######  

###### **SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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###### **FORM10-Q**

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

**Securities ExchangesAct of 1934**

 

##### **For the quarter endedMarch 31, 2002**

 

**Commission file number000-25128**

 

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**MAIN STREETBANKS, INC.**

(Exact name ofregistrant as specified in its charter)

 
| **Georgia**                               |   | **58-2104977**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State of  Incorporation)                 |   | (I.R.S. Employer  Identification No.) |
| **676  Chastain Road, Kennesaw, GA**      |   | **30144**                             |
| (Address of principal  executive offices) |   | (Zip Code)                            |

 

**770-422-2888**

(Registrant’stelephone number)

 

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

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

**Common Stock, no parvalue**

 

----

 

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

Yes   ý    No o

 

##### **APPLICABLE ONLY TOCORPORATE ISSUERS**

 

As of April 30, 2002,registrant had outstanding 15,873,775 shares of common stock.

 

 

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**MAIN STREET BANKS, INC.**

**TABLE OF CONTENTS**

 

 

 

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

 

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##### **PART I. — FINANCIALINFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

 

**MAIN STREET BANKS, INC.**

##### **CONDENSED CONSOLIDATEDBALANCE SHEETS**

 
|                                                                                                                                               |   | **      (Unaudited)** |          |              |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|---------------|-------------------|
|                                                                                                                                               |   | ** March 31,**                            |          | **December  31,** |   |
|                                                                                                                                               |   | **2002**                                       |          | **2001**          |   |
| **Assets**                                                                                                                                         |   |                                           |          |              |   |
| Cash and due  from banks                                                                                                                           |   | $                                              | 35,283,211    |              | $ | 36,002,196 |   |
| Interest-bearing  deposits in banks                                                                                                                |   | 238,257                                        |          | 14,509,315        |   |
| Federal funds  sold and securities purchased under agreement to resell                                                                             |   | 90,701,897                                     |          | 60,431,897        |   |
| Investment  securities available for sale                                                                                                          |   | 129,641,769                                    |          | 122,447,873       |   |
| Investment  securities held to maturity (fair value of $730,259 and $729,102 at March 31,  2002 and December 31, 2001, respectively)               |   | 687,111                                        |          | 686,966           |   |
| Mortgage loans  held for sale                                                                                                                      |   | 6,227,092                                      |          | 9,193,983         |   |
| Loans, net of  unearned income                                                                                                                     |   | 836,711,988                                    |          | 811,446,346       |   |
| Allowance for  loan losses                                                                                                                         |   | (12,346,331                                    | )             | (12,017,448       | ) |
| Loans, net                                                                                                                                         |   | 824,365,657                                    |          | 799,428,898       |   |
|                                                                                                                                               |   |                                           |          |              |   |
| Premises and  equipment, net                                                                                                                       |   | 26,882,988                                     |          | 26,692,404        |   |
| Other real  estate                                                                                                                                 |   | 1,692,275                                      |          | 1,266,650         |   |
| Accrued interest  receivable                                                                                                                       |   | 6,407,639                                      |          | 5,643,803         |   |
| Goodwill and  other intangible assets                                                                                                              |   | 672,267                                        |          | 705,867           |   |
| Other assets                                                                                                                                       |   | 37,481,109                                     |          | 33,158,039        |   |
| Total assets                                                                                                                                       |   | $                                              | 1,160,281,272 |              | $ | 1,110,167,891 |   |
|                                                                                                                                               |   |                                           |          |              |   |
| **Liabilities  and stockholders’ equity**                                                                                                     |   |                                           |          |              |   |
| **Liabilities**                                                                                                                                    |   |                                           |          |              |   |
| Deposits:                                                                                                                                          |   |                                           |          |              |   |
| Noninterest-bearing  demand                                                                                                                        |   | $                                              | 172,086,094   |              | $ | 160,675,955 |   |
| Interest-bearing  demand and money market                                                                                                          |   | 239,447,745                                    |          | 250,925,349       |   |
| Savings                                                                                                                                            |   | 51,722,697                                     |          | 50,311,997        |   |
| Time deposits of  $100,000 or more                                                                                                                 |   | 176,294,051                                    |          | 152,749,296       |   |
| Other time  deposits                                                                                                                               |   | 329,149,552                                    |          | 293,518,204       |   |
| Total deposits                                                                                                                                     |   | 968,700,139                                    |          | 908,180,801       |   |
|                                                                                                                                               |   |                                           |          |              |   |
| Accrued interest  payable                                                                                                                          |   | 4,178,264                                      |          | 4,570,179         |   |
| Federal Home  Loan Bank advances                                                                                                                   |   | 75,121,250                                     |          | 75,121,250        |   |
| Federal funds  purchased and securities sold under repurchase agreements                                                                           |   | 905,257                                        |          | 15,504,355        |   |
| Other  liabilities                                                                                                                                 |   | 3,591,982                                      |          | 1,669,954         |   |
| Total  liabilities                                                                                                                                 |   | 1,052,496,892                                  |          | 1,005,046,539     |   |
|                                                                                                                                               |   |                                           |          |              |   |
| **Shareholders’  equity**                                                                                                                     |   |                                           |          |              |   |
| Common stock3⁄4no par value per share; 50,000,000 shares  authorized; issued and outstanding, 15,879,397 shares in 2002 and 15,699,201  in 2001 |   | 29,535,590                                     |          | 32,407,424        |   |
| Retained  earnings                                                                                                                                 |   | 78,102,094                                     |          | 72,018,255        |   |
| Accumulated  other comprehensive gain                                                                                                              |   | 1,180,571                                      |          | 1,729,548         |   |
| Treasury stock,  169,082 shares in 2002 and 2001                                                                                                   |   | (1,033,875                                     | )             | (1,033,875        | ) |
| Total  shareholders’ equity                                                                                                                   |   | 107,784,380                                    |          | 105,121,352       |   |
| Total  liabilities and shareholders’ equity                                                                                                   |   | $                                              | 1,160,281,272 |              | $ | 1,110,167,891 |   |
|                                                                                                                                                    |        |                                                |               |                   |  |  |  |  |

