had an impact on the financial statements of
the Company:



| |  | Conversion to a new platform operating system and related write-off of obsolete equipment
| | - | -----------------------------------------------------------------------------------------



| |  | Elimination of 38 positions
| | - | ---------------------------



| |  | Write-off of a contract for ATM / EFT services
| | - | ----------------------------------------------



Each of the preceding items will be discussed in more detail in the Results of Operations included in this report on Form 10-Q.



Operating System Conversion



During the second quarter the Company completed its conversion to a new
operating system platform. The conversion was done primarily to replace a number of different independent systems with one fully integrated processing platform. This was done to improve reporting and processing efficiencies.



Preparation for the system conversion has been ongoing for the past two
years. During that time the Company has capitalized most of the cost associated with the conversion into projects-in-process on our balance sheet. Other related items were expensed as they were incurred and will not be capitalized. It was also
necessary for the Company to write-off the remaining book balance of software and hardware systems that were no longer necessary due to the conversion. The Company expects a $2.7 million increase in fixed assets during 2004 due to the conversion to
the new system.



11



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##### Table of Contents

Main Street Banks, Inc.

Selected Financial Data



|                                                                         |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|------------------------------------------------------------------------ |  | ------------------------------------- | --------- | - | ------------------------- | - | --------- | ---- |  | - | --------- | - |  | - | --------- | -
|                                                                         |  | Three months ended June 30,           |           |   | Six months ended June 30, |  
|                                                                         |  | 2004                                  |           |   | 2003                      |   |           | 2004 |  |   | 2003      |  
|                                                                         |  | (in thousdands except per share data) |          
|RESULTS OF OPERATIONS                                                    |  |                                       |           |  
|Net interest income                                                      |  | $                                     | 20,219    |   |                           | $ | 18,189    |      |  | $ | 40,146    |   |  | $ | 33,264    |  
|Net interest income (tax equivalent)                                     |  |                                       | 20,488    |   |                           |   | 18,474    |      |  |   | 40,693    |   |  |   | 33,838    |  
|Provision for loan losses                                                |  |                                       | 1,310     |   |                           |   | 1,801     |      |  |   | 2,871     |   |  |   | 2,848     |  
|Non-interest income                                                      |  |                                       | 7,419     |   |                           |   | 5,635     |      |  |   | 15,259    |   |  |   | 10,911    |  
|Non-interest expense                                                     |  |                                       | 16,134    |   |                           |   | 12,830    |      |  |   | 31,714    |   |  |   | 23,938    |  
|Net income                                                               |  |                                       | 7,391     |   |                           |   | 6,384     |      |  |   | 14,988    |   |  |   | 12,134    |  
|                                                                         |  |                                       |           |  
|AVERAGE BALANCE SHEET DATA                                               |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Loans, net of unearned income                                            |  | $                                     | 1,551,258 |   |                           | $ | 1,204,483 |      |  | $ | 1,511,065 |   |  | $ | 1,111,852 |  
|Investment securities                                                    |  |                                       | 282,850   |   |                           |   | 262,180   |      |  |   | 271,852   |   |  |   | 239,405   |  
|Total assets                                                             |  |                                       | 2,096,734 |   |                           |   | 1,622,600 |      |  |   | 2,043,147 |   |  |   | 1,500,477 |  
|Deposits                                                                 |  |                                       | 1,547,739 |   |                           |   | 1,252,649 |      |  |   | 1,506,394 |   |  |   | 1,190,225 |  
|Shareholders equity                                                     |  |                                       | 215,051   |   |                           |   | 154,818   |      |  |   | 212,461   |   |  |   | 145,445   |  
|                                                                         |  |                                       |           |  
|PER COMMON SHARE                                                         |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Earnings per share - Basic                                               |  | $                                     | 0.38      |   |                           | $ | 0.37      |      |  | $ | 0.78      |   |  | $ | 0.72      |  
|Earning per share - Diluted                                              |  | $                                     | 0.37      |   |                           | $ | 0.35      |      |  | $ | 0.75      |   |  | $ | 0.70      |  
|Book value per share at end of period                                    |  | $                                     | 10.94     |   |                           | $ | 10.10     |      |  | $ | 10.94     |   |  | $ | 10.10     |  
