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

**WASHINGTON,D.C. 20549**

 

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

 

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

 

##### **For the quarter ended March 31, 2003**

 

**Commission file number000-25128**

 

**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)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes   ý  No   o

 

Indicate by check whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).  Yes   ý  No   o

 

As of April 30,2003 registrant had outstanding 16,809,466 shares of common stock.

 

 

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**MAIN STREET BANKS, INC.**

**TABLE OF CONTENTS**

 
| **PART I.   FINANCIAL INFORMATION** |                                                                                                                                            | **Page** |   |
|------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|----------|--------|
|                                     |                                                                                                                                            |     |   |
| Item  1.                                 | Financial  Statements                                                                                                                           |     |   |   |
|                                     | Condensed Consolidated Balance  Sheets March 31, 2003 (unaudited), December 31, 2002 and March 31, 2002  (unaudited)                            |     | 2      |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Condensed Consolidated  Statements of Income (unaudited) Three Months Ended March 31, 2003, December  31, 2002 and March 31, 2002               |     | 3      |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Condensed Consolidated Statements of  Comprehensive Income (unaudited) Three Months Ended March 31, 2003, December  31, 2002 and March 31, 2002 |     | 4      |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Condensed Consolidated Statements of Cash Flows  (unaudited) Three Months Ended March 31, 2003 and 2002                                         |     | 5      |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Notes to Condensed Consolidated Financial  Statements (unaudited)                                                                               |     | 6      |   |
|                                     |                                                                                                                                            |     |   |   |
| Item  2.                                 | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                     |     | 8      |   |
|                                     |                                                                                                                                            |     |   |   |
| Item 3.                                  | Quantitative and  Qualitative Disclosures about Market Risk (included in Item 2)                                                                |     |   |   |
|                                     |                                                                                                                                            |     |   |   |
| Item  4.                                 | Controls  and Procedures                                                                                                                        |     | 15     |   |
|                                     |                                                                                                                                            |     |   |   |
| **PART II.  OTHER INFORMATION**     |                                                                                                                                            | 16       |   |
|                                     |                                                                                                                                            |     |   |   |
| Item  6.                                 | Exhibits  and Reports on Form 8-K                                                                                                               |     | 16     |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Signatures                                                                                                                                      |     | 17     |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Certification of CEO                                                                                                                            |     | 18     |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Certification  of CFO                                                                                                                           |     | 19     |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Exhibit 99.1                                                                                                                                    |     |   |   |
|                                     |                                                                                                                                            |     |   |   |
|                                     | Exhibit 99.2                                                                                                                                    |     |   |   |

 

1

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##### **PART I**.– FINANCIAL INFORMATION

 

**ITEM 1****.  FINANCIAL STATEMENTS**

 

**MAIN STREET BANKS, INC.**

##### **CONDENSED CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                                       |   | **Unaudited** |          |             |       | **Unaudited** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|---------------|------------------|------------|---------------|------------|
|                                                                                                                                                                                                       |   | **March 31,** |          | **December 31,** |       | **March 31,** |       |
|                                                                                                                                                                                                       |   | **2003**      |          | **2002**         |       | **2002**      |       |
|                                                                                                                                                                                                       |   |          |          |             |       |          |       |
| **Assets**                                                                                                                                                                                                 |   |          | ** **    |             | ** ** |          | ** ** |
| Cash and due from banks                                                                                                                                                                                    |   | $             | 35,903,869    |             | $          | 43,711,817    |       | $ | 34,420,283 |   |
| Interest-bearing deposits in banks                                                                                                                                                                         |   | 833,073       |          | 1,782,121        |       | 1,101,185     |       |
| Federal funds sold and securities purchased under  agreements to resell                                                                                                                                    |   | 5,455,000     |          | 54,656,351       |       | 90,701,897    |       |
| Investment securities available for sale (costs of$214,686,900,  $201,404,160, and $127,893,541 at March 31, 2003, December 31, 2002 andMarch 31, 2002,  respectively)                                     |   | 220,604,260   |          | 208,455,409      |       | 129,641,769   |       |
| Investment securities held to maturity (fair valueof  $752,076, $754,704, and $730,259 at March 31, 2003,December 31, 2002 and  March 31, 2002, respectively)                                              |   | 687,713       |          | 687,562          |       | 687,111       |       |
| Other investments                                                                                                                                                                                          |   | 4,518,924     |          | 3,699,368        |       | 4,118,600     |       |
| Mortgage loans held for sale                                                                                                                                                                               |   | 4,719,794     |          | 8,175,522        |       | 6,227,092     |       |
| Loans, net of unearned income                                                                                                                                                                              |   | 1,048,550,371 |          | 982,486,447      |       | 836,711,988   |       |
| Allowance for loan losses                                                                                                                                                                                  |   | (15,390,616   | )             | (14,588,582      | )          | (12,346,331   | )          |
| Loans, net                                                                                                                                                                                                 |   | 1,033,159,755 |          | 967,897,865      |       | 824,365,657   |       |
|                                                                                                                                                                                                       |   |          |          |             |       |          |       |
| Premises and equipment, net                                                                                                                                                                                |   | 35,136,570    |          | 31,674,673       |       | 26,882,988    |       |
| Other real estate                                                                                                                                                                                          |   | 796,688       |          | 815,880          |       | 1,692,275     |       |
| Accrued interest receivable                                                                                                                                                                                |   | 6,629,105     |          | 6,437,290        |       | 5,887,664     |       |
| Goodwill and other intangible assets                                                                                                                                                                       |   | 18,098,425    |          | 16,372,018       |       | 672,267       |       |
| Bank owned life insurance                                                                                                                                                                                  |   | 31,366,634    |          | 30,904,434       |       | 29,519,975    |       |
| Other assets                                                                                                                                                                                               |   | 7,004,843     |          | 6,719,791        |       | 4,454,711     |       |
| Total assets                                                                                                                                                                                               |   | $             | 1,404,914,653 |             | $          | 1,381,990,101 |       | $ | 1,160,373,474 |   |
|                                                                                                                                                                                                       |   |          |          |             |       |          |       |
| **Liabilities and shareholder’s equity**                                                                                                                                                              |   |          | ** **    |             | ** ** |          | ** ** |
| Liabilities:                                                                                                                                                                                               |   |          |          |             |       |          |       |
| Deposits:                                                                                                                                                                                                  |   |          |          |             |       |          |       |
| Noninterest-bearing demand                                                                                                                                                                                 |   | $             | 182,303,096   |             | $          | 184,130,490   |       | $ | 172,462,181 |   |
| Interest-bearing demand and money market                                                                                                                                                                   |   | 364,838,058   |          | 330,230,983      |       | 239,447,745   |       |
| Savings                                                                                                                                                                                                    |   | 46,061,846    |          | 47,261,815       |       | 51,722,697    |       |
| Time deposits of $100,000 or more                                                                                                                                                                          |   | 188,873,266   |          | 197,098,700      |       | 176,286,935   |       |
| Other time deposits                                                                                                                                                                                        |   | 355,904,030   |          | 370,205,897      |       | 329,156,668   |       |
| Total deposits                                                                                                                                                                                             |   | 1,137,980,296 |          | 1,128,927,885    |       | 969,076,226   |       |
|                                                                                                                                                                                                       |   |          |          |             |       |          |       |
| Accrued interest payable                                                                                                                                                                                   |   | 3,316,098     |          | 3,723,167        |       | 4,178,264     |       |
| Federal Home Loan Bank advances                                                                                                                                                                            |   | 74,500,000    |          | 50,000,000       |       | 75,121,250    |       |
| Federal funds purchased and securities sold under  repurchase agreements                                                                                                                                   |   | 46,990,844    |          | 47,666,699       |       | 905,370       |       |
| Trust preferred securities                                                                                                                                                                                 |   | 5,000,000     |          | 5,155,000        |       | —        |       |
| Other liabilities                                                                                                                                                                                          |   | 4,092,961     |          | 14,860,481       |       | 3,307,984     |       |
| Total liabilities                                                                                                                                                                                          |   | 1,271,880,199 |          | 1,250,333,232    |       | 1,052,589,094 |       |
|                                                                                                                                                                                                       |   |          |          |             |       |          |       |
| **Shareholders’ equity**                                                                                                                                                                              |   |          |          |             |       |          |       |
| Common stock-no par value per share; 50,000,000 shares  authorized; 16,173,647; 16,242,498 and 15,879,397 shares outstanding at March  31, 2003,  December 31, 2002 and March  31, 2002, respectively |   | 47,790,817    |          | 46,912,168       |       | 29,535,590    |       |
| Retained earnings                                                                                                                                                                                          |   | 89,279,754    |          | 86,041,957       |       | 78,102,094    |       |
| Accumulated other comprehensive income, net of tax                                                                                                                                                         |   | 4,750,972     |          | 5,561,196        |       | 1,180,571     |       |
| Treasury stock, at cost, 564,082; 464,082 and 169,082  shares at March 31, 2003, December 31, 2002, and March 31, 2002 respectively                                                                        |   | (8,787,089    | )             | (6,858,452       | )          | (1,033,875    | )          |
| Total shareholders’ equity                                                                                                                                                                            |   | 133,034,454   |          | 131,656,869      |       | 107,784,380   |       |
| Total liabilities and shareholders’ equity                                                                                                                                                            |   | $             | 1,404,914,653 |             | $          | 1,381,990,101 |       | $ | 1,160,373,474 |   |

