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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the Fiscal Year Ended December 31, 2004



Commission file number 000-25128



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MAIN STREET BANKS, INC.

(Exact name of registrant as specified in its
charter)



|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|Georgia                                  |  | 58-2104977                          
|(State of Incorporation)                 |  | (I.R.S. Employer Identification No.)
|                                         | 
|3500 Lenox Road Atlanta, Georgia         |  | 30326                               
|(Address of principal executive offices) |  | (Zip Code)                          



770-786-3441

(Registrants telephone number)



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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE



SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, no par value

(Title of Class)



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



Indicate by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈



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



The aggregate market value of voting stock held by non-affiliates as of February 28, 2005 (based on the closing price on June 30, 2004):



$444,215,225



The number of shares outstanding of the registrants common stock as of February 28, 2005:

21,298,505



DOCUMENTS INCORPORATED BY REFERENCE



Portions
of the Registrants definitive Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference into Part III.



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MAIN STREET BANKS, INC.

TABLE OF CONTENTS



FORM 10-K

DECEMBER 31, 2004



|         |  |                                                                                                      |  |     
|-------- |  | ---------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                      |  | Page
|PART I   |  |                                                                                                      |  |     
|Item 1.  |  | Business                                                                                             |  | 3   
|         |  |                                                                                                     
|Item 2.  |  | Properties                                                                                           |  | 15  
|         |  |                                                                                                     
|Item 3.  |  | Legal Proceedings                                                                                    |  | 15  
|         |  |                                                                                                     
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                  |  | 15  
|         |  |                                                                                                     
|PART II  |  |                                                                                                      |  |     
|Item 5.  |  | Market for Registrants Common Equity, Stockholder Matters and Issuer Purchases of Equity Securities |  | 16  
|         |  |                                                                                                     
|Item 6.  |  | Selected Financial Data                                                                              |  | 18  
|         |  |                                                                                                     
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 19  
|         |  |                                                                                                     
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                           |  | 40  
|         |  |                                                                                                     
|Item 8.  |  | Financial Statements and Supplementary Data                                                          |  | 41  
|         |  |                                                                                                     
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures                |  | 68  
|         |  |                                                                                                     
|Item 9A. |  | Controls and Procedures                                                                              |  | 69  
|         |  |                                                                                                     
|Item 9B. |  | Other Information                                                                                    |  | 71  
|         |  |                                                                                                     
|PART III |  |                                                                                                      |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                   |  | 72  
|         |  |                                                                                                     
|Item 11. |  | Executive Compensation                                                                               |  | 72  
|         |  |                                                                                                     
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters       |  | 72  
|         |  |                                                                                                     
|Item 13. |  | Certain Relationships and Related Transactions                                                       |  | 72  
|         |  |                                                                                                     
|Item 14. |  | Principal Accountant Fees and Services                                                               |  | 72  
|         |  |                                                                                                     
|PART IV  |  |                                                                                                      |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                           |  | 73  



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SPECIAL CAUTIONARY NOTICE

REGARDING FORWARD-LOOKING STATEMENTS



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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PART I



Item 1. Business



Business
Overview



The term the Company is used
throughout this Annual Report on Form 10-K to refer to Main Street Banks, Inc. and its subsidiaries. The term Parent Company is used to refer to Main Street Banks, Inc. wherever a distinction between Main Street Banks, Inc. and its
subsidiaries aids in the understanding of this Annual Report on Form 10-K.



The Parent Company is a financial holding company which engages through its subsidiaries, Main Street Bank (the Bank) Main Street Insurance Services, Inc. (MSII), Piedmont Settlement Services,
Inc. (Piedmont) and MSB Payroll Solutions, LLC in providing a full range of banking, mortgage banking, investment and insurance services to its retail and commercial customers located primarily in Barrow, Clarke, Cobb, DeKalb, Forsyth,
Fulton, Gwinnett, Newton, Rockdale and Walton counties in Georgia. The Parent Company was incorporated on March 16, 1994 as a Georgia business corporation. Its executive offices are located at 3500 Lenox Road, Atlanta, Georgia 30326, and its
telephone number is 770-786-3441. The Company has no foreign activities.



Effective November 17, 2000, the Parent Company became a financial holding company under the provisions of the Gramm-Leach-Bliley Act of 1999 (GLB Act), which amended the Bank Holding Company Act and
expanded the activities in which the Company may engage. After becoming a financial holding company, in December 2000 the Parent Company acquired Williamson Insurance Agency, Inc. and Williamson & Musselwhite Insurance Agency, Inc. Upon
consummation of the acquisition, the two insurance companies were combined with the Banks existing Insurance division as a single subsidiary and the name was ultimately changed to Main Street Insurance Services, Inc. In January of 2004 MSII
acquired substantially all of the assets of Banks Moneyhan Hayes Insurance Agency, Inc.



The Parent Company



Under Federal Reserve policy, the Parent Company is expected to act as a source of financial strength and to commit resources to support the Bank. In addition, any capital loans by a bank holding company to its subsidiary bank are
subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment.



Subsidiary Bank



The Bank, a state chartered commercial bank, provides traditional deposit, lending, mortgage and securities brokerage services. Main Street Bank
conducts a general banking business at 23 bank offices in Georgia. The Bank performs banking services customary for full service banks of similar size and character. Such services include receiving demand and time deposits, making personal and
commercial loans and furnishing personal and commercial checking accounts.



Insurance Subsidiary



The Parent Company, through its wholly owned subsidiary, MSII, makes available to its customers and others, as agent for a variety of insurance companies, term life insurance, fixed-rate annuities, property and casualty insurance and other
insurance products.



Products and Services



The Company provides a full range of traditional banking, mortgage
banking, investment, and insurance services to individual and corporate customers.



Loans.The Companys primary lending activities include real estate loans (mortgage and construction), commercial and industrial loans to small and medium sized businesses and consumer loans. The Company
originates first mortgage loans and enters into a commitment to sell these loans in the secondary market. The Company limits its interest rate risk on such loans originated by selling individual loans immediately after the customer locks in their
rate.



The Companys management has strategically located
its branches in high growth markets and has taken advantage of an increase in residential and commercial growth in the northern counties of metropolitan Atlanta, Georgia. The Company primarily lends in markets where it has physical branch locations.



Management seeks to achieve consistent growth within its
primary market areas while maintaining a quality loan portfolio with acceptable yields. The Company monitors its lending objectives primarily through its Credit Review committees. The Companys lending objectives are clearly defined in its
Lending Policy, which is reviewed annually and approved by the Board of Directors. New



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loans for borrowers with total credit exposure exceeding $750,000 require co-approval by officers in the Banks Credit Administration Department. New
loans with credit exposure exceeding $4,000,000 require additional approval by one or more executive officers of the Bank. New loans with credit exposure exceeding $12,500,000 require prior approval by the Board of Directors, which also reviews
specific credit approvals exceeding $5,000,000 made during the prior month.



The Credit Review committee process includes the Executive Review Committee, the Eastern and Western Senior Review Committees, and the Credit Risk Management Committee. The Executive Review Committee is chaired by the
President of the Bank and includes officers from the Credit Administration and Credit Review Departments. Executive Review Committee annually reviews credit analysis and financial statements for borrowers with credit relationships exceeding
$1,500,000 in exposure. The Eastern and Western Senior Review Committees annually review credit analysis and financial statements for borrowers with credit relationships exceeding $500,000 in total credit exposure up to $2,500,000 in total credit
exposure. These committees are chaired by officers from the Credit Administration department and its members include officers from the Credit Review and branch administration areas. These committees also review delinquent loan accounts and overdrawn
deposit accounts during the monthly meeting. The Credit Risk Management Committee meets on a quarterly basis and reviews the Banks larger adversely graded loans. This committee is chaired by officers from the Banks Credit Review
Department and includes officers from the Credit Administration and branch administration areas.



Commercial mortgage lending has significantly contributed to the Banks loan growth during the past several years. Loans included in this category
are for the acquisition or refinancing of commercial buildings, a majority of which are owner-occupied. These loans are underwritten based on our estimates of the borrowers ability to meet certain minimum debt service requirements and the
value of the underlying collateral to meet certain loan to value guidelines. The Bank also seeks security interests in equipment or other business assets of the borrower as well as personal guaranties.



The Bank also underwrites loans to finance the construction of residential
properties, and on a limited basis, commercial properties, which include speculative and pre-sale properties. Speculative construction loans involve a higher degree of risk, as these are made on the basis that a borrower expects to be able to sell
the project to a potential buyer after a project is completed. Pre-sale construction loans usually have a pre-qualified buyer under contract before construction is to begin. The major risk for pre-sale loans is completing the project in a timely
manner and according to plan specifications. Non-residential construction loans include construction loans for churches, commercial buildings, strip shopping centers, and acquisition and development loans. These loans also carry a higher degree of
risk and are subject to clear underwriting guidelines. All construction loans are secured by first liens on real estate and generally have floating interest rates. The Bank conducts periodic inspections either directly or through an agent prior to
approval of periodic draws on these loans. Our management focuses on the borrowers past experience in completing projects in a timely manner and the borrowers financial condition with special emphasis placed on the borrowers
liquidity ratios. Although construction loans are deemed to be of higher risk the Bank believes that it can monitor and manage this risk properly.



The Bank also underwrites residential real estate loans. Generally, these loans are owner-occupied and are amortized over a 15 to 20 year period with
three to five year maturity or repricing. Typically, a borrowers debt to income ratio cannot exceed 36% and the loan to appraised value ratio cannot exceed 89.9%.



The Bank also underwrites non real estate related commercial and industrial loans. Generally, these asset based loans are
for working capital purposes and are secured by inventory, accounts receivable, equipment, or personal guarantees. The Banks underwriting standards for this type of lending include requiring the borrower to maintain certain working capital and
debt ratios as well as a positive cash flow from operations. Borrowers in this category will generally have a debt service coverage ratio of at least 1.3 to 1.0. The Bank also seeks to perfect its security interests in the borrowers inventory,
accounts receivable, equipment or other business assets of the borrower as well as personal guaranties.



The Bank does not originate and does not currently hold in its portfolio any foreign loans.



The Bank is an active participant in the origination of Small Business Administration (SBA) loans. These loans
are solicited from the Companys market areas, and are generally underwritten in the same manner as conventional loans generated for the Banks portfolio. The portion of loans that are secured by the guaranty of the SBA may from time to
time be sold in the secondary market to provide additional liquidity, and to provide a source of fee income.



Consumer loans include automobile loans, recreational vehicle loans, boat loans, home improvement loans, home equity loans, personal loans (collateralized
and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 120 months and vary based upon the nature of collateral and size of the loan. Consumer loans involve greater risk than residential
mortgage loans. This is due to the fact that these loans may be unsecured or secured by rapidly depreciating assets such as automobiles. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the
outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections are dependent on the borrowers
continuing financial



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stability and thus are more likely to be adversely affected by factors such as job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws may limit the amount which can be recovered on such loans.



In addition to interest earned on loans, the Bank receives income through the servicing of loans and loan fees charged in connection with loan
originations and modifications, late payments, changes of property ownership and for miscellaneous services related to its loans. The Bank sells fixed-rate and variable-rate residential mortgage loans in the secondary market through an arrangement
with several investors. This program allows the Bank to offer more attractive rates in its highly competitive market. Mortgage banking activity is conducted only in the Banks market area. The Bank does not service those loans sold in the
secondary market. Income from these activities varies from period to period with the volume and type of loans made.



The Bank charges loan origination fees which are calculated as a percentage of the amount loaned. The fees received in connection with the origination of
conventional, single-family and residential real estate loans have generally amounted to two to three points (one point being equivalent to 1% of the principal amount of the loan). In addition, the Bank typically receives fees of one or two points
in connection with the origination of conventional, multi-family residential loans and commercial real estate loans. Loan fees and certain direct loan costs are deferred and the net fee or cost is amortized into income using the interest method over
the expected life of the loan.



Bank regulators require insured
depository institutions to use a classification system for monitoring their problem assets. Under this classification system, problem assets are classified as substandard, doubtful or loss. An asset is considered
substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct
possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all the weaknesses inherent in those classified substandard, with the
added characteristic that the weaknesses present make collection of principal in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets classified as loss
are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the Company to risk sufficient to warrant
classification in one of the above categories, but which possess some weakness, are required to be designated special mention by management.



When an insured depository institution classifies problem assets as either substandard or doubtful, it may establish allowances
for loan losses in an amount deemed prudent by management. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the assets so
classified or to charge off such amount. The Banks determination as to the classification of its assets and the amount of its allowances is subject to review by its federal and state regulators, which may require the establishment of
additional loss allowances.



Allowance for loan Losses.
The provision for loan losses is the annual cost of providing an allowance or reserve for estimated losses on loans. The amount for each year is dependent upon many factors including loan growth, net charge-offs, changes in the composition of the
loan portfolio, delinquencies, managements assessment of loan portfolio quality, the value of collateral and general economic and market factors.



Management monitors the entire loan portfolio in an effort to identify problem loans and risks in the portfolio on a timely basis, and to maintain
appropriate allowance for estimated losses on loans. Loan review procedures, including loan grading, periodic credit rescoring and trend analysis of loan portfolio performance, are utilized by the Companys Credit Review Department in the
process. Managements involvement continues throughout the process and includes participation in the work-out process and recovery activity. These formalized procedures are monitored internally by the Credit Review Department. Such internal
review procedures are quantified in periodic reports to senior management and to the Board of Directors and are used in determining whether such loans represent probable loss to the Company. Our regulators also review our credit quality and may
classify credits differently from us.



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



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



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



Investment Securities 
The Bank must maintain a sufficient level of liquid assets (including specified short-term securities and certain other investments) as determined by management. Our regulators also review our liquidity. The level of liquid assets varies depending
upon several factors, including: (i) the yields on investment alternatives, (ii) managements judgment as to the attractiveness of the yields then available in relation to other opportunities, (iii) expectation of future yield levels, and (iv)
managements projections as to the short-term demand for funds to be used for loans and other activities. Current regulatory and



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accounting guidelines regarding securities (including mortgage backed securities) require us to categorize securities as held to maturity,
available for sale or trading. Securities classified as available for sale are reported for financial reporting purposes at fair value with net changes in the market value from period to period included as a
separate component of stockholders equity, net of income taxes. Securities, including mortgage-backed securities, are classified at the time of purchase, based upon managements intentions and abilities, as securities held to maturity or
securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are classified as held to maturity and are stated at cost and adjusted for amortization of premium and accretion of discount, which are computed
using the level yield method and recognized as adjustments of interest income. All other debt securities are classified as available for sale to serve principally as a source of liquidity.



The changes in fair value in our available for sale portfolio reflect market
conditions and vary, either positively or negatively, based primarily on changes in general levels of market interest rates relative to the yields of the portfolio.



The Banks investment portfolio policy authorizes investments in instruments such as: (i) U.S. Treasury obligations,
(ii) U.S. federal agency or federally sponsored agency obligations, (iii) municipal obligations, (iv) mortgage-backed securities and collateralized mortgage obligations, (v) certificates of deposit, (vi) investment grade corporate bonds and
commercial paper, (vii) mutual funds; and (viii) trust preferred securities. The Board of Directors may authorize additional types of investments, however all investments at December 31, 2004 were within the existing authorized categories.



As a source of liquidity and to supplement its lending
activities the Bank has invested in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings by the Bank and, through repayments, as a source of liquidity. Mortgage-backed securities represent an
interest in a pool of residential or other types of mortgages. Principal and interest payments are passed from the mortgage originators, through intermediaries (generally governmental sponsored entities or GSE) that pool and repackage
the loans in the form of securities, to investors, like the Bank. The GSEs, which include GinnieMae, FreddieMac and FannieMae, may guarantee the payment of principal and interest to investors.



Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed rate or adjustable rate mortgage
loans. The interest rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate or adjustable rate) and the prepayment risk, are passed on to the holders of the mortgage-backed securities. The life of a mortgage-backed
pass-through security is equal to the life of the underlying mortgages. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without
prepayment penalties.



The Bank also invests in
mortgage-related securities, primarily collateralized mortgage obligations or CMOs, issued or sponsored by GinnieMae, FreddieMac and FannieMae and can invest in securities of private issuers as well. Investments in private issuer
collateralized mortgage obligations can be made because these issues generally are higher yielding than agency sponsored collateralized mortgage obligations with similar average life and payment characteristics. All such investments must be rated at
least A1/ A+. Collateralized mortgage obligations are a type of debt security that aggregates pools of mortgages and mortgage-backed securities and creates different classes of collateralized mortgage obligations securities with varying maturities
and amortization schedules as well as a residual interest with each class having different risk characteristics. The cash flows from the underlying collateral are usually divided into tranches or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest repayment of the underlying mortgages and mortgage backed securities as opposed to pass-through mortgage backed securities where cash flows are distributed pro rata to all
security holders. A particular tranche or class may carry prepayment risk which may be different from that of the underlying collateral and other tranches. We invest only in investment grade tranches of CMOs with investment ratings of at least A1 /
A+ (Moodys / S&P).



The Banks investments also
include certain other investments. These investments are recorded at cost which approximates market value. These other approved investments include Federal Home Loan Bank of Atlanta or FHLB stock. The Bank also participates in Community
Reinvestment Act (CRA) qualified investments of high quality and limited risk that benefit our communities and promote our compliance with that Act.



Deposits. The Company offers a full range of depository accounts and services to both individuals and businesses. These deposit accounts have a
wide range of interest rates and terms and consist of demand, savings, money market and time accounts.



The Banks current savings deposit products include passbook savings accounts, demand deposit accounts, NOW accounts, money market deposit accounts
and time deposits. Terms on interest-bearing deposit accounts range from three months to ten years. Included among these savings deposit products are Individual Retirement Account (IRA) certificates and Keogh Plan retirement certificates
(collectively retirement accounts). The Bank offers preferred rates for time deposits in denominations of $100,000 or more at terms ranging from one month to five years.



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The principal methods used by the Bank to attract deposit accounts include the offering of a wide variety
of services and accounts, competitive interest rates and convenient office locations and service hours.



In recent years, the Bank has been required by market conditions to rely increasingly on different types of short-term certificate accounts and other
savings deposit alternatives that are more responsive to market interest rates than passbook accounts and regulated fixed-rate, fixed-term certificates that were historically the Banks primary source of savings deposits. As a result of
deregulation and consumer preference for shorter term, market-rate sensitive accounts, the Bank has, like many financial institutions, experienced a significant shift in savings deposits towards relatively short-term, market-rate accounts. In recent
years, the Bank has been successful in attracting IRA retirement accounts which have provided the Bank with a relatively stable source of longer-term funds.



The Bank attempts to control the flow of savings deposits by pricing its accounts to remain generally competitive with other financial institutions in its
market area, but does not necessarily seek to match the highest rates paid by competing institutions. In this regard, the senior officers of the Bank meet weekly to determine the interest rates which the Bank will offer to the general public in our
various markets.



Rates established by the Bank are also
affected by the amount of funds needed by the Bank on both a short-term and long-term basis, alternative sources of funds and the projected level of interest rates in the future. The ability of the Bank to attract and maintain savings deposits and
the Banks cost of funds have been, and will continue to be, significantly affected by economic and competitive conditions.



Brokered deposits are deposits obtained by the Bank utilizing an outside broker that is typically paid a fee. The Bank will utilize brokered deposits to
obtain deposits with maturities and options that assist with the management of various balance sheet interest rate risks. These deposits typically have a higher interest rate than deposits obtained locally, but provide other benefits such as:



| |  |  | Obtaining deposits not available in the Banks market area.
| | - |  | -----------------------------------------------------------



| |  |  | Targeting a specific maturity and preferred dollar amount outside the Banks marketing area without being required to offer it to all of the Banks current depositors, in
an effort to decrease the overall cost of deposits to the Bank and increasing the likelihood that the desired deposit maturities are obtained.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Issuing long-term time deposits with continuous call options outside the Banks market area. This allows the Bank to obtain the options it desires to manage the balance sheet
without running the risk of impacting its local depositors by calling time deposits when rates decline.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reducing the operating costs the Bank incurs compared to the costs of issuing time deposits in its local market area.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



Brokered time deposits are set up on the Banks core processing system;
however, normal retail documentation will not be required on these deposits. Our goal is to limit total issuance of brokered deposits to not more than 10% of deposits in aggregate. Brokered deposits through any one Broker should not exceed 2% of
assets. Brokered deposits were $167.3 million at December 31, 2004 or 9.78% of total deposits and 7.19% of total assets.



National deposits are obtained from banks, savings & loans and credit unions by advertising our time deposit rates on the Internet. These are treated
similarly to retail time deposits with the same documentation. National deposits should not exceed 15% of assets. National time deposits will be obtained in small denominations, usually $99,000, and are obtained from a wide variety of depositors.
Internet generated deposits were $116.5 million at December 31, 2004 or 6.81% of total deposits and 5.01% of total assets.



Other Funding Sources:The Bank is eligible to obtain advances from the FHLB upon collateral consisting of the FHLB common stock the Bank owns,
securities owned by the Bank and held in safekeeping by the FHLB and certain of its residential mortgages provided certain standards related to credit worthiness have been met. Such advances are made pursuant to several different credit programs,
each of which has its own interest rate and range of maturities. FHLB advances are generally available to meet seasonal and other withdrawals of deposit accounts and to expand our lending base on a long-term basis through the extension of maturities
of liabilities.



The Bank also, from time to time, enters into
sales of securities under agreements to repurchase. Such reverse repurchase agreements are treated as financings and the obligations to repurchase securities sold are reflected as liabilities on the balance sheet.



Insurance Services. The Company provides insurance services to
individuals and businesses through its subsidiary, MSII. MSII provides a variety of insurance products for consumers including life, health, homeowners, automobile and umbrella liability coverage. Commercial products include coverage for property,
general liability, workers compensation and group life and health. MSII is an insurance agency and does not underwrite policies but rather acts as a broker.



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Investment Services. The Company, through a division of the Bank, provides its customers with
comprehensive investment and brokerage services through an arrangement with Invest Financial. Products and services include stocks and bonds, mutual funds, annuities, 401(k) plans, life insurance, individual retirement accounts, simplified employee
pension accounts, estate planning and financial needs analysis.



Business Combinations



Since 1995, the Company
has been reviewing and analyzing possible acquisition and growth opportunities in the Atlanta metropolitan area. Its strategic plan has been to enhance shareholder value by creating a larger high performing banking company in the Atlanta area. The
goal has been to provide broader and more comprehensive services to its customers, create efficiencies in the administration and service functions and provide a larger shareholder base with a more liquid security trading on a national market.



During 2003 the Company acquired First Colony Bancshares,
Inc., the former holding company of First Colony Bank, a $320 million asset holding company headquartered in Alpharetta, Georgia (First Colony). First Colonys banking offices in Alpharetta, Roswell, and Cumming gave the Bank a
strong presence in North Fulton County and the Cumming Office augmented the Companys presence in Forsyth County. First Colony Bank was merged into the Bank.



During 2003 the Company completed the acquisition of the remaining 50% interest from the other partners of Piedmont
Settlement Services, LLP, a Pennsylvania limited liability partnership. Upon this acquisition, the operations were transferred upstream to an intermediate holding company that subsequently changed its name to Piedmont Settlement Services, Inc.
Piedmont is a wholly-owned subsidiary of the Parent Company. Piedmont is a third party provider of mortgage loan related services.



During 2004 MSII acquired substantially all of the assets of Banks Moneyhan Hayes Insurance Agency, Inc. (BMIA), an insurance agency
headquartered in Conyers, Georgia. BMIAs insurance agency offices are located in Conyers and Athens, Georgia and sells business and property and casualty insurance, as well as group life and health. BMIA was the dominant insurance agency in
Newton and Rockdale counties and allowed us to further expand our customer base in our geographic markets.



Market Area and Competition



The Companys primary service area is in the counties north and east of Atlanta, Georgia. These counties include Barrow, Clarke, Cobb, DeKalb,
Forsyth, Fulton, Gwinnett, Newton, Rockdale and Walton counties. The Companys marketing strategy emphasizes its local nature and involvement in the communities located in its primary service area.



Since July 1, 1995, numerous interstate acquisitions involving Georgia-based
financial institutions have been announced or consummated. Though interstate banking has resulted in significant changes in the structure of financial institutions in the southeastern region, including the Banks primary service areas,
management does not feel that such changes have had or will have a significant impact upon its operations.



The Bank encounters vigorous competition from other commercial banks, savings and loan associations and other financial institutions and intermediaries in
the Banks primary service areas.



The Bank competes with
other banks in its primary service area in obtaining new deposits and accounts, making loans, obtaining branch banking locations and providing other banking services. The Bank also competes with savings and loan associations and credit unions for
savings and transaction deposits, time deposits and various types of retail and commercial loans.



The Bank must compete with other financial intermediaries, including mortgage banking firms and real estate investment trusts, small loan and finance
companies, insurance companies, credit unions, leasing companies and certain government agencies. Competition exists for time deposits and, to a more limited extent, demand and transaction deposits offered by a number of other financial
intermediaries and investment alternatives, including money market mutual funds, brokerage firms, government and corporate bonds and other securities.



Competition for banking services in the State of Georgia is not limited to institutions headquartered in the State. A number of large interstate banks,
bank holding companies and other financial institutions and intermediaries have established loan production offices, small loan companies and other offices and affiliates in the State of Georgia. Many of the interstate financial organizations that
compete in the Georgia market engage in regional, national or international operations and have substantially greater financial resources than the Company.



Management expects that competition will remain intense in the future due to State and Federal laws and regulations, and the entry of additional bank and
non-bank competitors in its markets.



Employees



As of December 31, 2004, the Company had a total of 518
full-time equivalent employees. These employees are provided with fringe benefits in varying combinations, including health, accident, disability and life insurance plans. None of the Companys



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employees are subject to a collective bargaining agreement and the Company has never experienced a work stoppage. The Company also maintains training,
educational and affirmative action programs designed to prepare employees for positions of increasing responsibility. In the opinion of management the Company enjoys good relations with its employees.



Government Monetary Fiscal Policy



The Company is affected by the credit policies of monetary authorities
including the Board of Governors of the Federal Reserve System (Federal Reserve). An important function of the Federal Reserve is to regulate the national supply of bank credit. Among the instruments of monetary policy used by the
Federal Reserve to implement these objectives are open market operations in United States Government securities, changes in the discount rate, reserve requirements on member bank deposits and funds availability regulations. These instruments are
used in varying combinations to influence the overall growth of bank loans, investments and deposits and may also affect interest rate charges on loans or paid on deposits.



The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of financial
institutions in the past and will continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no reasonable prediction can be made as
to the future impact that changes in interest rates, deposit levels, or loan demand may have on the business and income of the Parent Company its subsidiaries.



Supervision and Regulation



Supervision, regulation and examination of the Parent Company, the Bank and their subsidiaries are intended primarily for the protection of depositors
rather than holders of Parent Company securities. The Parent Company is a financial holding company registered with the Federal Reserve and the Georgia Department of Banking and Finance under the Bank Holding Company Act of 1956 (BHC
Act) as amended, the Holding Company Act and the Georgia Bank Holding Company Act, respectively. As a result, it is subject to the supervision, examination and reporting requirements of these acts and the regulations of the Federal
Reserve and the Georgia Department of Banking and Finance issued under these acts. To remain as a financial holding company, a bank holding company must demonstrate that each of its bank subsidiaries is well capitalized and well managed and has a
rating of satisfactory or better under the Community Reinvestment Act of 1977 (CRA).



The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before (1) it may acquire direct or indirect ownership
or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than five percent of the voting shares of the bank; (2) it or any of its subsidiaries, other than a bank,
may acquire all or substantially all of the assets of any bank; or (3) it may merge or consolidate with any other bank holding company.



The Gramm-Leach-Bliley Act (GLB Act) was enacted on November 12, 1999. The GLB Act permits bank holding companies meeting certain management,
capital and community reinvestment standards to engage in a substantially broader range of non-banking activities than were permitted previously, including insurance underwriting and merchant banking activities. The BHC Act was amended to permit a
financial holding company to engage in any activity and acquire and retain any company that the Federal Reserve determines to be (a) financial in nature or incidental to such financial activity or (b) complementary to a financial activity and does
not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. The GLB Act repealed sections 20 and 32 of the Glass Steagall Act, permitting affiliations of banks with securities firms and
registered investment companies. The GLB Act permits banks to be under common control with securities firms, insurance companies, investment companies and other financial interests if these companies are subsidiaries of a financial holding company.
Some of these affiliations are also permissible for bank subsidiaries. The GLB Act gives the Federal Reserve broad authority to regulate financial holding companies, but provides for functional regulation of subsidiary activities by the Securities
and Exchange Commission, the Federal Trade Commission, state insurance and securities authorities and similar regulatory agencies.



The GLB Act includes significant provisions regarding the privacy of financial information. These financial privacy provisions generally require a
financial institution to adopt a privacy policy regarding its practices for sharing nonpublic personal information and to disclose that policy to its customers, both at the time the customer relationship is established and at least annually during
the relationship. These provisions also prohibit the Company from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to opt out of the disclosure.



The Federal Reserve Act generally imposes certain limitations on extensions
of credit and other transactions by and between banks that are members of the Federal Reserve and other affiliates (which includes any holding company of which a bank is a subsidiary and any other non-bank subsidiary of such holding company). Banks
that are not members of the Federal Reserve also are subject to these limitations. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tying arrangements in connection with any extension of credit,
lease or sale of property or the furnishing of services.