|End of period shares outstanding                                         |  |                                       | 19,381    |   |                           |   | 18,889    |      |  |   | 19,381    |   |  |   | 18,889    |  
|Weighted average shares outstanding                                      |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Basic                                                                    |  |                                       | 19,351    |   |                           |   | 17,375    |      |  |   | 19,316    |   |  |   | 16,770    |  
|Diluted                                                                  |  |                                       | 19,974    |   |                           |   | 18,060    |      |  |   | 19,949    |   |  |   | 17,427    |  
|                                                                         |  |                                       |           |  
|STOCK PERFORMANCE                                                        |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Market Price:                                                            |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Closing                                                                  |  | $                                     | 28.10     |   |                           | $ | 24.94     |      |  | $ | 28.10     |   |  | $ | 24.94     |  
|High                                                                     |  |                                       | 28.82     |   |                           |   | 25.40     |      |  |   | 28.82     |   |  |   | 25.40     |  
|Low                                                                      |  |                                       | 25.62     |   |                           |   | 18.48     |      |  |   | 24.90     |   |  |   | 18.45     |  
|Trading volume                                                           |  |                                       | 2,010     |   |                           |   | 1,244     |      |  |   | 3,714     |   |  |   | 2,507     |  
|Cash dividends per share                                                 |  | $                                     | 0.135     |   |                           | $ | 0.120     |      |  | $ | 0.270     |   |  | $ | 0.240     |  
|Dividend payout ratio                                                    |  |                                       | 36.48     | % |                           |   | 33.95     | %    |  |   | 35.94     | % |  |   | 34.47     | %
|Price to earnings                                                        |  | $                                     | 18.88     |   |                           | $ | 17.59     |      |  | $ | 18.65     |   |  | $ | 17.76     |  
|Price to book value                                                      |  |                                       | 2.57      |   |                           |   | 2.47      |      |  |   | 2.57      |   |  |   | 2.47      |  
|                                                                         |  |                                       |           |  
|PERFORMANCE RATIOS                                                       |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Return on average assets                                                 |  |                                       | 1.41      | % |                           |   | 1.57      | %    |  |   | 1.47      | % |  |   | 1.63      | %
|Return on average equity                                                 |  |                                       | 13.75     | % |                           |   | 16.49     | %    |  |   | 14.11     | % |  |   | 16.80     | %
|Average loans as percentage of average deposits                          |  |                                       | 100.23    | % |                           |   | 96.15     | %    |  |   | 100.31    | % |  |   | 93.40     | %
|Net interest margin (tax equivalent)                                     |  |                                       | 4.42      | % |                           |   | 5.01      | %    |  |   | 4.50      | % |  |   | 4.99      | %
|Average equity to average assets                                         |  |                                       | 10.26     | % |                           |   | 9.54      | %    |  |   | 10.40     | % |  |   | 9.69      | %
|Efficiency ratio                                                         |  |                                       | 58.38     | % |                           |   | 53.85     | %    |  |   | 57.24     | % |  |   | 54.19     | %
|                                                                         |  |                                       |           |  
|ASSET QUALITY                                                            |  |                                       |           |   |                           |   |           |      |  |   |           |   |  |   |           |  
|Total non-performing assets                                              |  |                                       | 8,910     |   |                           |   | 7,134     |      |  |   | 8,910     |   |  |   | 7,134     |  
|Non-performing assets as a percentage of loans plus foreclosed assets    |  |                                       | 0.56      | % |                           |   | 0.52      | %    |  |   | 0.56      | % |  |   | 0.52      | %
|Net annualized charge-offs (recoveries) as a percentage of average loans |  |                                       | 0.09      | % |                           |   | 0.40      | %    |  |   | 0.14      | % |  |   | 0.26      | %
|Reserve for loan losses as a percentage of loans, at end of period       |  |                                       | 1.45      | % |                           |   | 1.47      | %    |  |   | 1.45      | % |  |   | 1.47      | %



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##### Table of Contents

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



Summary



During the second quarter the Company had several events that effected
earnings for the period. These events include an elimination of 38 jobs, sale of investment securities, and the effect of acquisitions.