*See accompanying notes.*

 

2

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**MAIN STREET BANKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

                                                                                                                                      
|                                                                        |   | **Three  Months Ended  March 31,** |       |
|-----------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                        |   | **2002**                           |       | **2001** |   |
| Interest Income:                                                            |   |                               |       |   |   |
| Loans, including  fees                                                      |   | $                                  | 16,569,933 |   | $ | 18,868,499 |   |
| Interest on  investment securities:                                         |   |                               |       |   |   |
| Taxable                                                                     |   | 1,285,349                          |       | 2,088,684 |   |
| Non-taxable                                                                 |   | 386,135                            |       | 360,989 |   |
| Federal funds  sold and other short term investments                        |   | 272,958                            |       | 917,835 |   |
| Interest-bearing  deposits in banks                                         |   | 32,411                             |       | 14,562 |   |
| Total interest  income                                                      |   | 18,546,786                         |       | 22,250,569 |   |
|                                                                        |   |                               |       |   |   |
| Interest  expense:                                                          |   |                               |       |   |   |
| Interest-bearing  demand and money market                                   |   | 640,300                            |       | 1,237,511 |   |
| Savings                                                                     |   | 126,270                            |       | 262,395 |   |
| Time deposits of  $100,000 or more                                          |   | 1,769,178                          |       | 2,485,584 |   |
| Other time  deposits                                                        |   | 3,357,027                          |       | 5,554,149 |   |
| Federal funds  purchased and securities sold under agreement to re purchase |   | 12,962                             |       | 87,493 |   |
| Federal Home  Loan Bank advances                                            |   | 373,399                            |       | 810,612 |   |
| Other interest  expense                                                     |   | 22,463                             |       | 4,860 |   |
| Total interest  expense                                                     |   | 6,301,599                          |       | 10,442,604 |   |
|                                                                        |   |                               |       |   |   |
| Net interest  income                                                        |   | 12,245,187                         |       | 11,807,965 |   |
| Provision for loan losses                                                   |   | 625,000                            |       | 530,000 |   |
|                                                                        |   |                               |       |   |   |
| Net interest  income after provision for loan losses                        |   | 11,620,187                         |       | 11,277,965 |   |
|                                                                        |   |                               |       |   |   |
| Noninterest  income:                                                        |   |                               |       |   |   |
| Service charges  on deposit accounts                                        |   | 1,523,106                          |       | 1,311,672 |   |
| Investment  securities gain                                                 |   | —                             |       | 3,655 |   |
| Gain (loss) on  sales of assets                                             |   | 500                                |       | (4,224 | ) |
| Gain on sales of  loans                                                     |   | 296,781                            |       | 241,748 |   |
| Other income                                                                |   | 2,424,202                          |       | 1,617,935 |   |
| Total  noninterest income                                                   |   | 4,244,589                          |       | 3,170,786 |   |
|                                                                        |   |                               |       |   |   |
| Noninterest  expense:                                                       |   |                               |       |   |   |
| Salaries and  other compensation                                            |   | 4,511,174                          |       | 4,104,564 |   |
| Employee  benefits                                                          |   | 854,269                            |       | 676,715 |   |
| Net occupancy  and equipment expense                                        |   | 1,177,797                          |       | 1,178,294 |   |
| Professional services                                                       |   | 294,751                            |       | 377,307 |   |
| Regulatory  agency assessments                                              |   | 59,151                             |       | 74,377 |   |
| Amortization of  intangible assets                                          |   | 33,600                             |       | 59,917 |   |
| Merger expense                                                              |   | —                             |       | 1,648,974 |   |
| Other expense                                                               |   | 2,132,171                          |       | 1,847,032 |   |
| Total  noninterest expense                                                  |   | 9,062,913                          |       | 9,967,180 |   |
|                                                                        |   |                               |       |   |   |
| Income before  income taxes                                                 |   | 6,801,863                          |       | 4,481,571 |   |
| Income tax  expense                                                         |   | 2,032,258                          |       | 1,822,730 |   |
| Net income                                                                  |   | $                                  | 4,769,605  |   | $ | 2,658,841 |   |
|                                                                        |   |                               |       |   |   |
| Earnings per  share:                                                        |   |                               |       |   |   |
| Basic                                                                       |   | $                                  | .30        |   | $ | .17 |   |
| Diluted                                                                     |   | $                                  | .29        |   | $ | .17 |   |
|                                                                        |   |                               |       |   |   |
| Dividends  declared per share                                               |   | $                                  | .105       |   | $ | .09 |   |
| Weighted average  common shares outstanding:                                |   |                               |       |   |   |
| Basic                                                                       |   | 15,707,262                         |       | 15,602,414 |   |
| Diluted                                                                     |   | 16,201,589                         |       | 15,979,368 |   |