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In December 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
was enacted. This act recapitalized the Bank Insurance Fund (BIF), of which the Bank is a member; substantially revised statutory provisions, including capital standards; restricted certain powers of state banks; gave regulators the
authority to limit officer and director compensation; and required holding companies to guarantee the capital compliance of their banks in certain instances. FDICIA, which became effective in December 1992, among other things, requires the federal
banking agencies to take prompt corrective action with respect to banks that do not meet minimum capital requirements. FDICIA established five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, as defined by regulations adopted by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the
other federal depository institution regulatory agencies. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets such
measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below such measure, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations.
The critical capital level must be a level of tangible equity capital equal to the greater of 2 percent of total tangible assets or 65 percent of the minimum leverage ratio to be prescribed by regulation. An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. Generally, subject to a narrow exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.



Under the agency rule implementing the prompt corrective action provisions, an institution that (i) has a Total Capital
ratio of 10.0% or greater, a Tier 1 Capital ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater and (ii) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the appropriate
federal banking agency is deemed to be well capitalized.



An institution with a Total Capital ratio of 8.0% or greater, a Tier 1 Capital ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater is considered to be adequately capitalized. A depository institution that has a
Total Capital ratio of less than 8.0%, a Tier 1 Capital ratio of less than 4.0%, or a Leverage Ratio of less than 4.0% is considered to be undercapitalized. A depository institution that has a Total Capital ratio of less than 6.0%, a
Tier 1 Capital ratio of less than 3.0%, or a Leverage Ratio of less than 3.0% is considered to be significantly undercapitalized, and an institution that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed
to be critically undercapitalized. For purposes of the regulation, the term tangible equity includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards plus the amount of
outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets with certain exceptions. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory examination rating. An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital
restoration plan to its appropriate federal banking agency.



Under FDICIA, a bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The obligation of a controlling bank holding company under FDICIA to fund a
capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiarys assets and the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing
its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the appropriate federal
banking agency is given authority with respect to any undercapitalized depository institution to take any of the actions it is required to or may take with respect to a significantly undercapitalized institution as described below if it determines
that those actions are necessary to carry out the purpose of FDICIA.



If a depository institution fails to meet regulatory capital requirements, the regulatory agencies can require submission and funding of a capital restoration plan by the institution, place limits on its activities,
require the raising of additional capital and, ultimately, require the appointment of a conservator or receiver for the institution. The obligation of a controlling FHC under FDICIA to fund a capital restoration plan is limited to the lesser of five
percent of an undercapitalized subsidiarys assets or the amount required to meet regulatory capital requirements. If the controlling FHC fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the
Federal Bankruptcy Code, the FDICs claim may be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company.



For those institutions that are significantly undercapitalized or undercapitalized and either fail to submit an acceptable
capital restoration plan or fail to implement an approved capital restoration plan, the appropriate federal banking agency must require the institution to take one or more of the following actions: (i) sell enough shares, including voting shares, to
become adequately capitalized; (ii) merge with (or be sold to) another institution (or holding company), but only if grounds exist for appointing a conservator or receiver; (iii) restrict certain transactions with banking affiliates as if the
sister bank exception to the requirements of Section 23A of the Federal Reserve Act did not exist; (iv) otherwise restrict transactions with bank or non-bank affiliates; (v) restrict interest rates that the institution pays on deposits
to prevailing rates in the institutions region; (vi) restrict asset growth or reduce total



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assets; (vii) alter, reduce, or terminate activities; (viii) hold a new election of directors; (ix) dismiss any director or senior executive officer who held
office for more than 180 days immediately before the institution became undercapitalized, provided that in requiring dismissal of a director or senior officer, the agency must comply with certain procedural requirements, including the opportunity
for an appeal in which the director or officer will have the burden of proving his or her value to the institution; (x) employ qualified senior executive officers; (xi) cease accepting deposits from correspondent depository institutions;
(xii) divest certain non-depository affiliates which pose a danger to the institution; or (xiii) be divested by a parent holding company. In addition, without the prior approval of the appropriate federal banking agency, a significantly
undercapitalized institution may not pay any bonus to any senior executive officer or increase the rate of compensation for such an officer without regulatory approval. At December 31, 2004, the Parent Company and the Bank were both well
capitalized and were not subject to any of the foregoing restrictions.



The Community Reinvestment Act of 1977 (CRA) and the regulations of the Federal Reserve and the FDIC implementing that act are intended to encourage regulated financial institutions to help meet the credit
needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The CRA and its implementing regulations provide that the appropriate
regulatory authority will assess the records of regulated financial institutions in satisfying their continuing and affirmative obligations to help meet the credit needs of their local communities as part of their regulatory examination of the
institution. The results of such examinations are made public and are taken into account upon the filing of any application to establish a domestic branch or to merge or to acquire the assets or assume the liabilities of a bank. In the case of a
bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank
holding company. An unsatisfactory record can substantially delay or block the transaction. The Banks most recent CRA examination was on February 1, 2003 and the bank received a Satisfactory rating.



The Omnibus Budget Reconciliation Act of 1993 provides that deposits and
certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution in the liquidation or other
resolution of such an institution by any receiver.



USA Patriot Act:On October 26, 2001, President Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act). The
USA Patriot Act is intended to allow the federal government to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title
III of the USA Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Certain provisions of Title III impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.



Among its provisions, the USA Patriot Act requires each financial institution: (i) to establish an anti-money laundering program, (ii) to establish due
diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks and (iii) to avoid establishing, maintaining, administering, or
managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA Patriot Act contains a provision encouraging cooperation among financial
institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. The federal banking
agencies have begun proposing and implementing regulations interpreting the USA Patriot Act. Compliance with the USA Patriot Act did not have a significant impact on the financial condition or results of operations of the Company.



Sarbanes-Oxley Act:On July 30, 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), which is intended to address systemic and structural weaknesses of the capital markets in the United States that were perceived to have contributed to recent corporate scandals.
The Sarbanes-Oxley Act creates the Public Company Accounting Oversight Board (PCAOB) to oversee the conduct of audits of public companies. The duties of PCAOB include (i) registering public accounting firms that prepare audit reports,
(ii) establishing auditing, quality control, ethics, independence and other standards for the preparation of audit reports, (iii) conducting inspections of registered public accounting firms and (iv) otherwise promoting high professional standards
among, and improving the quality of audit services offered by auditors of public companies. The PCAOB is funded from assessments on public companies and is subject to the oversight of the Securities and Exchange Commission. In addition, the
Sarbanes-Oxley Act attempts to strengthen the independence of public company auditors by, among other things, (i) prohibiting public company auditors from providing certain non-audit services to their audit clients, (ii) requiring a companys
audit committee to preapprove all audit and non-audit services being provided by its independent auditor, (iii) requiring the rotation of audit partners and (iv) prohibiting an auditor from auditing a client that has as its chief executive officer,
chief financial officer, chief accounting officer or controller a person that was employed by the auditor during the previous year.



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The Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate management by, among
other things, (i) requiring the chief executive officer and principal accounting officer of public companies to provide certain certifications in their periodic reports regarding the accuracy of the periodic reports filed with the Securities and
Exchange Commission, (ii) prohibiting officers and directors of public companies from fraudulently influencing an accountant engaged in the audit of the companys financial statements, (iii) requiring chief executive officers and chief
financial officers to forfeit certain bonuses in the event of a misstatement of financial results, (iv) prohibiting officers and directors found to be unfit from serving in a similar capacity with other public companies, (v) prohibiting officers and
directors from trading in the companys equity securities during pension blackout periods and (vi) requiring the Securities and Exchange Commission to issue standards of professional conduct for attorneys representing public companies. In
addition, public companies whose securities are listed on a national securities exchange or association must satisfy the following additional requirements: (i) the companys audit committee must appoint and oversee the companys auditors,
(ii) each member of the companys audit committee must be independent, (iii) the companys audit committee must establish procedures for receiving complaints regarding accounting, internal accounting controls and audit-related matters,
(iv) the companys audit committee must have the authority to engage independent advisors and (v) the company must provide appropriate funding to its audit committee, as determined by the audit committee.



The Sarbanes-Oxley Act contains several provisions intended to enhance the
quality of financial disclosures of public companies, including provisions that (i) require that financial disclosures reflect all material correcting adjustments identified by the companys auditors, (ii) require the disclosure of all material
off-balance sheet transactions, (iii) require the Securities and Exchange Commission to issue rules regarding the use by public companies of pro forma financial information, (iv) with certain limited exceptions, including an exception for financial
institutions making loans in compliance with federal banking regulations, prohibit public companies from making personal loans to its officers and directors, (v) with certain limited exceptions, require directors, officers and principal shareholders
of public companies to report changes in their ownership in the companys securities within two business days of the change, (vi) require a companys management to provide a report of its assessment of the internal controls of the company
in its annual report and requires auditors to attest to managements assertion of the internal controls, (vii) require public companies to adopt codes of conduct for senior financial officers and (viii) require companies to disclose whether the
companys audit committee has a financial expert as a member.



Under the Sarbanes-Oxley Act, the Securities and Exchange Commission is directed to adopt rules designed to protect the independence of research analysts and to require research analysts to disclose conflicts of interest and potential
conflicts of interest. The Sarbanes-Oxley Act also directs that certain studies be conducted by the Comptroller General and the Securities and Exchange Commission, including studies regarding the function of credit rating agencies and the role of
investment banks and financial advisers might have on earnings.



The Sarbanes-Oxley Act imposes criminal liability for certain acts, including altering documents involving federal investigations, bankruptcy proceedings, corporate audits and increases the penalties for certain offenses, including mail and
wire fraud. In addition, the Sarbanes-Oxley Act gives added protection to corporate whistle-blowers.



Although the Company has incurred additional expense in complying with the provisions of the Sarbanes-Oxley Act and the regulations promulgated by the
Securities and Exchange Commission thereunder, such compliance has not had a material impact on the Companys financial condition or results of operations.



Other:The United States Congress continues to consider a number of wide-ranging proposals for altering the structure, regulation, and
competitive relationships of the nations financial institutions. It cannot be predicted whether or in what form further legislation may be adopted or the extent to which the business of the Company may be affected thereby.



FDIC Insurance Assessments



Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for
insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The risk-based system, which went into effect on January 1, 1994, assigns an institution to one of
three capital categories: (i) well capitalized; (ii) adequately capitalized; and (iii) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the
undercapitalized category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. An institution is also assigned by the FDIC to one of
three supervisory subgroups within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institutions primary federal regulator and information which
the FDIC determines to be relevant to the institutions financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institutions state supervisor). An
institutions insurance assessment rate is then determined based on the capital category and supervisory category to which it is assigned. Under the final risk-based assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different assessment rates are applied.



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The Bank is assessed at the well-capitalized level where the premium rate is currently zero. Like all
insured banks, the Bank also must pay a quarterly assessment of approximately $.02 per $100 of assessable deposits to pay off bonds that were issued in the late 1980s by a government corporation, the Financing Corporation, to raise funds to
cover costs of the resolution of the savings and loan crisis.



Under the Federal Deposit Insurance Act (FDIA), insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to
continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.



Capital Adequacy



The Parent Company and the Bank are required to comply with the capital adequacy standards established by the Federal Reserve and the FDIC. There are two
basic measures of capital adequacy for bank holding companies that have been promulgated by the Federal Reserve: a risk-based measure and a leverage measure. All applicable capital standards must be satisfied for a bank holding company to be
considered in compliance.



The risk-based capital standards are
designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.



The minimum guideline for the ratio of total capital (Total
Capital) to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8.0%. At least half of the Total Capital must be composed of common equity, undivided profits, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (Tier 1 Capital). The remainder may consist
of subordinated debt, other preferred stock, and a limited amount of loan loss reserves. The minimum guideline for the Tier 1 Capital ratio is 4.0%. At December 31, 2004, the Companys consolidated Tier 1 Capital and Total Capital ratios were
12.33% and 13.59%, respectively. In December, 2004, the Company offered common stock through a capital offering that raised $51.1 million in additional capital. Without this common stock offering, the Companys consolidated Tier 1 and Total
Capital ratios would have been 9.21% and 10.88%, respectively.



In addition, the Federal Reserve has established minimum leverage ratio guidelines for bank holding companies. These guidelines provide for a minimum ratio of Tier 1 Capital to average assets, less goodwill and certain other intangible
assets (the Leverage Ratio), of 4.0% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a Leverage Ratio of
at least 4.0% plus an additional cushion of 100 to 200 basis points. The Companys Leverage Ratio at December 31, 2004, was 10.49%. Without the December, 2004, capital offering, the Companys Leverage Ratio at December 31, 2004 would be
7.79%.



The guidelines also provide that bank holding companies
experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve has
indicated that it will consider a tangible Tier 1 Capital leverage ratio (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activities.



The Bank is subject to risk-based and leverage capital requirements adopted
by the FDIC, which are substantially similar to those adopted by the Federal Reserve. The Bank was in compliance with applicable minimum capital requirements as of December 31, 2004. Neither the Parent Company nor the Bank has been advised
by any federal banking agency of any violations of specific minimum capital ratio requirement applicable to it.



Failure to meet capital guidelines could subject a bank to a variety of enforcement remedies, including the termination of deposit insurance by the FDIC
and to certain restrictions on its business.



Safety and
Soundness Standards



Main Street Bank is a Georgia
chartered commercial bank and subject to the supervision, examination and reporting requirements of the Georgia Department of Banking and Finance and the FDIC.



The FDIC and the Georgia Department of Banking and Finance regularly examine the operations of the Bank and are given the authority to approve or
disapprove mergers, consolidations, and the establishment of branches and similar corporate actions. The FDIC and the Georgia Department of Banking and Finance also have the power to prevent the continuance or development of unsafe or unsound
banking practices or other violations of law.



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FDIA, as amended by FDICIA and the Riegle Community Development and Regulatory Improvement Act of 1994,
requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits and such other operational and managerial standards as the agencies deem appropriate. The federal bank regulatory agencies adopted in 1995 a set of guidelines
prescribing safety and soundness standards pursuant to FDICIA, as amended.



The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation,
fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. In addition, the agencies adopted
regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified,
an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing
other actions of the types to which an undercapitalized institution is subject under the prompt corrective action provisions of FDICIA. If an institution fails to comply with such an order, the agency may seek to enforce such order in
judicial proceedings and to impose civil money penalties. The federal bank regulatory agencies also proposed guidelines for asset quality and earnings standards.



Risk Factors



Credit Risk and Loan Concentration:A major risk facing lenders is the risk of losing principal and interest as a result of a borrowers
failure to perform according to the terms of the loan agreement, or credit risk. Real estate loans include residential mortgages and construction and commercial loans secured by real estate. The Companys credit risk with respect to
its real estate loans relates principally to the value of the underlying collateral. The Companys credit risk with respect to its commercial loans relates principally to the general creditworthiness of the borrowers, who primarily are
individuals and small and medium-sized businesses in the Companys primary service areas. There can be no assurance that the allowance for loan losses will be adequate to cover future losses in the existing loan portfolios. Loan losses
exceeding the Companys historical rates could have a material adverse affect on the results of operations and financial condition of the Company.



Potential Impact of Change in Interest Rates:The earnings of the Company depends to a large extent upon its net interest income, which is the
difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowings. The net interest income of the Company would be adversely affected
if changes in market interest rates resulted in the interest-bearing assets of the Company being reduced because of softening loan demand. In addition, a decline in interest rates may result in greater than normal prepayments of the higher
interest-bearing obligations held by the Company.



Management Information Systems:The sophistication and level of risk of the Companys business requires the utilization of thorough and accurate management information systems. Failure of management to effectively implement,
maintain, update and utilize updated management information systems could prevent management from recognizing in a timely manner deterioration in the performance of its business, particularly its loan portfolios. Such failure to effectively
implement, maintain, update and utilize comprehensive management information systems could have a material adverse effect on the results of operations and financial condition of the Company.



Merger Integration:A risk facing financial institutions is the
successful integration of an acquired institutions staff, accounts, and products. Failure of management to effectively integrate all aspects of an acquired institution could lead to higher than anticipated account run-off, lower than
anticipated profits from these acquired institutions, and could have a material adverse effect on the operating results and financial conditions of the Company.



Potential Impact of Significant Growth:The Company has grown loans, deposits, fee businesses, and employees rapidly both organically and
through acquisition. The ability of the Company to manage this growth in a disciplined manner is imperative. The Company must thoroughly plan on how to support this growth from a human resources, training, operational, financial and technology
standpoint. The failure to successfully manage this growth could have a material adverse effect on the operating results and financial conditions of the company.



Adverse Economic Conditions:The Companys major lending activities are real estate and commercial loans.
Residential mortgage loans are also produced for resale. An increase in interest rates could have a material adverse effect on the housing industries and consumer spending generally. In addition, an increase in interest rates could cause a decline
in the value of residential mortgages. These events could adversely affect the results of operations and financial condition of the Company.



14



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##### Table of Contents

Governmental Regulation  Banking:The Parent Company and the Bank are subject to extensive
supervision, regulation and control by several Federal and State governmental agencies, including the Federal Reserve, FDIC, and the Georgia Department of Banking and Finance. Future legislation, regulations and government policy could adversely
affect the Company and the financial institutions industry as a whole, including the cost of doing business. Although the impact of such legislation, regulation and policies cannot be predicted, future changes may alter the structure of and
competitive relationships among financial institutions.



Consumer and Debtor Protection Laws:The Company is subject to numerous Federal and State consumer protection laws that impose requirements related to offering and extending credit. The United States Congress and state governments
may enact laws and amend existing laws to regulate further the consumer industry or to reduce finance charges or other fees or charges applicable to credit card and other consumer revolving loan accounts. Such laws, as well as any new laws or
rulings which may be adopted, may adversely affect the Companys ability to collect on account balances or maintain previous levels of finance charges and other fees and charges with respect to the accounts. Any failure by the Company to comply
with such legal requirements also could adversely affect its ability to collect the full amount of the account balances. Changes in federal and state bankruptcy and debtor relief laws could adversely affect the results of operations and financial
condition of the Company if such changes result in, among other things, additional administrative expenses and accounts being written off as uncollectible.



Composition of Real Estate Loan Portfolio:The real estate loan portfolio of the Company includes residential mortgages and construction and
commercial loans secured by real estate. The Company generates most of its real estate mortgage loans in Georgia. Therefore, conditions of this real estate market could strongly influence the level of the Companys non-performing mortgage loans
and the results of operations and financial condition of the Company. Real estate values and the demand for mortgages and construction loans are affected by, among other things, changes in general or local economic conditions, changes in
governmental rules or policies, the availability of loans to potential purchasers, and acts of nature. Although the Companys underwriting standards are intended to protect the Company against adverse general and local real estate trends,
declines in real estate markets could adversely impact the demand for new real estate loans, and the value of the collateral securing the Companys loans.



Website Availability of Reports Filed with the Securities and Exchange Commission



The Company maintains an Internet website located at www.mainstreetbank.com on which, among other things, the Company makes
available, free of charge, various reports that it files with, or furnishes to the Securities and Exchange Commission (SEC), including its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports. These reports are made available as soon as reasonably practicable after these reports are filed with, or furnished to the SEC.



Item 2. Properties



The
Companys corporate headquarters are located at 3500 Lenox Road, Atlanta, Georgia. The main office of the Bank is located at 1134 Clark Street, Covington, Georgia. The Bank leases space for its headquarters and various support functions. These
support functions include: an operations center, bank headquarters, and accounting facilities.



The Bank has 23 branch offices located in Barrow, Clarke, Cobb, DeKalb, Forsyth, Fulton, Gwinnett, Newton, Rockdale and Walton counties, Georgia, 17 of which are owned and 6 of which are leased. Deposit and loan
operations, proof, information technology, and purchasing are located in leased space at 2118 Usher Street in Covington, Georgia. Accounting, Risk Management and Compliance are in leased space at 1122 Pace Street in Covington, Georgia. Human
Resources, Piedmont Settlement Services and SBA Lending are located in leased space located at the Covington Professional Park on Highway 278, Covington, Georgia. The Banks corporate headquarters is in leased space at 1121 Floyd Street,
Covington, Georgia. The Bank also leases a building in Covington, Georgia, adjacent to the owned facility on Pace Street, which serves as the location of the Branch Operations and Treasury departments.



Item 3. Legal Proceedings



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



Item 4. Submission of Matters to a Vote of Security Holders



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



15



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##### Table of Contents

PART II

Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer

Purchases of
Equity Securities



Market Prices. Our common stock
trades on the NASDAQ under the symbol MSBK.



The
following table sets forth the high and low closing prices and the end of the quarter closing price of the common stock of the Parent Company and the dividends paid thereon during the periods indicated:



|              |  |      |       |     |   |       |  |          |       |  |   |      
|------------- |  | ---- | ----- | --- | - | ----- |  | -------- | ----- |  | - | -----
|Quarter Ended |  | High |       | Low |   | Close |  | Dividend
|2004          |  |      |       |     |   |       |  |          |       |  |   |      
|March 31      |  | $    | 27.50 |     | $ | 24.90 |  | $        | 27.34 |  | $ | 0.135
|June 30       |  |      | 28.82 |     |   | 25.62 |  |          | 28.10 |  |   | 0.135
|September 30  |  |      | 30.60 |     |   | 26.46 |  |          | 30.60 |  |   | 0.135
|December 31   |  |      | 34.93 |     |   | 28.55 |  |          | 34.93 |  |   | 0.135
|              |  |      |       |    
|2003          |  |      |       |     |   |       |  |          |       |  |   |      
|March 31      |  | $    | 20.48 |     | $ | 18.75 |  | $        | 18.45 |  | $ | 0.120
|June 30       |  |      | 25.40 |     |   | 18.50 |  |          | 24.94 |  |   | 0.120
|September 30  |  |      | 26.00 |     |   | 23.37 |  |          | 25.02 |  |   | 0.120
|December 31   |  |      | 27.92 |     |   | 25.01 |  |          | 26.52 |  |   | 0.120



As of February 28,
2005, there were approximately 1,738 shareholders of record of the Parent Companys common stock. The Company believes that there are a significant number of shares of Common Stock held either in nominee name or street name brokerage accounts
and consequently, the Company is unable to determine the number of beneficial owners of the Common Stock.



Dividend Policy and History. Neither the Parent Companys articles of incorporation nor the bylaws set forth any restriction on the ability of
the Parent Company to issue dividends to its shareholders. The Georgia Business Corporation Code, though, forbids any distribution which, after being given effect, would leave the Parent Company unable to pay its debts as they become due in the
usual course of business. Additionally, the Georgia Business Corporation Code provides that no distribution shall be made if, after giving it effect, the corporations total assets would be less than the sum of its total liabilities plus the
amount that would be needed to satisfy any preferential dissolution rights.



The Parent Company is a legal entity separate and distinct from its subsidiaries. Substantially all of the Parent Companys revenues result from amounts paid as dividends to the Parent Company by its
subsidiaries. The Bank is subject to statutory and regulatory limitations on the payment of dividends to the Parent Company, and the Parent Company is subject to statutory and regulatory limitations on dividend payments to its shareholders.



If in the opinion of the federal banking regulators, a
depository institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the regulatory authority may require, after notice and hearing, that the institution cease and desist from the practice. The Federal
banking agencies have indicated that paying dividends that deplete a depository institutions capital base to an inadequate level would be an unsafe and unsound banking practice. Under FDICIA, a depository institution may not pay any dividend
if payment would cause it to become undercapitalized or if it already is undercapitalized. The federal agencies have also issued policy statements that provide that bank holding companies and insured banks should generally only pay dividends out of
current operating earnings.



The Georgia Financial Institutions
Code and the Georgia Banking Departments regulations provide:



| |  |  | that dividends of cash or property may be paid only out of the Banks retained earnings;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | that dividends may not be paid if the Banks paid-in capital and retained earnings which are set aside for dividend payment and other distributions do not, in combination,
equal at least 20% of the Banks capital stock;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | that dividends may not be paid without prior approval of the Georgia Banking Department if:
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the Banks total classified assets at its most recent examination exceed 80% of its equity capital;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the aggregate amount of dividends to be declared exceeds 50% of the Banks net profits after taxes but before dividends for the previous calendar year;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ratio of equity capital total to adjusted assets is less than 6%.
| | - |  | ---------------------------------------------------------------------



The payment of dividends by the Parent Company may also be affected or limited by other factors, such as a requirement by the Federal Reserve to maintain
adequate capital above regulatory guidelines.



16



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##### Table of Contents

Recent sales of unregistered securities. On January 2, 2004 the Company acquired substantially all
of the assets of BMIA. As consideration for this acquisition, the Company issued 271,111 shares of its common stock to the shareholders of BMIA in a transaction that was exempt from registration under Section 4(2) of the Securities Act of 1933.
These shares are the subject of an effective registration statement on Form S-3.



Equity Compensation Plans. The following table sets forth information relating to the Companys equity compensation plans as of December 31, 2004:



|                                                           |  |                                                                                                 |  |                                                                                 |       |                                                                                                                                   |        
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                           |  | Number of securities tobe issued upon exerciseof outstanding options,warrants, and
rights ( a ) |  | Weighted-average exerciseprice of outstandingoptions, warrants,
andrights ( b ) |       | Number of securitiesremaining availablefor future issuanceunder equitycompensation
plans(excluding securitiesin column (a)) ( c )
|Equity compensation plans approved by security holders     |  | 1,075,684                                                                                       |  | $                                                                               | 13.34 |                                                                                                                                   | 594,249
|Equity compensation plans not approved by security holders |  |                                                                                                |  |                                                                                 | N/A   |                                                                                                                                   |       
|Total                                                      |  | 1,075,684                                                                                       |  | $                                                                               | 13.34 |                                                                                                                                   | 594,249



17



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##### Table of Contents

Item 6. Selected Financial Data



The following table sets forth selected financial data for the last five years. The acquisitions of Banks Moneyhan Hayes Insurance Agency, Inc. on January 2, 2004 , First Colony Bancshares, Inc. on May 22, 2003 and First National Bank of
Johns Creek on December 11, 2002 have significantly affected the comparability of Selected Financial Data. Specifically, since these acquisitions were accounted for using the purchase method, the assets of the acquired institutions were recorded at
their fair values and the excess purchase price over the net fair value of the assets was recorded as goodwill and the results of operations for these businesses have been included in the Companys results since the date these acquisitions were
completed. Accordingly, the level of our assets and liabilities and our results of operations for these businesses have been included in the Companys results. Discussion of these acquisitions can be found in the Business Combinations section
of Part 1, Item 1. Business and in Note B  Acquisitions in the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.



|                                    |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------- |  | ------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                    |  | Year ended December 31,                                 |          
|                                    |  | 2004                                                    |           |   | 2003 |   |           | 2002 |  |   | 2001      |   |  | 2000 |          
|                                    |  | (Dollars and shares in Thousands except per share data) |          
|EARNINGS                            |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Interest income                     |  | $                                                       | 117,677   |   |      | $ | 98,835    |      |  | $ | 79,189    |   |  | $    | 84,752    |   |  | $ | 85,635    |  
|Interest expense                    |  |                                                         | 35,268    |   |      |   | 27,465    |      |  |   | 24,891    |   |  |      | 35,222    |   |  |   | 37,399    |  
|Net interest income                 |  |                                                         | 82,409    |   |      |   | 71,370    |      |  |   | 54,298    |   |  |      | 49,530    |   |  |   | 48,236    |  
|Non-interest income                 |  |                                                         | 30,623    |   |      |   | 24,344    |      |  |   | 19,078    |   |  |      | 14,112    |   |  |   | 10,676    |  
|Non-interest expense                |  |                                                         | 62,618    |   |      |   | 52,943    |      |  |   | 39,873    |   |  |      | 39,342    |   |  |   | 35,041    |  
|Net income                          |  |                                                         | 30,950    |   |      |   | 26,699    |      |  |   | 20,471    |   |  |      | 14,347    |   |  |   | 13,925    |  
|                                    |  |                                                         |           |   |     
|SELECTED AVERAGE BALANCES           |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Assets                              |  | $                                                       | 2,133,741 |   |      | $ | 1,704,212 |      |  | $ | 1,194,583 |   |  | $    | 1,063,215 |   |  | $ | 980,641   |  
|Earning assets                      |  |                                                         | 1,879,990 |   |      |   | 1,525,504 |      |  |   | 1,101,286 |   |  |      | 990,358   |   |  |   | 914,113   |  
|Loans                               |  |                                                         | 1,578,622 |   |      |   | 1,259,640 |      |  |   | 857,184   |   |  |      | 775,236   |   |  |   | 713,862   |  
|Total deposits                      |  |                                                         | 1,571,723 |   |      |   | 1,313,888 |      |  |   | 966,238   |   |  |      | 896,804   |   |  |   | 828,794   |  
|Shareholders equity                |  |                                                         | 218,680   |   |      |   | 168,496   |      |  |   | 111,579   |   |  |      | 99,951    |   |  |   | 83,578    |  
|Common shares outstanding - diluted |  |                                                         | 20,077    |   |      |   | 18,556    |      |  |   | 16,186    |   |  |      | 16,111    |   |  |   | 15,804    |  
|                                    |  |                                                         |           |   |     
|YEAR-END BALANCES                   |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Assets                              |  | $                                                       | 2,326,534 |   |      | $ | 1,971,765 |      |  | $ | 1,381,990 |   |  | $    | 1,110,168 |   |  | $ | 1,070,575 |  
|Earning assets                      |  |                                                         | 2,090,748 |   |      |   | 1,759,669 |      |  |   | 1,259,942 |   |  |      | 1,016,163 |   |  |   | 999,907   |  
|Loans                               |  |                                                         | 1,699,035 |   |      |   | 1,443,326 |      |  |   | 982,486   |   |  |      | 811,446   |   |  |   | 735,963   |  
|Total deposits                      |  |                                                         | 1,710,210 |   |      |   | 1,458,403 |      |  |   | 1,128,928 |   |  |      | 908,181   |   |  |   | 885,910   |  
|Long-term obligations *             |  |                                                         | 252,617   |   |      |   | 260,605   |      |  |   | 55,155    |   |  |      | 75,121    |   |  |   | 52,128    |  
|Shareholders equity                |  |                                                         | 278,963   |   |      |   | 202,704   |      |  |   | 131,657   |   |  |      | 105,121   |   |  |   | 93,774    |  
|Common shares outstanding           |  |                                                         | 21,230    |   |      |   | 18,981    |      |  |   | 16,242    |   |  |      | 15,699    |   |  |   | 15,534    |  
|                                    |  |                                                         |           |   |     
|PER COMMON SHARE                    |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings per share - basic          |  | $                                                       | 1.59      |   |      | $ | 1.49      |      |  | $ | 1.30      |   |  | $    | 0.92      |   |  | $ | 0.90      |  
|Earnings per share - diluted        |  |                                                         | 1.54      |   |      |   | 1.44      |      |  |   | 1.26      |   |  |      | 0.89      |   |  |   | 0.88      |  
|Book value                          |  |                                                         | 13.10     |   |      |   | 10.50     |      |  |   | 8.11      |   |  |      | 6.70      |   |  |   | 6.04      |  
|Cash dividend paid                  |  |                                                         | 0.54      |   |      |   | 0.48      |      |  |   | 0.42      |   |  |      | 0.36      |   |  |   | 0.24      |  
|                                    |  |                                                         |           |   |     
|FINANCIAL RATIOS                    |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average assets            |  |                                                         | 1.45      | % |      |   | 1.57      | %    |  |   | 1.71      | % |  |      | 1.35      | % |  |   | 1.42      | %
|Return on average equity            |  |                                                         | 14.15     | % |      |   | 15.80     | %    |  |   | 18.30     | % |  |      | 14.40     | % |  |   | 16.70     | %
|Average equity to average assets    |  |                                                         | 10.25     | % |      |   | 9.89      | %    |  |   | 9.02      | % |  |      | 9.40      | % |  |   | 8.52      | %
|Dividend payout ratio               |  |                                                         | 35.03     | % |      |   | 33.36     | %    |  |   | 33.21     | % |  |      | 32.70     | % |  |   | 24.90     | %
|Price to earnings                   |  |                                                         | 16.96     |   |      |   | 18.43     |      |  |   | 15.18     |   |  |      | 18.40     |   |  |   | 14.10     |  
|Price to book value                 |  |                                                         | 2.67      |   |      |   | 2.53      |      |  |   | 2.29      |   |  |      | 2.45      |   |  |   | 2.06      |  
|                                    |  |                                                         |           |   |     
|NON-FINANCIAL                       |  |                                                         |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Employees                           |  |                                                         | 518       |   |      |   | 541       |      |  |   | 459       |   |  |      | 392       |   |  |   | 404       |  
|Banking offices                     |  |                                                         | 23        |   |      |   | 25        |      |  |   | 23        |   |  |      | 21        |   |  |   | 23        |  
|ATMs                                |  |                                                         | 27        |   |      |   | 28        |      |  |   | 26        |   |  |      | 23        |   |  |   | 25        |  



|* | Long-term obligations include Federal Home Loan Bank advances, Trust Preferred Securities and Subordinated Debt. Discussions of Borrowings can be found in Note I 
Borrowings section of the Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following is managements discussion and analysis of certain significant factors which have affected the Companys financial position at
December 31, 2004 as compared to December 31, 2003 and a comparison of operating results for the years ended December 31, 2004, 2003 and 2002. These comments should be read in conjunction with the Companys consolidated financial statements and
accompanying notes appearing elsewhere herein.