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



As part of normal business processes, the Company will, from time to time,
sell investment securities available for sale and recognize the associated gain or loss as part of non-interest income. During the second quarter, the Company sold investment securities available for sale totaling $11,686,267 and recognized a gain
on the sale of these securities of $490,481. The weighted average coupon rate on the securities sold was 5.721%.



The MSII acquired BMIA on January 1, 2004. During the second quarter the business generated by BMIA increased insurance agency income by $839,842. For the
six month period, BMIA has increased insurance agency income by $2.1 million.



Interest Income



Interest income for the three months ended June 30, 2004 was $28.5 million, an increase of $4.4 million, or 18.26% compared to $24.1 million for the same period in 2003. The increase is mainly attributable to the acquisition of First Colony
and net loan growth of $211.5 million from June 30, 2003 to June 30, 2004. Interest on federal funds sold decreased due to the Companys decision to use the funds to purchase investment securities to earn a higher yield. Average earning assets
for the three month period increased $386.3 million to $1.9 billion as of June 30, 2004 compared to $1.5 billion as of June 30, 2003. Yield on average earning assets decreased 49 basis points to 6.14% from 6.63% for the quarters ended June 30, 2004
and 2003, respectively.



Interest Expense



Interest expense on deposits and other borrowings for the three months ended
June 30, 2004 was $8.3 million, a $2.4 million, or 40.68% increase from June 30, 2003. The increase is mainly attributable to the acquisition of First Colony. While average interest bearing liabilities increased $424.2 million to $1.9 billion for
the three months ended June 30, 2004 compared to $1.5 billion for the three months ended June 30, 2003, the yield on average interest bearing liabilities decreased 13 basis points to 1.77% from 1.64% as of June 30, 2004 and 2003, respectively.



Net Interest Income



Net interest income for the three months ended June 30, 2004 increased $2.0
million, or 10.99% to $20.2 million compared to $18.2 million for the same period ending June 30, 2003. The increase was mainly attributable to the Companys ability to manage the effects of the Federal Reserves rate reductions. The
Companys net interest margin decreased to 4.42% for the three months ended June 30, 2004 compared to 4.55% as of June 30, 2003.



Provision for Loan Losses



The provision for loan losses was $1.3 million for the three months ended June 30, 2004 as compared to $1.8 million for the three months ended June 30,
2003. Many of the asset indicators used to determine the adequacy of the loan loss reserve have continued to improve since December of 2003. These indicators include criticized assets, non-performing assets, monthly annualized charge-offs and the
over 30 day past due percentage. Overall real estate market conditions in Atlanta appear to be stable to improving and the national economy improved during the quarter. Management believes that the present allowance for loan losses is adequate.



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##### Table of Contents

Non-interest Income



Non-interest income was $7.4 million for the three months ended June 30, 2004 an increase of $1.8 million, or 32.14%
compared to $5.6 million for the three months ended June 30, 2003. The major components of the increase were insurance agency income and gain on sales of investment securities. Insurance agency income increased $1.2 million, or 100.00% to $2.4
million from $1.2 million for the three months ended June 30, 2004 and 2003, respectively. A gain on sales of investment securities of $549,000 was recognized for the three months ended June 30, 2004, compared to $132,000 for the three month period
ended June 30, 2003.



Non-interest Expense



Non-interest expense increased $3.3 million or 25.78% to $16.1 million
from $12.8 million for the three months ended June 30, 2004 and 2003, respectively. The increase was largely attributable to the acquisition of First Colony, personnel required to accommodate the Companys growth over the same period in 2003
and the additional expenses associated with the elimination of 38 positions in June of 2004. Salaries were $7.7 million, an increase of $1.5 million, or 24.19% from the three months ended June 30, 2003. The Companys efficiency ratio was 58.38%
for the three months ended June 30, 2004 compared to 53.85% for the three months ended June 30, 2003.



Income Taxes



The amount of income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, the amount of nondeductible interest
expense, and the amount of other nondeductible expenses. For the three months ended June 30, 2004 and 2003, the provision for taxes was $2.8 million. The effective tax rate for the three months ended June 30, 2004 was 27.50% compared to 30.55% for
the same period in 2003. The effective tax rate for the three months ending June 30, 2004 is lower than for the same period in 2003 due to a tax refund received in 2004 that has been credited against the income tax expense for 2004.