 

*See accompanying notes.*

 

3

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**MAIN STREET BANKS, INC.**

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

**(Unaudited)**

 
|                                                                     |   | **Three  Months Ended  March 31,** |       |
|--------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                     |   | **2002**                           | ** ** | **2001** | ** ** |
|                                                                     |   |                               |       |   |   |
| **Net  income**                                                          |   | $                                  | 4,769,605  |   | $ | 2,658,841 |   |
|                                                                     |   |                               |       |   |   |
| **Other comprehensive income, net of  tax**                              |   |                               |       |   |   |
|                                                                     |   |                               |       |   |   |
| Unrealized gains  on securities available for sale                       |   | 1,180,571                          |       | 1,371,032 |   |
| Less  reclassification adjustment for net (gains) included in net income |   | (21,112                            | )          | (2,412 | ) |
|                                                                     |   |                               |       |   |   |
| **Comprehensive  income**                                                |   | $                                  | 5,929,064  |   | $ | 4,027,461 |   |

 

 

4

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**MAIN STREET BANKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

** (Unaudited)**

 
|                                                                               |   | **Three  Months Ended  March 31,** |        |
|------------------------------------------------------------------------------------|--------|------------------------------------|-------------|
|                                                                               |   | **2002**                           |        | **2001** |   |
| **Operating  activities**                                                          |   |                               |        |   |   |
| Net income                                                                         |   | $                                  | 4,769,605   |   | $ | 2,658,841 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |                               |        |   |   |
| Provision for  loan losses                                                         |   | 625,000                            |        | 530,000 |   |
| Depreciation and  amortization of premises and equipment                           |   | 500,714                            |        | 563,567 |   |
| Amortization of  intangible assets                                                 |   | 33,600                             |        | 59,917 |   |
| Loss on sales of  other real estate                                                |   | —                             |        | 15,245 |   |
| Investment  securities (gain)                                                      |   | —                             |        | (3,655 | ) |
| Net accretion of  investment securities                                            |   | 41,642                             |        | (292,901 | ) |
| Net accretion of  loans purchased                                                  |   | 6,596                              |        | 12,484 |   |
| Net decrease  (increase) in mortgage loans held for sale                           |   | 2,966,891                          |        | (3,461,224 | ) |
| Gains on sales  of mortgage loans                                                  |   | (124,798                           | )           | (127,006 | ) |
| (Gains) on sales  of other loans                                                   |   | (296,781                           | )           | (241,748 | ) |
| Deferred income  tax provision                                                     |   | 482,258                            |        | 788,394 |   |
| Deferred net  loan fees (cost amortization)                                        |   | (13,565                            | )           | (21,886 | ) |
| Vesting in  restricted stock award plan                                            |   | 133,856                            |        | 125,941 |   |
| Changes in  operating assets and liabilities:                                      |   |                               |        |   |   |
| (Increase)  decrease in accrued interest receivable                                |   | (763,836                           | )           | 278,509 |   |
| (Decrease) increase in accrued interest payable                                    |   | (391,915                           | )           | 1,300,539 |   |