 

*See accompanying notes to condensedconsolidated financial statements*

 

2

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**MAIN STREET BANKS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited)**

 
|                                                |   | **Three Months Ended** |       |
|-----------------------------------------------------|--------|------------------------|------------|
|                                                |   | **March 31,**          |       | **December 31,** |   | **March 31,** |   |
|                                                |   | **2003**               |       | **2002** |   | **2002** |   |
| **Interest income:**                                |   |                   | ** ** |   | ** ** |   | ** ** |
| Loans, including fees                               |   | $                      | 18,933,953 |   | $ | 17,659,454 |   | $ | 16,607,191 |   |
| Investment securities:                              |   |                   |       |   |   |   |   |
| Taxable                                             |   | 2,075,114              |       | 2,281,974 |   | 1,275,420 |   |
| Non-taxable                                         |   | 438,663                |       | 440,377 |   | 339,718 |   |
| Federal funds sold & repurchase agreements      |   | 57,860                 |       | 277,822 |   | 279,602 |   |
| Deposits in banks                                   |   | 7,534                  |       | 5,337 |   | 25,842 |   |
| Other investments                                   |   | 31,740                 |       | 64,595 |   | 56,346 |   |
| Total interest income                               |   | 21,544,864             |       | 20,729,559 |   | 18,584,119 |   |
|                                                |   |                   |       |   |   |   |   |
| **Interest expense:**                               |   |                   |       |   |   |   |   |
| Interest-bearing demand and money market            |   | 1,385,838              |       | 1,126,656 |   | 640,300 |   |
| Savings                                             |   | 89,804                 |       | 98,405 |   | 126,270 |   |
| Time deposits of $100,000 or more                   |   | 1,314,791              |       | 1,550,346 |   | 1,769,178 |   |
| Other time deposits                                 |   | 2,966,994              |       | 2,870,987 |   | 3,357,027 |   |
| Federal funds purchased                             |   | 13,233                 |       | 11,975 |   | 31,583 |   |
| Federal Home Loan Bank advances                     |   | 230,111                |       | 224,774 |   | 373,399 |   |
| Trust preferred securities                          |   | 55,402                 |       | 30,638 |   | — |   |
| Other                                               |   | 413,662                |       | 445,331 |   | 3,842 |   |
| Total interest expense                              |   | 6,469,835              |       | 6,359,112 |   | 6,301,599 |   |
|                                                |   |                   |       |   |   |   |   |
| Net interest income                                 |   | 15,075,029             |       | 14,370,447 |   | 12,282,520 |   |
| Provision for loan losses                           |   | 1,047,000              |       | 1,727,000 |   | 625,000 |   |
| Net interest income after provision for loan losses |   | 14,028,029             |       | 12,643,447 |   | 11,657,520 |   |
|                                                |   |                   |       |   |   |   |   |
| **Noninterest income:**                             |   |                   |       |   |   |   |   |
| Service charges on deposit accounts                 |   | 1,740,874              |       | 1,879,825 |   | 1,523,106 |   |
| Other customer service fees                         |   | 364,100                |       | 306,737 |   | 331,036 |   |
| Mortgage banking income                             |   | 646,375                |       | 823,554 |   | 454,919 |   |
| Investment agency commissions                       |   | 83,670                 |       | 69,567 |   | 92,357 |   |
| Insurance agency income                             |   | 1,180,240              |       | 1,107,813 |   | 819,491 |   |
| Income from SBA lending                             |   | 379,254                |       | 106,799 |   | 311,687 |   |
| Income on bank owned life insurance                 |   | 462,200                |       | 459,953 |   | 443,296 |   |
| Other income                                        |   | 235,969                |       | 315,134 |   | 230,864 |   |
| (Loss) gain on sales of premises and equipment      |   | (85                    | )          | (12,252 | ) | 500 |   |
| Investment securities gains                         |   | 184,102                |       | 130,310 |   | — |   |
| Total noninterest income                            |   | 5,276,699              |       | 5,187,440 |   | 4,207,256 |   |
|                                                |   |                   |       |   |   |   |   |
| **Noninterest expense:**                            |   |                   | ** ** |   | ** ** |   | ** ** |
| Salaries and other compensation                     |   | 5,614,891              |       | 5,135,575 |   | 4,511,174 |   |
| Employee benefits                                   |   | 1,203,592              |       | 1,029,252 |   | 933,627 |   |
| Net occupancy and equipment expense                 |   | 1,359,460              |       | 1,353,031 |   | 1,077,402 |   |
| Data processing fees                                |   | 309,734                |       | 378,126 |   | 237,577 |   |
| Professional services                               |   | 376,180                |       | 332,933 |   | 220,414 |   |
| Communications and supplies                         |   | 827,050                |       | 726,758 |   | 603,153 |   |
| Marketing expense                                   |   | 155,486                |       | 67,476 |   | 206,203 |   |
| Regulatory agency assessments                       |   | 61,215                 |       | 67,901 |   | 59,151 |   |
| Amortization of intangible assets                   |   | 56,475                 |       | 56,475 |   | 33,600 |   |
| Other expense                                       |   | 1,143,644              |       | 751,346 |   | 1,180,612 |   |
| Total noninterest expense                           |   | 11,107,727             |       | 9,898,873 |   | 9,062,913 |   |
| Income before income taxes                          |   | 8,197,001              |       | 7,932,014 |   | 6,801,863 |   |
| Income tax expense                                  |   | 2,446,522              |       | 2,453,005 |   | 2,032,258 |   |
| Net income                                          |   | $                      | 5,750,479  |   | $ | 5,479,009 |   | $ | 4,769,605 |   |
|                                                |   |                   |       |   |   |   |   |
| Earnings per share:                                 |   |                   |       |   |   |   |   |
| Basic                                               |   | $                      | 0.36       |   | $ | 0.35 |   | $ | 0.30 |   |
| Diluted                                             |   | 0.34                   |       | 0.34 |   | 0.29 |   |
|                                                |   |                   |       |   |   |   |   |
| Dividends declared per share                        |   | $                      | 0.120      |   | $ | 0.105 |   | $ | 0.105 |   |
|                                                |   |                   |       |   |   |   |   |
| Weighted average common shares outstanding          |   |                   |       |   |   |   |   |
| Basic                                               |   | 16,217,854             |       | 15,755,243 |   | 15,707,262 |   |
| Diluted                                             |   | 16,828,821             |       | 16,173,200 |   | 16,201,589 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