Executive
Overview



The year ended December 31, 2004 was both an
exciting and challenging year for Main Street Banks, Inc. The Company experienced significant growth and change during the year. The year began with the successful integration of Banks Moneyhan Hayes Insurance Agency, Inc. into the Company in
January.



In addition to the acquisition of the Insurance
Agency, the Company also opened its new Midtown Center, and moved into new prototype banking centers in Roswell, Winder and Conyers.



The strong 2004 operating results were highlighted by:



| |  |  | A 15.9 percent increase in net income compared to the prior year with double digit loan and core deposit growth
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Loans increased $255.7 million or 17.7 percent, compared to the prior year.
| | - |  | ---------------------------------------------------------------------------



| |  |  | Asset quality was stable due to the Companys insistence on properly margined collateral and principal guarantees in its lending policies, and due to the overall strength of
the Atlanta economy.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Total deposits increased $251.8 million, or 17.3 percent during the year. The deposit mix improved as transaction deposits grew 22.2 percent compared to December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Non interest income increased $6.3 million or 25.8 percent compared to the prior years
| | - |  | --------------------------------------------------------------------------------------



During 2005 the Company faces many risks and a great deal of competition. Key objectives and principles have been
established to manage risks and maintain solid financial results. The following principles are of the greatest concern to management and are reflected in managements decision making in daily decisions and in long-term strategic planning:



| |  |  | Solidify our position as Atlantas community banking market leader
| | - |  | ------------------------------------------------------------------



| |  |  | Continue strong internal growth of loans and deposits
| | - |  | -----------------------------------------------------



| |  |  | Maintain asset quality by:
| | - |  | --------------------------



| | 1. | Keeping delinquency trends stable,
| | -- | ----------------------------------



| | 2. | Limiting shared national credits,
| | -- | ---------------------------------



| | 3. | Having a high percentage of portfolio well collateralized, and
| | -- | --------------------------------------------------------------



| | 4. | Keeping nonperforming assets low through active management and disciplined underwriting criteria.
| | -- | -------------------------------------------------------------------------------------------------



| |  |  | Use a disciplined, limited, and rational acquisition strategy to achieve external growth when possible.
| | - |  | -------------------------------------------------------------------------------------------------------



The Company has announced two new banking centers located in the Galleria business district (Cobb County, GA), and Suwanee,
GA to aid in future growth. Additionally, the Company will continue to commit resources to both MSB Payroll Solutions, LLC and Piedmont Settlement Services to further enhance fee income and diversify the Companys revenue stream.



Critical Accounting Policies



The accounting and reporting policies of the Parent Company and its
subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. A summary of our significant accounting policies is included in Note A to
Notes to our Consolidated Financial Statements. Certain accounting policies require management to make significant estimates and assumptions, which have a material impact on the carrying value of certain assets and liabilities and the results of
operations, and the Company considers these to be critical accounting policies. The following are the accounting policies that management believes are most important to the portrayal of our financial condition and results of operations and require
managements most difficult, subjective, or complex judgments. The estimates and assumptions used are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Actual results could
differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and results of operations for the reporting periods.



19



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##### Table of Contents

Allowance for Loan Losses:An allowance for loan losses is based on managements opinion of
an amount that is adequate to absorb probable losses inherent in the loan portfolio. The allowance for loan losses is established through a provision for losses based on managements evaluation. The evaluation, which includes a review of all
loans on which full collection may not be reasonably assumed, considers, among other matters, the fair market value or the estimated net realizable value of the underlying collateral, managements estimate of probable credit losses, historical
loan loss experience, and other factors that warrant recognition in providing for an adequate loan loss allowance. Changes in the factors used by management to determine the adequacy of the allowance or the availability of new information could
cause the allowance for loan losses to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require that additions or reductions be made to the allowance for loan losses based
on their judgments and estimates. Historically, our estimates of the level of allowance for loan losses required have been appropriate and have not required significant revision, and we expect that trend to continue.



Income Taxes: The calculation of the Companys income tax
provision requires the use of estimates and judgments in its determination. As part of the Companys evaluation and implementation of business strategies, consideration is given to the regulations and tax laws that apply to the specific facts
and circumstances for any transaction under evaluation. This analysis includes the amount and timing of the realization of income tax liabilities or benefits. Management closely monitors tax developments in order to evaluate the effect they may have
on the Companys overall tax position.



Goodwill:
In our financial statements, we have recorded $102.2 million of goodwill and other intangible assets, which represents the amount by which the price we paid for acquired businesses exceeds the fair value of tangible assets acquired plus the
liabilities assumed. The determination of whether these assets are impaired involved significant judgments based upon managements short and long-term projections of future performance. Certain of these forecasts reflect assumptions regarding
our ability to sustain or increase business. Changes in strategy and/or market conditions may result in changes to recorded asset balances. On at least an annual basis, the Company conducts an evaluation to assess whether the fair value of our
recorded goodwill and other intangible assets exceeds the aggregate carrying value of these assets. As long as the aggregate fair value exceeds the aggregate carrying value, no impairment is recognized in our financial statements. For the year ended
December 31, 2004, management determined that there was no impairment of goodwill or intangible assets.



Net Income and Earnings per Share



The Companys net income was $30.9 million, $26.7 million, and $20.5 million for the years ended December 31, 2004, 2003, and 2002, respectively.
Basic earnings per share were $1.59, $1.49, and $1.30 for the same periods, respectively, and diluted earnings per share were $1.54, $1.44 and $1.26 for the same periods. Earnings growth from 2002 to 2003 and from 2003 to 2004 resulted principally
from merger activity and an increase in non-interest income fueled mainly by insurance agency income and service charges on deposit accounts. Earnings growth was further augmented by an increase in net interest income, which was directly related to
an increase in the Companys level of earning assets.



Earning Assets and Liabilities



Average
earning assets in 2004 increased 23.2% over 2003 due principally to a 25.3% increase in total loans, offset partially by a 14.1% decrease in Federal Funds sold and Securities purchased under resell agreements. The average earning assets mix in 2004
changed from 2003 with loans at 84.0% and 82.6% for 2004 and 2003, respectively, and total investment securities at 15.0% and 16.0% for 2004 and 2003, respectively. The mix of earning assets is monitored on a continuous basis in order to place the
Company in a neutral position so movements in interest rates will not adversely impact our return.



20



---

##### Table of Contents

The following table presents the total dollar amount of average balances, interest income from average
interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.



|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|-------------------------------------------- |  | ------------------------------- | --------- | - | --------------- | - | ----------- | ---- | ----- | -------------- |  | - | --------------- | - | ----------- | - | ------ | -------------- | ---- | - | --------------- | - | ----------- | - |  | - | ------ |  | ---- | -
|                                             |  | For the Year Ended December 31, |          
|                                             |  | 2004                            |           |   | 2003            |   |             | 2002 |      
|                                             |  | AverageBalance                  |           |   | Income /Expense |   | Yield /Rate |      |       | AverageBalance |  |   | Income /Expense |   | Yield /Rate |   |        | AverageBalance |      |   | Income /Expense |   | Yield /Rate |  
|                                             |  | (Dollars in Thousands)          |          
|Interest Earning Assets                      |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Loans, net of unearned income1 2             |  | $                               | 1,578,622 |   |                 | $ | 105,272     |      | 6.67  | %              |  | $ | 1,259,640       |   |             | $ | 87,852 |                | 6.97 | % |                 | $ | 857,184     |   |  | $ | 68,363 |  | 7.98 | %
|Mortgage loans held for sale                 |  |                                 | 6,480     |   |                 |   | 312         |      | 4.81  | %              |  |   | 5,365           |   |             |   | 320    |                | 5.96 | % |                 |   | 5,106       |   |  |   | 294    |  | 5.76 | %
|Investment securities:                       |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Taxable                                      |  |                                 | 243,188   |   |                 |   | 10,363      |      | 4.26  | %              |  |   | 204,775         |   |             |   | 8,816  |                | 4.31 | % |                 |   | 151,411     |   |  |   | 8,099  |  | 5.35 | %
|Non-taxable3                                 |  |                                 | 38,385    |   |                 |   | 2,308       |      | 6.01  | %              |  |   | 39,265          |   |             |   | 2,532  |                | 6.45 | % |                 |   | 36,694      |   |  |   | 2,503  |  | 6.82 | %
|Interest bearing deposits                    |  |                                 | 208       |   |                 |   | 23          |      | 11.06 | %              |  |   | 1,199           |   |             |   | 29     |                | 2.42 | % |                 |   | 2,330       |   |  |   | 59     |  | 2.53 | %
|Federal Funds sold                           |  |                                 | 13,107    |   |                 |   | 184         |      | 1.40  | %              |  |   | 15,260          |   |             |   | 146    |                | 0.96 | % |                 |   | 48,561      |   |  |   | 722    |  | 1.49 | %
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Total interest earning assets                |  | $                               | 1,879,990 |   |                 | $ | 118,462     |      | 6.30  | %              |  | $ | 1,525,504       |   |             | $ | 99,695 |                | 6.54 | % |                 | $ | 1,101,286   |   |  | $ | 80,040 |  | 7.27 | %
|Non-interest earning:                        |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Cash and due from banks                      |  |                                 | 38,506    |   |                 |   |             |      |       |                |  |   | 34,163          |   |             |   |        |                |      |   |                 |   | 31,338      |   |  |   |        |  |      |  
|Allowance for loan losses                    |  |                                 | (22,974   | ) |                 |   |             |      |       |                |  |   | (18,397         | ) |             |   |        |                |      |   |                 |   | (12,618     | ) |  |   |        |  |      |  
|Premises and equipment                       |  |                                 | 48,235    |   |                 |   |             |      |       |                |  |   | 38,265          |   |             |   |        |                |      |   |                 |   | 27,240      |   |  |   |        |  |      |  
|Other real estate owned                      |  |                                 | 2,296     |   |                 |   |             |      |       |                |  |   | 1,425           |   |             |   |        |                |      |   |                 |   | 1,656       |   |  |   |        |  |      |  
|Goodwill and other intangible assets         |  |                                 | 102,237   |   |                 |   |             |      |       |                |  |   | 62,221          |   |             |   |        |                |      |   |                 |   | 1,471       |   |  |   |        |  |      |  
|Other assets                                 |  |                                 | 85,451    |   |                 |   |             |      |       |                |  |   | 61,031          |   |             |   |        |                |      |   |                 |   | 44,210      |   |  |   |        |  |      |  
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Total assets                                 |  | $                               | 2,133,741 |   |                 |   |             |      |       |                |  | $ | 1,704,212       |   |             |   |        |                |      |   |                 | $ | 1,194,583   |   |  |   |        |  |      |  
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Interest Bearing Liabilities                 |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |       
|Demand and money market deposits             |  | $                               | 540,690   |   |                 | $ | 7,542       |      | 1.39  | %              |  | $ | 424,579         |   |             | $ | 5,735  |                | 1.35 | % |                 | $ | 254,927     |   |  | $ | 3,042  |  | 1.19 | %
|Savings deposits                             |  |                                 | 49,035    |   |                 |   | 288         |      | 0.59  | %              |  |   | 47,905          |   |             |   | 349    |                | 0.73 | % |                 |   | 46,618      |   |  |   | 421    |  | 0.90 | %
|Time deposits                                |  |                                 | 749,430   |   |                 |   | 19,059      |      | 2.54  | %              |  |   | 640,246         |   |             |   | 16,072 |                | 2.51 | % |                 |   | 490,746     |   |  |   | 18,692 |  | 3.81 | %
|FHLB advances                                |  |                                 | 164,973   |   |                 |   | 3,634       |      | 2.20  | %              |  |   | 130,833         |   |             |   | 2,270  |                | 1.74 | % |                 |   | 68,925      |   |  |   | 1,316  |  | 1.91 | %
|Federal Funds purchased and other borrowings |  |                                 | 117,731   |   |                 |   | 2,234       |      | 1.90  | %              |  |   | 44,876          |   |             |   | 1,586  |                | 3.53 | % |                 |   | 40,327      |   |  |   | 1,389  |  | 3.44 | %
|Subordinated debt                            |  |                                 | 51,167    |   |                 |   | 2,511       |      | 4.91  | %              |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Trust preferred securities                   |  |                                 |           |   |                 |   |             |      |       |                |  |   | 31,783          |   |             |   | 1,453  |                | 4.57 | % |                 |   | 458         |   |  |   | 31     |  | 6.77 | %
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Total interest bearing liabilities           |  | $                               | 1,673,026 |   |                 | $ | 35,268      |      | 2.11  | %              |  | $ | 1,320,222       |   |             | $ | 27,465 |                | 2.08 | % |                 | $ | 902,001     |   |  | $ | 24,891 |  | 2.76 | %
|Non-interest bearing:                        |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Demand deposits                              |  |                                 | 232,568   |   |                 |   |             |      |       |                |  |   | 201,158         |   |             |   |        |                |      |   |                 |   | 173,947     |   |  |   |        |  |      |  
|Other liabilities                            |  |                                 | 9,467     |   |                 |   |             |      |       |                |  |   | 14,336          |   |             |   |        |                |      |   |                 |   | 7,056       |   |  |   |        |  |      |  
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Total liabilities                            |  | $                               | 1,915,061 |   |                 |   |             |      |       |                |  | $ | 1,535,716       |   |             |   |        |                |      |   |                 | $ | 1,083,004   |   |  |   |        |  |      |  
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Shareholders equity                         |  |                                 | 218,680   |   |                 |   |             |      |       |                |  |   | 168,496         |   |             |   |        |                |      |   |                 |   | 111,579     |   |  |   |        |  |      |  
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  
|Total liabilities and shareholders equity   |  | $                               | 2,133,741 |   |                 |   |             |      |       |                |  | $ | 1,704,212       |   |             |   |        |                |      |   |                 | $ | 1,194,583   |   |  |   |        |  |      |  
|                                             |  |                                 |           |   |                 |   |             |      |       |                |  |   |                 |   |             |   |        |                |      |   |                 |   |             |   |  |   |        |  |      |  



Interest rate spread



|(1) | Fee income related to loans of $10,980, $9,078 and $6,182 for the years ended December 31, 2004, 2003, and 2002, respectively, is included in interest income.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Non-accrual loans of $12,255, $11,548, and $3,356 at December 31, 2004, 2003 and 2002, respectively, are included in the average loan balances.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------



|(3) | To make pre-tax income and resultant yields on tax-exempt investments comparable to those on taxable investments, a tax-equivalent adjustment has been computed using a federal
income tax rate of 34%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | The net interest margin is equal to the net income divided by average interest-earning assets
|--- | ---------------------------------------------------------------------------------------------



21



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##### Table of Contents

Results of Operations



For the year ended December 31, 2004, Main Street Banks, Inc. reported net income of $30.9 million ($1.54 per diluted share)
compared with net income of $26.7 million ($1.44 per diluted share) and $20.5 million ($1.26 per diluted share) for 2003 and 2002 respectively.



The primary factors that impacted the financial results in 2004 were as follows:



| |  |  | The acquisition of Banks Moneyhan Hayes Insurance Agency, Inc. in January, 2004
| | - |  | -------------------------------------------------------------------------------



| |  |  | The acquisition of First Colony in May of 2003
| | - |  | ----------------------------------------------



| |  |  | We continued to experience significant loan growth throughout 2004
| | - |  | ------------------------------------------------------------------



| |  |  | We experienced slower than expected deposit growth in 2004
| | - |  | ----------------------------------------------------------



| |  |  | The opening of the Midtown Banking Center
| | - |  | -----------------------------------------



| |  |  | The sale of SBA loans and investment securities
| | - |  | -----------------------------------------------



| |  |  | The successful conversion to a new operating system platform
| | - |  | ------------------------------------------------------------



The Companys total assets increased $354.8 million or 18.0% since December 2003, due primarily to growth in the investment and loan portfolios.
Federal funds sold increased $4.0 million primarily due to additional proceeds from the capital offering in December, 2004. Loans, net of allowance for loan loss, increased 17.7% or $251.7 million since December 2003, while the investment portfolio
increased $69.1 million. The growth in loans continues to be attributable to a strong economy in the Atlanta metropolitan area and the investment portfolio growth was primarily attributable to the investments in bonds of the proceeds from the $51
million common stock offering. Goodwill and intangible assets increased by $4.7 million as a result of the BMIA acquisition. Total deposits increased by 17.3% or $251.8 million due primarily to an ongoing deposit campaign, limited use of brokered
and national deposits, and seasonal public funds.



Return on
average assets for the year ended December 31, 2004 was 1.45%. This compares to 1.57% for the same period in 2003. Return on average equity for the year ended December 31, 2004 was 14.15% on average equity of $218.7 million. This compares to 15.85%
on average equity of $168.5 million for the same period in 2003.



Net Interest Income:Net interest income for 2004 was $82.4 million compared to $71.4 million in 2003, an increase of 15.4% or $11.0 million. The increase in net interest income was largely the result of overall balance sheet
growth and the corresponding increase in average interest earning assets, which grew 23.2% over the December 31, 2003 level. Growth in average loans of $319.0 million or 25.3% provided the bulk of the increase in earning assets and contributed most
significantly to the growth in net interest income. Interest on earning assets yielded 6.30% in 2004 versus 6.54% in 2003, a 24 basis point decrease. The cost of interest bearing liabilities increased 3 basis points from 2.08% to 2.11% for the
comparable period. Other investment income increased to $0.8 million at December 31, 2004 compared to $0.5 million for the same period in 2003, an increase of 59.1% or $0.3 million. This increase is mainly attributable to the Banks increased
investment in FHLB capital stock of $4.7 million, which was required in order to increase borrowing capacity from the FHLB.



22



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##### Table of Contents

The following schedule presents the dollar amount of changes in interest income and interest expense for
the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the change related to higher outstanding balances and the change in interest rates. For purposes of this table, changes attributable to both
rate and volume, which cannot be segregated, have been allocated to rate.



|                                              |  |                            |        |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |         |   |  |   |        |  
|--------------------------------------------- |  | -------------------------- | ------ | - | -------------------------- | - | ------ | ----- |  | - | ------ | - |  | ---- | ------ | - | ----- | - | ------- | - |  | - | ------ | -
|                                              |  | 2004 vs 2003               |        |   | 2003 vs 2002               |  
|                                              |  | Increase (Decrease) Due to |        |   | Increase (Decrease) Due to |  
|                                              |  | Volume                     |        |   | Rate                       |   |        | Total |  |   | Volume |   |  | Rate |        |   | Total |  
|                                              |  | (Dollars in Thousands)     |       
|Interest income on:                           |  |                            |        |  
|Loans                                         |  | $                          | 22,178 |   |                            | $ | (4,758 | )     |  | $ | 17,420 |   |  | $    | 32,408 |   |       | $ | (12,919 | ) |  | $ | 19,489 |  
|Mortgage loans held for sale                  |  |                            | 66     |   |                            |   | (74    | )     |  |   | (8     | ) |  |      | 15     |   |       |   | 11      |   |  |   | 26     |  
|Investment securities:                        |  |                            |        |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |         |   |  |   |        |  
|Taxable                                       |  |                            | 1,641  |   |                            |   | (94    | )     |  |   | 1,547  |   |  |      | 2,857  |   |       |   | (2,140  | ) |  |   | 717    |  
|Non-taxable(1)                                |  |                            | (56    | ) |                            |   | (168   | )     |  |   | (224   | ) |  |      | 174    |   |       |   | (145    | ) |  |   | 29     |  
|Interest-bearing deposits                     |  |                            | (24    | ) |                            |   | 18     |       |  |   | (6     | ) |  |      | (29    | ) |       |   | (1      | ) |  |   | (30    | )
|Federal Funds sold                            |  |                            | (20    | ) |                            |   | 58     |       |  |   | 38     |   |  |      | (495   | ) |       |   | (81     | ) |  |   | (576   | )
|                                              |  |                            |        |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |         |   |  |   |        |  
|Total increase (decrease) in interest income  |  | $                          | 23,785 |   |                            | $ | (5,018 | )     |  | $ | 18,767 |   |  | $    | 34,930 |   |       | $ | (15,275 | ) |  | $ | 19,655 |  
|Interest expense on:                          |  |                            |        |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |         |   |  |   |        |  
|Demand deposits                               |  | $                          | 1,564  |   |                            | $ | 243    |       |  | $ | 1,807  |   |  | $    | 2,010  |   |       | $ | 683     |   |  | $ | 2,693  |  
|Savings deposits                              |  |                            | 9      |   |                            |   | (70    | )     |  |   | (61    | ) |  |      | 10     |   |       |   | (82     | ) |  |   | (72    | )
|Time deposits                                 |  |                            | 2,739  |   |                            |   | 248    |       |  |   | 2,987  |   |  |      | 5,701  |   |       |   | (8,321  | ) |  |   | (2,620 | )
|FHLB advances                                 |  |                            | 601    |   |                            |   | 763    |       |  |   | 1,364  |   |  |      | 1,183  |   |       |   | (229    | ) |  |   | 954    |  
|Federal funds purchased and other borrowings  |  |                            | 2,570  |   |                            |   | (1,922 | )     |  |   | 648    |   |  |      | 155    |   |       |   | 42      |   |  |   | 197    |  
|Subordinated debt                             |  |                            | 885    |   |                            |   | 173    |       |  |   | 1,058  |   |  |      | 2,095  |   |       |   | (673    | ) |  |   | 1,422  |  
|                                              |  |                            |        |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |         |   |  |   |        |  
|Total increase (decrease) in interest expense |  |                            | 8,368  |   |                            |   | (565   | )     |  |   | 7,803  |   |  |      | 11,154 |   |       |   | (8,580  | ) |  |   | 2,574  |  
|                                              |  |                            |        |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |         |   |  |   |        |  
|Increase (decrease) in net interest income    |  | $                          | 15,417 |   |                            | $ | (4,453 | )     |  | $ | 10,964 |   |  | $    | 23,776 |   |       | $ | (6,695  | ) |  | $ | 17,081 |  
|                                              |  |                            |        |   |                            |   |        |       |  |   |        |   |  |      |        |   |       |   |         |   |  |   |        |  



|1 | To make pre-tax income and resultant yields on tax-exempt investments comparable to those on
taxable investments, a tax-equivalent adjustment has been computed using a federal income tax rate of 34%.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Provision for Loan Losses:Managements policy is to maintain the allowance for loan losses at a level sufficient to absorb estimated
probable losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses and decreased by charge-offs, net of recoveries. The allowance for loan losses is established through a provision for losses based on
managements evaluation of loan portfolio data, specific loan allowance, and current economic conditions. The evaluation, which includes a review of all loans on which full collection may not be reasonably assumed, considers among other
matters, economic conditions, the fair market value or the estimated net realizable value of the underlying collateral, managements estimate of probable credit losses, historical loan loss experience, and other factors that warrant recognition
in providing for an adequate loan loss allowance. As these factors change, the level of loan loss provision changes. The allowance for loan losses at December 31, 2004 was $25.2 million, representing 1.48% of outstanding loans, compared to $21.2
million or 1.47% of outstanding loans as of December 31, 2003. The 2004 provision of $7.4 million was $2.2 million higher than the provision of $5.2 million in 2003. This exceeded the provision of $4.0 million recorded in 2002. The increase in the
provision expense is the result of consistent growth in the loan portfolio. Other factors influencing the level of the allowance did not change significantly in 2004. Net loans charged off in 2004 were $3.4 million compared to $2.9 million in 2003
and $2.9 million in 2002.



Non-interest Income:
For 2004, non-interest income totaled $30.6 million, an increase of $6.3 million over non-interest income of $24.3 million in 2003, which represented a 25.9% increase. The growth in insurance agency income is attributable to the acquisition of BMIA.
The growth in fee income was primarily fueled by the growth in demand deposit accounts. Other increases are also attributed to the growth in the Companys insurance business lines as well as the Companys income from bank owned life
insurance.