| Other                                                                              |   | 682,320                            |        | 665,053 |   |
| Net cash  provided by operating activities                                         |   | 8,651,587                          |        | 2,850,070 |   |
|                                                                               |   |                               |        |   |   |
| **Investing activities**                                                           |   |                               |        |   |   |
| Purchases of  investment securities available for sale                             |   | (21,488,798                        | )           | (8,883,232 | ) |
| Maturities and  calls of investment securities available for sale                  |   | 9,329,486                          |        | 24,841,322 |   |
| Proceeds from  sales of investment securities available for sale                   |   | —                             |        | 1,104,250 |   |
| Net increase in  loans funded                                                      |   | (25,212,868                        | )           | (13,714,568 | ) |
| Purchases of  premises and equipment                                               |   | (593,944                           | )           | (507,184 | ) |
| Proceeds from  sales of premises and equipment                                     |   | 500                                |        | — |   |
| Proceeds from  sales of other real estate                                          |   | 274,419                            |        | 1,149,465 |   |
| Net cash (used in) provided by investing activities                                |   | (37,691,205                        | )           | 3,990,053 |   |
|                                                                               |   |                               |        |   |   |
| **Financing activities**                                                           |   |                               |        |   |   |
| Net increase in  demand and savings accounts                                       |   | 1,343,235                          |        | 9,855,313 |   |
| Increase  (decrease) in time deposits                                              |   | 59,176,103                         |        | (1,987,488 | ) |
| Decrease in  federal funds purchased                                               |   | (14,599,098                        | )           | (26,295,111 | ) |
| Dividends paid                                                                     |   | (1,649,227                         | )           | (1,292,122 | ) |
| Proceeds from  the issuance of common stock                                        |   | 48,562                             |        | 350,988 |   |
| Net cash  provided by (used in) financing activities                               |   | 44,319,575                         |        | (19,368,420 | ) |
| Net increase  (decrease) in cash and cash equivalents                              |   | 15,279,957                         |        | (12,528,297 | ) |
| Cash and cash  equivalents at beginning of period                                  |   | 110,943,408                        |        | 129,397,609 |   |
| Cash and cash  equivalents at end of period                                        |   | $                                  | 126,223,365 |   | $ | 116,869,312 |   |
| **Supplemental disclosures of cash  flow information**                             |   |                               |        |   |   |
| Cash paid during  the year for:                                                    |   |                               |        |   |   |
| Interest                                                                           |   | $                                  | 6,693,514   |   | $ | 9,142,065 |   |
| **Supplemental disclosures of noncash  transactions**                              |   |                               |        |   |   |
| Loans  transferred to real estate acquired through foreclosure                     |   | $                                  | 425,625     |   | $ | 96,225 |   |
| Transfer of  investment securities from held to maturity to available for sale     |   | $                                  | —      |   | $ | 17,851,829 |   |

 

 

5

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**MAIN STREET BANKS, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

**MARCH 31, 2002**

 

 

**NOTE 1.        BASIS OFPRESENTATION**

 

The accompanyingunaudited condensed consolidated financial statements for Main Street Banks,Inc. (the “Company”) have been prepared in accordance with accountingprinciples generally accepted in the United States followed within thefinancial services industry for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and notes required for complete financialstatement presentation. In the opinion of management, all adjustments(consisting solely of normal recurring adjustments) considered necessary for afair presentation of the financial position and results of operations forinterim periods have been included.