3

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**MAIN STREET BANKS, INC.**

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

**(Unaudited)**

 
|                                                                     |   | **Three Months Ended** |      |
|--------------------------------------------------------------------------|--------|------------------------|-----------|
|                                                                     |   | **March 31,**          |      | **December 31,** |   | **March 31,** |   |
|                                                                     |   | **2003**               |      | **2002** |   | **2002** |   |
|                                                                     |   |                   |      |   |   |   |   |
| **Net income**                                                           |   | $                      | 5,750,479 |   | $ | 5,479,009 |   | $ | 4,769,605 |   |
|                                                                     |   |                   |      |   |   |   |   |
| **Other comprehensive (losses), net of tax**                             |   |                   |      |   |   |   |   |
|                                                                     |   |                   |      |   |   |   |   |
| Unrealized gains (losses) on securities available for  sale              |   | (748,173               | )         | (103,066 | ) | 1,180,571 |   |
| Unrealized losses on derivative contracts                                |   | (62,051                | )         | (525,398 | ) | — |   |
| Less reclassification adjustment for net (gains)  included in net income |   | (296,664               | )         | (241,244 | )  | (21,112 | ) |
|                                                                     |   |                   |      |   |   |   |   |
| Comprehensive income                                                     |   | $                      | 4,643,591 |   | $ | 4,609,301 |   | $ | 5,929,064 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

4

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**MAIN STREET BANKS, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                               |   | **Three Months Ended** |       |
|------------------------------------------------------------------------------------|--------|------------------------|------------|
|                                                                               |   | **March 31,  2003**    |       | **March 31,  2002** |   |
| **Operating activities**                                                           |   |                   |       |   |   |
| Net income                                                                         |   | $                      | 5,750,479  |   | $ | 4,769,605 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                   |       |   |   |
| Provision for loan losses                                                          |   | 1,047,000              |       | 625,000 |   |
| Depreciation and amortization of premises and  equipment                           |   | 688,386                |       | 500,714 |   |
| Amortization of intangible assets                                                  |   | 56,475                 |       | 33,600 |   |
| Loss on sales of other real estate                                                 |   | 3,273                  |       | — |   |
| Investment securities gains                                                        |   | (184,102               | )          | — |   |
| Net accretion of investment securities                                             |   | 253,754                |       | 41,642 |   |
| Net (amortization) accretion of loans purchased                                    |   | (9,753                 | )          | 6,596 |   |
| Loss on sales of premises and equipment                                            |   | 85                     |       | — |   |
| Net decrease in mortgage loans held for sale                                       |   | 3,455,728              |       | 2,966,891 |   |
| Income from mortgage banking operations                                            |   | (646,375               | )          | (124,798 | ) |
| Gains on sales of other loans                                                      |   | (379,254               | )          | (296,781 | ) |
| Deferred income tax (benefit) provision                                            |   | (417,388               | )          | 482,258 |   |
| Deferred net loan fees (amortization)                                              |   | 199,026                |       | (13,565 | ) |
| Vesting in restricted stock award plan                                             |   | 97,658                 |       | 133,856 |   |
| Changes in operating assets and liabilities:                                       |   |                   |       |   |   |
| Increase in accrued interest receivable                                            |   | (191,815               | )          | (763,836 | ) |
| Decrease in accrued interest payable                                               |   | (407,069               | )          | (391,915 | ) |
| Other                                                                              |   | 47,622                 |       | 682,320 |   |
| Net cash provided by operating activities                                          |   | 9,363,730              |       | 8,651,587 |   |
|                                                                               |   |                   |       |   |   |
| **Investing activities**                                                           |   |                   |       |   |   |
| Purchases of investment securities available for sale                              |   | (41,792,241            | )          | (21,488,798 | ) |
| Purchases of other investments                                                     |   | (819,555               | )          | — |   |
| Maturities and calls of investment securities  available for sale                  |   | 3,950,000              |       | 9,329,486 |   |
| Proceeds from sales of investment securities available  for sale                   |   | 13,991,169             |       | — |   |
| Net increase in loans receivable                                                   |   | (66,063,924            | )          | (25,212,868 | ) |
| Purchases of premises and equipment                                                |   | (3,934,204             | )          | (593,944 | ) |
| Proceeds from sales of premises and equipment                                      |   | —                 |       | 500 |   |
| Proceeds from sales of other real estate                                           |   | 47,643                 |       | 274,419 |   |
| Improvements to other real estate                                                  |   | (9,279                 | )          | — |   |
| Net cash paid for acquisitions                                                     |   | (1,782,882             | )          |   |   |
| Net cash used in investing activities                                              |   | (96,413,273            | )          | (37,691,205 | ) |
|                                                                               |   |                   |       |   |   |
| **Financing activities**                                                           |   |                   |       |   |   |
| Net increase in demand and savings accounts                                        |   | 31,590,179             |       | 1,343,235 |   |
| (Decrease) increase in time deposits                                               |   | (22,527,301            | )          | 59,176,103 |   |
| Decrease in federal funds purchased                                                |   | (675,855               | )          | (14,599,098 | ) |
| Net increase in Federal Home Loan Bank advances                                    |   | 24,500,000             |       | — |   |
| Dividends paid                                                                     |   | (1,867,190             | )          | (1,649,227 | ) |
| Proceeds from issuance of common stock                                             |   | —                 |       | 48,562 |   |
| Payments to repurchase common stock                                                |   | (1,928,637             | )          | — |   |
| Net cash provided by financing activities                                          |   | 29,091,196             |       | 44,319,575 |   |
|                                                                               |   |                   |       |   |   |
| Net (decrease) increase in cash and cash equivalents                               |   | (57,958,347            | )          | 15,279,957 |   |
| Cash and cash equivalents at beginning of period                                   |   | 100,150,289            |       | 110,943,408 |   |
| Cash and cash equivalents at end of period                                         |   | $                      | 42,191,942 |   | $ | 126,223,365 |   |
| **Supplemental disclosures of cash flow  information**                             |   |                   |       |   |   |
| Cash paid during the period for:                                                   |   |                   |       |   |   |
| Interest                                                                           |   | $                      | 3,153,736  |   | $ | 6,693,514 |   |
| Income taxes, net                                                                  |   | 500,000                |       | — |   |
| **Supplemental disclosures of noncash  transactions**                              |   |                   |       |   |   |
| Loans transferred to real estate acquired through  foreclosure                     |   | $                      | 23,053     |   | $ | 425,625 |   |

 

*See accompanying notes to condensed consolidated financialstatements.*

 

5

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**MAIN STREET BANKS, INC.**

**NOTES****TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

##### **March 31, 2003**

 

**NOTE 1.  BASIS OF PRESENTATION**

 

The accompanying unaudited condensed consolidatedfinancial statements for Main Street Banks, Inc. (the “Company”) have beenprepared in accordance with accounting principles generally accepted in theUnited States followed within the financial services industry for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andnotes required for complete financial statement presentation. In the opinion ofmanagement, all adjustments (consisting solely of normal recurring adjustments)considered necessary for a fair presentation of the financial position andresults of operations for interim periods have been included.