23



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##### Table of Contents

The following table presents the major categories of non-interest income:



|                                          |  |                                 |        |      |   |        |  |   |       
|----------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ |  | - | ------
|                                          |  | For the Year Ended December 31,
|                                          |  | 2004                            |        | 2003 |   | 2002  
|                                          |  | (Dollars in Thousands)         
|Insurance agency income                   |  | $                               | 10,050 |      | $ | 4,857  |  | $ | 3,930 
|Service charges on deposit accounts       |  |                                 | 8,117  |      |   | 7,760  |  |   | 7,019 
|Mortgage banking income                   |  |                                 | 3,274  |      |   | 3,342  |  |   | 2,576 
|Gain on sales of SBA loans                |  |                                 | 3,070  |      |   | 1,725  |  |   | 736   
|Income on BOLI                            |  |                                 | 2,431  |      |   | 2,171  |  |   | 1,828 
|Other customer service fees               |  |                                 | 1,362  |      |   | 1,544  |  |   | 1,313 
|Net realized gains (losses) on securities |  |                                 | 1,185  |      |   | 730    |  |   | 130   
|Investment agency commissions             |  |                                 | 828    |      |   | 264    |  |   | 361   
|Other non-interest income                 |  |                                 | 306    |      |   | 1,951  |  |   | 1,185 
|                                          |  |                                 |        |      |   |        |  |   |       
|Total non-interest income                 |  | $                               | 30,623 |      | $ | 24,344 |  | $ | 19,078
|                                          |  |                                 |        |      |   |        |  |   |       



The following table
represents the composition of insurance agency income:



|                              |  |                                 |        |      |   |       |  |   |      
|----------------------------- |  | ------------------------------- | ------ | ---- | - | ----- |  | - | -----
|                              |  | For the Year Ended December 31,
|                              |  | 2004                            |        | 2003 |   | 2002 
|                              |  | (Dollars in Thousands)         
|Insurance agency income       |  |                                 |        |      |   |       |  |   |      
|Commission income             |  | $                               | 9,194  |      | $ | 4,561 |  | $ | 3,816
|Contigency income             |  |                                 | 771    |      |   | 261   |  |   | 103  
|Other income                  |  |                                 | 85     |      |   | 35    |  |   | 11   
|                              |  |                                 |        |      |   |       |  |   |      
|Total insurance agency income |  | $                               | 10,050 |      | $ | 4,857 |  | $ | 3,930
|                              |  |                                 |        |      |   |       |  |   |      



The following table
represents the composition of mortgage banking income:



|                                |  |                                 |       |      |   |       |  |   |      
|------------------------------- |  | ------------------------------- | ----- | ---- | - | ----- |  | - | -----
|                                |  | For the Year Ended December 31,
|                                |  | 2004                            |       | 2003 |   | 2002 
|                                |  | (Dollars in Thousands)         
|Mortgage banking income         |  |                                 |       |      |   |       |  |   |      
|Gain on mortgage sales          |  | $                               | 1,280 |      | $ | 1,127 |  | $ | 884  
|Origination fees                |  |                                 | 976   |      |   | 1,186 |  |   | 1,077
|Non-conforming origination fees |  |                                 | 687   |      |   | 541   |  |   | 84   
|Processing fees                 |  |                                 | 143   |      |   | 228   |  |   | 292  
|Other fees                      |  |                                 | 188   |      |   | 260   |  |   | 239  
|                                |  |                                 |       |      |   |       |  |   |      
|Total mortgage banking income   |  | $                               | 3,274 |      | $ | 3,342 |  | $ | 2,576
|                                |  |                                 |       |      |   |       |  |   |      



Non-interest
Expense: For the years ended 2004, 2003 and 2002, non-interest expense totaled $62.6 million, $52.9 million and $39.9 million, respectively. The following table presents the major categories of non-interest expense:



|                               |  |                                 |        |      |   |        |  |   |       
|------------------------------ |  | ------------------------------- | ------ | ---- | - | ------ |  | - | ------
|                               |  | For the Year Ended December 31,
|                               |  | 2004                            |        | 2003 |   | 2002  
|                               |  | (Dollars in Thousands)         
|Salaries and employee benefits |  | $                               | 37,464 |      | $ | 30,323 |  | $ | 23,158
|Net occupancy and equipment    |  |                                 | 8,239  |      |   | 6,661  |  |   | 4,710 
|Other                          |  |                                 | 6,921  |      |   | 6,622  |  |   | 5,464 
|Communications and supplies    |  |                                 | 3,999  |      |   | 3,736  |  |   | 2,817 
|Professional fees              |  |                                 | 2,243  |      |   | 2,150  |  |   | 1,265 
|Data processing fees           |  |                                 | 1,661  |      |   | 1,684  |  |   | 1,147 
|Marketing expense              |  |                                 | 1,203  |      |   | 1,080  |  |   | 869   
|Intangible amortization        |  |                                 | 508    |      |   | 365    |  |   | 180   
|Regulatory assessments         |  |                                 | 380    |      |   | 322    |  |   | 263   
|                               |  |                                 |        |      |   |        |  |   |       
|Total non-interest expense     |  | $                               | 62,618 |      | $ | 52,943 |  | $ | 39,873
|                               |  |                                 |        |      |   |        |  |   |       



For 2004, non-interest
expense increased 18.3% or $9.7 million over 2003. From 2003 to 2002, non-interest expense increased by 32.8%. The majority of the increase in 2004 and 2003 was related to an increase in salary and employee benefits expenses. Personnel related costs
rose to $37.5 million or a 23.8% increase in 2004 compared to $30.3 million and $23.2 million in 2003 and 2002 respectively.



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##### Table of Contents

Personnel increases in 2004 were primarily related to the salaries and employee benefit expense for BMIA,
which was acquired in January of 2004, as well as First Colony which was acquired in May of 2003. Also contributing to the increase in personnel expenses were general staffing increases concurrent with expansion of offices and business lines,
increases in health insurance costs, and increases in 401(k) matching expenses. Performance based compensation, including bonuses and commissions, contributed to increases in the salaries and employee benefits category in 2004 due to the achievement
of higher performance levels in virtually all of the Companys operating units.



Income Taxes: Income tax expense includes both Federal income tax and Georgia state income tax. The amount of Federal income tax expense is influenced by the amount of taxable income, the amount of
tax-exempt income and the amount of non-deductible expenses. In 2004, income tax expense was $12.0 million compared to $10.8 million in 2003. In 2002, income tax expense was $9.0 million. The Companys effective tax rates in 2004, 2003, 2002,
respectively, were 28.0%, 28.9%, and 30.6%. The decline in the effective tax rate in 2004 and 2003 was due to the effects of BOLI transactions and the impact of lower state tax expense.



Loans



At December 31, 2004, loans, net of unearned income, were $1.70 billion, an increase of $255.7 million or 17.7% over net loans at December 31, 2003 of
$1.44 billion. The growth in the loan portfolio was attributable to a consistent focus on quality loan production and strong loan markets in the state. Residential mortgage and commercial real estate loans increased $155.1 million or 15.8% from
December 31, 2003 while real estate construction loans increased $97.8 million or 32.2% over the same period. The Company continues to monitor the composition of the loan portfolio to ensure that the market risk to the balance sheet is not adversely
affected by the impact of changes in the economic environment on any one segment of the portfolio.



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



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



|                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------- |  | ---------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                         |  | December 31,           |          
|                                         |  | 2004                   |           |   | 2003 |   |           | 2002 |  |   | 2001    |   |  | 2000 |        
|                                         |  | (Dollars in Thousands) |          
|Loan Type                                |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial and industrial                |  | $                      | 127,476   |   |      | $ | 118,243   |      |  | $ | 104,062 |   |  | $    | 68,320  |   |  | $ | 97,572  |  
|Real estate - construction               |  |                        | 401,815   |   |      |   | 304,046   |      |  |   | 238,415 |   |  |      | 173,464 |   |  |   | 150,107 |  
|Real estate - residential mortgage       |  |                        | 288,703   |   |      |   | 269,358   |      |  |   | 198,400 |   |  |      | 152,226 |   |  |   | 162,706 |  
|Commercial real estate                   |  |                        | 846,945   |   |      |   | 711,209   |      |  |   | 404,630 |   |  |      | 366,003 |   |  |   | 263,500 |  
|Consumer and other                       |  |                        | 36,966    |   |      |   | 41,650    |      |  |   | 38,387  |   |  |      | 53,075  |   |  |   | 63,857  |  
|Unearned income and deferred loan fees   |  |                        | (2,870    | ) |      |   | (1,180    | )    |  |   | (1,407  | ) |  |      | (1,642  | ) |  |   | (1,779  | )
|                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loans, net of unearned income            |  | $                      | 1,699,035 |   |      | $ | 1,443,326 |      |  | $ | 982,487 |   |  | $    | 811,446 |   |  | $ | 735,963 |  
|                                         |  |                        |           |   |     
|Mortgage loans held-for-sale             |  | $                      | 4,563     |   |      | $ | 5,671     |      |  | $ | 8,176   |   |  | $    | 9,194   |   |  | $ | 2,248   |  
|                                         |  |                        |           |   |     
|Percent of loans category to total loans |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial and industrial                |  |                        | 7.50      | % |      |   | 8.19      | %    |  |   | 10.59   | % |  |      | 8.42    | % |  |   | 13.26   | %
|Real estate - construction               |  |                        | 23.65     | % |      |   | 21.07     | %    |  |   | 24.27   | % |  |      | 21.38   | % |  |   | 20.40   | %
|Real estate - residential mortgage       |  |                        | 16.99     | % |      |   | 18.66     | %    |  |   | 20.19   | % |  |      | 18.76   | % |  |   | 22.11   | %
|Commercial real estate                   |  |                        | 49.85     | % |      |   | 49.28     | %    |  |   | 41.18   | % |  |      | 45.10   | % |  |   | 35.80   | %
|Consumer and other                       |  |                        | 2.18      | % |      |   | 2.88      | %    |  |   | 3.91    | % |  |      | 6.54    | % |  |   | 8.67    | %
|Unearned income and deferred loan fees   |  |                        | -0.17     | % |      |   | -0.08     | %    |  |   | -0.14   | % |  |      | -0.20   | % |  |   | -0.24   | %
|                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loans, net of unearned income            |  |                        | 100.00    | % |      |   | 100.00    | %    |  |   | 100.00  | % |  |      | 100.00  | % |  |   | 100.00  | %



To accomplish the
Companys lending objectives, management seeks to achieve consistent growth within its primary market areas while maximizing loan yields and maintaining a high quality loan portfolio. The Company monitors its lending objectives primarily
through its Pricing and Credit Review committees. The Companys lending objectives are clearly defined in its Lending Policy, which is reviewed annually and approved by the Board of Directors. New loans for borrowers with total credit exposure
exceeding $750,000 require co-approval by officers in the Banks Credit Administration department. New loans with credit exposure exceeding $4,000,000 require additional approval by one or more Executive Officers of the Bank. New loans with
credit exposure exceeding $12,500,000 require prior approval by the Board of Directors, which also reviews specific credit approvals exceeding $5,000,000 during the prior month.



25



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##### Table of Contents

The Credit Review committee system includes the Executive Review Committee, the Eastern and Western
Senior Review Committees, and the Credit Risk Management Committee. The Executive Review Committee is chaired by the President of the Bank and includes officers from the Credit Administration and Credit Review Departments. Executive Review Committee
annually reviews credit analysis and financial statements for borrowers with credit relationships exceeding $2,500,000 in exposure. The Eastern and Western Senior Review Committees annually review credit analysis and financial statements for
borrowers with credit relationships exceeding $500,000 in total credit exposure up to $2,500,000 in total credit exposure. This committee is chaired by officers from the Credit Administration department and its members include officers from the
Credit Review and branch administration areas. These committees also review delinquent loan accounts and overdrawn deposit accounts during the monthly meeting. The Credit Risk Management Committee meets on a quarterly basis and reviews the
Banks larger adversely graded loans. This committee is chaired by officers from the Banks Credit Review department and includes officers from the Credit Administration and branch administration areas.



Commercial mortgage lending has significantly contributed to the Banks
loan growth during the past several years. Loans included in this category are primarily for the acquisition or refinancing of owner-occupied commercial buildings. These loans are underwritten on the borrowers ability to meet certain minimum
debt service requirements and the value of the underlying collateral to meet certain loan to value guidelines. The Bank also perfects its interest in equipment or other business assets of the borrower and obtains personal guaranties.



The Bank also underwrites loans to finance the construction of residential
properties and commercial properties, which include speculative and pre-sale loans. Speculative construction loans involve a higher degree of risk, as these are made on the basis that a borrower will be able to sell the project to a potential buyer
after a project is completed. Pre-sale construction loans usually have a pre-qualified buyer under contract before construction is to begin. The major risk for pre-sale loans is getting the project completed in a timely manner and according to plan
specifications. Non-residential construction loans include construction loans for churches, commercial buildings, strip shopping centers, and acquisition and development loans. These loans also carry a higher degree of risk and require strict
underwriting guidelines. All construction loans are secured by first liens on real estate and generally have floating interest rates. The Bank conducts periodic inspections either directly or through an agent prior to approval of periodic draws on
these loans. As an underwriting guideline, management focuses on the borrowers past experience in completing projects in a timely manner and the borrowers financial condition with special emphasis placed on liquidity ratios. Although
construction loans are deemed to be of higher risk, the Bank believes that it can monitor and manage this risk properly.



The Bank also underwrites residential real estate loans. Generally, these loans are owner-occupied and are amortized over a 15 to 20 year period with
three to five year maturity or repricing. The underwriting criteria for these loans are very similar to the underwriting criteria used in the mortgage industry. Typically, a borrowers debt to income ratio cannot exceed 36% and the loan to
appraised value ratio cannot exceed 89.9%. However, the Banks knowledge of its customers and its market allows the Company to be more flexible in meeting its customers needs.



The Bank also underwrites commercial and industrial loans. Generally, these loans are for working capital purposes and are
secured by inventory, accounts receivable, or equipment. The Bank maintains strict underwriting standards for this type of lending. Potential borrowers must meet certain working capital and debt ratios as well as generate positive cash flow from
operations. Borrowers in this category will generally have a debt service coverage ratio of at least 1.3 to 1.0. The Bank will also perfect its interest in equipment or other business assets of the borrower and obtain personal guaranties.



The Bank does not originate and does not currently hold in its
portfolio any foreign loans.



The Bank is also an active
participant in the origination of Small Business Administration (SBA) loans. These loans are solicited from the Companys market areas, and are generally underwritten in the same manner as conventional loans generated for the
Banks portfolio. The portion of loans that are secured by the guaranty of the SBA may from time to time be sold in the secondary market to provide additional liquidity, and to provide a source of fee income.



Consumer loans include automobile loans, recreational vehicle loans, boat
loans, home improvement loans, home equity loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 120 months and vary based upon the nature of
collateral and size of the loan. Consumer loans involve greater risk than residential mortgage loans. This is due to the fact that these loans may be unsecured or secured by rapidly depreciating assets such as automobiles. Repossessed collateral for
a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency
judgment. In addition, consumer loan collections are dependent on the borrowers continuing financial stability, and thus are more likely to be adversely affected by factors such as job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.



The contractual maturity ranges of the commercial and industrial, commercial real estate and real estate-construction portfolios



26



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##### Table of Contents

and the amount of such loans with predetermined interest rates and floating rates in each maturity range as of December 31, 2004 are summarized as follows:



|                                         |  |                        |         |                           |   |                 |  |       |         |  |   |          
|---------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | --------------- |  | ----- | ------- |  | - | ---------
|                                         |  | One Year orLess        |         | One YearThroughFive Years |   | After FiveYears |  | Total
|                                         |  | (Dollars in Thousands)
|Commercial and industrial                |  | $                      | 55,265  |                           | $ | 42,959          |  | $     | 29,252  |  | $ | 127,476  
|Commercial real estate                   |  |                        | 201,400 |                           |   | 532,556         |  |       | 112,989 |  |   | 846,945  
|Real estate - construction               |  |                        | 323,684 |                           |   | 75,526          |  |       | 2,605   |  |   | 401,815  
|                                         |  |                        |         |                           |   |                 |  |       |         |  |   |          
|Total                                    |  | $                      | 580,349 |                           | $ | 651,041         |  | $     | 144,846 |  | $ | 1,376,236
|Loans with a predetermined interest rate |  | $                      | 338,097 |                           | $ | 341,356         |  | $     | 59,635  |  | $ | 739,088  
|Loans with a floating interest rate      |  |                        | 242,252 |                           |   | 309,685         |  |       | 85,211  |  |   | 637,148  
|                                         |  |                        |         |                           |   |                 |  |       |         |  |   |          
|Total                                    |  | $                      | 580,349 |                           | $ | 651,041         |  | $     | 144,846 |  | $ | 1,376,236



Investment
Securities



The Company uses its securities portfolio both
as a source of income and as a source of liquidity. At December 31, 2004, investment securities totaled $327.2 million, an increase of $69.0 million from $258.2 million at December 31, 2003. At December 31, 2004, investment securities represented
14.1% of total assets, compared to 13.1% of total assets at December 31, 2003. The average yield on a fully taxable equivalent basis on the investment portfolio for the year ended December 31, 2004 was 4.50% compared to a yield of 4.65% for the year
ended December 31, 2003 and 5.64% for the year ended December 31, 2002. Approximately $33.3 million or 10.2% of investment securities reprice within one year.



The following table presents the amortized costs and fair value of securities classified as available for sale and held-to-maturity at December 31,
2004, 2003 and 2002:



|                                          |  |                        |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|----------------------------------------- |  | ---------------------- | ------- | ---------- | - | ------------- |  | ---------- | ------- | ------------- | - | ---------- |  | - | ------- |  | - | -------
|                                          |  | December 31,          
|                                          |  | 2004                   |         | 2003       |   | 2002         
|                                          |  | AmortizedCost          |         | Fair Value |   | AmortizedCost |  | Fair Value |         | AmortizedCost |   | Fair Value
|                                          |  | (Dollars in Thousands)
|Held-to-Maturity Securities:              |  |                        |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|State and political subdivisions          |  | $                      | 11,716  |            | $ | 11,260        |  | $          | 10,788  |               | $ | 10,780     |  | $ | 688     |  | $ | 755    
|                                          |  |                        |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total Held-to-Maturity securities         |  |                        | 11,716  |            |   | 11,260        |  |            | 10,788  |               |   | 10,780     |  |   | 688     |  |   | 755    
|                                          |  |                        |         |            |   |              
|Available for Sale Securities:            |  |                        |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|U.S. Treasury securities                  |  | $                      | 15,179  |            | $ | 15,155        |  | $          | 10,249  |               | $ | 10,406     |  | $ | 87      |  | $ | 88     
|U.S. Government agencies and corporations |  |                        | 113,656 |            |   | 113,336       |  |            | 73,426  |               |   | 74,888     |  |   | 42,566  |  |   | 44,928 
|Mortgage-backed securities                |  |                        | 161,336 |            |   | 161,523       |  |            | 128,460 |               |   | 129,709    |  |   | 117,491 |  |   | 119,933
|State and political subdivisions          |  |                        | 24,386  |            |   | 25,507        |  |            | 30,737  |               |   | 32,389     |  |   | 41,260  |  |   | 43,506 
|                                          |  |                        |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total available for sale securities       |  | $                      | 314,557 |            | $ | 315,521       |  | $          | 242,872 |               | $ | 247,392    |  | $ | 201,404 |  | $ | 208,455
|                                          |  |                        |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        
|Total Investments                         |  | $                      | 326,273 |            | $ | 326,781       |  | $          | 253,660 |               | $ | 258,172    |  | $ | 202,092 |  | $ | 209,210
|                                          |  |                        |         |            |   |               |  |            |         |               |   |            |  |   |         |  |   |        



The following table
summarizes the contractual maturity of investment securities and their weighted average yields as of December 31, 2004. Average yields on investments are based on amortized cost.



|                                          |  |                        |        |       |                                     |   |        |                                      |         |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |   |  |   |        
|----------------------------------------- |  | ---------------------- | ------ | ----- | ----------------------------------- | - | ------ | ------------------------------------ | ------- |  | --------------- | ------ |  | ----- | ------ |  | ------ | - | ----- | - | ------ | ----- | ---- | - |  | - | -------
|                                          |  | Within One Year        |        |       | After One Year ButWithin Five Years |   |        | After Five Years ButWithin Ten Years |         |  | After Ten Years |        |  |      
|                                          |  | Amount                 |        | Yield |                                     |   | Amount |                                      | Yield   |  |                 | Amount |  | Yield |        |  | Amount |   | Yield |   |        | Total
|                                          |  | (Dollars in Thousands)
|U.S. Treasury securities                  |  | $                      |       |       | 0.00                                | % |        | $                                    | 15,155  |  | 3.06            | %      |  | $     |       |  | 0.00   | % |       | $ |       |       | 0.00 | % |  | $ | 15,155 
|U.S. Government agencies and corporations |  |                        | 17,058 |       | 3.76                                | % |        |                                      | 96,278  |  | 3.59            | %      |  |       |       |  | 0.00   | % |       |   |       |       | 0.00 | % |  |   | 113,336
|Mortgage-backed securities                |  |                        | 14,746 |       | 5.71                                | % |        |                                      | 129,648 |  | 4.18            | %      |  |       | 6,668  |  | 4.40   | % |       |   | 10,461 |       | 4.79 | % |  |   | 161,523
|State and political subdivisions          |  |                        | 1,594  |       | 3.64                                | % |        |                                      | 16,841  |  | 5.59            | %      |  |       | 10,677 |  | 6.44   | % |       |   | 8,111  |       | 6.33 | % |  |   | 37,223 
|                                          |  |                        |        |       |                                     |   |        |                                      |         |  |                 |        |  |       |        |  |        |   |       |   |        |       |      |   |  |   |        
|Total                                     |  | $                      | 33,398 |       | 4.61                                | % |        | $                                    | 257,922 |  | 3.99            | %      |  | $     | 17,345 |  | 5.66   | % |       | $ | 18,572 |       | 5.46 | % |  | $ | 327,237



Mortgage-backed
securities are securities which have been developed by pooling real estate mortgages and are principally issued by federal agencies such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These



27



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##### Table of Contents

securities are deemed to have high credit ratings, minimum regular monthly cash flows of principal and interest, and are guaranteed by the issuing agencies.



At December 31, 2004, 10.6% of the mortgage-backed securities
the Company held had contractual final maturities of more than five years. However, unlike U.S. Treasury and U.S. Government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular
principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities which are purchased at a premium will generally suffer decreasing net yields as interest rates drop because homeowners tend
to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Conversely, these securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the
opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and consequently, their average lives will not be unduly shortened. If
interest rates fall, prepayments will increase, and the average life of these securities will decrease.



The Company has adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. At the date of purchase, the Company is required to classify debt securities into one of three categories: held to maturity, trading, or available for sale. Equity securities are classified as available for sale. At each
reporting date, the appropriateness of the classification is reassessed. Investments in securities are classified as held to maturity and measured at amortized cost in the financial statements only if management has the positive intent and ability
to hold those securities to maturity.



Securities that are
bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the financial statements with unrealized gains and losses included in earnings. The Company does not have any
securities classified as trading securities. Investments not classified as either held to maturity or trading are classified as available for sale and measured at fair value in the financial statements with unrealized gains and losses reported, net
of tax, in accumulated other comprehensive income, a separate component of shareholders equity, until realized.



The Company periodically tests securities for other than temporary impairment. Management does not believe any individual unrealized loss as of December
31, 2004 represents an other-than-temporary impairment. The unrealized losses reported for U.S. Government agencies and corporations and mortgage-backed securities relate primarily to securities issued by FHLB, FNMA, FHLMC and GNMA. These unrealized
losses are primarily attributable to changes in interest rates and not a change in credit quality. The investments were individually not significant relative to their respective amortized cost.



Deposits



The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Banks deposits consist of demand, savings, money market, and time accounts. The Bank relies primarily on competitive pricing policies and customer service to attract and retain these deposits. Brokered and
Internet time deposits at December 31, 2004 were $283.8 million compared to $131.2 million at December 31, 2003. The Bank uses brokered and internet time deposits as additional sources of funds to provide for the funding needs of the bank. Brokered
and internet time deposits comprised 16.59% and 9.00% of our total deposits and 12.20% and 6.65% of our total assets at December 31, 2004 and 2003, respectively. The Banks lending and investing activities are funded principally by deposits,
approximately 52.3% of which are demand, money market and savings deposits. Deposits at December 31, 2004 were $1.710 billion, an increase of $251.8 million or 17.3% from $1.458 billion at December 31, 2003. Non-interest-bearing deposits were $225.0
million at December 31, 2003, a decrease of $3.6 million, or 1.6% from $228.6 million at December 31, 2003. Time deposits were $780.2 million at December 31, 2004, an increase of $83.0 million, or 11.9% from $697.2 million at December 31, 2003. The
deposit growth was due to internal growth. Due to the increase in the Banks lending activities during 2003 and 2004, the Bank has increased its participation in brokered and internet time deposits.



The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 2004, 2003 and 2002 are presented below:



|                                     |  |                          |           |      |      |   |        |      |           |  |      |        |  |      |         |  |      |  
|------------------------------------ |  | ------------------------ | --------- | ---- | ---- | - | ------ | ---- | --------- |  | ---- | ------ |  | ---- | ------- |  | ---- | -
|                                     |  | Years Ended December 31, |          
|                                     |  | 2004                     |           |      | 2003 |   |        | 2002 |          
|                                     |  | Amount                   |           | Rate |      |   | Amount |      | Rate      |  |      | Amount |  | Rate |        
|                                     |  | (Dollars in Thousands)   |          
|Deposit Type                         |  |                          |           |      |      |   |        |      |           |  |      |        |  |      |         |  |      |  
|Non-interest-bearing demand deposits |  | $                        | 232,568   |      | 0.00 | % |        | $    | 201,158   |  | 0.00 | %      |  | $    | 173,947 |  | 0.00 | %
|Demand and money market deposits     |  |                          | 540,690   |      | 1.39 | % |        |      | 424,579   |  | 1.35 | %      |  |      | 254,927 |  | 1.19 | %
|Savings deposits                     |  |                          | 49,035    |      | 0.59 | % |        |      | 47,905    |  | 0.73 | %      |  |      | 46,618  |  | 0.90 | %
|Time Deposits                        |  |                          | 749,430   |      | 2.54 | % |        |      | 640,246   |  | 2.51 | %      |  |      | 490,746 |  | 3.81 | %
|                                     |  |                          |           |      |      |   |        |      |           |  |      |        |  |      |         |  |      |  
|Total Deposits                       |  | $                        | 1,571,723 |      | 1.92 | % |        | $    | 1,313,888 |  | 2.76 | %      |  | $    | 966,238 |  | 3.64 | %
|                                     |  |                          |           |      |      |   |        |      |           |  |      |        |  |      |         |  |      |  



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The following table sets forth the amount of the Companys time deposits that are $100,000 or
greater by time remaining until maturity as of December 31, 2004:



|                                          |  |                       |        
|----------------------------------------- |  | --------------------- | -------
|                                          |  | (Dollars inThousands)
|Three months or less                      |  | $                     | 81,056 
|Over three months through six months      |  |                       | 65,762 
|Over six months through twelve months     |  |                       | 131,653
|Over twelve months                        |  |                       | 92,187 
|                                          |  |                       |        
|Total time deposits greater than $100,000 |  | $                     | 370,658
|                                          |  |                       |        



Borrowed Funds



Deposits are the primary source of funds for the
Companys lending and investment activities. The Company obtains additional funds from the Federal Home Loan Bank (FHLB) and correspondent banks. At December 31, 2004, the Company had borrowings of $201.1 million in the form of term
FHLB advances and $73.4 million in securities sold under repurchase agreements and other overnight funding compared to $141.6 million and $112.9 million, respectively, at December 31, 2003. The Companys weighted average interest rate on term
FHLB advances for the year ended December 31, 2004 and 2003 was 2.68% and 2.20%, respectively. For a more detailed discussion of the borrowings of the Company, see Note I to the Companys consolidated financial statements included herein.



Off-Balance Sheet Arrangements



The Company is a party to financial instruments with off-balance risk in the
normal course of business to meet the financing needs of its customers. The financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheets. As of December 31, 2004 the Company had $378.4 million in commitments to extend credit and $7.5 million in standby letters of credit that were outstanding.



The Company is exposed to credit loss in the event of nonperformance by the
customer on financial instruments. The Company uses its normal credit policies in granting loan commitments and issuing standby letters of credit.



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



Capital



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



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



Assets and off-balance sheet items are assigned to broad risk categories,
each with appropriate relative risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items.



The risk-based capital standards issued by the Federal Reserve Board require all bank holding companies to have Tier 1
capital of at least 4.0% and Total risk-based capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted assets. Tier 1 capital generally includes common shareholders equity and qualifying perpetual
preferred stock together with related surpluses and retained earnings, less deductions for goodwill and various other intangibles. Tier 2 capital may consist of a limited amount of intermediate-term preferred stock, a limited amount of
term subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and a limited amount of the general valuation allowance for loan losses. The sum of Tier 1 capital and
Tier 2 capital is Total risk-based capital.



The
Federal Reserve Board has also adopted guidelines which supplement the risk-based capital guidelines with a minimum ratio of Tier 1 capital to average total consolidated assets (leverage ratio) of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure, excellent asset quality, high liquidity, good earnings, and that are generally considered to be strong banking organizations, rated composite 1 under applicable federal guidelines, and
that are not experiencing or anticipating significant



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growth. Other banking organizations are required to maintain a leverage ratio of at least 4.0% to 5.0%. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible
assets.



The following table provides a comparison of the
Companys and the Banks leverage and risk-weighted capital ratios as of December 31, 2004 to the minimum and well-capitalized regulatory standards. For comparative purposes, these ratios are shown both including the proceeds from our
$51.1 million common stock offering in December 2004 and excluding the effect of this offering:



|                           |  |                                                  |   |  |                                                  |   |  |                  |   |  |                  |   |  |      |   |  |       |  
|-------------------------- |  | ------------------------------------------------ | - |  | ------------------------------------------------ | - |  | ---------------- | - |  | ---------------- | - |  | ---- | - |  | ----- | -
|                           |  | Including the effect of thecommon stock offering |   |  | Excluding the effect ofthe common stock offering |   |  | Minimum Required |   |  | Well Capitalized |  
|                           |  | Company                                          |   |  | Bank                                             |   |  | Company          |   |  | Bank             |   |  |     
|Leverage ratio             |  | 10.49                                            | % |  | 10.08                                            | % |  | 7.79             | % |  | 7.73             | % |  | 4.00 | % |  | 5.00  | %
|Risk based capital ratios: |  |                                                  |   |  |                                                  |   |  |                  |   |  |                  |   |  |      |   |  |       |  
|Tier 1 risk based capital  |  | 12.33                                            | % |  | 11.92                                            | % |  | 9.21             | % |  | 9.18             | % |  | 4.00 | % |  | 6.00  | %
|Risk-based capital         |  | 13.59                                            | % |  | 13.04                                            | % |  | 10.88            | % |  | 10.43            | % |  | 8.00 | % |  | 10.00 | %



Pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991, each federal banking agency revised its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the
risks of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multifamily mortgages. The Company is subject to capital adequacy guidelines of the FDIC that are substantially similar to the Federal Reserve
Boards guidelines. Also pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, the FDIC has promulgated regulations setting the levels at which an insured institution such as the Company would be considered well
capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under the FDICs regulations, the Company is classified well
capitalized for purposes of prompt corrective action.