 

                The results of operations forthe three month period ended March 31, 2002 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2002. Thesefinancial statements and related “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” should be read in conjunctionwith the consolidated financial statements and notes thereto for the year endedDecember 31, 2001, included in the Company’s Current Report on Form 10-K AnnualReport.

 

**NOTE2.**        **BUSINESS COMBINATION**

 

                On January 25, 2001, the Companycompleted a business combination with Walton Bank and Trust Company (“Walton”)by exchanging 2.752 shares of its common stock for each share of Waltonoutstanding common stock.  Thecombination was accounted for as a pooling of interests in accordance withAccounting Principles Board No. 16, “Business Combinations”.

 

**NOTE3.**        **CURRENT ACCOUNTING DEVELOPMENTS**

 

In July 2001, the FASB issued Statement No. 141,“Business Combinations” (“Statement 141”), effective for business combinationsinitiated after June 30, 2001.  UnderStatement 141, the pooling of interests method of accounting for businesscombinations is eliminated.  Theadoption of this statement did not have a material financial impact on theCompany’s financial position or results of operations.

 

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

 

 

6

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In October 2001, the FASB issuedStatement No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” (“Statement 144”), effective for fiscal years beginning after December15, 2001 and applied prospectively. Statement 144 superceded Statement 121 and APB 30.  Statement 144 retains the fundamentalprovisions of Statement 121 related to the recognition and measurement oflong-lived assets.  Statement 144provides more guidance on estimating cash flows when performing arecoverability test.  Furthermore,Statement 144 requires that operating losses from a “component of an entity”would be recognized in the period in which they occur rather than as of themeasurement date as presently required by APB 30.  The adoption of this statement did not have a material financialimpact on the Company’s financial position or results of operations.

 

**NOTE4.**        **EARNINGS PER SHARE**

 

The computation of diluted earnings per share isas follows:

 
|                              |   | **Three Months Ended  March 31,** |      |
|-----------------------------------|--------|-----------------------------------|-----------|
|                              |   | **2002**                          |      | **2001** |   |
|                              |   |                              |      |   |   |
| Basic and diluted net  income     |   | $                                 | 4,769,605 |   | $ | 2,658,841 |   |
|                              |   |                              |      |   |   |
| Basic weighted average  shares    |   | 15,707,262                        |      | 15,602,414 |   |
| Effect of Employee  Stock Options |   | 494,327                           |      | 376,954 |   |
| Diluted weighted  average shares  |   | 16,201,589                        |      | 15,979,368 |   |
|                              |   |                              |      |   |   |
| Diluted earnings per  share       |   | $                                 | .29       |   | $ | .17 |   |

 

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

 

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

 
|                       |   | **March 31,  2002**          |         | **December 31,  2001** |   |
|----------------------------|--------|------------------------------|--------------|------------------------|--------|
|                       |   | ***(Dollars in thousands)*** | *** *** |
|                       |   |                         |         |                   |   |
| Commercial                 |   | $                            | 67,733       |                   | $      | 68,320 |   |
| Real  estate construction  |   | 190,456                      |         | 173,464                |   |
| Residential  mortgage      |   | 158,917                      |         | 152,226                |   |
| Commercial  real estate    |   | 371,510                      |         | 366,003                |   |
| Consumer                   |   | 40,685                       |         | 53,075                 |   |
| Total  loans               |   | 838,301                      |         | 813,088                |   |
| Less:                      |   |                         |         |                   |   |
| Net  deferred loan fees    |   | (1,589                       | )            | (1,642                 | )      |
| Allowance  for loan losses |   | (12,346                      | )            | (12,017                | )      |
|                       |   |                         |         |                   |   |
| Net  loans                 |   | $                            | 824,366      |                   | $      | 799,429 |   |

 

 

7

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### **ITEM2.          MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION**

##### **                        AND RESULTS OFOPERATIONS**

 

                The following ismanagement’s discussion and analysis of certain significant factors which haveaffected the Company’s financial position at March 31, 2002 as compared toDecember 31, 2001 and operating results for the three month period ended March31, 2002. These comments should be read in conjunction with the Company’s unauditedcondensed consolidated financial statements and accompanying notes appearingelsewhere herein.