 

The results of operations for the three-month period ended March 31,2003 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2003. These financial statements and related“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” should be read in conjunction with the consolidated financialstatements and notes thereto for the year ended December 31, 2002, included inthe Company’s Annual Report on Form 10-K.

 

Certain previously reported amounts have been reclassified to conformto current financial statement presentation. These reclassifications had noeffect on net income or stockholders’ equity.

 

**NOTE 2.  BUSINESS COMBINATION**

 

On December 11, 2002, theCompany completed a business combination with First National Bank of JohnsCreek of Suwanee, Georgia (“FNB Johns Creek”). The $26.2 million merger was based on Main Street’s closing stock priceof $20.48  per share on July 17,2002.   Main Street issued 647,510shares of its common stock and $10.7 million in cash in exchange for all outstanding shares of FNB JohnsCreek.  The transaction was accountedfor as a purchase business combination and accordingly, the results ofoperations of FNB Johns Creek are included from the acquisition date.

 

On December 11, 2002, the Company executed adefinitive merger agreement with First Colony Bancshares, Inc. of Alpharetta,Georgia (“First Colony”). First Colony shareholders approved the merger onApril 2, 2003.  The consummation of themerger is anticipated to be complete by May 31, 2003.  In the merger, each share of First Colony common stockoutstanding on the effective date of the merger will be converted into eitherapproximately 9.3 shares of Main Street common stock or in cash at the electionof the shareholder subject to the condition that a total amount of cash of$45,000,000 shall be paid to all shareholders. The merger will be accounted for under the purchase method of accounting.

 

**NOTE 3.**    **CURRENT ACCOUNTING DEVELOPMENTS**

 

In June 2002, FASB issuedFASB Statement No. 146, “Accounting for Costs Associated with Exit or DisposalActivities”. This Statement requires that a liability for costs associated withexit or disposal activities be recognized when the liability is incurred and bemeasured at fair value and adjusted for changes in estimated cash flows.Existing generally accepted accounting principles provide for the recognitionof such costs at the date of management’s commitment to an exit plan. UnderStatement No. 146, management’s commitment to an exit plan would not besufficient, by itself, to recognize a liability. The Statement is effective forexit or disposal activities initiated after December 31, 2002 and is notexpected to have a material impact on the results of operations or financialcondition of the Company.

 

In November 2002, the FASBissued Interpretation No. 45 (“FIN 45”), “Guarantees, Including IndirectGuarantees of Indebtedness of Others,” to clarify accounting and disclosurerequirements relating to a guarantor’s issuance of certain types of guarantees.FIN 45 requires entities to disclose additional information about certainguarantees, or groups of similar guarantees, even if the likelihood of theguarantor’s having to make any payments under the guarantee is remote. Thedisclosure provisions are effective for financial statements for fiscal yearsended after December 15, 2002. For certain guarantees, the interpretation alsorequires that guarantors recognize a liability equal to the fair value of theguarantee upon its issuance. The initial recognition and measurement provisionis to be applied only on a prospective basis to guarantees issued or modifiedafter December 31, 2002. The adoption of this Interpretation did not have amaterial impact on the Company’s financial statements.

 

In December 2002, the FASBissued Statement No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation

 

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 – Transition and Disclosure,”an amendment of Statement of Financial Accounting Standards No. 123. SFAS 148provides alternative methods of transition for a voluntary change to the fairvalue method of accounting for stock-based employee compensation. SFAS 148 iseffective for fiscal years ended after December 15, 2002. The Company plans tocontinue to account for stock-based employee compensation under the intrinsicvalue method and to provide disclosure of the impact of the fair value methodon reported income. Employee stock options have characteristics that aresignificantly different from those of traded options, including vestingprovisions and trading limitations that impact their liquidity. Therefore, theexisting option pricing models, such as Black-Scholes, do not necessarilyprovide a reliable measure of the fair value of employee stock options. Referto Note 6 for pro forma disclosure of the impact of stock options utilizing theBlack-Scholes valuation method. The adoption of this statement did not have amaterial impact on the financial condition or operating results of the Company.

 

In January 2003, theFASB issued FASB Interpretation No. 46 (“FIN 46”) “Consolidation of VariableInterest Entities” which addresses consolidation by business enterprises ofvariable interest entities.  FIN 46clarifies the application of Accounting Research Bulletin No. 51 (“ARB 51”),"Consolidated Financial Statements," to certain entities in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties.  FIN 46 applies immediately tovariable interest entities created after January 31, 2003, and to variableinterest entities in which an enterprise obtains an interest after thatdate.  It applies in the fiscal year orinterim period beginning after June 15, 2003, to variable interest entities inwhich an enterprise holds a variable interest that it acquired before February1, 2003.  The Company does not expectthe requirements of FIN 46 to have a material impact on its financial conditionor results of operations.

 

**NOTE 4.  EARNINGS PER COMMON SHARE**

 

The computation of diluted earnings per share is asfollows:

 
|                             |   | **Three months ended** |      |
|----------------------------------|--------|------------------------|-----------|
|                             |   | **March 31,**          |      | **December 31,** |   | **March 31,** |   |
|                             |   | **2003**               |      | **2002** |   | **2002** |   |
| Basic and diluted net income     |   | $                      | 5,750,479 |   | $ | 5,479,009 |   | $ | 4,769,605 |   |
|                             |   |                   |      |   |   |   |   |
| Basic earnings per share         |   | $                      | 0.36      |   | $ | 0.35 |   | $ | 0.30 |   |
| Diluted earnings per share       |   | $                      | 0.34      |   | $ | 0.34 |   | $ | 0.29 |   |
|                             |   |                   |      |   |   |   |   |
| Dividends declared per share     |   | $                      | .120      |   | $ | .105 |   | $ | .105 |   |
|                             |   |                   |      |   |   |   |   |
| Basic weighted average shares    |   | 16,217,854             |      | 15,755,243 |   | 15,707,262 |   |
| Effect of Employee Stock Options |   | 610,967                |      | 417,957 |   | 494,327 |   |
| Diluted weighted average shares  |   | 16,828,821             |      | 16,173,200 |   | 16,201,589 |   |

 

**NOTE 5.  LOANS**

 