Shareholders equity increased to $279.0 million at December 31, 2004 from $200.5 million at December 31, 2003, an increase of $77.5 million or 38.7%. This increase was primarily the combined result of net income of $31.0 million,
proceeds from the capital offering of $51.1 million, capital stock issued in conjunction with the Banks Moneyhan Hays Insurance Agency acquisition of $7.0 million and exercise of stock options of $1.9 million, less dividends declared on common stock
of $10.5 million and net unrealized losses on investment securities available for sale of $4.1.



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



On December 14, 2004, Main Street closed a public offering of 1,500,000 shares of its common stock. All shares were sold at $31.25 per share, pursuant to
an underwriting agreement dated December 8, 2004. On December 30, 2004, the company issued an additional 225,000 shares as a result of the underwriters exercising their entire over-allotment option in connection with the public offering. The
proceeds of this issuance will be used for general corporate purposes.



Subordinated Debt



The Parent Company owns all
of the outstanding common stock of Main Street Banks Statutory Trust I and Main Street Banks Statutory Trust II. The trusts have issued mandatorily redeemable trust preferred securities (Capital Securities). As guarantor, the Parent
Company unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the capital securities, the redemption price when a capital security is called for redemption, and amounts due if the Trust is liquidated or
terminated.



The Trusts used the proceeds from the issuance of
their Capital Securities and common stock to buy debentures of the Company. These debentures are the Trusts only assets and their interest payments from the debentures finance the distributions paid on the Capital Securities. The
Companys financial statements reflect the debentures or the related income effects.



The capital securities must be redeemed when the related debentures mature. Each issue of capital securities carries an interest rate identical to that of the related debenture. The capital securities qualify as Tier
1 Capital, subject to regulatory limitations, under guidelines established by the Board of Governors of the Federal Reserve System. Under these guidelines, the value of the Capital Securities that can be included in the calculation of Tier 1 Capital
is limited to 25%. The Company has the right to redeem its



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debentures: (i) in whole or in part, on or after November 15, 2007 (for debentures owned by Main Street Banks Statutory Trust I) and June 30, 2008 (for
debentures owned by Main Street Banks Statutory Trust II); and (ii) in whole at any time within 90 days following the occurrence and during the continuation of a tax event or capital treatment event (as defined in the offering circulars). If the
debentures purchased by Main Street Banks Statutory Trust I or Main Street Banks Statutory Trust II are redeemed before they mature, the redemption price will be the principal amount, plus any accrued but unpaid interest.



Allowance for Loan Losses



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



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



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



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



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



When determining the adequacy of the allowance
for loan losses, management considers changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific
borrowers or industries and current economic conditions. In November 2004, the Bank identified a problem loan relationship totaling approximately $2.5 million of principal balances that was originated outside its lending policies. The Company has
significant doubt about collecting the entire principal balance of the loans as a result of an evaluation of the borrowers business and prospects, the financial strength of the loan guarantors and the estimated value of the collateral securing
the loans, which is less than the principal balance of the loans. The Company determined that the impairment approximated $1.6 million. The Company recognized the impairment immediately and increased the provision for loan losses by the amount for
the quarter ended December 31, 2004.



The Companys level
of non-performing assets increased marginally as of December 31, 2004. Management established specific reserves for the accounts that contributed to this increase, requiring an increase in the Allowance for Loan Losses relative to total loans. While
the level of non-performing assets increased as of December 31, 2004, management anticipates that they will return to historical levels. Otherwise, management does not believe these or other factors affecting the allowance have significantly changed
over the periods presented. Historically, we believe our estimates of the level of allowance for loan losses required have been appropriate and our expectation is that the primary factors considered in the provision calculation will continue to be
consistent with prior trends.



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The following represents the allocation of the loan loss allowance by loan category:



|                                   |  |                         |        |     |        |   |           |      |        |  |        |           |  |      |        |  |           |   |     |   |        |           |        |     |  |   |        |  |        |  
|---------------------------------- |  | ----------------------- | ------ | --- | ------ | - | --------- | ---- | ------ |  | ------ | --------- |  | ---- | ------ |  | --------- | - | --- | - | ------ | --------- | ------ | --- |  | - | ------ |  | ------ | -
|                                   |  | Year ended December 31, |       
|                                   |  | 2004                    |        |     | 2003   |   |           | 2002 |        |  | 2001   |           |  | 2000 |       
|                                   |  | Allowance               |        | % * |        |   | Allowance |      | % *    |  |        | Allowance |  | % *  |        |  | Allowance |   | % * |   |        | Allowance |        | % * | 
|                                   |  | (Dollars in Thousands)  |       
|Commercial and industrial          |  | $                       | 1,889  |     | 7.50   | % |           | $    | 1,732  |  | 8.19   | %         |  | $    | 1,540  |  | 10.56     | % |     | $ | 1,012  |           | 8.42   | %   |  | $ | 1,449  |  | 13.29  | %
|Real estate - construction         |  |                         | 5,958  |     | 23.65  | % |           |      | 4,457  |  | 21.07  | %         |  |      | 3,528  |  | 24.18     | % |     |   | 2,548  |           | 21.20  | %   |  |   | 2,200  |  | 20.17  | %
|Real estate - residential mortgage |  |                         | 4,280  |     | 16.99  | % |           |      | 3,947  |  | 18.66  | %         |  |      | 2,946  |  | 20.19     | % |     |   | 2,254  |           | 18.76  | %   |  |   | 2,412  |  | 22.11  | %
|Commercial real estate             |  |                         | 12,558 |     | 49.85  | % |           |      | 10,424 |  | 49.28  | %         |  |      | 6,007  |  | 41.17     | % |     |   | 5,420  |           | 45.10  | %   |  |   | 3,905  |  | 35.80  | %
|Consumer and other                 |  |                         | 506    |     | 2.01   | % |           |      | 592    |  | 2.80   | %         |  |      | 568    |  | 3.89      | % |     |   | 783    |           | 6.52   | %   |  |   | 941    |  | 8.63   | %
|                                   |  |                         |        |     |        |   |           |      |        |  |        |           |  |      |        |  |           |   |     |   |        |           |        |     |  |   |        |  |        |  
|Allowance for loan losses          |  | $                       | 25,191 |     | 100.00 | % |           | $    | 21,152 |  | 100.00 | %         |  | $    | 14,589 |  | 100.00    | % |     | $ | 12,017 |           | 100.00 | %   |  | $ | 10,907 |  | 100.00 | %
|                                   |  |                         |        |     |        |   |           |      |        |  |        |           |  |      |        |  |           |   |     |   |        |           |        |     |  |   |        |  |        |  



|* | Percentage of respective loan types to total loans.
|- | ---------------------------------------------------



For the year ending December 31, 2004, net charge-offs totaled $3.4 million or 0.22% of average loans outstanding for the period, net of unearned income,
compared to $2.9 million or 0.23% in net charge-offs for the same period in 2003. The provision for loan losses for the year ended December 31, 2004 was $7.4 million compared to $5.2 million for the same period in 2003. The allowance for loan losses
totaled $25.2 million or 1.48% of total loans, net of unearned income at December 31, 2004, compared to $21.2 million or 1.47% of total loans at December 31, 2003. The increase in the allowance was primarily due to the overall growth in the loan
portfolio.



With the acquisition of First Colony and First
National Bank of Johns Creek, the Bank acquired total loans of $283.7 million and $92.7 million, respectively, with related allowances for loan losses of $4.2 million and $1.5 million, respectively. There were no purchase accounting adjustments made
to the allowance related to these acquisitions.



The following
table presents an analysis of the allowance for loan losses and other related data:



|                                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | ---------------------- | --------- | - | ---- | - | --------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                         |  | December 31,           |          
|                                                         |  | 2004                   |           |   | 2003 |   |           | 2002 |  |   | 2001    |   |  | 2000 |        
|                                                         |  | (Dollars in thousands) |          
|Average loans outstanding (net of unearned income)       |  | $                      | 1,578,622 |   |      | $ | 1,259,640 |      |  | $ | 857,184 |   |  | $    | 775,236 |   |  | $ | 713,862 |  
|Total loans, net of unearned income at year end          |  |                        | 1,699,035 |   |      |   | 1,443,326 |      |  |   | 982,486 |   |  |      | 811,446 |   |  |   | 735,963 |  
|Allowance for loan losses at beginning of year           |  |                        | 21,152    |   |      |   | 14,589    |      |  |   | 12,017  |   |  |      | 10,907  |   |  |   | 9,744   |  
|Provision for loan losses                                |  |                        | 7,430     |   |      |   | 5,235     |      |  |   | 4,003   |   |  |      | 2,452   |   |  |   | 2,184   |  
|Charge-offs                                              |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial and industrial                                |  |                        | (2,297    | ) |      |   | (1,970    | )    |  |   | (1,547  | ) |  |      | (329    | ) |  |   | (330    | )
|Real estate construction                                 |  |                        | (728      | ) |      |   | (27       | )    |  |   | (95     | ) |  |      | (11     | ) |  |   | (344    | )
|Real estate mortgage                                     |  |                        | (342      | ) |      |   | (243      | )    |  |   | (291    | ) |  |      | (363    | ) |  |   | (110    | )
|Real estate other                                        |  |                        | (92       | ) |      |   | (50       | )    |  |   |        |   |  |      | (25     | ) |  |   | (38     | )
|Consumer                                                 |  |                        | (1,233    | ) |      |   | (1,070    | )    |  |   | (1,216  | ) |  |      | (957    | ) |  |   | (553    | )
|                                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                        |  |                        | (4,692    | ) |      |   | (3,360    | )    |  |   | (3,149  | ) |  |      | (1,685  | ) |  |   | (1,375  | )
|Recoveries                                               |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial and industrial                                |  |                        | 395       |   |      |   | 102       |      |  |   | 19      |   |  |      | 80      |   |  |   | 48      |  
|Real estate construction                                 |  |                        | 61        |   |      |   |          |      |  |   |        |   |  |      |        |   |  |   |        |  
|Real estate mortgage                                     |  |                        | 179       |   |      |   | 52        |      |  |   | 5       |   |  |      | 23      |   |  |   | 29      |  
|Real estate other                                        |  |                        | 32        |   |      |   |          |      |  |   |        |   |  |      |        |   |  |   | 66      |  
|Consumer                                                 |  |                        | 634       |   |      |   | 261       |      |  |   | 219     |   |  |      | 240     |   |  |   | 211     |  
|                                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                         |  |                        | 1,301     |   |      |   | 415       |      |  |   | 243     |   |  |      | 343     |   |  |   | 354     |  
|Net charge-offs                                          |  |                        | (3,391    | ) |      |   | (2,945    | )    |  |   | (2,906  | ) |  |      | (1,342  | ) |  |   | (1,021  | )
|Additional allowance from acquisitions                   |  |                        |          |   |      |   | 4,273     |      |  |   | 1,475   |   |  |      |        |   |  |   |        |  
|                                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses at end of period               |  | $                      | 25,191    |   |      | $ | 21,152    |      |  | $ | 14,589  |   |  | $    | 12,017  |   |  | $ | 10,907  |  
|                                                         |  |                        |           |   |      |   |           |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratio of allowance to end-of-year loans                  |  |                        | 1.48      | % |      |   | 1.47      | %    |  |   | 1.48    | % |  |      | 1.48    | % |  |   | 1.48    | %
|Ratio of net charge-offs to average loans                |  |                        | 0.21      | % |      |   | 0.23      | %    |  |   | 0.34    | % |  |      | 0.17    | % |  |   | 0.14    | %
|Ratio of allowance to end-of-period non-performing loans |  |                        | 174.69    | % |      |   | 157.93    | %    |  |   | 434.71  | % |  |      | 849.26  | % |  |   | 971.24  | %



The Company believes
that the allocation of its allowance for loan losses is reasonable. When management is able to identify specific loans or categories of loans which require specific amounts of reserve, allocations are assigned to those categories. Federal and state
bank regulators also require that banks maintain a reserve that is sufficient to absorb an estimated amount of potential losses based on managements perception of economic conditions, loan portfolio growth, historical charge-off experience and
exposure concentrations.



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The Company believes that the allowance for loan losses at December 31, 2004 is adequate to cover losses
inherent in the portfolio as of such date. There can be no assurance that the Company will not sustain losses in future periods, which could be substantial in relation to the size of the allowance for loan losses at December 31, 2004.



The allowance for loan losses is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance for loan losses in comparison to a group of peer banks identified by the regulators. During
their routine examinations of banks, the FDIC and the Georgia Department of Banking and Finance may require a bank to make additional provisions to its allowance for loan losses when, in the opinion of the regulators, credit evaluations and
allowance for loan loss methodology differ materially from those of management.



While it is the Banks policy to charge off in the current period loans for which a loss is considered probable there are additional risks of future losses which cannot be quantified precisely or attributed to
particular loans or classes of loans. Because these risks include the state of the economy, managements judgment as to the adequacy of the allowance is necessarily approximate and imprecise.



Non-Performing Assets



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



However, if the loan is deemed to be in process of collection, it may be maintained on an accrual basis. The Companys management conducts continuous
training and communicates regularly with loan officers to make them aware of its lending policy and the collection policy contained therein. The Companys management has also staffed its collection department with properly trained staff to
assist lenders with collection efforts and to maintain records and develop reports on delinquent borrowers. The Company had non-performing assets of $14.4 million, $13.5 million, and $4.2 million as of December 31, 2004, 2003, and 2002,
respectively. For 2004, 2003 and 2002, the gross amount of interest income that would have been recorded on non-performing loans, if all such loans had been accruing interest at the original contract rate, was approximately $476,612, $286,706, and
$217,272, respectively. The Company did not have any loans that were troubled debt restructurings as defined by SFAS No. 15. The Company records real estate acquired through foreclosure at the lesser of the outstanding loan balance or
the fair value at the time of foreclosure, less estimated costs to sell.



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



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



|                                                                                      |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                                      |  | December 31,           |       
|                                                                                      |  | 2004                   |        |   | 2003 |   |        | 2002 |  |   | 2001  |   |  | 2000 |      
|                                                                                      |  | (Dollars in Thousands) |       
|Non-performing assets                                                                 |  |                        |        |  
|Non-accrual loans                                                                     |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial and industrial                                                             |  | $                      | 3,405  |   |      | $ | 2,821  |      |  | $ | 1,254 |   |  | $    | 336   |   |  | $ | 449   |  
|Real estate construction                                                              |  |                        | 2,069  |   |      |   | 2,281  |      |  |   | 120   |   |  |      | 355   |   |  |   |      |  
|Real estate mortgage                                                                  |  |                        | 2,892  |   |      |   | 1,944  |      |  |   | 507   |   |  |      | 269   |   |  |   | 171   |  
|Real estate other                                                                     |  |                        | 3,844  |   |      |   | 4,435  |      |  |   | 492   |   |  |      | 366   |   |  |   | 254   |  
|Consumer and other                                                                    |  |                        | 45     |   |      |   | 67     |      |  |   | 983   |   |  |      | 89    |   |  |   | 249   |  
|Other real estate and repossessions                                                   |  |                        | 2,166  |   |      |   | 1,940  |      |  |   | 873   |   |  |      | 1,309 |   |  |   | 2,141 |  
|                                                                                      |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total non-performing assets                                                           |  | $                      | 14,421 |   |      | $ | 13,488 |      |  | $ | 4,229 |   |  | $    | 2,724 |   |  | $ | 3,264 |  
|Loans past due 90 days or more and still accruing                                     |  | $                      | 5,658  |   |      | $ | 1,922  |      |  | $ | 1,186 |   |  | $    | 3,000 |   |  | $ | 1,735 |  
|Ratio of past due 90 days or more loans to loans net of unearned income               |  |                        | 0.33   | % |      |   | 0.13   | %    |  |   | 0.12  | % |  |      | 0.37  | % |  |   | 0.24  | %
|Ratio of non-performing assets to loans, net of unearned income and other real estate |  |                        | 0.85   | % |      |   | 0.93   | %    |  |   | 0.43  | % |  |      | 0.34  | % |  |   | 0.44  | %



Interest Rate
Sensitivity and Liquidity



Asset Liability
Management: The Companys primary market risk exposures are credit (as discussed previously), interest rate risk and to a lesser degree, liquidity risk. The Bank operates under an Asset Liability and Risk Management policy
approved by the Board of Directors of the Bank through the Asset and Liability Committee (ALCO). The policy outlines limits on interest rate risk



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in terms of changes in net interest income and changes in the net market values of assets and liabilities over certain changes in interest rate environments.
These measurements are made through a simulation model which projects the impact of changes in interest rates on the Banks assets and liabilities. The policy also outlines responsibility for monitoring interest rate risk, and the process for
the approval, implementation and monitoring of interest rate risk strategies to achieve the Banks interest rate risk objectives.



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



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



Interest Rate Risk: The normal course of business activity exposes the Company to interest rate risk. Interest rate risk is managed
within an overall asset and liability framework for the Company. The principal objectives of asset and liability management are to guide the sensitivity of net interest spreads to potential changes in interest rates and enhance profitability in ways
that promise sufficient reward for recognized and controlled risk. Funding positions are kept within predetermined limits designed to ensure that risk-taking is not excessive and that liquidity is properly managed. The Company employs sensitivity
analysis in the form of a net interest income simulation to help characterize the market risk arising from changes in interest rates. In addition, fluctuations in interest rates usually result in changes in the fair market value of the
Companys financial instruments, cash flows and net interest income. The Companys interest rate risk position is managed by ALCO.



The Company uses a simulation modeling process to measure interest rate risk and evaluate potential strategies. The Companys net interest income
simulation includes all financial assets and liabilities. This simulation measures both the term risk and basis risk in the Companys assets and liabilities. The simulation also captures the option characteristics of products, such as caps and
floors on floating rate loans, the right to pre-pay mortgage loans without penalty and the ability of customers to withdraw deposits on demand. These options are modeled through the use of primarily historical customer behavior and statistical
analysis. Other interest rate-related risks such as prepayment, basis and option risk are also considered. Simulation results quantify interest risk under various interest rate scenarios. Management then develops and implements appropriate
strategies. The Board of Directors regularly reviews the overall rate risk position and asset and liability management strategies.



The Company uses three standard scenariosrates unchanged, rising rates, and declining ratesin analyzing interest rate sensitivity. The rising
and declining rate scenarios cover a 100 basis points upward and downward rate shock. The following table illustrates the expected effect a given interest rate shift would have on the fair market value of the Balance Sheet and the annualized
projected net interest income of the Company as of December 31, 2004.



|                         |  |                                              |  |                                            
|------------------------ |  | -------------------------------------------- |  | -------------------------------------------
|Change in Interest Rates |  | Increase / (Decrease) inFMV of Balance Sheet |  | Increase / (Decrease) inNet Interest Income
|+ 100 basis points       |  | 3.780%                                       |  | 6.860%                                     
|- 100 basis points       |  | -4.370%                                      |  | -6.070%                                    



These simulated
computations should not be relied upon as indicative of actual future results. Further, the computations do not contemplate certain actions that management may undertake in response to future changes in interest rates.



In fiscal 2005, the Company will continue to face term risk and basis risk
and may be confronted with several risk scenarios. If interest rates rise, net interest income may actually increase if deposit rates lag increases in market rates. The Company could, however, experience significant pressure on net interest income
if there is a substantial increase in deposit rates relative to market rates. A declining interest rate environment might result in a decrease in loan rates, while deposit rates remain relatively stable, which could also create significant risk to
net interest income. ALCOs subcommittee, the pricing committee, meets weekly to establish interest rates on loans and deposits and review interest rate sensitivity and liquidity positions.



Derivative Instruments and Hedging Activities: Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS 149), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for
hedging activities. As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting
designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge
the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.



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



Interest rate swaps are currently utilized by the Company to hedge the interest rate risk associated with pools of loans that bear interest based upon the prime rate. The interest rate swaps synthetically convert the floating interest rate
payments received on pools of assets bearing interest based upon the prime rates to fixed interest receipts. The Company assesses hedge effectiveness and measures hedge ineffectiveness on a quarterly basis for each hedging relationship. The Company
performs its effectiveness testing by comparing the present value of the cumulative change in the variable interest payments on each swap to the present value of the cumulative change in the overall variable receipts on the underlying loans since
the inception of the hedge. Hedge ineffectiveness is recognized to the extent that the cumulative change on the swap exceeds the cumulative change on the hedged variable interest receipts on the loans. If the ratio of the cumulative changes in the
variable interest payments on a swap to the cumulative changes in the variable receipts on the underlying loans is outside of the range of 80% to 120%, the Company considers the hedging relationship to no longer be highly effective and would
dedesignate the interest rate swap from its hedging relationship. Subsequent changes in the value of the derivative would be remeasured directly through earnings.



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



As of December 31, 2004 and 2003, derivatives with a fair value of $(1.2) million and $1.7 million, respectively, were included in other assets. The
change in net unrealized loss of $0.6 million (pretax) in 2004 for derivatives designated as cash flow hedges is separately disclosed in the changes of shareholders equity and comprehensive income. In June 2003, the Company entered into a
$100.0 million notional interest rate floor agreement and designated the derivative as a cash flow hedge of the changes in overall cash flows associated with certain variable rate loans. The Company dedesignated this floor as a cash flow hedge in
the third quarter of 2003. Increases and decreases in the fair value of the dedesignated floors of $14 thousand and $(8) thousand in 2004 and 2003 respectively, were included in interest income. No hedging ineffectiveness on cash flow hedges was
recognized during 2004.



Amounts reported in accumulated other
comprehensive income related to derivatives is reclassified to interest income as interest payments are received on the Companys variable-rate loans. The change in net unrealized gains on cash flow hedges reflects a reclassification of $2.2
million (pre-tax) and $0.3 million (pre-tax) of net unrealized gains from accumulated other comprehensive income to interest income during 2004 and 2003, respectively. During 2005, the Company estimates that an additional $553 thousand will be
reclassified as a decrease in interest income.



Liquidity: Liquidity involves the Companys ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise
to operate on an ongoing basis. During the past three years, the Companys liquidity needs have primarily been met by growth in core deposits, advances from Federal Home Loan Bank, and additional capital. The Companys cash and Federal
Funds sold and cash flows from amortizing investment and loan portfolios have generally created an adequate liquidity position. Executive management reviews liquidity monthly. This review is from a regulatory as well as static and a four-quarter
forecasted standpoint.



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



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



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



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



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



Subject to certain limitations, the Bank may borrow funds from the Atlanta FHLB in the form of advances. Credit availability from the Atlanta FHLB to the Bank is based on the Banks financial and operating
condition. Borrowings from the FHLB to the Bank were $201.1 million for term advances and $50.0 million in overnight funding at December 31, 2004. In addition to creditworthiness, the Bank must own a minimum amount of FHLB capital stock. Unused
borrowing capacity at FHLB at December 31, 2004 was approximately $48.5 million. The Bank uses FHLB advances for both long-term and short-term liquidity needs.



Additionally, the Bank has Federal Funds purchased lines with SunTrust, First Tennessee, and the Bankers Bank in the amount of $15 million, $10 million
and $30 million, respectively. The Company also has a line of credit with SunTrust in the amount of $20 million. At December 31, 2004, $4.9 million of the Bankers Bank line had been used. There were no outstanding balances on the other lines of
credit.



In December 2004, the Company raised $51.1 million
from the sale of 1,750,000 shares of common stock. The Company purchased bonds with the proceeds from this sale. These bonds can be used as additional collateral for future borrowing capacity or sold to generate additional liquidity for the Company
if needed.



Contractual Obligations



The following table sets forth the principal maturities of our material
contractual obligations owing to third parties at December 31, 2004 (in thousands):



|                                            |  |       |         |                 |   |           |  |          |         |                  |   |   |  |   |       
|------------------------------------------- |  | ----- | ------- | --------------- | - | --------- |  | -------- | ------- | ---------------- | - | - |  | - | ------
|                                            |  | Total |         | Less than1 year |   | 1-3 years |  | 3-5years |         | More than5 years
|Federal Home Loan Bank overnight            |  | $     | 50,000  |                 | $ | 50,000    |  | $        |        |                  | $ |  |  | $ |      
|Federal Home Loan Bank advances             |  |       | 201,070 |                 |   | 63,570    |  |          | 122,500 |                  |   |  |  |   | 15,000
|Federal Funds purchased                     |  |       | 4,931   |                 |   | 4,931     |  |          |        |                  |   |  |  |   |      
|Securities sold under repurchase agreements |  |       | 18,437  |                 |   | 18,437    |  |          |        |                  |   |  |  |   |      
|Subordinated debt                           |  |       | 51,547  |                 |   |          |  |          |        |                  |   |  |  |   | 51,547
|                                            |  |       |         |                 |   |           |  |          |         |                  |   |   |  |   |       
|Total                                       |  | $     | 325,985 |                 | $ | 136,938   |  | $        | 122,500 |                  | $ |  |  | $ | 66,547
|                                            |  |       |         |                 |   |           |  |          |         |                  |   |   |  |   |       



Future payments for
interest and operating lease obligations to third parties at December 31, 2004 are as follows (in thousands):



|                                            |  |       |         |                 |   |           |  |          |        |                  |   |       |  |   |       
|------------------------------------------- |  | ----- | ------- | --------------- | - | --------- |  | -------- | ------ | ---------------- | - | ----- |  | - | ------
|                                            |  | Total |         | Less than1 year |   | 1-3 years |  | 3-5years |        | More than5 years
|Federal Home Loan Bank overnight            |  | $     | 1,220   |                 | $ | 1,220     |  | $        |       |                  | $ |      |  | $ |      
|Federal Home Loan Bank advances             |  |       | 10,034  |                 |   | 4,631     |  |          | 2,559  |                  |   | 1,430 |  |   | 1,414 
|Federal Funds purchased                     |  |       | 133     |                 |   | 133       |  |          |       |                  |   |      |  |   |      
|Securities sold under repurchase agreements |  |       | 278     |                 |   | 278       |  |          |       |                  |   |      |  |   |      
|Subordinated debt                           |  |       | 76,668  |                 |   | 2,696     |  |          | 5,392  |                  |   | 5,392 |  |   | 63,188
|Operating leases                            |  |       | 15,894  |                 |   | 2,546     |  |          | 4,337  |                  |   | 2,872 |  |   | 6,139 
|                                            |  |       |         |                 |   |           |  |          |        |                  |   |       |  |   |       
|Total                                       |  | $     | 104,227 |                 | $ | 11,504    |  | $        | 12,288 |                  | $ | 9,694 |  | $ | 70,741
|                                            |  |       |         |                 |   |           |  |          |        |                  |   |       |  |   |       



Interest Rate
Sensitivity: Interest rate sensitivity is a measure of exposure to changes in net interest income due to changes in market interest rates. The difference of interest earning assets less interest bearing liabilities repricing or maturing in a
given period of time is commonly referred to as GAP. A positive GAP indicates an excess of interest rate sensitive assets over interest rate sensitive liabilities; a negative GAP indicates an excess of interest rate sensitive liabilities
over interest rate sensitive assets.



The GAP analysis is
prepared using either actual repricing intervals or maturity dates when stated. Loans held for sale are included in less than three months since it is managements intent to sell them within that time. Equity securities having no stated
maturity are reported after five years. In the current interest rate environment, the Companys NOW accounts and savings deposits have been relatively insensitive to interest rate changes. However, the Company considers a portion of money
market accounts to be rate sensitive based on historical growth trends and managements expectations. Shortcomings are inherent in any GAP analysis since certain assets and liabilities may not move proportionally as interest rates change.



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The following table presents the Companys interest sensitivity GAP between interest earnings assets
and interest bearing liabilities at December 31, 2004.



|                                                   |  |                                     |           |   |              |   |         |               |  |   |                |   |  |       |         |   |  |   |          
|-------------------------------------------------- |  | ----------------------------------- | --------- | - | ------------ | - | ------- | ------------- |  | - | -------------- | - |  | ----- | ------- | - |  | - | ---------
|                                                   |  | Volumes Subject to Repricing Within
|                                                   |  | 0 - 90Days                          |           |   | 91 - 180Days |   |         | 181 - 365Days |  |   | After One Year |   |  | Total
|                                                   |  | (Dollars in Thousands)             
|INTEREST-EARNING ASSETS                            |  |                                     |           |   |              |   |         |               |  |   |                |   |  |       |         |   |  |   |          
|Investment securities                              |  | $                                   | 33,334    |   |              | $ | 20,065  |               |  | $ | 26,107         |   |  | $     | 247,731 |   |  | $ | 327,237  
|Interest-bearing assets                            |  |                                     | 318       |   |              |   |        |               |  |   |               |   |  |       |        |   |  |   | 318      
|Loans                                              |  |                                     | 1,095,636 |   |              |   | 125,700 |               |  |   | 171,920        |   |  |       | 305,779 |   |  |   | 1,699,035
|Mortgage loans held for sale                       |  |                                     | 4,563     |   |              |   |        |               |  |   |               |   |  |       |        |   |  |   | 4,563    
|Other investments                                  |  |                                     | 23,782    |   |              |   |        |               |  |   |               |   |  |       |        |   |  |   | 23,782   
|Federal Funds sold and short-term investments      |  |                                     | 35,813    |   |              |   |        |               |  |   |               |   |  |       |        |   |  |   | 35,813   
|                                                   |  |                                     |           |   |              |   |         |               |  |   |                |   |  |       |         |   |  |   |          
|Total interest-earning assets                      |  | $                                   | 1,193,446 |   |              | $ | 145,765 |               |  | $ | 198,027        |   |  | $     | 553,510 |   |  | $ | 2,090,748
|                                                   |  |                                     |           |   |             
|INTEREST-BEARING LIABILITIES                       |  |                                     |           |   |              |   |         |               |  |   |                |   |  |       |         |   |  |   |          
|Demand, money market and savings deposits          |  | $                                   | 662,787   |   |              | $ |        |               |  | $ |               |   |  | $     |        |   |  | $ | 662,787  
|Time deposits                                      |  |                                     | 137,922   |   |              |   | 131,064 |               |  |   | 288,835        |   |  |       | 222,344 |   |  |   | 780,165  
|FHLB advances                                      |  |                                     | 16,070    |   |              |   | 32,500  |               |  |   | 15,000         |   |  |       | 137,500 |   |  |   | 201,070  
|Trust preferred securities                         |  |                                     |          |   |              |   |        |               |  |   |               |   |  |       | 51,547  |   |  |   | 51,547   
|Federal Funds purchased and other borrowings       |  |                                     | 60,678    |   |              |   | 12,500  |               |  |   |               |   |  |       | 190     |   |  |   | 73,368   
|                                                   |  |                                     |           |   |              |   |         |               |  |   |                |   |  |       |         |   |  |   |          
|Total interest-bearing liabilities                 |  | $                                   | 877,457   |   |              | $ | 176,064 |               |  | $ | 303,835        |   |  | $     | 411,581 |   |  | $ | 1,768,937
|Rate sensitive assets / rate sensitive liabilities |  |                                     | 1.36      |   |              |   | 0.83    |               |  |   | 0.65           |   |  |       | 1.34    |   |  |   | 1.18     
|Period gap                                         |  |                                     | 315,989   |   |              |   | (30,299 | )             |  |   | (105,808       | ) |  |       | 141,929 |   |  |   | 321,811  
|Cumulative gap                                     |  |                                     | 315,989   |   |              |   | 285,690 |               |  |   | 179,882        |   |  |       | 321,811 |   |  |   |          
|Period gap to total assets                         |  |                                     | 13.58     | % |              |   | -1.30   | %             |  |   | -4.55          | % |  |       | 6.10    | % |  |   |          
|CUMULATIVE GAP TO TOTAL ASSETS                     |  |                                     | 13.58     | % |              |   | 12.28   | %             |  |   | 7.73           | % |  |       | 13.83   | % |  |   |          



Impact of Inflation
and Changing Prices



The effects of inflation on the local
economy and on the Companys operating results have been relatively modest for the past several years. Since substantially all of the Companys assets and liabilities are monetary in nature, such as cash, securities, loans and deposits,
their values are less sensitive to the effects of inflation than to changing interest rates, which do not necessarily change in accordance with inflation rates.