 

**ForwardLooking Statements**

 

This discussion contains certain forward-lookingstatements including statements relating to present or future trends or factorsgenerally affecting the banking industry and specifically affecting theCompany’s operations, markets and products. Without limiting the foregoing, the words “believes” “anticipates”,“intends”, “expects” or similar expressions are intended to identifyforward-looking statements.  Theseforward-looking statements involve certain risks and uncertainties.  Actual results could differ materially fromthose projected for many reasons including, without limitation, changing eventsand trends that have influenced the Company’s assumptions.  These trends and events include (i) changesin the interest rate environment which may reduce margins, (ii) non-achievementof expected growth (iii) less favorable than anticipated changes in nationaland local business environment and securities markets (iv) adverse changes inthe regulatory requirements affecting the Company (v) greater competitivepressures among financial institutions in the Company’s market and (vi) greaterthan expected loan losses. Additional information and other factors that couldaffect future financial results are included in the Company’s filings with theSecurities and Exchange Commission, including the Annual Report on Form 10-Kfor 2001.

 

**Overview**

 

                The Company’stotal assets have increased $ 50.1 million or 4.51% since December 31,2001.  Federal funds sold increased$30.3 million primarily due to an increase in deposit campaigns. Loans haveincreased $25.3 million or 3.11% and the investment portfolio increased $7.2million or 5.88%.  Time deposits haveincreased $59.1 million or 27.6% since December 31, 2001 due to the initiationof a time deposit campaign and the limited use of national and brokereddeposits.

 

                Return on averageequity (operating income, excluding one-time charges) for the three monthsended March 31, 2002 was 18.2%, compared to 17.8% for the same period in 2001.

 

                Return on averageassets (operating income, excluding one-time charges) for the three monthsended March 31, 2002 was 1.74%, compared to 1.61% for the same period in 2001.

 

**Critical Accounting Policies**

 

                The Company’scritical accounting policy relates to the allowance for loan losses.

 

                Allowance for loanlosses is based on management’s opinion of an amount that is adequate to absorblosses in the existing loan portfolio. The allowance for loan losses is established throughout a provision forlosses based on management’s evaluation of current economic conditions.  The evaluation, which includes a review ofall loans on which full collection may not be reasonably assumed, considersamong other matters, economic conditions, the fair market value or theestimated net realizable value of the underlying collateral, management’sestimate of probable credit losses, historical loan loss experience, and otherfactors that warrant recognition in providing for an adequate loan lossallowance.

 

 

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**Capital**

 

                At March 31, 2002, the capitalratios of the Company and the Bank were adequate based on regulatory minimumcapital requirements.  The minimumcapital requirements for banks and bank holding companies require a leveragecapital to total assets ratio of at least 4%, core capital to risk-weightedassets ratio of at least 4% and total capital to risk-weighted assets of8%.  The following table reflects theCompany’s and the Bank’s compliance with regulatory capital requirements atMarch 31, 2002.

 
|                        |   | **Company** |   | **Bank** |   |
|-----------------------------|--------|-------------|--------|----------|--------|
|                        |   |        |   |     |   |
| Leverage ratio              |   | 9.51        | %      | 9.33     | %      |
|                        |   |        |   |     |   |
| Risk based  capital ratios: |   |        |   |     |   |
| Tier 1 risk  based capital  |   | 11.54       | %      | 11.32    | %      |
| Risk-based  capital         |   | 12.79       | %      | 12.58    | %      |

 

**Loansand Allowance for Loan Losses**

 

AtMarch 31, 2002, loans, net of unearned income, were $836.7 million, an increaseof $25.3 million or 3.11% over net loans at December 31, 2001 of $811.4million. The growth in the loan portfolio was attributable to a consistentfocus on quality loan production and strong loan markets in the state andregion. Real estate-construction loans increased $17 million or 9.8% fromDecember 31, 2001. The Company continues to monitor the composition of the loanportfolio to ensure that the market risk to the balance sheet is not adverselyaffected by the impact of changes in the economic environment on any onesegment of the portfolio.