Loans are stated at unpaid principal balances, net ofunearned 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,** |          | **December 31,** |   |
|---------------------------|--------|---------------|---------------|------------------|--------|
|                      |   | **2003**      |          | **2002**         |   |
| **Loans**                 |   |          |          |             |   |
| Commercial and industrial |   | $             | 74,467,394    |             | $      | 104,061,368 |   |
| Real estate construction  |   | 270,713,894   |          | 238,415,023      |   |
| Residential mortgage      |   | 212,270,942   |          | 198,400,329      |   |
| Real estate - other       |   | 455,558,447   |          | 404,630,039      |   |
| Consumer and other        |   | 37,127,397    |          | 38,386,805       |   |
| Total loans receivable    |   | 1,050,138,074 |          | 983,893,564      |   |
|                      |   |          |          |             |   |
| Less:                     |   |          |          |             |   |
| Purchase discount         |   | (99,520       | )             | (109,273         | )      |
| Deferred net loan fees    |   | (1,431,077    | )             | (1,233,812       | )      |
| Unearned income           |   | (57,106       | )             | (64,032          | )      |
| Allowance for loan losses |   | (15,390,616   | )             | (14,588,582      | )      |
| Loans, net                |   | $             | 1,033,159,755 |             | $      | 967,897,865 |   |

 

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##### **NOTE 6**. STOCK OPTIONS AND LONG-TERM COMPENSATION PLANS

 

The Company has elected to follow AccountingPrinciples Board Opinion No. 25 “Accounting for Stock issued to Employees” (APB25) and related interpretations in accounting for its employee stockoptions.  Under APB 25, because the exerciseprice of the Company’s employee stock options equals the market price of theunderlying 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 148,requires pro forma disclosures of net income and earnings per share forcompanies not adopting its fair value accounting method for stock-basedemployee compensation. The pro-forma disclosure below uses the fair valuemethod of SFAS 123 to measure compensation expense for stock-based employeecompensation plans. Because the Company’s employee stock options havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing model does notnecessarily provide a reliable single measure of the fair value of its employeestock options.

 

|                             |   | **For the three   months  ended  March 31, 2003** |      |
|----------------------------------|--------|--------------------------------------------------------|-----------|
| Net Income                       |   | $                                                      | 5,750,479 |   |
| EPS – basic                 |   | 0.36                                                   |      |
| EPS – Diluted               |   | 0.34                                                   |      |
|                             |   |                                                   |      |
| Compensation  cost – FV     |   | $                                                      | 239,002   |   |
| Less: Tax Effect                 |   | (81,266                                                | )         |
| Net compensation  cost – FV |   | $                                                      | 157,736   |   |
|                             |   |                                                   |      |
| Net Income,  Pro-forma           |   | 5,592,743                                              |      |
| EPS – Basic                 |   | 0.35                                                   |      |
| EPS – Diluted               |   | 0.33                                                   |      |

 

### **ITEM 2**.               MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysisof certain significant factors which have affected the Company’s financialposition at March 31, 2003 as compared to December 31, 2002 and operatingresults for the three month period ended March 31, 2003 as compared to thethree period ended March 31, 2002. These comments should be read in conjunctionwith the Company’s unaudited condensed consolidated financial statements andaccompanying  notes appearing elsewhereherein.

 

**Forward LookingStatements**

 

This Quarterly Report on Form 10-Q may contain orincorporate by reference statements which may constitute “forward lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21 of the Securities Exchange Act of 1934, as amended,including statements relating to present or future trends or factors generallyaffecting the banking industry and specifically affecting Main Street Banks,Inc.’s (the “Company”) operations, markets and products.  Without limiting the foregoing, the words“believes,” “anticipates,” “intends,” “expects” or similar expressions areintended to identify forward-looking statements.  These forward-looking statements involve certain risks anduncertainties.  Actual results coulddiffer materially from those projected for many reasons including, withoutlimitation, changing events and trends that have influenced the Company’sassumptions.  These trends and eventsinclude (i) changes in the interest rate environment which may reduce margins,(ii) non-achievement of expected growth, (iii) less favorable than anticipatedchanges in national and local business environment and securities markets, (iv)adverse changes in the regulatory requirements affecting the Company, (v)greater competitive pressures among financial institutions in the Company’smarket, (vi) greater than expected loan losses and (vii) inability toeffectively integrate acquired businesses. Additional information and otherfactors that could affect future financial results are included in theCompany’s filings with the****Securities and Exchange Commission.

 

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**Overview**

 

The Company’s total assets have increased $22.9 millionor 1.66% since December 2002.  Federalfunds sold decreased $49.2 million primarily due to an increase in loandemand.  Loans have increased 6.72% or$66.1 million since December 2002.  Theinvestment portfolio has increased $13.0 million due to the purchase ofadditional securities. Total deposits have increased by .80% or $9.1 milliondue to an ongoing deposit campaign, limited use of brokered and nationaldeposits, and seasonal public funds.

 

Return on average equity for the three months ended March 31, 2003 was17.14% on average equity of $136.1 million. This compares to 18.21% on average equity of $106.2 million for the sameperiod in 2002.

 

Return on average assets for the three months endedMarch 31, 2003 was 1.69%.  This comparesto 1.74% for the same period in 2002.

 