The Company manages the impact of interest rate fluctuations by managing the net interest margin and relationship between its interest sensitive assets
and liabilities. Changes in interest rates will affect the volume of loans generated and the values of investment securities and collateral held. Increasing interest rates generally decrease the value of securities and collateral and reduce loan
demand, especially the demand for real estate loans. Declining interest rates tend to increase the value of securities and increase the demand for loans.



Other Accounting Matters



In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantees, Including Indirect Guarantees of Indebtedness of Others,
to clarify accounting and disclosure requirements relating to a guarantors issuance of certain types of guarantees. FIN 45 requires entities to disclose additional information about certain guarantees, or groups of similar guarantees, even if
the likelihood of the guarantors having to make any payments under the guarantee is remote. The disclosure provisions were effective for financial statements for fiscal years ended after December 15, 2002. For certain guarantees, the
interpretation also requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The initial recognition and measurement provision is to be applied only on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of this Interpretation did not have a material impact on the Companys financial statements.



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In December 2002, the FASB issued Statement No. 148 (SFAS 148), Accounting for Stock-Based
Compensation  Transition and Disclosure, an amendment of Statement of Financial Accounting Standards No. 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS 148 is effective for fiscal years ended after December 15, 2002. The Company plans to continue to account for stock-based employee compensation under the intrinsic value based method and to provide disclosure
of the impact of the fair value based method on reported income until the adoption of SFAS 123R beginning in January 2005. Employee stock options have characteristics that are significantly different from those of traded options, including vesting
provisions and trading limitations that impact their liquidity. Therefore, the existing option pricing models, such as Black-Scholes, do not necessarily provide a reliable measure of the fair value of employee stock options. Refer to Note A in the
accompanying financial statements for pro forma disclosure of the impact of stock options utilizing the Black-Scholes valuation method. The adoption of this statement did not have a material impact on the financial condition or operating results of
the Company.



The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123 (Revised 2004) (SFAS No. 123R), Share-Based Payment, in December 2004. SFAS No. 123R is a revision of FASB Statement 123,
Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value
of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first annual reporting
period that begins after June 15, 2005 and the Company will adopt the standard in the first quarter of fiscal 2005. The Company has not determined the impact that this statement will have on its consolidated financial position or results of
operations.



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



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



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



In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which is effective for hedging relationships entered into or modified after June 30, 2003. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of this statement did not have a material impact on the financial condition or the
operating results of the Company.



In May 2003, the FASB issued
SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with



38



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##### Table of Contents

characteristics of both liabilities and equity in its balance sheet. SFAS No. 150 became effective in the third quarter of 2003. The adoption of this
statement did not have a material impact on the financial condition or the operating results of the Company.



In March 2004, the SEC issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. Current accounting
guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences
between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for commitments to originate mortgage loans
to be held for sale that are entered into after March 31, 2004. Its adoption did not have a material impact on the consolidated financial position or results of the Company.



In March 2004, the Financial Accounting Standards Boards (FASB) Emerging Issues Task Force reached a
consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an investment is considered impaired, whether impairment is
other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless: (i) the investor has the
ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii) evidence indicating that the cost of the investment is recoverable
within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to the difference between the investments cost and its fair
value. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in September 2004, the effective date of these provisions was
delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. Due to the recognition and measurement provisions being suspended and the final rule delayed, we are not able to determine whether the
adoption of these new provisions will have a material impact on our consolidated financial position or results of income.



Quarterly Financial Information (Unaudited)



The following table sets forth certain consolidated quarterly financial information of the Company. This information is derived from unaudited
consolidated financial statements, which include, in the opinion of management, all normal recurring adjustments which management considers necessary for a fair presentation of the results for such periods.



|                              |  |                                               |        |         |   |         |  |         |        |  |   |       
|----------------------------- |  | --------------------------------------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | ------
|                              |  | 2004 Quarter Ended (unaudited)               
|                              |  | March 31                                      |        | June 30 |   | Sept 30 |  | Dec 31 
|                              |  | (Dollars in Thousands, except per share data)
|Interest income               |  | $                                             | 27,688 |         | $ | 28,470  |  | $       | 29,852 |  | $ | 31,667
|Interest expense              |  |                                               | 7,762  |         |   | 8,251   |  |         | 9,019  |  |   | 10,236
|Net interest income           |  |                                               | 19,926 |         |   | 20,219  |  |         | 20,833 |  |   | 21,431
|Provision for loan losses     |  |                                               | 1,561  |         |   | 1,310   |  |         | 1,603  |  |   | 2,956 
|Securities gains              |  |                                               | 304    |         |   | 549     |  |         | 317    |  |   | 15    
|Earnings before income taxes  |  |                                               | 10,627 |         |   | 10,194  |  |         | 11,558 |  |   | 10,605
|Net income                    |  |                                               | 7,597  |         |   | 7,391   |  |         | 8,264  |  |   | 7,698 
|Net income per share, basic   |  |                                               | 0.39   |         |   | 0.38    |  |         | 0.43   |  |   | 0.39  
|Net income per share, diluted |  |                                               | 0.38   |         |   | 0.37    |  |         | 0.41   |  |   | 0.38  
|                              | 
|                              |  | 2003 Quarter Ended (unaudited)               
|                              |  | March 31                                      |        | June 30 |   | Sept 30 |  | Dec. 31
|                              |  | (Dollars in Thousands, except per share data)
|Interest income               |  | $                                             | 21,545 |         | $ | 24,132  |  | $       | 26,310 |  | $ | 26,847
|Interest expense              |  |                                               | 6,470  |         |   | 5,943   |  |         | 7,545  |  |   | 7,507 
|Net interest income           |  |                                               | 15,075 |         |   | 18,189  |  |         | 18,765 |  |   | 19,340
|Provision for loan losses     |  |                                               | 1,047  |         |   | 1,801   |  |         | 1,146  |  |   | 1,241 
|Securities gains              |  |                                               | 184    |         |   | 132     |  |         | 301    |  |   | 113   
|Earnings before income taxes  |  |                                               | 8,197  |         |   | 9,193   |  |         | 9,787  |  |   | 10,359
|Net income                    |  |                                               | 5,750  |         |   | 6,384   |  |         | 7,118  |  |   | 7,447 
|Net income per share, basic   |  |                                               | 0.36   |         |   | 0.37    |  |         | 0.38   |  |   | 0.39  
|Net income per share, diluted |  |                                               | 0.34   |         |   | 0.35    |  |         | 0.36   |  |   | 0.38  



The results for any
quarter are not necessarily indicative of results for any future period. This information should be read in conjunction with the Companys consolidated financial statements and the notes thereto included elsewhere in this report.



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Item 7A. Quantitative and Qualitative Disclosures About Market Risk



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



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



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



Additional information required by Item 305 of Regulation S-K is set forth under Item 7 of this report.



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##### Table of Contents

Item 8. Financial Statements and Supplementary Data



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                                              |  | 42  
|                                                                                                     | 
|Consolidated Balance Sheets at December 31, 2004 and 2003                                            |  | 43  
|                                                                                                     | 
|Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002               |  | 44  
|                                                                                                     | 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2004, 2003 and 2002 |  | 45  
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002           |  | 46  
|                                                                                                     | 
|Notes to Consolidated Financial Statements                                                           |  | 47  



41



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##### Table of Contents

Report of Independent Registered Public Accounting Firm



Board of Directors

Main Street Banks, Inc.



We have audited the accompanying consolidated balance sheets of Main Street Banks, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Main Street Banks, Inc. and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting principals.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Main Street Banks, Inc.s internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2005 expressed an unqualified opinion on
managements assessment and an adverse opinion on the effectiveness of internal control over financial reporting.



/s/ Ernst & Young LLP



March 4, 2005

Atlanta, Georgia



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##### Table of Contents

Main Street Banks, Inc. and Subsidiaries

Consolidated Balance Sheets



|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                       |  | December 31,           |          
|                                                                                                                                                                       |  | 2004                   |           |   | 2003 |  
|                                                                                                                                                                       |  | (Dollars in Thousands) |          
|ASSETS                                                                                                                                                                 |  |                        |           |  
|Cash and due from banks                                                                                                                                                |  | $                      | 35,090    |   |      | $ | 39,839    |  
|Interest-bearing deposits in banks                                                                                                                                     |  |                        | 318       |   |      |   | 1,021     |  
|Federal funds sold and securities purchased under agreements to resell                                                                                                 |  |                        | 35,813    |   |      |   | 31,819    |  
|Investment securities available for sale (cost of $314,557 and $242,872 at December 31, 2004 and 2003, respectively)                                                   |  |                        | 315,521   |   |      |   | 247,392   |  
|Investment securities held to maturity (fair value of $11,260 and $10,780 at December 31, 2004 and 2003, respectively)                                                 |  |                        | 11,716    |   |      |   | 10,788    |  
|Other investments                                                                                                                                                      |  |                        | 23,782    |   |      |   | 19,651    |  
|Mortgage loans held for sale                                                                                                                                           |  |                        | 4,563     |   |      |   | 5,671     |  
|Loans, net of unearned income                                                                                                                                          |  |                        | 1,699,035 |   |      |   | 1,443,326 |  
|Allowance for loan losses                                                                                                                                              |  |                        | (25,191   | ) |      |   | (21,152   | )
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|Loans, net                                                                                                                                                             |  |                        | 1,673,844 |   |      |   | 1,422,174 |  
|Premises and equipment, net                                                                                                                                            |  |                        | 53,470    |   |      |   | 42,761    |  
|Other real estate                                                                                                                                                      |  |                        | 2,141     |   |      |   | 1,845     |  
|Accrued interest receivable                                                                                                                                            |  |                        | 9,763     |   |      |   | 8,182     |  
|Goodwill and other intangible assets                                                                                                                                   |  |                        | 102,170   |   |      |   | 96,237    |  
|Bank owned life insurance                                                                                                                                              |  |                        | 42,056    |   |      |   | 35,773    |  
|Other assets                                                                                                                                                           |  |                        | 16,195    |   |      |   | 8,612     |  
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|TOTAL ASSETS                                                                                                                                                           |  | $                      | 2,326,442 |   |      | $ | 1,971,765 |  
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|                                                                                                                                                                       |  |                       
|LIABILITIES                                                                                                                                                            |  |                        |           |   |      |   |           |  
|Deposits:                                                                                                                                                              |  |                        |           |   |      |   |           |  
|Noninterest-bearing demand                                                                                                                                             |  | $                      | 224,958   |   |      | $ | 228,610   |  
|Interest-bearing demand and money market                                                                                                                               |  |                        | 658,088   |   |      |   | 482,775   |  
|Savings                                                                                                                                                                |  |                        | 46,999    |   |      |   | 49,832    |  
|Time deposits of $100,000 or more                                                                                                                                      |  |                        | 370,658   |   |      |   | 254,422   |  
|Other time deposits                                                                                                                                                    |  |                        | 409,507   |   |      |   | 442,764   |  
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|Total deposits                                                                                                                                                         |  |                        | 1,710,210 |   |      |   | 1,458,403 |  
|Accrued interest payable                                                                                                                                               |  |                        | 3,955     |   |      |   | 3,020     |  
|Federal Funds purchased and securities sold under repurchase agreements                                                                                                |  |                        | 73,368    |   |      |   | 112,859   |  
|Federal Home Loan Bank advances                                                                                                                                        |  |                        | 201,070   |   |      |   | 141,605   |  
|Subordinated debt                                                                                                                                                      |  |                        | 51,547    |   |      |   |          |  
|Trust preferred securities                                                                                                                                             |  |                        |          |   |      |   | 50,000    |  
|Other liabilities                                                                                                                                                      |  |                        | 7,329     |   |      |   | 5,335     |  
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|TOTAL LIABILITIES                                                                                                                                                      |  |                        | 2,047,479 |   |      |   | 1,771,222 |  
|                                                                                                                                                                       |  |                       
|SHAREHOLDERS EQUITY                                                                                                                                                   |  |                        |           |   |      |   |           |  
|Common stock-no par value per share; 50,000,000 shares authorized; 21,229,545 and 18,981,340 shares issued and outstanding at December 31,
2004 and 2003, respectively |  |                        | 161,517   |   |      |   | 100,876   |  
|Treasury stock, at cost, 564,082 shares at December 31, 2004 and 2003, respectively                                                                                    |  |                        | (8,789    | ) |      |   | (8,789    | )
|Retained earnings                                                                                                                                                      |  |                        | 126,448   |   |      |   | 104,539   |  
|Accumulated other comprehensive income, net of tax expense of $(120) and $2,203, respectively                                                                          |  |                        | (213      | ) |      |   | 3,917     |  
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                                                             |  |                        | 278,963   |   |      |   | 200,543   |  
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                             |  | $                      | 2,326,442 |   |      | $ | 1,971,765 |  
|                                                                                                                                                                       |  |                        |           |   |      |   |           |  



See accompanying
Notes to Consolidated Financial Statements



43



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##### Table of Contents

Main Street Banks, Inc. and Subsidiaries

Consolidated Statements of Income



|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|------------------------------------------------------ |  | ----------------------- | ---------- | - | ---- | - | ---------- |  | - | ---------- | -
|                                                       |  | Year ended December 31, |           
|                                                       |  | 2004                    |            |   | 2003 |   | 2002       | 
|                                                       |  | (Dollars in Thousands)  |           
|INTEREST INCOME                                        |  |                         |            |   |      |   |            |  |   |            |  
|Loans, including fees                                  |  | $                       | 105,584    |   |      | $ | 88,172     |  | $ | 68,657     |  
|Investment securities:                                 |  |                         |            |   |      |   |            |  |   |            |  
|Taxable                                                |  |                         | 9,556      |   |      |   | 8,309      |  |   | 7,875      |  
|Non-taxable                                            |  |                         | 1,523      |   |      |   | 1,671      |  |   | 1,652      |  
|Federal Funds sold and other short-term investments    |  |                         | 184        |   |      |   | 146        |  |   | 722        |  
|Interest-bearing deposits in banks                     |  |                         | 23         |   |      |   | 29         |  |   | 59         |  
|Other investments                                      |  |                         | 807        |   |      |   | 508        |  |   | 224        |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|TOTAL INTEREST INCOME                                  |  |                         | 117,677    |   |      |   | 98,835     |  |   | 79,189     |  
|INTEREST EXPENSE                                       |  |                         |            |   |      |   |            |  |   |            |  
|Interest-bearing demand and money market               |  |                         | 7,542      |   |      |   | 5,735      |  |   | 3,042      |  
|Savings                                                |  |                         | 288        |   |      |   | 348        |  |   | 421        |  
|Time deposits of $100,000 or more                      |  |                         | 8,959      |   |      |   | 6,893      |  |   | 6,536      |  
|Other time deposits                                    |  |                         | 10,100     |   |      |   | 9,179      |  |   | 12,157     |  
|Federal Funds purchased                                |  |                         | 1,287      |   |      |   | 76         |  |   | 86         |  
|Federal Home Loan Bank advances                        |  |                         | 3,634      |   |      |   | 2,270      |  |   | 1,316      |  
|Trust preferred securities                             |  |                         | 2,511      |   |      |   | 1,453      |  |   | 31         |  
|Other interest expense                                 |  |                         | 947        |   |      |   | 1,511      |  |   | 1,302      |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|TOTAL INTEREST EXPENSE                                 |  |                         | 35,268     |   |      |   | 27,465     |  |   | 24,891     |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|Net interest income                                    |  |                         | 82,409     |   |      |   | 71,370     |  |   | 54,298     |  
|Provision for loan losses                              |  |                         | 7,430      |   |      |   | 5,235      |  |   | 4,003      |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES    |  |                         | 74,979     |   |      |   | 66,135     |  |   | 50,295     |  
|NON-INTEREST INCOME                                    |  |                         |            |   |      |   |            |  |   |            |  
|Service charges on deposit accounts                    |  |                         | 8,117      |   |      |   | 7,760      |  |   | 7,019      |  
|Other customer service fees                            |  |                         | 1,362      |   |      |   | 1,544      |  |   | 1,313      |  
|Mortgage banking income                                |  |                         | 3,274      |   |      |   | 3,342      |  |   | 2,576      |  
|Investment agency commissions                          |  |                         | 828        |   |      |   | 264        |  |   | 361        |  
|Insurance agency income                                |  |                         | 10,050     |   |      |   | 4,857      |  |   | 3,930      |  
|Income from SBA lending                                |  |                         | 3,070      |   |      |   | 1,725      |  |   | 736        |  
|Income on bank owned life insurance                    |  |                         | 2,431      |   |      |   | 2,171      |  |   | 1,828      |  
|Other income                                           |  |                         | 830        |   |      |   | 856        |  |   | 1,210      |  
|Gain (loss) on sales of premises and equipment         |  |                         | (524       | ) |      |   | 1,095      |  |   | (25        | )
|Investment securities gains                            |  |                         | 1,185      |   |      |   | 730        |  |   | 130        |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|TOTAL NON-INTEREST INCOME                              |  |                         | 30,623     |   |      |   | 24,344     |  |   | 19,078     |  
|NON-INTEREST EXPENSE                                   |  |                         |            |   |      |   |            |  |   |            |  
|Salaries and other compensation                        |  |                         | 31,938     |   |      |   | 25,574     |  |   | 19,911     |  
|Employee benefits                                      |  |                         | 5,526      |   |      |   | 4,749      |  |   | 3,247      |  
|Net occupancy and equipment expense                    |  |                         | 8,239      |   |      |   | 6,661      |  |   | 4,710      |  
|Data processing fees                                   |  |                         | 1,661      |   |      |   | 1,684      |  |   | 1,147      |  
|Professional services                                  |  |                         | 2,243      |   |      |   | 2,150      |  |   | 1,265      |  
|Communications & supplies                              |  |                         | 3,999      |   |      |   | 3,736      |  |   | 2,817      |  
|Marketing expense                                      |  |                         | 1,203      |   |      |   | 1,080      |  |   | 869        |  
|Regulatory agency assessments                          |  |                         | 380        |   |      |   | 322        |  |   | 263        |  
|Amortization of intangible assets                      |  |                         | 508        |   |      |   | 365        |  |   | 180        |  
|Other expense                                          |  |                         | 6,921      |   |      |   | 6,622      |  |   | 5,464      |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|TOTAL NON-INTEREST EXPENSE                             |  |                         | 62,618     |   |      |   | 52,943     |  |   | 39,873     |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|Income before income taxes                             |  |                         | 42,984     |   |      |   | 37,536     |  |   | 29,500     |  
|Income tax expense                                     |  |                         | 12,034     |   |      |   | 10,837     |  |   | 9,029      |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|NET INCOME                                             |  | $                       | 30,950     |   |      | $ | 26,699     |  | $ | 20,471     |  
|                                                       |  |                         |            |   |      |   |            |  |   |            |  
|Basic net income available to shareholders per share   |  | $                       | 1.59       |   |      | $ | 1.49       |  | $ | 1.30       |  
|Diluted net income available to shareholders per share |  | $                       | 1.54       |   |      | $ | 1.44       |  | $ | 1.26       |  
|Weighted average shares - basic                        |  |                         | 19,455,084 |   |      |   | 17,875,246 |  |   | 15,706,176 |  
|Weighted average shares - diluted                      |  |                         | 20,076,687 |   |      |   | 18,556,383 |  |   | 16,186,149 |  



See accompanying
Notes to Consolidated Financial Statements



44



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##### Table of Contents

Main Street Banks, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity



|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------- | - |  | -------------- | ------- | - | ----------------- | ------- | ------ | ------------------------------------ | ------ | - | ------------------------- | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                   |  | Common Stock           |   |  | Treasury Stock |         |   | Retained Earnings |         |        | AccumulatedOtherComprehensive Income |        |   | TotalShareholders Equity |  
|                                                                                                   |  | Shares                 |   |  | Amount         |         |   | Shares            |         | Amount |                                      |        |   |                          
|                                                                                                   |  | (Dollars in Thousands) |  
|Balance, January 1, 2002                                                                           |  | 15,699,201             |   |  |                | 32,407  |   |                   | 169,082 |        |                                      | (1,034 | ) |                           |   | 72,018  |   |  |   | 1,730  |   |  |   | 105,121 |  
|Net income                                                                                         |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | 20,471  |   |  |   |        |   |  |   | 20,471  |  
|Net change in unrealized gains (losses) net of tax expense of $1,505                               |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | 3,008  |   |  |   | 3,008   |  
|Net change in fair value of derivative instruments net of tax expense of $468                      |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | 909    |   |  |   | 909     |  
|Less reclassification adjustment for net gains included in net income (net of tax expense of $44)  |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | (86    | ) |  |   | (86     | )
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Comprehensive income                                                                               |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 24,302  |  
|Common stock issued for acquisition                                                                |  | 647,510                |   |  |                | 13,261  |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 13,261  |  
|Treasury stock purchased                                                                           |  | (295,000               | ) |  |                |         |   |                   | 295,000 |        |                                      | (5,824 | ) |                           |   |         |   |  |   |        |   |  |   | (5,824  | )
|Common dividends paid                                                                              |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | (6,601  | ) |  |   |        |   |  |   | (6,601  | )
|Exercise of stock options                                                                          |  | 67,500                 |   |  |                | 337     |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 337     |  
|Restricted stock award plan                                                                        |  | 127,125                |   |  |                | 930     |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 930     |  
|Restricted stock forfeited                                                                         |  | (3,838                 | ) |  |                | (23     | ) |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | (23     | )
|Tax benefit from exercise of stock options                                                         |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | 154     |   |  |   |        |   |  |   | 154     |  
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2002                                                                         |  | 16,242,498             |   |  |                | 46,912  |   |                   | 464,082 |        |                                      | (6,858 | ) |                           |   | 86,042  |   |  |   | 5,561  |   |  |   | 131,657 |  
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                         |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | 26,699  |   |  |   |        |   |  |   | 26,699  |  
|Net change in unrealized gains (losses) net of tax expense of $(885)                               |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | (1,235 | ) |  |   | (1,235  | )
|Net change in fair value of derivative instruments net of tax expense of $38                       |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | 74     |   |  |   | 74      |  
|Less reclassification adjustment for net gains included in net income (net of tax expense of $248) |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | (483   | ) |  |   | (483    | )
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Comprehensive income                                                                               |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 25,055  |  
|Common stock issued for acquisition                                                                |  | 2,599,983              |   |  |                | 50,983  |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 50,983  |  
|Treasury stock purchased                                                                           |  | (100,000               | ) |  |                |         |   |                   | 100,000 |        |                                      | (1,931 | ) |                           |   |         |   |  |   |        |   |  |   | (1,931  | )
|Common dividends paid                                                                              |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | (8,361  | ) |  |   |        |   |  |   | (8,361  | )
|Exercise of stock options                                                                          |  | 215,414                |   |  |                | 1,921   |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 1,921   |  
|Restricted stock award plan                                                                        |  | 23,445                 |   |  |                | 1,060   |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 1,060   |  
|Tax benefit from exercise of stock options                                                         |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | 159     |   |  |   |        |   |  |   | 159     |  
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2003                                                                         |  | 18,981,340             |   |  |                | 100,876 |   |                   | 564,082 |        |                                      | (8,789 | ) |                           |   | 104,539 |   |  |   | 3,917  |   |  |   | 200,543 |  
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                         |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | 30,950  |   |  |   |        |   |  |   | 30,950  |  
|Net change in unrealized gains (losses) net of tax expense of $(1,213)                             |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | (1,572 | ) |  |   | (1,572  | )
|Net change in fair value of derivative instruments net of tax expense of $(915)                    |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | (1,776 | ) |  |   | (1,776  | )
|Less reclassification adjustment for net gains included in net income (net of tax expense of $403) |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   | (782   | ) |  |   | (782    | )
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Comprehensive income                                                                               |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 26,820  |  
|Common stock issued for acquisition                                                                |  | 271,109                |   |  |                | 7,000   |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 7,000   |  
|Acquisition adjustment                                                                             |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | (78     | ) |  |   |        |   |  |   | (78     | )
|Capital offering                                                                                   |  | 1,725,000              |   |  |                | 51,101  |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 51,101  |  
|Common dividends paid                                                                              |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | (10,460 | ) |  |   |        |   |  |   | (10,460 | )
|Exercise of stock options                                                                          |  | 234,601                |   |  |                | 1,936   |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 1,936   |  
|Restricted stock award plan                                                                        |  | 20,695                 |   |  |                | 669     |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | 669     |  
|Restricted stock forfeited                                                                         |  | (3,200                 | ) |  |                | (65     | ) |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   | (65     | )
|Tax benefit from exercise of stock options                                                         |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   | 1,497   |   |  |   |        |   |  |   | 1,497   |  
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2004                                                                         |  | 21,229,545             |   |  | $              | 161,517 |   |                   | 564,082 |        | $                                    | (8,789 | ) |                           | $ | 126,448 |   |  | $ | (213   | ) |  | $ | 278,963 |  
|                                                                                                   |  |                        |   |  |                |         |   |                   |         |        |                                      |        |   |                           |   |         |   |  |   |        |   |  |   |         |  