 

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

 

The allowance for loan losses is a reserve establishedthrough charges to earnings in the form of a provision for loan losses.  The provision for loan losses is based onmanagement’s evaluation of the size and composition of the loan portfolio, thelevel of non-performing and past due loans, historical trends of charged-offloans and recoveries, prevailing economic conditions and other factorsmanagement deems appropriate. The Company’s management has established anallowance for loan losses which it believes is adequate for anticipated lossesin the loan portfolio.  Based on acontinuous credit evaluation of the loan portfolio, management presents aquarterly review of the allowance for loan losses to the Company’s board ofdirectors. The review that management has developed primarily focuses on riskby evaluating the level of loans in certain risk categories.  These categories have also been establishedby management and take the form of loan grades. These loan grades closelymirror regulatory classification guidelines and include pass loan categories 1through 4 and special mention, substandard, doubtful, and loss categories of 5through 8, respectively.  By grading theloan portfolio in this manner the Company’s management is able to effectivelyevaluate the portfolio by risk, which management believes is the most effectiveway to analyze the loan portfolio and thus analyze the adequacy of theallowance for loan losses. Management also reviews charge-offs and recoverieson a quarterly basis to identify trends.

 

The Company’s risk management processes include a loanreview program to evaluate the credit risk in the loan portfolio. The creditreview department is independent of the loan function and reports to the SeniorVice President of Risk Management. Through the loan review process, the Company maintains an internallycriticized classified loan watch list which, along with the delinquency reportof loans serves as a tool to assist management assess the overall quality ofthe loan portfolio and the adequacy of the allowance for loan losses. Loansclassified as “substandard” are those loans with clear and defined weaknessessuch as a highly leveraged position, unfavorable financial ratios, uncertainfinancial ratios, uncertain repayment sources, deterioration in underlyingcollateral values, or poor financial condition which may jeopardizerecoverability of the debt. Loans classified as “doubtful” are those loans thathave characteristics similar to substandard loans but have an increased risk ofloss, or at least a portion of the loan may require being

 

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charged-off. Loans classified as “loss” are those loans that are in theprocess of being charged-off.

 

                For the quarter ending March 31,2002, net charge-offs totaled $296,118 or .17% (annualized) of average loansoutstanding for the period, net of unearned income, compared to $158,447 or..13% in net charge-offs for the same period in 2001. The provision for loan lossesfor the quarter ending March 31, 2002 was $625,000 compared to $530,000 for thesame period in 2001. The allowance for loan losses totaled $12,346,331 or 1.48%of total loans, net of unearned income at March 31, 2002, compared to$12,017,448 or 1.48% at December 31, 2001.

 

                The following table presents ananalysis of the allowance for loan losses for the three month period endedMarch 31, 2002 and March 31, 2001 follows:

 
|                                                         |   | **Three Months Ended  March 31,** |       |
|--------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                         |   | **2002**                          |       | **2001** |   |
|                                                         |   |                              |       |   |   |
| Balance of  allowance for loan losses at beginning of period |   | $                                 | 12,017,448 |   | $ | 10,907,424 |   |
|                                                         |   |                              |       |   |   |
| Provision  charged to operating expense                      |   | 625,000                           |       | 530,000 |   |
| Charge-offs:                                                 |   |                              |       |   |   |
| Commercial,  financial and agricultural                      |   | 14,078                            |       | 2,090 |   |
| Real estate —  mortgage                                 |   | —                            |       | 17,484 |   |
| Installment and  other consumer                              |   | 331,949                           |       | 214,289 |   |
| Total  charge-offs                                           |   | 346,027                           |       | 233,863 |   |
| Recoveries:                                                  |   |                              |       |   |   |
| Commercial,  financial and agricultural                      |   | 5,684                             |       | 31,017 |   |
| Real estate —  mortgage                                 |   | —                            |       | 541 |   |
| Installment and  other consumer                              |   | 44,226                            |       | 43,858 |   |
| Total recoveries                                             |   | 49,910                            |       | 75,416 |   |
| Net charge-offs                                              |   | 296,117                           |       | 158,447 |   |
|                                                         |   |                              |       |   |   |
| Balance of  allowance for loan losses at end of period       |   | $                                 | 12,346,331 |   | $ | 11,278,977 |   |

 

**Liquidityand Market Risk Sensitivity**

 

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

 

TheCompany’s asset liability and funds management policy provides management withthe necessary guidelines for effective funds management and a measurementsystem for monitoring its net interest rate sensitivity position. The Companymanages its sensitivity position within established guidelines.

 

                Market risk isdefined as the risk of loss arising from adverse changes in market interestrates and prices. In order to maintain acceptable net interest income levels,interest rates, liquidity and maturities of the Company’s assets andliabilities need to be managed.  In adecreasing rate environment earnings are typically negatively impacted as theCompany’s rate sensitive assets generally reprice faster than its rate sensitiveliabilities thus an increase in interest rates will typically have a positiveimpact on earnings.