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|                                                                   |   | **For the Quarter ended** |       |
|------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                   |   | **March 31,**             |       | **December 31,** |   | **March 31,** |   |
|                                                                   |   | **2003**                  |       | **2002** |   | **2002** |   |
| **RESULTS OF  OPERATIONS**                                             |   |                      | ** ** |   | ** ** |   | ** ** |
| Net  interest income                                                   |   | $                         | 15,075,029 |   | $ | 14,370,447 |   | $ | 12,282,520 |   |
| Net  interest income (tax equivalent)                                  |   | 15,363,807                |       | 14,658,439 |   | 12,511,076 |   |
| Provision  for loan losses                                             |   | 1,047,000                 |       | 1,727,000 |   | 625,000 |   |
| Non-interest  income                                                   |   | 5,276,699                 |       | 5,187,440 |   | 4,207,256 |   |
| Non-interest  expense                                                  |   | 11,107,727                |       | 9,898,873 |   | 9,062,913 |   |
| Net  Income                                                            |   | 5,750,479                 |       | 5,479,009 |   | 4,769,605 |   |
| **AVERAGE BALANCE SHEET DATA (in  thousands)**                         |   |                      |       |   |   |   |   |
| Loans,  net of unearned income                                         |   | $                         | 1,019,221  |   | $ | 893,316 |   | $ | 823,350 |   |
| Investment  securities                                                 |   | 216,631                   |       | 213,656 |   | 119,051 |   |
| Earning  assets                                                        |   | 1,258,807                 |       | 1,190,426 |   | 1,019,079 |   |
| Total  assets                                                          |   | 1,378,489                 |       | 1,290,778 |   | 1,114,519 |   |
| Deposits                                                               |   | 1,127,935                 |       | 1,058,405 |   | 924,295 |   |
| Shareholders’  equity                                             |   | 136,072                   |       | 118,300 |   | 106,241 |   |
| **PER COMMON  SHARE**                                                  |   |                      |       |   |   |   |   |
| Earnings  per share - Basic                                            |   | $                         | 0.36       |   | $ | 0.35 |   | $ | 0.30 |   |
| Earnings  per share - Diluted                                          |   | 0.34                      |       | 0.34 |   | 0.29 |   |
| Book  value per share at end of period                                 |   | 7.95                      |       | 7.88 |   | 6.79 |   |
| End  of period shares outstanding                                      |   | 16,173,647                |       | 16,242,498 |   | 15,879,397 |   |
| Weighted  average shares outstanding                                   |   |                      |       |   |   |   |   |
| Basic                                                                  |   | 16,217,854                |       | 15,755,243 |   | 15,707,262 |   |
| Diluted                                                                |   | 16,828,821                |       | 16,173,200 |   | 16,201,589 |   |
| **STOCK  PERFORMANCE**                                                 |   |                      |       |   |   |   |   |
| Market  Price:                                                         |   |                      |       |   |   |   |   |
| Closing                                                                |   | $                         | 18.45      |   | $ | 19.20 |   | $ | 18.75 |   |
| High                                                                   |   | 20.48                     |       | 20.48 |   | 19.08 |   |
| Low                                                                    |   | 18.45                     |       | 15.95 |   | 16.59 |   |
| Trading  volume                                                        |   | 1,262,900                 |       | 851,500 |   | 537,000 |   |
| Cash  dividends per share                                              |   | $                         | 0.120      |   | $ | 0.105 |   | $ | 0.105 |   |
| Dividend  payout ratio                                                 |   | 35.12                     | %          | 30.99 | % | 35.67 | % |
| Price  to earnings                                                     |   | 13.31                     |       | 13.97 |   | 15.71 |   |
| Price  to book value                                                   |   | 2.32                      |       | 2.44 |   | 2.76 |   |
| **PERFORMANCE  RATIOS**                                                |   |                      |       |   |   |   |   |
| Return  on average assets                                              |   | 1.69                      | %          | 1.72 | % | 1.74 | % |
| Return  on average equity                                              |   | 17.14                     | %          | 18.78 | % | 18.21 | % |
| Average  earning assets to average total assets                        |   | 91                        | %          | 92 | % | 91 | % |
| Average  loans as percentage of average deposits                       |   | 90                        | %          | 84 | % | 89 | % |
| Net  interest margin (tax equivalent)                                  |   | 4.95                      | %          | 4.89 | % | 4.98 | % |
| Average  equity to average assets                                      |   | 9.87                      | %          | 9.16 | % | 9.53 | % |
| Efficiency  ratio                                                      |   | 54.58                     | %          | 50.61 | % | 54.96 | % |
| **ASSET QUALITY**                                                      |   |                      |       |   |   |   |   |
| Total  non-performing assets                                           |   | 5,484,735                 |       | 4,230,087 |   | 5,128,239 |   |
| Non-performing  assets as a percentage of loans plus foreclosed assets |   | 0.52                      | %          | 0.43 | % | 0.61 | % |
| Net  annualized charges-offs as a percentage of average loans.         |   | 0.10                      | %          | 0.60 | % | 0.15 | % |
| Reserve  for loan losses as a a percentage of loans, at end of period  |   | 1.47                      | %          | 1.48 | % | 1.48 | % |

 

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**Capital**

 

At March 31, 2003, the capital ratios of the Companyand Main Street Bank (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 the Company’sand the Bank’s compliance with regulatory capital requirements at March 31,2003.

 
|                        |   | **Company** |   | **Bank** |   | **Minimum  Required** |   | **Well  Capitalized** |   |
|-----------------------------|--------|-------------|--------|----------|--------|-----------------------|--------|-----------------------|--------|
|                        |   |        |   |     |   |                  |   |                  |   |
| Leverage ratio              |   | 8.17        | %      | 8.15     | %      | 4.00                  | %      | 5.00                  | %      |
|                        |   |        |   |     |   |                  |   |                  |   |
| Risk based  capital ratios: |   |        |   |     |   |                  |   |                  |   |
| Tier 1 risk  based capital  |   | 9.93        | %      | 9.90     | %      | 4.00                  | %      | 6.00                  | %      |
| Risk-based  capital         |   | 11.63       | %      | 11.15    | %      | 8.00                  | %      | 10.00                 | %      |

 

**Loansand Allowance for Loan Losses**

 

At March 31, 2003,loans, net of unearned income, were $1.049 billion, an increase of $66.1million or 6.72% over net loans at December 31, 2002 of $982.5 million. Thegrowth in the loan portfolio was attributable to a consistent focus on qualityloan production and strong loan markets in the state. Real estate-constructionloans increased $32.3 million or 13.55% from December 31, 2002 and other realestate increased $50.9 million or 12.59% from December 31, 2002. The Companycontinues to monitor the composition of the loan portfolio to ensure that themarket risk to the balance sheet is not adversely affected by the impact ofchanges in the economic environment on any one segment of the portfolio.

 

The Companyprimarily focuses on the following loan categories: (1) commercial andindustrial, (2) real estate construction, (3) residential mortgage, (4)commercial real estate and (5) consumer loans. The Company’s management hasstrategically located its branches in high growth markets and has takenadvantage of a surge in residential and industrial growth in northeasternGeorgia.

 

The allowance forloan losses is a reserve established through charges to earnings in the form ofa provision for loan losses.  Theprovision for loan losses is based on management’s evaluation of the size andcomposition of the loan portfolio, the level of non-performing and past due loans,historical trends of charged-off loans and recoveries, prevailing economicconditions and other factors management deems appropriate. The Company’smanagement has established an allowance for loan losses which it believes isadequate for probable losses in the loan portfolio.  Based on a credit evaluation of the loan portfolio, managementpresents a quarterly review of the allowance for loan losses to the Company’sBoard of Directors. The review that management has developed primarily focuseson risk by 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 riskmanagement processes include a loan review program to evaluate the credit riskin the loan portfolio. The credit review department is independent of the loanfunction and reports to the Executive Vice President of Risk Management.  Through the loan review process, the Companymaintains an internally criticized classified loan watch list which, along withthe delinquency report of loans, serves as a tool to assist management inassessing the overall quality of the loan portfolio and the adequacy of theallowance for loan losses. Loans classified as “substandard” are those loanswith clear and defined weaknesses such as a highly leveraged position,unfavorable financial ratios, uncertain financial ratios, uncertain repaymentsources, deterioration in underlying collateral values, or poor financialcondition which may jeopardize recoverability of the debt. Loans classified as“doubtful” are those loans that have characteristics similar to substandardloans but have an increased risk of loss, or at least a portion of the loan mayrequire being charged-off.  Loansclassified as “loss” are those loans that are in the process of beingcharged-off.

 

For the threemonth period ending March 31, 2003, net charge-offs totaled $244,966 or .10%(annualized) of average

 

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loans outstanding for the period, net of unearned income, compared to$296,117 or .15% in net charge-offs for the same period in 2002. The provisionfor loan losses for the three months ended March 31, 2003 was $1,047,000compared to $625,000 for the same period in 2002. The allowance for loan lossestotaled $15,390,616 or 1.47% of total loans, net of unearned income at March31, 2003, compared to $14,588,582 or 1.48% of total loans at December 31, 2002.