See accompanying
Notes to Consolidated Financial Statements



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##### Table of Contents

Main Street Banks, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                  |  | For the Year Ended December 31, |         
|                                                                                  |  | 2004                            |          |   | 2003 |   |          | 2002 | 
|                                                                                  |  | (Dollars in Thousands)          |         
|Operating activities                                                              |  |                                 |          |  
|Net income                                                                        |  | $                               | 30,950   |   |      | $ | 26,699   |      |  | $ | 20,471   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                 |          |   |      |   |          |      |  |   |          |  
|Provision for loan losses                                                         |  |                                 | 7,430    |   |      |   | 5,235    |      |  |   | 4,003    |  
|Depreciation and amortization of premises and equipment                           |  |                                 | 3,705    |   |      |   | 3,191    |      |  |   | 2,457    |  
|Amortization of intangible assets                                                 |  |                                 | 508      |   |      |   | 364      |      |  |   | 180      |  
|(Gain) loss on sales of other real estate                                         |  |                                 | 454      |   |      |   | 155      |      |  |   | 13       |  
|Investment securities gains                                                       |  |                                 | (1,185   | ) |      |   | (730     | )    |  |   | (130     | )
|Net amortization of investment securities                                         |  |                                 | 1,288    |   |      |   | 1,597    |      |  |   | 607      |  
|Net accretion of loans purchased                                                  |  |                                 | 41       |   |      |   | (24      | )    |  |   | (55      | )
|(Gain) loss on sales of premises and equipment                                    |  |                                 | 524      |   |      |   | (1,095   | )    |  |   | 25       |  
|Net decrease (increase) in mortgage loans held for sale                           |  |                                 | 1,108    |   |      |   | 2,505    |      |  |   | 1,018    |  
|(Gain) loss on mortgage banking operations                                        |  |                                 | (1,280   | ) |      |   | (1,127   | )    |  |   | (884     | )
|Gains on sales of SBA loans                                                       |  |                                 | (3,070   | ) |      |   | (1,725   | )    |  |   | (736     | )
|Deferred income tax (benefit) provision                                           |  |                                 | (1,248   | ) |      |   | (1,718   | )    |  |   | (1,288   | )
|Deferred net loan fees (cost amortization)                                        |  |                                 | 2,121    |   |      |   | (889     | )    |  |   | (110     | )
|Vesting in restricted stock award plan                                            |  |                                 | 602      |   |      |   | 407      |      |  |   | 656      |  
|Changes in operating assets and liabilities:                                      |  |                                 |          |   |      |   |          |      |  |   |          |  
|(Increase) decrease in accrued interest receivable                                |  |                                 | (1,581   | ) |      |   | (678     | )    |  |   | (793     | )
|Increase cash surrender value of bank owned life insurance                        |  |                                 | (1,284   | ) |      |   | (1,420   | )    |  |   | (1,828   | )
|(Decrease) in accrued interest payable                                            |  |                                 | 935      |   |      |   | (1,455   | )    |  |   | (847     | )
|Other                                                                             |  |                                 | (430     | ) |      |   | (2,481   | )    |  |   | 2,426    |  
|                                                                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                         |  |                                 | 39,588   |   |      |   | 26,811   |      |  |   | 25,185   |  
|                                                                                  |  |                                 |         
|Investing activities                                                              |  |                                 |          |   |      |   |          |      |  |   |          |  
|Purchases of investment securities available for sale                             |  |                                 | (168,092 | ) |      |   | (145,464 | )    |  |   | (151,188 | )
|Purchases of investment securities held to maturity                               |  |                                 | (1,210   | ) |      |   | (10,100  | )    |  |   |         |  
|Purchases of other investments                                                    |  |                                 | (4,131   | ) |      |   | (14,324  | )    |  |   |         |  
|Maturities, paydowns and calls of investment securities available for sale        |  |                                 | 41,023   |   |      |   | 78,470   |      |  |   | 51,877   |  
|Proceeds from sales of investment securities available for sale                   |  |                                 | 54,345   |   |      |   | 22,282   |      |  |   | 11,245   |  
|Net increase in loans funded                                                      |  |                                 | (424,873 | ) |      |   | (334,250 | )    |  |   | (206,306 | )
|Proceeds from the sales of loans held for sale                                    |  |                                 | 169,163  |   |      |   | 161,323  |      |  |   | 131,298  |  
|Purchase of bank-owned life insurance                                             |  |                                 | (5,000   | ) |      |   |         |      |  |   |         |  
|Purchases of premises and equipment                                               |  |                                 | (17,764  | ) |      |   | (10,777  | )    |  |   | (4,841   | )
|Proceeds from sales of premises and equipment                                     |  |                                 | 196      |   |      |   | 3,330    |      |  |   | 3,090    |  
|Proceeds from sales of other real estate                                          |  |                                 | 1,831    |   |      |   | 3,320    |      |  |   | 3,406    |  
|Improvements to other real estate                                                 |  |                                 | (185     | ) |      |   | (197     | )    |  |   |         |  
|Net cash paid for acquisitions                                                    |  |                                 | (706     | ) |      |   | (33,447  | )    |  |   |         |  
|                                                                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                             |  |                                 | (355,403 | ) |      |   | (279,834 | )    |  |   | (161,419 | )
|                                                                                  |  |                                 |         
|Financing activities                                                              |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net increase in demand and savings accounts                                       |  |                                 | 168,827  |   |      |   | 94,696   |      |  |   | 65,156   |  
|Increase in time deposits                                                         |  |                                 | 82,980   |   |      |   | (47,416  | )    |  |   | 59,585   |  
|Increase (decrease) in Federal Funds purchased                                    |  |                                 | (39,492  | ) |      |   | (3,807   | )    |  |   | 32,162   |  
|Net increase in Federal Home Loan Bank advances                                   |  |                                 | 59,465   |   |      |   | 145,605  |      |  |   | (25,121  | )
|Proceeds from the issuance of trust preferred securities                          |  |                                 |         |   |      |   | 44,845   |      |  |   | 5,155    |  
|Dividends paid                                                                    |  |                                 | (10,460  | ) |      |   | (8,361   | )    |  |   | (6,601   | )
|Purchase of treasury stock                                                        |  |                                 |         |   |      |   | (1,931   | )    |  |   | (5,825   | )
|Proceeds from issuance of common stock                                            |  |                                 | 53,037   |   |      |   | 1,921    |      |  |   | 930      |  
|                                                                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|Net cash provided by financing activities                                         |  |                                 | 314,357  |   |      |   | 225,552  |      |  |   | 125,441  |  
|Net decrease in cash and cash equivalents                                         |  |                                 | (1,458   | ) |      |   | (27,471  | )    |  |   | (10,793  | )
|Cash and cash equivalents at beginning of period                                  |  |                                 | 72,679   |   |      |   | 100,150  |      |  |   | 110,943  |  
|                                                                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                               | 71,221   |   |      | $ | 72,679   |      |  | $ | 100,150  |  
|                                                                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|Supplemental disclosures of cash flow information                                 |  |                                 |          |   |      |   |          |      |  |   |          |  
|Cash paid during the period for:                                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|Interest                                                                          |  | $                               | 21,330   |   |      | $ | 24,444   |      |  | $ | 25,738   |  
|Income taxes                                                                      |  |                                 | 13,926   |   |      |   | 11,400   |      |  |   | 7,250    |  
|Supplemental disclosures of noncash transactions                                  |  |                                 |          |   |      |   |          |      |  |   |          |  
|Loans transferred to other real estate acquired through foreclosure               |  | $                               | 5,138    |   |      | $ | 4,931    |      |  | $ | 3,335    |  



See accompanying
Notes to Consolidated Financial Statements



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note A  Significant Accounting Policies



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



Nature of Operations: Main Street Banks, Inc. is a bank holding
company which conducts business primarily in Barrow, Clarke, Cobb, DeKalb, Forsyth, Fulton, Gwinnett, Newton, Rockdale and Walton counties in Georgia through its wholly owned subsidiaries, Main Street Bank and MSII. The Bank provides a full range of
traditional banking, mortgage banking, investment services and insurance services to individual and corporate customers in its primary market areas and surrounding counties.



During 2001 the Bank formed MSB Holdings, Inc., a holding company and MSB Investments Inc., a real estate investment trust
(REIT). These companies were established in order to strengthen the Banks capital position. The establishment of a REIT subsidiary allowed the Bank to increase the effective yield on its real estate related assets and residential
mortgage loan portfolios by transferring a portion of those assets and loans to an entity that receives favorable tax treatment.



Use of Estimates in the Preparation of the Financial Statements: The consolidated financial statements of Main Street Banks, Inc. and Subsidiaries
are prepared in accordance with U.S. generally accepted accounting principles, and practices within the financial services industry, which require management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for
loan losses, evaluation of goodwill impairment, and the valuation of other real estate acquired in connection with foreclosures or in satisfaction of loans. Management believes that the allowance for loan losses is adequate and the valuation of
goodwill and other real estate is appropriate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. The Companys results of
operations are significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory agencies.



Reclassification:Certain previously reported amounts have been
reclassified to conform to the 2004 financial statement presentation. These reclassifications had no effect on net income or stockholders equity.



Segments: The Company does not currently report financial results by business segment. The Company tests all business segments on a quarterly basis
to determine whether any individual segment represents more than 10% of total assets of the Company or contributes more than 10% to the revenue or net income of the Company.



Cash and Cash Equivalents:For purposes of presentation in the statement of cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, interest-bearing deposits in banks, Federal Funds sold and securities purchased under agreements to resell. Generally, Federal Funds and securities purchased under agreements to resell are purchased and
sold for one-day periods.



Investment Securities:
Investment securities are classified into three categories. Debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and
equity securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt securities
not classified as either held-to-maturity securities or trading securities and equity securities not classified as trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of other comprehensive income. No securities have been classified as trading securities by the Company as of December 31, 2004.



Premiums and discounts related to securities are amortized or accreted over
the life of the related security as an adjustment to the yield using the effective interest method and considering prepayment assumptions. Dividend and interest income is recognized when earned.



Gains and losses on sales or calls of securities are recognized on the
settlement date based on the adjusted cost basis of the specific security. The financial statement impact of settlement date accounting versus trade date accounting is not significant.



Management conducts regular reviews to assess whether the values of our investments are impaired and if any impairment is
other than temporary. If we determine that the value of any investment is other than temporarily impaired, we record a charge against earnings in the amount of the impairment. The determination of whether other than temporary impairment has occurred
involves significant assumptions, estimates and judgments by management. Changing economic conditions  global, regional or related to industries of specific issuers  could adversely affect these values. There was no other than temporary
impairment for securities recorded in the years ending December 31, 2004, 2003 and 2002.



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Securities Purchased Under Agreement to Resell: Securities purchased under resell agreements are
recorded at the amounts at which the securities are acquired plus accrued interest. The Company enters into purchases of U. S. Government and agency securities under resell agreements to resell substantially identical securities.



The securities underlying the resell agreements are delivered by appropriate
entry into a third-party custodians account designated by the Company under a written custodial agreement that explicitly recognizes the Companys interest in the securities.



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



The Company evaluates loans for impairment when a loan is internally risk rated as substandard or doubtful. The Company measures impairment based upon the
present value of the loans expected future cash flows discounted at the loans effective interest rate, except where foreclosure or liquidation is probable or when the primary source of repayment is provided by real estate collateral. In
these circumstances, impairment is measured based upon the fair value of the collateral. In addition, in certain circumstances, impairment may be based on the loans observable estimated fair value. Impairment with regard to substantially all
of the Companys impaired loans has been measured based on the fair value of the underlying collateral. The Companys policy for recognizing interest income on impaired loans is consistent with its nonaccrual policy. At the time the
contractual payments on a loan are deemed to be uncollectible, generally at 90 days past due, the Companys policy is to record a charge-off against the Allowance for Loan Losses. As of December 31, 2004, the Company had $14.5 million in loans
that were in excess of 90 days past due, of which $8.8 million are classified as nonaccrual.



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



Gains on sales of loans
are recognized at the time of sale, as determined by the difference between the net sales proceeds and the net book value of the loans sold.



Loan origination fees, net of direct loan origination costs, are deferred and recognized as income over the life of the related loan on a level-yield
basis.



Allowance for Loan Losses: The allowance for
loan losses is established through a provision for loan losses charged to expense. The allowance represents an amount which, in managements judgment, will be adequate to absorb probable losses inherent in the existing loan portfolio.
Managements judgment in determining the adequacy of the allowance is based on evaluations of the collectibility of loans taking into consideration such factors as changes in the nature and volume of the loan portfolio, current economic
conditions that may affect the borrowers ability to pay, overall portfolio quality and review of specific problem loans. Periodic revisions are made to the allowance when circumstances which necessitate such revisions become known. Recognized
losses are charged to the allowance for loan losses, while subsequent recoveries are added to the allowance.



Other Real Estate Owned: Other real estate owned represents property acquired through foreclosure or in settlement of loans and is recorded at the
lower of cost or fair value, based on current market appraisals, less estimated selling expenses. Losses incurred in the acquisition of foreclosed properties are charged against the allowance for loan losses at the time of foreclosure. Subsequent
write-downs of other real estate are charged to current operations.



Mortgage Loans Held for Sale: The Company originates first mortgage loans for sale in the secondary market. Mortgage loans held for sale are recorded at the lower of cost or market on an individual loan basis. Market value is
determined based on outstanding commitments from investors and prevailing market conditions. Gains and losses on sales of loans are recognized at settlement date and are determined as the difference between the net sales proceeds and carrying value
of the loans sold. The Company limits its interest rate risk on such loans originated by selling individual loans immediately after the customers lock into their rate.



Accounting for Derivatives and Hedging Activities: The Company periodically uses derivatives, primarily interest rate
swaps and floors, as part of the Companys overall interest rate risk management. These derivatives are designated as hedges of exposure to changes in the fair value of interest-bearing assets or liabilities and modify the interest rate
characteristics of the hedged item. To



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qualify for special hedge accounting, a derivative must be designated and documented as a hedge and be highly effective in offsetting changes in the hedged
item. The Company evaluates the effectiveness of each hedging relationship at the inception of the hedge and on an ongoing basis each month. The effective portion of each hedge is recognized in earnings if a fair value hedge or in other
comprehensive income if a cash flow hedge. Ineffective portions of a hedging relationship are recognized in earnings. Amounts receivable or payable on each derivative are recognized in net interest income. If the hedged item no longer exists,
previously unrecognized gains and losses are recognized in earnings and future changes in the value of the derivative will be reflected in earnings.



Securities Sold Under Repurchase Agreements: The Company uses securities sold under repurchase agreements as an investment option for some
commercial customers. Such securities sold under repurchase agreements are classified as secured borrowings, and generally mature within one to four days from the transaction date. The Company also uses securities sold under repurchased agreements
as a funding source, which may have longer maturities up to three years or more. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company monitors the fair value of the
underlying securities.



Financial Instruments:In the
ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are
funded or when related fees are earned.



Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition to such commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at December 31, 2004 and 2003 include $198.6 million and $75.9
million, respectively, in undisbursed credit lines and $179.8 million and $173.5 million, respectively, in unfunded construction and development loans. The Companys experience has been that approximately 80 percent of loan commitments are
ultimately drawn upon by customers.



The Company issues standby
letters of credit, which are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and expire in decreasing amounts with
terms ranging from one to four years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral supporting those
commitments for which collateral is deemed necessary. The maximum potential payments the Company could be required to make under outstanding standby letters of credit was $7.5 million and $7.2 million as of December 31, 2004 and 2003, respectively.



Comprehensive Income: Financial Accounting Standards
Board (FASB) Statement No. 130, Reporting Comprehensive Income, describes comprehensive income as the total of all components of comprehensive income, including net income. Other comprehensive income refers to revenues, expenses, gains
and losses that under accounting principles generally accepted in the United States are included in comprehensive income but excluded from net income. Currently, the Companys other comprehensive income consists of unrealized gains and losses
on available for sale securities and the value of derivatives qualifying for special hedge accounting as cash flow hedges.



Income Taxes: The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse.



Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.



Property and Equipment: Premises and equipment are reported at cost less accumulated depreciation and amortization. Depreciation and amortization
are computed using primarily accelerated methods over the estimated useful lives of the assets. The estimated useful lives of premises and equipment are: (1) building and leasehold improvements  5 to 35 years, (2) furniture, fixtures and
equipment  1 to 7 years, (3) automobiles  1 to 5 years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the term of the related lease.



Goodwill and other intangible assets: The adoption of Statement of
Financial Accounting Standards No. 142 (SFAS 142) resulted in the Company no longer amortizing goodwill. Prior to 2002, goodwill was amortized over periods ranging from 10 to 15 years. The Company tests goodwill and intangible assets for
impairment annually. Goodwill is assigned to each individual acquisition on a stand alone basis. Goodwill was tested for impairment on November 1, 2004. The fair value of each reporting unit was estimated using the expected present value of future
cash flows. This cash flow approach indicated that no impairment charge was required. The adoption of SFAS 142 had no material impact on the financial condition or operating results of the Company for prior years.



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Intangible assets related to capital lease rights are being amortized over the term of the related lease
using the straight-line method. Intangible assets are amortized over a period of 5 to 20 years.



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



|                                 |  |                                              |            |      |   |            |  |   |           
|-------------------------------- |  | -------------------------------------------- | ---------- | ---- | - | ---------- |  | - | ----------
|                                 |  | For the Year Ended December 31,             
|                                 |  | 2004                                         |            | 2003 |   | 2002      
|                                 |  | (Dollars in Thousands except per share data)
|Numerator:                       |  |                                              |            |      |   |            |  |   |           
|Basic and diluted net income     |  | $                                            | 30,950     |      | $ | 26,699     |  | $ | 20,471    
|Denominator:                     |  |                                              |            |      |   |            |  |   |           
|Basic weighted average shares    |  |                                              | 19,455,084 |      |   | 17,875,246 |  |   | 15,706,176
|Effect of employee stock options |  |                                              | 621,603    |      |   | 681,137    |  |   | 479,973   
|                                 |  |                                              |            |      |   |            |  |   |           
|Diluted weighted average shares  |  |                                              | 20,076,687 |      |   | 18,556,383 |  |   | 16,186,149
|                                 |  |                                              |            |      |   |            |  |   |           
|Diluted earnings per share       |  | $                                            | 1.54       |      | $ | 1.44       |  | $ | 1.26      



Stock Based
Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for
under Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, requires the use of option valuation models that were not developed for use in valuing employee stock options.



Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 2004, 2003 and 2002: risk-free interest of 4.19%, 4.21% and 3.47%, respectively; dividend yield of 1.97%, 2.09% and 1.95%, respectively; volatility factor of the expected
market price of the Companys common stock of .199, .231, and .247, respectively; and a weighted-average expected life of the options of 8 years in each of 2004, 2003 and 2002. Because the Companys employee stock options have
characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, in managements opinion, the existing model does not necessarily provide a
reliable single measure of the fair value of its employee stock options. The weighted-average fair value of options granted during 2004, 2003 and 2002 was $6.76, $6.69 and $5.26, respectively.



For purposes of pro forma disclosures, the estimated fair value of the
options granted in 2004, 2003 and 2002 is amortized to expense over the options vesting period. The Companys pro forma information follows (in thousands except per share data):



|                                    |  |                                 |        |   |      |   |        |      |  |   |        |  
|----------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                    |  | For the Year Ended December 31, |       
|                                    |  | 2004                            |        |   | 2003 |   |        | 2002 | 
|Net income                          |  | $                               | 30,950 |   |      | $ | 26,699 |      |  | $ | 20,471 |  
|EPS - basic                         |  |                                 | 1.59   |   |      |   | 1.49   |      |  |   | 1.30   |  
|EPS - diluted                       |  |                                 | 1.54   |   |      |   | 1.44   |      |  |   | 1.26   |  
|                                    |  |                                 |       
|Compensation cost - fair value      |  |                                 | 624    |   |      |   | 816    |      |  |   | 543    |  
|Less: tax effect                    |  |                                 | (212   | ) |      |   | (277   | )    |  |   | (185   | )
|Net compensation costs - fair value |  |                                 | 412    |   |      |   | 539    |      |  |   | 358    |  
|                                    |  |                                 |       
|Net income, pro forma               |  |                                 | 30,538 |   |      |   | 26,160 |      |  |   | 20,113 |  
|EPS - basic                         |  |                                 | 1.57   |   |      |   | 1.46   |      |  |   | 1.28   |  
|EPS - diluted                       |  |                                 | 1.52   |   |      |   | 1.41   |      |  |   | 1.24   |  



Recently Issued
Accounting Standards: In June 2002, the FASB issued FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires that a liability for costs associated with exit or disposition
activities be recognized when the liability is incurred and be measured at fair value and adjusted for changes in estimated cash flows. Prior guidance provided for the recognition of such costs at the date of managements commitment to an exit
plan. Under Statement No. 146, managements commitment to an exit plan would not be sufficient, by itself, to recognize a liability. The Statement was effective for exit or disposal activities initiated after December 31, 2002 and did not have
a material impact on the results of operations or financial condition of the Company.



In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantees, Including Indirect Guarantees of Indebtedness of Others, to clarify accounting and disclosure requirements relating to a
guarantors issuance of certain types of



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guarantees. FIN 45 requires entities to disclose additional information about certain guarantees, or groups of similar guarantees, even if the likelihood of
the guarantors having to make any payments under the guarantee is remote. The disclosure provisions were effective for financial statements for fiscal years ended after December 15, 2002. For certain guarantees, the interpretation also
requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The initial recognition and measurement provision is to be applied only on a prospective basis to guarantees issued or modified after December
31, 2002. The adoption of this Interpretation did not have a material impact on the Companys financial statements.



In December 2002, the FASB issued Statement No. 148 (SFAS 148), Accounting for Stock-Based Compensation  Transition and
Disclosure, an amendment of Statement of Financial Accounting Standards No. 123. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS
148 is effective for fiscal years ended after December 15, 2002. The Company plans to continue to account for stock-based employee compensation under the intrinsic value based method and to provide disclosure of the impact of the fair value based
method on reported income until the adoption of SFAS 123R beginning in January 2005. Employee stock options have characteristics that are significantly different from those of traded options, including vesting provisions and trading limitations that
impact their liquidity. Therefore, the existing option pricing models, such as Black-Scholes, do not necessarily provide a reliable measure of the fair value of employee stock options. Refer to Note A in the accompanying financial statements for pro
forma disclosure of the impact of stock options utilizing the Black-Scholes valuation method. The adoption of this statement did not have a material impact on the financial condition or operating results of the Company.



The Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 123 (Revised 2004) (SFAS No. 123R), Share-Based Payment, in December 2004. SFAS No. 123R is a revision of FASB Statement 123, Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first annual reporting period that begins after June
15, 2005 and the Company will adopt the standard in the first quarter of fiscal 2005. The Company has not determined the impact that this statement will have on its consolidated financial position or results of operations.



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



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



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



In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which is effective for hedging relationships entered into or modified after June 30, 2003.



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SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The adoption of this statement did not have a material impact on the financial condition or the operating results of the Company.



In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity in its balance sheet. SFAS No. 150 became
effective in the third quarter of 2003. The adoption of this statement did not have a material impact on the financial condition or the operating results of the Company.



In March 2004, the SEC issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan
Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value
measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for
commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Its adoption did not have a material impact on the consolidated financial position or results of the Company.



In March 2004, the Financial Accounting Standards Boards
(FASB) Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides guidance for determining when an
investment is considered impaired, whether impairment is other-than-temporary, and measurement of an impairment loss. An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is
considered other-than-temporary unless: (i) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (ii)
evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other-than-temporary, then an impairment loss should be recognized equal to
the difference between the investments cost and its fair value. The recognition and measurement provisions were initially effective for other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. However, in
September 2004, the effective date of these provisions was delayed until the finalization of a FASB Staff Position (FSP) to provide additional implementation guidance. Due to the recognition and measurement provisions being suspended and the final
rule delayed, we are not able to determine whether the adoption of these new provisions will have a material impact on our consolidated financial position or results of income.



Note B  Acquisitions



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



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



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



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



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



On December 11, 2002
the Bank acquired First National Bank of Johns Creek. First National Bank of Johns Creek, a $110 million asset community bank was headquartered in Forsyth County, Georgia. The merger provides Main Street with a natural extension of its Atlanta
community bank franchise into Forsyth County and nearby areas of north Fulton County, Georgia. This transaction was accounted for using the purchase method of accounting and accordingly, the results of operations of First National Bank of Johns
Creek are included from the acquisition date. The Company allocated the purchase price among the First National Bank of Johns Creek assets acquired and liabilities assumed based on their fair values at the time the merger was consummated and the
remainder of the purchase price was allocated to goodwill. There were no identifiable intangibles recognized from this acquisition. None of the resulting goodwill is deductible for federal income tax purposes. This transaction was completed on
December 11, 2002. The $26.2 million merger was based on the Companys closing stock price on July 17, 2002 of $20.48 per share, the date the acquisition was announced. The Company issued 647,510 shares of its common stock and $10.7 million in
cash in exchange for all outstanding shares of First National Bank of Johns Creek. Summarized below is an initial allocation of assets and liabilities acquired (in thousands):



|                               |  |   |        
|------------------------------ |  | - | -------
|Assets acquired:               |  |   |        
|Loans                          |  |   | 92,710 
|Other assets                   |  |   | 17,796 
|Goodwill and other intangibles |  |   | 14,800 
|                               |  |   |        
|Total Assets                   |  | $ | 125,306
|                               |  |   |        
|Liabilities acquired:          |  |   |        
|Deposits                       |  |   | 96,007 
|Other liabilities              |  |   | 3,099  
|                               |  |   |        
|Total Liabilities              |  | $ | 99,106 
|                               |  |   |        



During 2002 MSII,
acquired Hometown Insurance Center, Inc. located in Winder, Georgia. Hometown is a multi-line independent insurance agency serving Barrow, Jackson, and Gwinnett counties. This acquisition was accounted for as a purchase.



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



|                                                    |  |                                             |        |      |   |        |  |   |       
|--------------------------------------------------- |  | ------------------------------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                    |  | December 31,                               
|                                                    |  | 2004                                        |        | 2003 |   | 2002  
|                                                    |  | (Dollars in Thousands except pershare data)
|Net interest income                                 |  | $                                           | 82,409 |      | $ | 72,105 |  | $ | 69,059
|Net interest income after provision for loan losses |  |                                             | 74,979 |      |   | 67,606 |  |   | 63,798
|Net income                                          |  |                                             | 30,950 |      |   | 28,196 |  |   | 24,303
|Earnings per share - Basic                          |  | $                                           | 1.59   |      | $ | 1.55   |  | $ | 1.52  
|Earnings per share - Diluted                        |  | $                                           | 1.54   |      | $ | 1.50   |  | $ | 1.48  



Note C  Cash
and Due From Banks



The Company is required to maintain
average reserve balances with the Federal Reserve Bank, on deposit with national banks, or in cash. The average reserve requirements was $25,000 at December 31, 2004 and 2003.



Note D  Investment Securities



The following table details unrealized gains and losses on investment securities held to maturity and investment securities
available for sale as of December 31, 2004 and 2003.



|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|----------------------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                          |  | December 31, 2004     
|                                          |  | AmortizedCost          |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                          |  | (Dollars in Thousands)
|HELD-TO-MATURITY SECURITIES               |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|State and political subdivisions          |  | $                      | 11,716  |                      | $ | 26                    |  | $ | (482                | ) |  | $ | 11,260 
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total Held-to-Maturity securities         |  |                        | 11,716  |                      |   | 26                    |  |   | (482                | ) |  |   | 11,260 
|                                          |  |                        |         |                     
|AVAILABLE FOR SALE SECURITIES             |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|U.S. Treasury securities                  |  | $                      | 15,179  |                      | $ |                      |  | $ | (24                 | ) |  | $ | 15,155 
|U.S. Government agencies and corporations |  |                        | 113,656 |                      |   | 353                   |  |   | (673                | ) |  |   | 113,336
|Mortgage-back securities                  |  |                        | 161,336 |                      |   | 1,168                 |  |   | (981                | ) |  |   | 161,523
|State and polital subdivisions            |  |                        | 24,386  |                      |   | 1,207                 |  |   | (86                 | ) |  |   | 25,507 
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total available for sale securities       |  | $                      | 314,557 |                      | $ | 2,728                 |  | $ | (1,764              | ) |  | $ | 315,521
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total Investments                         |  | $                      | 326,273 |                      | $ | 2,754                 |  | $ | (2,246              | ) |  | $ | 326,781
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        



|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|----------------------------------------- |  | ---------------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|                                          |  | December 31, 2003     
|                                          |  | AmortizedCost          |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|                                          |  | (Dollars in Thousands)
|HELD-TO-MATURITY SECURITIES               |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|State and political subdivisions          |  | $                      | 10,788  |                      | $ | 48                    |  | $ | (56                 | ) |  | $ | 10,780 
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total Held-to-Maturity securities         |  |                        | 10,788  |                      |   | 48                    |  |   | (56                 | ) |  |   | 10,780 
|                                          |  |                        |         |                     
|AVAILABLE FOR SALE SECURITIES             |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|U.S. Treasury securities                  |  | $                      | 10,249  |                      | $ | 157                   |  | $ |                    |   |  | $ | 10,406 
|U.S. Government agencies and corporations |  |                        | 73,426  |                      |   | 1,572                 |  |   | (110                | ) |  |   | 74,888 
|Mortgage-back securities                  |  |                        | 128,460 |                      |   | 1,461                 |  |   | (212                | ) |  |   | 129,709
|State and polital subdivisions            |  |                        | 30,737  |                      |   | 1,765                 |  |   | (113                | ) |  |   | 32,389 
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total available for sale securities       |  | $                      | 242,872 |                      | $ | 4,955                 |  | $ | (435                | ) |  | $ | 247,392
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        
|Total Investments                         |  | $                      | 253,660 |                      | $ | 5,003                 |  | $ | (491                | ) |  | $ | 258,172
|                                          |  |                        |         |                      |   |                       |  |   |                     |   |  |   |        



54



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Those investment securities available for sale, which have an unrealized loss position at December 31,
2004, are detailed below:



|                                          |  |                                            |         |                                            |   |           |  |                  |        |            |   |                  |  |   |         |  |   |      
|----------------------------------------- |  | ------------------------------------------ | ------- | ------------------------------------------ | - | --------- |  | ---------------- | ------ | ---------- | - | ---------------- |  | - | ------- |  | - | -----
|                                          |  | Securities impaired forless than 12 months |         | Securities impaired for12 months or longer |   | Total    
|                                          |  | Fair Value                                 |         | UnrealizedLosses                           |   | FairValue |  | UnrealizedLosses |        | Fair Value |   | UnrealizedLosses
|                                          |  | (Dollars in Thousands)                    
|AVAILABLE FOR SALE SECURITIES             |  |                                            |         |                                            |   |           |  |                  |        |            |   |                  |  |   |         |  |   |      
|U.S. Treasury securities                  |  | $                                          | 15,155  |                                            | $ | 24        |  | $                |       |            | $ |                 |  | $ | 15,155  |  | $ | 24   
|U.S. Government agencies and corporations |  |                                            | 49,519  |                                            |   | 437       |  |                  | 16,947 |            |   | 236              |  |   | 66,466  |  |   | 673  
|Mortgage-Backed securities                |  |                                            | 37,559  |                                            |   | 503       |  |                  | 26,223 |            |   | 478              |  |   | 63,782  |  |   | 981  
|State and political subdivisions          |  |                                            | 1,378   |                                            |   | 23        |  |                  | 1,989  |            |   | 63               |  |   | 3,367   |  |   | 86   
|                                          |  |                                            |         |                                            |   |           |  |                  |        |            |   |                  |  |   |         |  |   |      
|Total available for sale securities       |  | $                                          | 103,611 |                                            | $ | 987       |  | $                | 45,159 |            | $ | 777              |  | $ | 148,770 |  | $ | 1,764
|                                          |  |                                            |         |                                            |   |           |  |                  |        |            |   |                  |  |   |         |  |   |      



Management does not
believe any individual unrealized loss as of December 31, 2004 represents an other-than-temporary impairment. The unrealized losses reported for U.S. Government agencies and corporations and mortgage-backed securities relate primarily to securities
issued by FHLB, FNMA, FHLMC and GNMA. These unrealized losses are primarily attributable to changes in interest rates and not a change in credit quality. The investments were individually not significant relative to their respective amortized cost.