 

 

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

 

TheCompany manages its exposure to interest rates by structuring its balance sheetin the ordinary course of business. The Company has in the past, and may in thefuture utilize interest rate swaps, financial options, or financial futurescontracts in order to reduce interest rate risk.

 

Asof March 31, 2002, a $50 million notional amount interest rate floor is inplace to protect the Company from further interest rate reductions.  The interest rate floor has a 12 monthcontract term that is tied to the 3 month London Interbank Offered Rate (LIBOR)and has a strike price of 2.0%.  Theinterest rate floor contract term expires during 2002.

 

Aninterest rate sensitive asset or liability is one that, within a defined timeperiod, either matures or experiences an interest rate change in line withgeneral market interest rates. The management of interest rate risk isperformed by analyzing the maturity and repricing relationships betweeninterest-earning assets and interest-bearing liabilities at specific points intime (gap) and by analyzing the effects of interest rate changes on netinterest income over specific periods of time by projecting the performance ofthe mix of assets and liabilities in varied interest rate environments.Interest rate sensitivity reflects the potential effect on net interest incomeof a movement in interest rates. A company is considered to be asset sensitive,or having a positive gap, when the amount of its interest-earning assetsmaturing or repricing within a given period exceeds the amount of its interest-bearingliabilities also maturing or repricing within that time period. Conversely, acompany is considered to be liability sensitive, or having a negative gap, whenthe amount of its interest-bearing liabilities maturing or repricing within agiven period exceeds the amount of its interest-earning assets also maturing orrepricing within that time period. During a period of rising interest rates, anegative gap would tend to affect net interest income adversely, while apositive gap would tend to result in an increase in net interest income. Duringa period of falling interest rates, a negative gap would tend to result in anincrease in net interest income, while a positive gap would tend to affect netinterest income adversely.

 

**Resultsof Operations for the Three Months Ended March 31, 2002 and 2001**

 

                Net income for thequarter ended March 31, 2002 was $4.8 million compared to $2.7 million for thequarter ended March 31, 2001.  Operatingnet income, which excludes the impact of merger, expenses was $4.8 million forthe quarter ended March 31, 2002, an increase of $605,980 or 14.55% over thesame period in 2001.  Operating dilutedearnings per share was $ .29 and $ .26 for the quarters ending March 31, 2002and March 31, 2001, respectively.

 

The increase in net income, excluding merger expenses,was attributable to several factors: interest income decreased by $3.7 million or 16.65%, interest expensedecreased by $4.1 million or 39.65%, non-interest income increased by $1.1million or 33.87% and non-interest operating expenses decreased by $0.9 millionor 9.07%. The reduction in interest income and interest expense when comparedto the same period in the prior year is attributable to the Federal Reservesaggressive easing of interest rates during 2001.  Average earning assets increased by $44.5 million or 4.56% andaverage interest bearing liabilities increased $38.0 million over the sameperiod in 2001.  Although interest ratesdeclined in 2001, the Company realized an increase in net interest income of$437,222 or 3.03% and was able to limit the effect of the interest ratereductions on the net interest margin. The net interest margin for the quarterended March 31, 2002 was 4.98% compared to 4.99% for the quarter ended March31,2001. The Company operates in the highly competitive metro Atlanta marketand continues to enjoy excellent growth. Average total deposits for the quarterended March 31, 2002, increased $39.3 million or 4.44%, over the quarter endedMarch 31, 2001.

 

 

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##### **PART II. — OTHERINFORMATION**

 

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

 

(a)                          Current report on Form 8-K

 

There were no reports onForm 8-K filed during the quarter ended March 31, 2002.

 

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**SIGNATURES**

 

 

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

 

                                                                                                                            **MAIN STREETBANKS, INC.**

 

 

 
| Date:  | May 15, 2002 | By:    | /s/ Edward C. Milligan            |
|--------|--------------|--------|-----------------------------------|
|   |         |   | Edward C. Milligan, President and |
|   |         |   | Chief Executive Officer           |

 

 

 
| Date:  | May 15, 2002 | By:    | /s/ Robert D. McDermott                       |
|--------|--------------|--------|-----------------------------------------------|
|   |         |   | Robert  D. McDermott, Chief Financial Officer |

 

 

 

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