 

The followingtable presents an analysis of the allowance for loan losses for the three-monthperiods ended March 31, 2003 and 2002:

 
|                                                         |   | **Three  Months Ended  March 31,** |       |
|--------------------------------------------------------------|--------|------------------------------------|------------|
|                                                         |   | **2003**                           |       | **2002** |   |
|                                                         |   |                               |       |   |   |
| Balance of  allowance for loan losses at beginning of period |   | $                                  | 14,588,582 |   | $ | 12,017,448 |   |
|                                                         |   |                               |       |   |   |
| Provision  charged to operating expense                      |   |                               |       |   |   |
| Charge-offs:                                                 |   | 1,047,000                          |       | 625,000 |   |
| Commercial,  financial and agricultural                      |   | 78,632                             |       | 14,078 |   |
| Real estate –  construction and land development        |   | 875                                |       | — |   |
| Real estate –  mortgage                                 |   | —                             |       |   |   |
| Installment and  other consumer                              |   | 246,083                            |       | 331,949 |   |
| Total  charge-offs                                           |   | $                                  | 325,590    |   | $ | 346,027 |   |
| Recoveries:                                                  |   |                               |       |   |   |
| Commercial,  financial and agricultural                      |   | 12,463                             |       | 5,684 |   |
| Real estate –  construction and land development        |   | 573                                |       | — |   |
| Real estate –  mortgage                                 |   |                               |       |   |   |
| Installment and  other consumer                              |   | 67,588                             |       | 44,226 |   |
| Total recoveries                                             |   | $                                  | 80,624     |   | $ | 49,910 |   |
| Net charge-offs                                              |   | $                                  | 244,966    |   | $ | 296,117 |   |
|                                                         |   |                               |       |   |   |
| Balance of  allowance for loan losses at end of period       |   | $                                  | 15,390,616 |   | $ | 12,346,331 |   |

 

##### **Interest ratesensitivity and liquidity**

 

# ***Asset LiabilityManagement***

 

The Company’sprimary market risk exposures are credit (as discussed previously), interestrate risk and to a lesser degree, liquidity risk.  The Bank operates under an Asset Liability and Risk Managementpolicy approved by the Board of Directors of the Bank through the Asset andLiability Committee (“ALCO”).  Thepolicy outlines limits on interest rate risk in terms of changes in netinterest income and changes in the net market values of assets and liabilitiesover certain changes in interest rate environments.  These measurements are made through a simulation model whichprojects the impact of changes in interest rates on the Bank’s assets andliabilities.  The policy also outlinesresponsibility for monitoring interest rate risk, and the process for the approval,implementation and monitoring of interest rate risk strategies to achieve theBank’s interest rate risk objectives.

 

The Bank’s ALCO iscomprised of senior officers of the Bank. The ALCO makes all tactical and strategic decisions with respect to thesources and uses of funds that may affect net interest income, including netinterest spread and net interest margin. The ALCO’s decisions are based upon policies established by the Bank’sBoard of Directors, which are designed to meet three goals—manage interest raterisk, improve interest rate spread and maintain adequate liquidity.

 

The ALCO hasdeveloped a program of action which includes, among other things, thefollowing: (i) selling substantially all conforming, long-term, fixed ratemortgage originations, (ii) originating and retaining for the portfolio shorterterm, higher yielding loan products which meet the Company’s underwritingcriteria; and (iii) actively managing the Company’s interest rate riskexposure.

 

# ***Interest Rate Risk***

 

The normal courseof business activity exposes the Company to interest rate risk.  Interest rate risk is managed within anoverall asset and liability framework for the Company.  The principal objectives of asset andliability management are

 

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to guide the sensitivity of net interest spreads to potential changesin interest rates and enhance profitability in ways that promise sufficientreward for recognized and controlled risk. Funding positions are kept within predetermined limits designed toensure that risk-taking is not excessive and that liquidity is properlymanaged.  The Company employssensitivity analysis in the form of a net interest income simulation to helpcharacterize the market risk arising from changes in interest rates.  In addition, fluctuations in interest ratesusually result in changes in the fair market value of the Company’s financialinstruments, cash flows and net interest income.  The Company’s interest rate risk position is managed by ALCO.  ALCO’s objective is to optimize theCompany’s financial position, liquidity and net interest income, whileremaining within the Board of Director’s approved limits.

 

The Company uses asimulation modeling process to measure interest rate risk and evaluatepotential strategies.  The Company’s netinterest income simulation includes all financial assets and liabilities.  This simulation measures both the term riskand basis risk in the Company’s assets and liabilities.  The simulation also captures the optioncharacteristics of products, such as caps and floors on floating rate loans,the right to pre-pay mortgage loans without penalty and the ability ofcustomers to withdraw deposits on demand. These options are modeled through the use of primarily historicalcustomer behavior and statistical analysis. These simulations incorporate assumptions regarding balance sheetgrowth, asset and liability mix, pricing and maturity characteristics of theexisting and projected balance sheets. Other interest rate-related risks such as prepayment, basis and optionrisk are also considered.  Simulationresults quantify interest risk under various interest rate scenarios.  Management then develops and implementsappropriate strategies.  The Board ofDirectors regularly reviews the overall rate risk position and asset andliability management strategies.

 

# ***DerivativeInstruments and Hedging Activities***

 

Statement ofFinancial Accounting Standards No. 133, *Accountingfor Derivative Instruments and Hedging**Activities* (SFAS 133), as amended and interpreted,establishes accounting and reporting standards for derivative instruments,including certain derivative instruments embedded in other contracts, and forhedging activities.  As required by SFAS133, the Company records all derivatives on the balance sheet at fairvalue.  The accounting for changes in the fair value of derivativesdepends on the intended use of the derivative and the resulting designation.Derivatives used to hedge the exposure to changes in the fair value of anasset, liability, or firm commitment attributable to a particular risk, such asinterest rate risk, are considered fair value hedges. Derivatives used to hedgethe exposure to variability in expected future cash flows, or other types offorecasted transactions, are considered cash flow hedges.

 

The Company’sobjective in using derivatives is to add stability to interest income and/orinterest expense and to manage its exposure to interest rate movements or otheridentified risks.  To accomplish this objective, the Company primarilyuses interest rate swaps as part of its cash flow hedging strategy.  Interest rate swaps designated as cash flowhedges involve the receipt of fixed-rate amounts in exchange for variable-ratepayments, over the life of the agreements without exchange of the underlyingprincipal amount.  For more details on the derivative instruments utilizedby the Company, please refer to the December 31, 2002 10-K.

 

# ***Liquidity***

 

Liquidity involvesthe Company’s ability to raise funds to support asset growth or reduce assetsto meet deposit withdrawals and other payment obligations, to maintain reserverequirements and otherwise to operate on an ongoing basis. During the pastthree years, the Company’s liquidity needs have primarily been met by growth incore deposits, advances from Federal Home Loan Bank and raising capital.  The Company’s cash and Federal funds soldand cash flows from amortizing investment and loan portfolios have generallycreated an adequate liquidity position. Executive management reviews liquidity monthly. This review is from aregulatory as well as static and a four-quarter forecasted standpoint.

 

Managementbelieves the Company has sufficient liquidity to meet all reasonable borrower,depositor, and creditor needs in the present economic environment. In addition,the Bank has access to the Atlanta FHLB for borrowing purposes. The Company hasnot received any recommendations from regulatory authorities that wouldmaterially affect liquidity, capital resources or operations.

 

The Companyintends to issue $45 million of Trust Preferred Securities to fund the FirstColony acquisition.

 

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## **Results of Operations for the Three Months Ended March31, 2003 and 2002**

 

### **Interest Income**

 

Interest incomefor the three months ended March 31, 2003 was $21.5 million, an increase of$2.9 million, or 15.93% compared to $18.6 million for the same period in2002.  Interest and fees on loansincreased $2.3 million to $18.9 million for the three months ended March 31,2003 compared to $16.6 million for the same period ending March 31, 2002.  The increase is mainly attributable to loangrowth of $212 million from March 31, 2002 to March 31, 2003. Interest on federalfunds sold decreased $220,000 or 79.31%. This was due to the Company’s decision to use the funds to purchaseinvestment securities to earn a higher yield.  Average earning assets for the three month period increased $68.4million to $1.259 billion as of March 31, 2003 compared to $1.019 billion as ofMarch 31, 2002.   Yield on averageearning assets decreased 47 basis points to 7.04% from 7.51% for the quartersended March 31, 2003 and 2002, respectively.