Results of Operations for the Six Months Ended June 30, 2004 and 2003



Interest Income



Interest income for the six months ended June 30, 2004 was $56.2 million, an
increase of $10.5 million, or 22.98% compared to $45.7 million for the same period in 2003. The increase is mainly attributable to the acquisition of First Colony and net loan growth of $211.5 million from June 30, 2003 to June 30, 2004. Interest on
federal funds sold decreased due to the Companys decision to use the funds to purchase investment securities to earn a higher yield. Average earning assets for the six month period increased $449.3 million to $1.8 billion as of June 30, 2004
compared to $1.4 billion as of June 30, 2003. Yield on average earning assets decreased 61 basis points to 6.21% from 6.82% for the quarters ended June 30, 2004 and 2003, respectively.



Interest Expense



Interest expense on deposits and other borrowings for the six months ended June 30, 2004 was $16.0 million, a $3.6 million, or 29.03% increase from June
30, 2003. The increase is mainly attributable to the acquisition of First Colony. While average interest bearing liabilities increased $484.6 million to $1.8 billion for the six months ended June 30, 2004 compared to $1.3 billion for the six months
ended June 30, 2003, the yield on average interest bearing liabilities decreased 38 basis points to 1.77% from 2.15% as of June 30, 2004 and 2003, respectively.



Net Interest Income



Net interest income for the six months ended June 30, 2004 increased $6.8 million, or 20.42% to $40.1 million compared to $33.3 million for the same
period ending June 30, 2003. The increase was mainly attributable to growth in the loan portfolio. The Companys net interest margin decreased to 4.50% for the six months ended June 30, 2004 compared to 4.99% as of June 30, 2003.



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##### Table of Contents

Provision for Loan Losses



The provision for loan losses was $2.9 million for the six months ended June 30, 2004 as compared to $2.8 million for the
six months ended June 30, 2003. Many of the asset indicators used to determine the adequacy of the loan loss reserve have continued to improve since December of 2003. These indicators include criticized assets, non-performing assets, monthly
annualized charge-offs and the over 30 day past due percentage. Overall real estate market conditions in Atlanta appear to be stable to improving and the national economy improved during the second quarter of 2004. Management believes that the
present allowance for loan losses is adequate.



Non-interest
Income



Non-interest income was $15.3 million for the six
months ended June 30, 2004 an increase of $4.4 million, or 40.37% compared to $10.9 million for the six months ended June 30, 2003. The major components of the increase were insurance agency income, gain on sales of investment securities and
mortgage banking income. Insurance agency income increased $2.7 million, or 112.50% to $5.1 million from $2.4 million for the six months ended June 30, 2004 and 2003, respectively. Income from bank owned life insurance increased $0.5 million, or
55.55% to $1.4 million from $0.9 million for the six months ended June 30, 2004 and 2003, respectively. Mortgage banking income increased $0.2 million, or 13.33% to $1.7 million from $1.5 million for the six months ended June 30, 2004 and 2003,
respectively. A gain on sales of investment securities of $853,000 was recognized for the six months ended June 30, 2004, compared to $316,000 for the six month period ended June 30, 2003.



Non-interest Expense



Non-interest expense increased $7.8 million or 32.64% to $31.7 million from
$23.9 million for the six months ended June 30, 2004 and 2003, respectively. The increase was largely attributable to the acquisition of First Colony, additional personnel required to accommodate the Companys growth and the additional expenses
associated with the elimination of 38 positions in June of 2004. Salaries were $15.7 million, an increase of $3.9 million, or 33.05% from the six months ended June 30, 2003. The Companys efficiency ratio was 57.24% for the six months ended
June 30, 2004 compared to 54.19% for the six months ended June 30, 2003.



Income Taxes



The
amount of income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, the amount of nondeductible interest expense, and the amount of other nondeductible expenses. For the six months ended June 30, 2004, the
provision for taxes was $5.8 million, an increase of $0.5 million from the $5.3 million provided for in the same period in 2003. The effective tax rate for the six months ended June 30, 2004 was 28.01% compared to 30.22% for the same period in 2003.
The effective tax rate for the six months ending June 30, 2004 is lower than for the same period in 2003 to a tax refund received in 2004 that has been credited against the income tax expense for 2004.



Capital



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



Both the Federal Reserve Board and the FDIC 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, to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets.



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##### Table of Contents

At June 30, 2004, the capital ratios of the Company and the Bank were well capitalized based on
regulatory minimum capital requirements. The minimum capital requirements for banks and bank holding companies require a leverage capital to total assets ratio of at least 4%, core capital to risk-weighted assets ratio of at least 4% and total
capital to risk-weighted assets of 8%. The following table provides a comparison of the Companys and the Banks leverage and risk-weighted capital ratios as of June 30, 2004 to the minimum and well-capitalized regulatory standards:



|                           |  |         |   |  |       |   |  |                 |   |  |                  |  
|-------------------------- |  | ------- | - |  | ----- | - |  | --------------- | - |  | ---------------- | -
|                           |  | Company |   |  | Bank  |   |  | MinimumRequired |   |  | Well Capitalized |  
|Leverage ratio             |  | 7.54    | % |  | 8.00  | % |  | 4.00            | % |  | 5.00             | %
|Risk based capital ratios: |  |         |   |  |       |   |  |                 |   |  |                  |  
|Tier 1 risk based capital  |  | 8.74    | % |  | 9.14  | % |  | 4.00            | % |  | 6.00             | %
|Risk-based capital         |  | 10.71   | % |  | 10.32 | % |  | 8.00            | % |  | 10.00            | %



In December 2003, the
Board of Directors approved a $100.0 million shelf offering. The Companys registration statement on Form S-3 became effective on January 15, 2004. The net proceeds from the sale of the securities, if sold, would be used for general corporate
purposes. General corporate purposes may include repurchasing shares of our common stock, acquisitions of other companies, and extending credit to, or funding investments in, our subsidiaries. The precise amounts and timing of the use of the net
proceeds will depend upon the Company and its subsidiaries funding requirements and the availability of other funds. Until the Company uses the net proceeds from the sale of any of our securities for general corporate purposes, the Company would use
the net proceeds to reduce short-term indebtedness or for temporary investments. The Company expects that it will, on a recurrent basis, engage in additional financings as the need arises to finance our growth, through acquisitions or otherwise, or
to fund subsidiaries of the Company.



Loans and Allowance
for Loan Losses



At June 30, 2004, loans, net of unearned
income, were $1.594 billion, an increase of $151.0 million or 10.46% over net loans at December 31, 2003 of $1.443 billion. The growth in the loan portfolio was attributable to a consistent focus on quality loan production and strong loan markets in
the state. Residential mortgage and commercial real estate loans increased $97.3 million or 9.92% from December 31, 2003 while real estate construction loans increased $44.7 million or 14.70% over the same period. The Company continues to monitor
the composition of the loan portfolio to ensure that the market risk to the balance sheet is not adversely affected by the impact of changes in the economic environment on any one segment of the portfolio.



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



The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The provision for loan losses is based on managements evaluation of the size and
composition of the loan portfolio, the level of non-performing and past due loans, historical trends of charged-off loans and recoveries, prevailing economic conditions and other factors management deems appropriate. The Companys management
has established an allowance for loan losses which it believes is adequate for inherent losses 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.



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



For the six month period ending June 30, 2004, net charge-offs totaled $0.9 million or 0.12% (annualized) of average loans outstanding for the period, net
of unearned income, compared to $1.4 million or 0.26 % in net charge-offs for the same period in 2003. The provision for loan losses for the six months ended June 30, 2004 was $2.9 million compared to $2.8 million for the same period in 2003. The
allowance for loan losses totaled $23.1 million or 1.45% of total loans, net of unearned income at June 30, 2004, compared to $21.2 million or 1.47% of total loans at December 31, 2003.