##### ** **

##### **Interest Expense**

 

Interest expenseon deposits and other borrowings for the three months ended March 31, 2003 was$6.5 million, a $0.2 million, or 2.67% increase from March 31, 2002.  While the yield on average interest bearingliabilities decreased 42 basis points to 2.13% from 2.55% as of March 31, 2003and 2002, respectively, average interest bearing liabilities increased $231.0million to $1.233 billion for the three months ended March 31, 2003 compared to$1.002 billion for the three months ended March 31, 2002.  The decrease was also attributable to theCompany refinancing its Federal Home Loan Bank borrowings to take advantage ofthe Federal Reserve’s aggressive interest rate reductions.

 

**NetInterest Income**

 

Net interestincome for the three months ended March 31, 2003 increased $2.8 million, or22.74% to $15.1 million compared to $12.3 million for the same period endingMarch 31, 2002.  The increase wasattributable to the acquisition of FNB of Johns Creek in December 2002, as wellas the Company’s ability to manage the effects of the Federal Reserve’saggressive rate reductions.  The Company’snet interest margin remained stable at 4.95% for the three months ended March31, 2003 compared to 4.98% as of March 31, 2002.

 

**Provisionfor Loan Losses**

 

The provision forloan losses was $1.047 million for the three months ended March 31, 2003 ascompared to $0.6 million for the three months March 31, 2002.  The increase in the provision for loanlosses was attributable to the loan growth. Although no assurance is given, management believes that the presentallowance for loan losses is adequate.

 

**Non-interestIncome**

 

Non-interestincome was $5.3 million for the three months ended March 31, 2003 an increaseof $1.1 million, or 25.42% compared to $4.2 million for the three months endedMarch 31, 2002.  The components of theincrease were service charges on deposit accounts, mortgage banking income,insurance agency income and investment security gains.  Service charges on deposit accountsincreased $0.2 million, or 14.30% to $1.7 million from $1.5 million for thethree months ended March 31, 2003 and 2002, respectively.  Mortgage banking income increased $0.191million, or 42.09% to $0.646 million from $0.455 million for the three monthsended March 31, 2003 and 2002, respectively. Insurance agency income increased $0.4 million, 44.02% to $1.2 millionfrom $0.8 million for the three months ended March 31, 2003 and 2002,respectively.  Gains on sales ofinvestment securities of $0.2 million were recognized for the three monthsended March 31, 2003 with no securities gains recognized during the same periodin 2002.

 

**Non-interestExpense**

 

Non-interestexpense increased $2.0 million or 22.56% to $11.1 million from $9.1 million forthe three months ended March 31, 2003 and 2002, respectively.  The increase was attributable to the impactof the FNB of Johns Creek acquisition as well as due to additional personnelrequired to accommodate the Company’s growth. Salaries were $5.6 million, an increase of $1.1 million, or 24.47% fromthe three months ended March 31, 2002.  The Company’s efficiency ratio was 54.6% for the three months endedMarch 31, 2003 compared to 55.0% for the three months ended March 31, 2002.

 

**IncomeTaxes**

 

The amount ofincome tax expense is influenced by the amount of taxable income, the amount oftax-exempt income, the amount 

 

 

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of nondeductible interest expense, and the amount of othernondeductible expenses.  For the threemonths ended March 31, 2003, the provision for taxes was $2.4 million, anincrease of $0.4 million from the $2.0 million provided for in the same periodin 2002.  The effective tax rate for thethree months ended March 31, 2003 was 29.85% compared to 29.88% for the sameperiod in 2002.

 

ITEM 4.     CONTROLS AND PROCEDURES

 

(a) Evaluation ofdisclosure controls and procedures

 

The Company’sChief Executive Officer and Chief Financial Officer believe that theRegistrant’s disclosure controls and procedures, as defined in SecuritiesExchange Act Rules 13a-14 (c) and 15d-14(c), are effective.  This conclusion was reached after anevaluation of these controls and procedures as of March 31, 2003.

 

(b) Changes ininternal controls

 

We are not awareof any significant changes in the Company’s internal controls, including anycorrective actions with regard to significant deficiencies and materialweaknesses, or in other factors that could significantly affect these controlsafter March 31, 2003.

 

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##### **PART II**.– OTHER INFORMATION

 

### **ITEM 6**.          EXHIBITS AND REPORTS ON FORM 8-K

 

(a)                             Thefollowing are filed with or incorporated by reference into this report

 

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                            |
|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |   | Articles of Incorporation of Main Street Bank, Inc.  (incorporated by reference to Exhibit 3.1 to Registration Statement No.  33-78046 on Form S-4) as amended by Certificate of Merger and Name Change  (incorporated by reference to Exhibit 3.1 of the December 31, 1996, Form  10-KSB) |
|             |   |                                                                                                                                                                                                                                                                                       |
| 3.2              |   | Bylaws of Main Street Bank, Inc. (incorporated by  reference to Exhibit 3.2 to Registration Statement No. 33-78046 on Form S-4)                                                                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                       |
| 99.1             |   | Certification of Chief Executive Officer                                                                                                                                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                       |
| 99.2             |   | Certification of Chief Financial Officer                                                                                                                                                                                                                                                   |
|             |   |                                                                                                                                                                                                                                                                                       |
| (b)              |   | Reports on Form  8K                                                                                                                                                                                                                                                                        |

 

The Company filed Form8-K issuing two press releases on January 17, 2003.  The first announced Main Street Banks, Inc.’s 2002 fourth quarterand year-end results.  The secondannounced that the Company had declared a dividend.

 

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**SIGNATURES**

 

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

 
|   | **MAIN  STREET BANKS, INC.**                              |
|--------|-----------------------------------------------------------|
|   |                                                      |
|   |                                                      |
| Date   | May 15, 2003                                              |   | By: | /s/ Edward C. Milligan |   |
|   | Edward C. Milligan, Chairman and  Chief Executive Officer |
|   |                                                      |
|   |                                                      |
| Date:  | May 15, 2003                                              |   | By: | /s/ Robert D. McDermott |   |
|   | Robert D. McDermott, Chief Financial Officer              |

 

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**CERTIFICATION**

 

I, Edward C. Milligan, certify that:

 

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

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

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

 

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

 

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

 

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

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

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

 

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

 

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  | May 15, 2003                                              |   | By: | /s/ Edward C. Milligan |   |
|--------|-----------------------------------------------------------|--------|-----|------------------------|--------|
|   | Edward C. Milligan, Chairman and  Chief Executive Officer |

 

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**CERT****IFICATION**

 

I, Robert D. McDermott, certify that:

 

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

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

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

 

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

 

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

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

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

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the  registrant’sinternal controls; and

 

6. The registrant’s other certifying officers and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:  | May 15, 2003                                 |   | By: | /s/ Robert D. McDermott |   |
|--------|----------------------------------------------|--------|-----|-------------------------|--------|
|   | Robert D. McDermott, Chief Financial Officer |

 

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