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



|                                                            |  |                          |        |      |   |       
|----------------------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------
|                                                            |  | Six Months EndedJune 30,
|                                                            |  | 2004                     |        | 2003
|                                                            |  | (Dollars in thousands)  
|Balance of allowance for loan losses at beginning of period |  | $                        | 21,152 |      | $ | 18,841
|Provision charged to operating expense                      |  |                          | 2,871  |      |   | 2,848 
|Charge-offs:                                                |  |                          |        |      |   |       
|Commercial, financial and agricultural                      |  |                          | 513    |      |   | 790   
|Real estate - construction and land development             |  |                          | 273    |      |   | 136   
|Installment and other consumer                              |  |                          | 534    |      |   | 667   
|                                                            |  |                          |        |      |   |       
|Total charge-offs                                           |  |                          | 1,320  |      |   | 1,593 
|Recoveries:                                                 |  |                          |        |      |   |       
|Commercial, financial and agricultural                      |  |                          | 105    |      |   | 26    
|Real estate - construction and land development             |  |                          | 144    |      |   | 1     
|Installment and other consumer                              |  |                          | 167    |      |   | 149   
|                                                            |  |                          |        |      |   |       
|Total recoveries                                            |  |                          | 416    |      |   | 176   
|                                                            |  |                          |        |      |   |       
|Net charge-offs                                             |  |                          | 904    |      |   | 1,417 
|                                                            |  |                          |        |      |   |       
|Balance of allowance for loan losses at end of period       |  | $                        | 23,119 |      | $ | 20,272
|                                                            |  |                          |        |      |   |       



Non-Performing Assets



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



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



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##### Table of Contents

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



Non-performing assets decreased by $6.3 million since December 31, 2004. The Bank was able to reduce its non-performing assets during the first two
quarters of 2004 through the sale of property securing our largest non-performing loan, refinance of another large non-performing loan by another bank, and the liquidation of collateral obtained through foreclosure. The following table presents
information regarding non-performing assets at the dates indicated:



|                                                                                            |  |                        |       |   |                   |   |        |              |  |   |       |  
|------------------------------------------------------------------------------------------- |  | ---------------------- | ----- | - | ----------------- | - | ------ | ------------ |  | - | ----- | -
|                                                                                            |  | June 30, 2004          |       |   | December 31, 2003 |   |        | June 30,2003 | 
|                                                                                            |  | (Dollars in thousands) |      
|Non-performing assets                                                                       |  |                        |       |   |                   |   |        |              |  |   |       |  
|Non-accrual loans                                                                           |  | $                      | 5,179 |   |                   | $ | 11,548 |              |  | $ | 6,069 |  
|Other real estate and repossessions                                                         |  |                        | 3,731 |   |                   |   | 1,940  |              |  |   | 1,065 |  
|                                                                                            |  |                        |       |   |                   |   |        |              |  |   |       |  
|Total non-performing assets                                                                 |  | $                      | 8,910 |   |                   | $ | 13,488 |              |  | $ | 7,134 |  
|Loans past due 90 days or more and still accruing                                           |  | $                      | 3,618 |   |                   | $ | 1,923  |              |  | $ | 4,241 |  
|Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income |  |                        | 0.23  | % |                   |   | 0.13   | %            |  |   | 0.31  | %
|Ratio of non-performing assets to loans, net of unearned income and other real estate       |  |                        | 0.56  | % |                   |   | 0.95   | %            |  |   | 0.52  | %



Interest Rate Sensitivity and
Liquidity



Asset Liability Management



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



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



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 guide the sensitivity of net interest spreads to potential changes in interest rates and enhance profitability in ways that promise sufficient reward for
recognized and controlled risk. Funding positions are kept



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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 market risk arising from changes in interest rates. In addition, fluctuations in interest rates usually result in changes in the fair
market value of the Companys financial instruments, cash flows and net interest income. The Companys interest rate risk position is managed by ALCO.



The Company uses a simulation modeling process to measure interest rate risk and evaluate potential strategies. The Companys net interest income
simulation includes all financial assets and liabilities. This simulation measures both the term risk and basis risk in the Companys assets and liabilities. Term risk in the result of repricing and maturity timing mismatches. This is caused
when the rates of deposits are changed at different times than when the rates of loans and investments change. Basis risk is caused by the differences in the amounts by which interest rates change from one instrument to another. The simulation also
captures the option characteristics of products, such as caps and floors on floating rate loans, the right to pre-pay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled through the
use of primarily historical customer behavior and statistical analysis. Other interest rate-related risks such as prepayment, basis and option risk are also considered. Simulation results quantify interest risk under various interest rate scenarios.
Management then develops and implements appropriate strategies. The Board of Directors regularly reviews the overall rate risk position and asset and liability management strategies.



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



|                         |  |                                               |   |  |                                              |  
|------------------------ |  | --------------------------------------------- | - |  | -------------------------------------------- | -
|Change in Interest Rates |  | Increase / (Decrease) in FMV of Balance Sheet |   |  | Increase / (Decrease) in Net Interest Income |  
|+ 100 basis points       |  | 2                                             | % |  | 2                                            | %
|- 100 basis points       |  | -4                                            | % |  | -1                                           | %



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.



In fiscal 2004, the Company has continued to face term risk and basis risk.
If interest rates rise, net interest income may actually increase if 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 and review interest rate sensitivity and liquidity positions.



Derivative Instruments and Hedging Activities



Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and
Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Accounting for Derivative Instruments and Hedging Activities (SFAS 149), as amended and interpreted, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value. 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.



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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.



The
Companys objective in using derivatives is to add stability to net interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors 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 floating-rate payments over the life of the agreements without exchange of the underlying principal amount.
Interest rate floors designated as cash flow hedges involve the receipt of variable rate amounts over the life of the agreement if the Prime interest rate decreases below a certain rate.



The following chart illustrates the Banks derivative positions as of June 30, 2004.



|                                       |  |                  |  |           |  |          |             |          |      |   |              |      |   |                |       |   |              |   |            |  
|-------------------------------------- |  | ---------------- |  | --------- |  | -------- | ----------- | -------- | ---- | - | ------------ | ---- | - | -------------- | ----- | - | ------------ | - | ---------- | -
|Type                                   |  | Transaction Date |  | Term Date |  | Notional |             | Pay Rate |      |   | Receive Rate |      |   | Current Spread |       |   | Market Value |  
|Received Fixed Prime Swap - amortizing |  | Apr-02           |  | Apr-05    |  | $        | 20,000,000  |          | 4.00 | % |              | 6.63 | % |                | 2.63  | % |              | $ | 257,136    |  
|Received Fixed Prime Swap              |  | Mar-03           |  | Mar-06    |  | $        | 50,000,000  |          | 4.00 | % |              | 5.26 | % |                | 1.26  | % |              | $ | (548,165   | )
|Received Fixed Prime Swap              |  | Aug-03           |  | Aug-06    |  | $        | 100,000,000 |          | 4.00 | % |              | 5.59 | % |                | 1.59  | % |              | $ | (1,109,729 | )
|                                       |  |                  |  |           |  |          |             |          |      |   |              |      |   |                |       |   |              |   |            |  
|Total Received Fixed Swaps             |  |                  |  |           |  | $        | 170,000,000 |          |      |   |              |      |   |                |       |   |              | $ | (1,400,758 | )
|Prime based Floor                      |  | Jun-03           |  | Jun-05    |  | $        | 100,000,000 |          | 3.75 | % |              | 4.00 | % |                | -0.25 | % |              | $ | 4          |  
|                                       |  |                  |  |           |  |          |             |          |      |   |              |      |   |                |       |   |              |   |            |  
|Total Interest Rate Floors             |  |                  |  |           |  | $        | 100,000,000 |          |      |   |              |      |   |                |       |   |              | $ | 4          |  
|                                       |  |                  |  |           |  |          |             |          |      |   |              |      |   |                |       |   |              |   |            |  
|Total Derivative Positions             |  |                  |  |           |  | $        | 270,000,000 |          |      |   |              |      |   |                |       |   |              | $ | (1,400,754 | )
|                                       |  |                  |  |           |  |          |             |          |      |   |              |      |   |                |       |   |              |   |            |  



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 core deposits, advances from Federal Home Loan Bank, and raised capital. The Companys cash and Federal Funds sold and cash flows from amortizing investment and loan portfolios have generally created
an adequate liquidity position. Executive management reviews liquidity monthly. This review is from a regulatory as well as static and a four-quarter forecasted standpoint.



Market and public confidence in the financial strength of the Company and financial institutions in general will determine
the Corporation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 Atlanta Federal Home Loan Bank (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.



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.



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



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



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



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



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



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



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



ITEM 4. CONTROLS AND PROCEDURES



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



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PART II.  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



The
Company, in the normal course of business, is subject to various pending or threatened lawsuits in which claims for monetary damages are asserted. Although it is not possible for the Company to predict the outcome of these lawsuits or the range of
any possible loss, management, after consultation with legal counsel, does not anticipate that the ultimate aggregate liability, if any, arising from these lawsuits will have a material adverse effect on the Companys financial position or
operating results.



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



The Company held its Annual Meeting of Shareholders on May 5, 2004. The following matters were submitted to a vote of the shareholders:



| | 1) | Proposal One: Elect three Class I Directors of the Company to serve, each for three-year terms expiring at the 2007 Annual Meeting of Shareholders and elect two Class
II directors to serve for one-year terms expiring at the 2005 Annual Meeting of Shareholders. The nominees for Class I directors were: Robert R. Fowler III, Samuel B. Hay III and C. Candler Hunt. The nominees for Class II Directors were: T. Ken
Driskell and John R. Burgess, Jr. The voting results for each nominee were as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                     |  |                       |  |                      |  |          
|-------------------- |  | --------------------- |  | -------------------- |  | ---------
|                     |  | Shares Voted in Favor |  | Shares Voted Against |  | Abstained
|Robert R. Fowler III |  | 16,913,524            |  | 0                    |  | 44,598   
|Samuel B. Hay III    |  | 16,913,524            |  | 0                    |  | 44,598   
|C. Candler Hunt      |  | 16,913,524            |  | 0                    |  | 44,598   
|T. Ken Driskell      |  | 16,913,524            |  | 0                    |  | 44,598   
|John R. Burgess, Sr. |  | 16,913,524            |  | 0                    |  | 44,598   



| | 2) | Proposal Two: The ratification of the selection of Ernst & Young LLP as the Companys independent auditors for 2004. There were 16,916,324 affirmative votes,
33,682 negative votes and 8,116 shares abstained. Ernst & Young was ratified as the independent auditor for 2004.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 5. OTHER INFORMATION



None.



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) | The following are filed with or incorporated by reference into this report
| | --- | --------------------------------------------------------------------------



|           |  |                                                                                                                                                                                                                                                                                       
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                           
|3.1        |  | Articles of Incorporation of Main Street Bank, Inc. (incorporated by reference to Exhibit 3.1 to Registration Statement No. 33-78046 on Form S-4) as amended by Certificate of Merger and Name
Change (incorporated by reference to Exhibit 3.1 of the December 31, 1996, Form 10-KSB)
|           | 
|3.2        |  | Bylaws of Main Street Bank, Inc. (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-78046 on Form S-4)                                                                                                                                                        
|           | 
|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                                                                                                                                                                                    
|           | 
|99.1       |  | Comments concerning forward looking statements                                                                                                                                                                                                                                        



| | (b) | Reports on Form 8-K
| | --- | -------------------



The Company filed the following Form 8-Ks during the second quarter of 2004:



|               |  |                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|April 21, 2004 |  | Press release announcing the results of the first quarter of 2004.                                                                                                     
|               | 
|May 12, 2004   |  | Press release announcing that Main Street Bank will make a presentation at the SunTrust Robinson Humphrey 33rd Annual Institutional Investor Conference in Atlanta, GA.
|               | 
|June 30, 2004  |  | Press release announcing the date of the Companys conference call to release the results of the second quarter of 2004.                                               



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SIGNATURES



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



|                     |  |                         |  |                                             
|-------------------- |  | ----------------------- |  | --------------------------------------------
|                     |  | MAIN STREET BANKS, INC.
|                     |  |                        
|Date: August 9, 2004 |  | By:                     |  | /s/ EDWARD C. MILLIGAN                      
|                     |  |                         |  | Edward C. Milligan, Chairman and            
|                     |  |                         |  | Chief Executive Officer                     
|                     |  |                        
|Date: August 9, 2004 |  | By:                     |  | /s/ ROBERT D. MCDERMOTT                     
|                     |  |                         |  | Robert D. McDermott, Chief Financial Officer



25