The amortized cost and estimated fair value of investment
securities held to maturity and available for sale at December 31, 2004, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or repay obligations without
call or prepayment penalties.



|                                       |  |                                       |        |                                         |   |               |  |            |         |  |   |        
|-------------------------------------- |  | ------------------------------------- | ------ | --------------------------------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                       |  | December 31, 2004                    
|                                       |  | Investment SecuritiesHeld-to-Maturity |        | Investment SecuritiesAvailable for Sale
|                                       |  | AmortizedCost                         |        | FairValue                               |   | AmortizedCost |  | Fair Value
|                                       |  | (Dollars in Thousands)               
|Due in one year or less                |  | $                                     | 1,100  |                                         | $ | 1,092         |  | $          | 32,298  |  | $ | 32,295 
|Due after one year through five years  |  |                                       | 4,856  |                                         |   | 4,735         |  |            | 253,215 |  |   | 253,068
|Due after five years through ten years |  |                                       | 2,470  |                                         |   | 2,400         |  |            | 14,366  |  |   | 14,875 
|Due after ten years                    |  |                                       | 3,290  |                                         |   | 3,033         |  |            | 14,678  |  |   | 15,283 
|                                       |  |                                       |        |                                         |   |               |  |            |         |  |   |        
|Total                                  |  | $                                     | 11,716 |                                         | $ | 11,260        |  | $          | 314,557 |  | $ | 315,521
|                                       |  |                                       |        |                                         |   |               |  |            |         |  |   |        



Other investments are
recorded at cost and are composed of the following:



|                                                           |  |                        |        |      |   |       
|---------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------
|                                                           |  | December 31,          
|                                                           |  | 2004                   |        | 2003
|                                                           |  | (Dollars in Thousands)
|Federal Home Loan Bank stock                               |  | $                      | 15,189 |      | $ | 10,450
|Senior Housing Crime Prevention Foundation Preferred Stock |  |                        | 8,381  |      |   | 8,404 
|Bankers Bank stock                                        |  |                        | 172    |      |   | 172   
|Southeast Bankcard Association stock                       |  |                        | 40     |      |   | 40    
|Other investments                                          |  |                        |       |      |   | 435   
|North Georgia Bank stock                                   |  |                        |       |      |   | 150   
|                                                           |  |                        |        |      |   |       
|Total other investments                                    |  | $                      | 23,782 |      | $ | 19,651
|                                                           |  |                        |        |      |   |       



During 2004, 2003 and
2002, proceeds from sales of investment securities available for sale were $54.3 million, $22.3 million and $11.2 million, respectively, with gross realized gains and losses of $1,107,303, $730,120 and $130,310, respectively. The tax impact of the
gain or loss on these transactions was $396,483, $248,241 and $44,305 for the years ended December 31, 2004, 2003, and 2002, respectively. The method followed in determining the cost of investments sold is specific identification.



Securities with carrying values of $188.5 million and $133.0 million and
estimated fair values of $189.2 million and $135.4 million at December 31, 2004 and 2003, respectively, were pledged to secure public deposits.



55



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##### Table of Contents

Note E  Loans



The following table represents the composition of the loan portfolio at December 31, 2004 and 2003:



|                                   |  |                        |           |   |      |   |           |  
|---------------------------------- |  | ---------------------- | --------- | - | ---- | - | --------- | -
|                                   |  | December 31,           |          
|                                   |  | 2004                   |           |   | 2003 |  
|                                   |  | (Dollars in Thousands) |          
|LOAN TYPE                          |  |                        |           |   |      |   |           |  
|Commercial and Industrial          |  | $                      | 127,476   |   |      | $ | 118,243   |  
|Real estate - construction         |  |                        | 401,815   |   |      |   | 304,046   |  
|Real estate - residential mortgage |  |                        | 288,703   |   |      |   | 269,358   |  
|Commercial real estate             |  |                        | 846,945   |   |      |   | 711,209   |  
|Consumer and other                 |  |                        | 36,967    |   |      |   | 41,650    |  
|Less:                              |  |                        |           |   |      |   |           |  
|Purchase premium (discount)        |  |                        | (63       | ) |      |   | 981       |  
|Deferred net loan fees             |  |                        | (4,360    | ) |      |   | (2,121    | )
|Unearned income                    |  |                        | 1,552     |   |      |   | (40       | )
|                                   |  |                        |           |   |      |   |           |  
|LOANS, NET OF UNEARNED INCOME      |  | $                      | 1,699,035 |   |      | $ | 1,443,326 |  
|Allowance for loan losses          |  |                        | (25,191   | ) |      |   | (21,152   | )
|                                   |  |                        |           |   |      |   |           |  
|LOANS, NET                         |  | $                      | 1,673,844 |   |      | $ | 1,422,174 |  
|                                   |  |                        |           |   |      |   |           |  



At December 31, 2004
the Company had a market value adjustment on loans that were acquired during the First Colony Bancshares, Inc. acquisition of $0.6 million which is reflected in the loan amounts above. The Bank also has a purchase discount booked from the
acquisition of First Federal Savings Bank in 1993. These balances are being amortized monthly.



At December 31, 2004 approximately $360.8 million of loans were pledged to secure Federal Home Loan Bank advances and for other purposes as required or permitted by law.



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



The
Company occasionally sells the guaranteed portion of Small Business Administration (SBA) loans to third parties and retains the servicing rights for these loans. The Company has limited recourse related to these sales if a loan sold by
the Bank defaults within 90 days of sale. The Company has never repurchased an SBA loan sold to a third party due to default within 90 days of the sale. A servicing asset has been recorded for these loans. The Company recognized a gain of $3.1
million on the sale of SBA loans during 2004 and $1.7 million on the sale of SBA loans during 2003. The Company serviced $24.6 million and $17.0 million of SBA loans for others as of December 31, 2004 and 2003, respectively.



A summary of the activity in the allowance for loan losses for the years
ended December 31, 2004, 2003 and 2002 follows:



|                                                       |  |                        |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | December 31,           |       
|                                                       |  | 2004                   |        |   | 2003 |   |        | 2002 | 
|                                                       |  | (Dollars in Thousands) |       
|Balance at the beginning of the period                 |  | $                      | 21,152 |   |      | $ | 14,589 |      |  | $ | 12,017 |  
|Provision for loan losses                              |  |                        | 7,430  |   |      |   | 5,235  |      |  |   | 4,003  |  
|Loans charged off                                      |  |                        | (4,701 | ) |      |   | (3,360 | )    |  |   | (3,149 | )
|Recoveries on loans previously charged off             |  |                        | 1,310  |   |      |   | 415    |      |  |   | 243    |  
|Allowance of purchased institution at acquisition date |  |                        |       |   |      |   | 4,273  |      |  |   | 1,475  |  
|                                                       |  |                        |        |   |      |   |        |      |  |   |        |  
|Balance at the end of the year                         |  | $                      | 25,191 |   |      | $ | 21,152 |      |  | $ | 14,589 |  
|                                                       |  |                        |        |   |      |   |        |      |  |   |        |  



Non-accrual loans were
$12.2 million and $11.5 million at December 31, 2004 and 2003, respectively. The allowance for loan losses related to these impaired loans was $1.8 million and $1.7 million at December 31, 2004 and 2003, respectively. The average recorded investment
in impaired loans was $12.7 million, $11.8 million and $3.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.



56



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##### Table of Contents

Non-performing assets at December 31, 2004 and 2003 are detailed in the following table:



|                                                                                       |  |                        |        |   |      |   |        |  
|-------------------------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                                                       |  | December 31,           |       
|                                                                                       |  | 2004                   |        |   | 2003 |  
|                                                                                       |  | (Dollars in Thousands) |       
|Non-performing assets                                                                  |  |                        |        |   |      |   |        |  
|Non-accrual loans                                                                      |  | $                      | 12,255 |   |      | $ | 11,548 |  
|Other real estate and repossessions                                                    |  |                        | 2,166  |   |      |   | 1,940  |  
|                                                                                       |  |                        |        |   |      |   |        |  
|Total non-performing assets                                                            |  |                        | 14,421 |   |      |   | 13,488 |  
|Loans past due 90 days or more and still accruing                                      |  | $                      | 5,658  |   |      | $ | 1,923  |  
|Ratio of past due loans to loans net of unearned income                                |  |                        | 0.33   | % |      |   | 0.13   | %
|Ratio of non-performing assets to loans, net of unearned income, and other real estate |  |                        | 0.85   | % |      |   | 0.95   | %



Details of non-accrual
loans at December 31, 2004, 2003 and 2002 appear below:



|                                                            |  |                        |        |      |   |        |  |   |      
|----------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ |  | - | -----
|                                                            |  | December 31,          
|                                                            |  | 2004                   |        | 2003 |   | 2002  
|                                                            |  | (Dollars in Thousands) |        |     
|Principal balance                                           |  | $                      | 12,255 |      | $ | 11,548 |  | $ | 3,356
|Interest that would have been recorded under original terms |  |                        | 477    |      |   | 287    |  |   | 217  



Interest recognized on
non-accrual loans was not significant for years ended December 31, 2004, 2003 and 2002.



Note F  Goodwill and Other Intangible Assets



Goodwill and other intangible assets as of December 31, 2004 are detailed in the following table in thousands:



|                                                  |  |                      |         |                         |   |                   |  |   |        
|------------------------------------------------- |  | -------------------- | ------- | ----------------------- | - | ----------------- |  | - | -------
|                                                  |  | Gross CarryingAmount |         | AccumulatedAmortization |   | Net CarryingValue
|Non-amortizing goodwill                           |  | $                    | 98,300  |                         | $ | 902               |  | $ | 97,398 
|Core deposit intangibles                          |  |                      | 1,877   |                         |   | 313               |  |   | 1,564  
|Amortizing intangibles - customer list            |  |                      | 2,937   |                         |   | 175               |  |   | 2,762  
|Amortizing intangibles - covenants not to compete |  |                      | 372     |                         |   | 40                |  |   | 332    
|Lease rights                                      |  |                      | 248     |                         |   | 134               |  |   | 114    
|                                                  |  |                      |         |                         |   |                   |  |   |        
|Total Goodwill and other intangible assets        |  | $                    | 103,734 |                         | $ | 1,564             |  | $ | 102,170
|                                                  |  |                      |         |                         |   |                   |  |   |        



The changes in the
carrying amount of goodwill and other intangible assets for the years ended December 31, 2004 and 2003 are as follows:



|                                              |  |                        |         |  
|--------------------------------------------- |  | ---------------------- | ------- | -
|                                              |  | (Dollars in Thousands) |        
|Balance as of January 1, 2003                 |  | $                      | 16,512  |  
|Goodwill and other intangible assets acquired |  |                        | 80,089  |  
|Amortization                                  |  |                        | (364    | )
|                                              |  |                        |         |  
|Balance at December 31, 2003                  |  |                        | 96,237  |  
|Goodwill and other intangible assets acquired |  |                        | 7,573   |  
|Fully amortized core deposit intangible       |  |                        | (1,132  | )
|Amortization                                  |  |                        | (508    | )
|                                              |  |                        |         |  
|Balance at December 31, 2004                  |  | $                      | 102,170 |  
|                                              |  |                        |         |  



The Company recognized
no amortization expense related to goodwill, and recognized amortization expense on intangible assets for each of the years ended December 31, 2004, 2003 and 2002 of $507,584, $364,499 and $180,000, respectively. The estimated amortization expense
for each of the five succeeding fiscal years is as follows (in thousands):



|                                |  |   |    
|------------------------------- |  | - | ---
|For the year ended December 31,
|2005                            |  | $ | 510
|2006                            |  | $ | 510
|2007                            |  | $ | 510
|2008                            |  | $ | 510
|2009                            |  | $ | 510



Accumulated
amortization was $1.56 million and $2.50 million at December 31, 2004 and 2003, respectively. The decline in 2004 is due to the write-off of fully depreciated core deposit intangible assets.



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##### Table of Contents

Note G  Premises and Equipment



Premises and equipment are composed of the following:



|                                                |  |                        |         |   |      |   |         |  
|----------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                |  | December 31,           |        
|                                                |  | 2004                   |         |   | 2003 |  
|                                                |  | (Dollars in Thousands) |        
|Land                                            |  | $                      | 9,866   |   |      | $ | 7,785   |  
|Building and leasehold improvements             |  |                        | 26,797  |   |      |   | 20,120  |  
|Furniture, fixtures and equipment               |  |                        | 19,129  |   |      |   | 18,248  |  
|Construction in process                         |  |                        | 13,977  |   |      |   | 12,000  |  
|Less: accumulated depreciation and amortization |  |                        | (16,299 | ) |      |   | (15,392 | )
|                                                |  |                        |         |   |      |   |         |  
|Total premises and equipment                    |  | $                      | 53,470  |   |      | $ | 42,761  |  
|                                                |  |                        |         |   |      |   |         |  



Depreciation and
amortization expense totaled $3.7 million, $3.2 million and $2.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.



The Company leases certain facilities and equipment for use in its business. The lease for facilities generally runs for periods of 10 to 20 years with
various renewal options, while leases for equipment generally have terms not in excess of 5 years. The majority of the leases for facilities contain rental escalation clauses tied to changes in price indices. Certain real property leases contain
purchase options. Management expects that most leases will be renewed or replaced with new leases in the normal course of business.



The following is a schedule of future minimum rentals required under operating leases that have initial or remaining noncancellable lease terms in excess
of one year as of December 31, 2004, for leased facilities:



|                    |  |                |       
|------------------- |  | -------------- | ------
|                    |  | (In Thousands)
|2005                |  | $              | 2,546 
|2006                |  |                | 2,239 
|2007                |  |                | 2,098 
|2008                |  |                | 1,679 
|2009                |  |                | 1,193 
|Thereafter          |  |                | 6,139 
|                    |  |                |       
|Minimum requirement |  | $              | 15,894
|                    |  |                |       



Rental expense for all
operating leases charged to earnings totaled $1.9 million, $1.0 million and $.05 million for years ended December 31, 2004, 2003 and 2002, respectively.



Note H  Deposits



The deposit mix for the years ended December 31, 2004 and 2003 are as follows:



|                                     |  |                        |           |      |      |   |                |   |           |  |      |  
|------------------------------------ |  | ---------------------- | --------- | ---- | ---- | - | -------------- | - | --------- |  | ---- | -
|                                     |  | December 31,           |          
|                                     |  | 2004                   |           |      | 2003 |  
|                                     |  | AverageBalance         |           | Rate |      |   | AverageBalance |   | Rate      | 
|                                     |  | (Dollars in Thousands) |          
|Deposit Type                         |  |                        |           |      |      |   |                |   |           |  |      |  
|Non-interest-bearing demand deposits |  | $                      | 232,568   |      | 0.00 | % |                | $ | 201,158   |  | 0.00 | %
|Demand and money market deposits     |  |                        | 540,690   |      | 1.39 | % |                |   | 424,579   |  | 1.35 | %
|Savings deposits                     |  |                        | 49,035    |      | 0.59 | % |                |   | 47,905    |  | 0.58 | %
|Time Deposits                        |  |                        | 749,430   |      | 2.54 | % |                |   | 640,246   |  | 3.00 | %
|                                     |  |                        |           |      |      |   |                |   |           |  |      |  
|Total Deposits                       |  | $                      | 1,571,723 |      | 1.92 | % |                | $ | 1,313,888 |  | 1.92 | %



The Company had $370.7
million and $254.4 million in time deposits over $100,000 at December 31, 2004 and 2003, respectively. Interest expense on these deposits was $9.0 million, $6.9 million, and $6.5 million for the years ended December 31, 2003, 2002 and 2001,
respectively.



58



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##### Table of Contents

The following table summarizes the maturities of time deposits at December 31, 2004:



|                    |  |                        |        
|------------------- |  | ---------------------- | -------
|                    |  | December 31, 2004     
|                    |  | (Dollars in Thousands)
|Time deposits       |  |                        |        
|2005                |  | $                      | 557,822
|2006                |  |                        | 136,425
|2007                |  |                        | 25,840 
|2008                |  |                        | 32,304 
|2009                |  |                        | 27,774 
|After 2009          |  |                        |       
|                    |  |                        |        
|Total time deposits |  | $                      | 780,165



Note I 
Borrowings



At December 31, 2004 and 2003 the Company had
term advances from the Federal Home Loan Bank totaling $201.1 million and $141.6 million, respectively and overnight advances of $50.0 million and $69.0 million, respectively. The Company has pledged all of its eligible residential mortgage loans
secured by first mortgages on one-to-four family dwellings as collateral. The Company has also pledged eligible commercial real estate loans. The Company is allowed to borrow up to 80% of the balance of the eligible first mortgage loans pledged as
collateral, and up to 50% of the eligible commercial real estate loans. At December 31, 2004 and 2003 the available balance under the Companys line with the Federal Home Loan Bank was approximately $48.5 million and $99.6 million,
respectively. This decrease is the result of an increase in the amount borrowed at the Federal Home Loan Bank, although additional collateral has been added including investment securities. At December 31, 2004, the Company has 16 advances with
rates between 1.59% and 4.80%.



The following table stratifies
the Banks borrowings as short-term and long-term as of December 31, 2004 and 2003:



|                                            |  |                        |         |      |      |   |         |   |         |  |      |  
|------------------------------------------- |  | ---------------------- | ------- | ---- | ---- | - | ------- | - | ------- |  | ---- | -
|                                            |  | December 31,           |        
|                                            |  | 2004                   |         |      | 2003 |  
|                                            |  | Balance                |         | Rate |      |   | Balance |   | Rate    | 
|                                            |  | (Dollars in Thousands) |        
|SHORT-TERM                                  |  |                        |         |      |      |   |         |   |         |  |      |  
|Securities sold under repurchase agreements |  | $                      | 12,500  |      | 4.46 | % |         | $ | 17,500  |  | 3.82 | %
|Retail customer repurchase agreements       |  |                        | 5,746   |      | 1.82 | % |         |   | 11,791  |  | 1.82 | %
|Federal Funds purchased                     |  |                        | 54,932  |      | 2.70 | % |         |   | 1,842   |  | 1.43 | %
|                                            |  |                        |         |      |      |   |         |   |         |  |      |  
|Total short-term borrowings                 |  | $                      | 73,178  |      |      |   |         | $ | 31,133  |  |      |  
|                                            |  |                        |         |      |      |   |         |   |         |  |      |  
|LONG-TERM                                   |  |                        |         |      |      |   |         |   |         |  |      |  
|Federal Home Loan Bank advances             |  | $                      | 201,070 |      | 2.68 | % |         | $ | 210,605 |  | 2.11 | %
|Subordinated debt                           |  |                        | 51,547  |      | 5.23 | % |         |   |        |  | 0.00 | %
|Trust preferred securities                  |  |                        |        |      | 0.00 | % |         |   | 50,000  |  | 4.51 | %
|Securities sold under repurchase agreements |  |                        |        |      | 0.00 | % |         |   | 12,500  |  | 3.95 | %
|Other repurchase agreements                 |  |                        | 190     |      | 0.00 | % |         |   | 226     |  | 0.00 | %
|                                            |  |                        |         |      |      |   |         |   |         |  |      |  
|Total long-term borrowings                  |  | $                      | 252,807 |      |      |   |         | $ | 273,331 |  |      |  
|                                            |  |                        |         |      |      |   |         |   |         |  |      |  



The aggregate stated
maturities of long-term debt outstanding are summarized as follows:



|                     |  |                        |        
|-------------------- |  | ---------------------- | -------
|                     |  | December 31, 2004     
|                     |  | (Dollars in Thousands)
|Long-term debt       |  |                        |        
|2005                 |  | $                      | 63,760 
|2006                 |  |                        | 122,500
|2007                 |  |                        |       
|2008                 |  |                        |       
|2009                 |  |                        |       
|Thereafter           |  |                        | 66,547 
|                     |  |                        |        
|Total long-term debt |  | $                      | 252,807
|                     |  |                        |        



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At December 31, 2004 the Company had additional borrowings outstanding as shown in the table below:



|                                            |  |                        |        |          |          |      |      |  
|------------------------------------------- |  | ---------------------- | ------ | -------- | -------- | ---- | ---- | -
|                                            |  | Amount                 |        | Maturity |          | Rate |     
|                                            |  | (Dollars in Thousands) |       
|Securities sold under repurchase agreements |  | $                      | 12,500 |          | 04/23/05 |      | 4.46 | %
|Retail customer repurchase agreements       |  |                        | 5,746  |          | Daily    |      | 1.82 | %
|Main Street Banks Statutory Trust I         |  |                        | 5,155  |          | 11/15/32 |      | 5.23 | %
|Main Street Banks Statutory Trust II        |  |                        | 46,392 |          | 06/30/33 |      | 5.23 | %
|Federal Home Loan Bank Advances:            |  |                        |        |          |          |      |      |  
|Overnight Daily Rate Credit                 |  |                        | 50,000 |          | 01/03/05 |      | 2.44 | %
|Fixed Rate Credit                           |  |                        | 5,000  |          | 02/28/05 |      | 1.59 | %
|Fixed Rate Credit                           |  |                        | 10,000 |          | 03/31/05 |      | 1.88 | %
|Fixed Rate Credit                           |  |                        | 25,000 |          | 04/23/05 |      | 1.98 | %
|Fixed Rate Credit                           |  |                        | 7,500  |          | 06/27/05 |      | 2.36 | %
|Fixed Rate Credit                           |  |                        | 5,000  |          | 08/29/05 |      | 1.85 | %
|Fixed Rate Credit                           |  |                        | 10,000 |          | 12/26/05 |      | 2.83 | %
|Fixed Rate Credit                           |  |                        | 25,000 |          | 02/28/06 |      | 2.60 | %
|Fixed Rate Credit                           |  |                        | 25,000 |          | 04/10/06 |      | 2.69 | %
|Fixed Rate Credit                           |  |                        | 15,000 |          | 05/02/06 |      | 2.43 | %
|Fixed Rate Credit                           |  |                        | 25,000 |          | 05/22/06 |      | 2.73 | %
|Fixed Rate Credit                           |  |                        | 7,500  |          | 06/26/06 |      | 3.24 | %
|Fixed Rate Credit                           |  |                        | 25,000 |          | 06/28/06 |      | 2.80 | %
|Convertible                                 |  |                        | 10,000 |          | 12/19/11 |      | 4.80 | %
|Convertible                                 |  |                        | 4,449  |          | 12/19/11 |      | 4.69 | %
|Convertible                                 |  |                        | 551    |          | 12/19/11 |      | 4.80 | %



Government agency and
mortgage backed securities in the amount of $33.3 million are pledged as collateral for the securities sold under repurchase agreements noted above.



Note J  Subordinated Debt



On May 22, 2003, Main Street Banks, Inc. completed the sale of $45.0 million of Main Street Banks Statutory Trust II floating rate trust preferred
securities with a maturity date of June 30, 2033 and a stated liquidation amount of $1,000 per Capital Security. Interest on the Capital Securities is to be paid on the last day of each March, June, September, and December and is reset quarterly
based on the three month London InterBank offered rate (3-Month LIBOR) plus 325 basis points at the end of the preceding quarter, provided, however, that prior to May 22, 2008, the 3-Month LIBOR shall not exceed 8.75%. The proceeds from
such issuances, together with the proceeds of the related issuance of common securities of the Trust purchased by the Company, were invested in Floating Subordinated Debentures (the Debentures) of the Company. The sole assets of the
Trust are the Debentures. The Debentures are unsecured and rank junior to all senior debt of the Company. The Company owns all of the common securities of the Trust. Main Street Banks, Inc. used the Debentures from this offering to fund a portion of
the price paid to acquire First Colony Bancshares, Inc., Alpharetta, Georgia.



November 15, 2002, the Company executed a $5.0 million floating rate Cumulative Trust Preferred Securities transaction offered and sold by Main Street Banks Statutory Trust I, having a liquidation amount of $1,000
each. The proceeds from such issuances, together with the proceeds of the related issuance of common securities of the Trust purchased by the Company, were invested in Floating Subordinated Debentures (the Debentures) of the Company. The
sole assets of the Trust are the Debentures. The Debentures are unsecured and rank junior to all senior debt of the Company. The Company owns all of the common securities of the Trust.



The Company has the right to redeem its debentures: (i) in whole or in part, on or after November 15, 2007 (for debentures
owned by Main Street Banks Statutory Trust I) and June 30, 2008 (for debentures owned by Main Street Banks Statutory Trust II); and (ii) in whole at any time within 90 days following the occurrence and during the continuation of a tax event or
capital treatment event (as defined in the offering circulars). If the debentures purchased by Main Street Banks Statutory Trust I or Main Street Banks Statutory Trust II are redeemed before they mature, the redemption price will be the principal
amount, plus any accrued but unpaid interest.



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Subordinated debt is summarized below:



|                                     |  |                        |        |                  |   |                                          |  |      |                                     |  |     
|------------------------------------ |  | ---------------------- | ------ | ---------------- | - | ---------------------------------------- |  | ---- | ----------------------------------- |  | ----
|                                     |  | December 31,2004       |        | December 31,2003 |   | Interest Rate ofSecurities andDebentures |  |      | Maturity ofSecurities andDebentures
|                                     |  | (Dollars in Thousands)
|Main Street Banks Statutory Trust I  |  | $                      | 5,155  |                  | $ | 5,000                                    |  | 5.23 | %                                   |  | 2032
|Main Street Banks Statutory Trust II |  |                        | 46,392 |                  |   | 45,000                                   |  | 5.23 | %                                   |  | 2033
|                                     |  |                        |        |                  |   |                                          |  |      |                                     |  |     
|Total                                |  | $                      | 51,547 |                  | $ | 50,000                                   |  |      |                                     |  |     
|                                     |  |                        |        |                  |   |                                          |  |      |                                     |  |     



Note K 
Income Taxes



For the years ended December 31, 2004, 2003
and 2002, income tax expense consists of:



|                                       |  |                        |        |   |      |   |        |      |  |   |        |  
|-------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                       |  | 2004                   |        |   | 2003 |   |        | 2002 | 
|                                       |  | (Dollars in Thousands) |       
|Current income tax expense:            |  | $                      | 13,282 |   |      | $ | 12,555 |      |  | $ | 10,317 |  
|Deferred income tax expense (benefit): |  |                        | (1,248 | ) |      |   | (1,718 | )    |  |   | (1,288 | )
|                                       |  |                        |        |   |      |   |        |      |  |   |        |  
|Total income tax expense               |  | $                      | 12,034 |   |      | $ | 10,837 |      |  | $ | 9,029  |  
|                                       |  |                        |        |   |      |   |        |      |  |   |        |  



Income tax differed
from the amount computed by applying the federal statutory income tax rate to pretax earnings for the following reasons:



|                                             |  |                        |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                             |  | 2004                   |        |   | 2003 |   |        | 2002 | 
|                                             |  | (Dollars in Thousands) |       
|Earnings before income taxes                 |  | $                      | 42,984 |   |      | $ | 37,536 |      |  | $ | 29,499 |  
|Income tax expense at Federal statutory rate |  |                        | 15,044 |   |      |   | 13,138 |      |  |   | 10,325 |  
|Increase (decrease) resulting from:          |  |                        |        |   |      |   |        |      |  |   |        |  
|Tax-exempt interest                          |  |                        | (746   | ) |      |   | (744   | )    |  |   | (730   | )
|Tax-exempt BOLI income                       |  |                        | (854   | ) |      |   | (760   | )    |  |   | (639   | )
|Other                                        |  |                        | (1,410 | ) |      |   | (797   | )    |  |   | 73     |  
|                                             |  |                        |        |   |      |   |        |      |  |   |        |  
|Income tax expense                           |  | $                      | 12,034 |   |      | $ | 10,837 |      |  | $ | 9,029  |  
|                                             |  |                        |        |   |      |   |        |      |  |   |        |  



The tax effects of
temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003, are presented below:



|                                       |  |                        |        |   |      |   |        |  
|-------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                       |  | 2004                   |        |   | 2003 |  
|                                       |  | (Dollars in Thousands) |       
|Allowance for loan losses              |  | $                      | 9,729  |   |      | $ | 8,228  |  
|Depreciation on premises and equipment |  |                        | (2,605 | ) |      |   | (1,665 | )
|Core deposit intangibles               |  |                        | 331    |   |      |   | 217    |  
|Deferred net loan fees                 |  |                        | 1,322  |   |      |   | 840    |  
|Net unrealized gains on investments    |  |                        | 125    |   |      |   | (2,332 | )
|Other, net                             |  |                        | 588    |   |      |   | 1,014  |  
|                                       |  |                        |        |   |      |   |        |  
|Net deferred tax asset                 |  | $                      | 9,490  |   |      | $ | 6,302  |  
|                                       |  |                        |        |   |      |   |        |  



Note L 
Commitments and Contingencies



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



The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.



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



The
following represents the Companys commitments to extend credit and standby letters of credit as of December 31, 2004:



|                             |  |                        |         |      |   |        
|---------------------------- |  | ---------------------- | ------- | ---- | - | -------
|                             |  | 2004                   |         | 2003
|                             |  | (Dollars in Thousands)
|Commitments to extend credit |  | $                      | 378,386 |      | $ | 249,411
|Standby letters of credit    |  |                        | 7,513   |      |   | 7,234  



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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. Total commitments to extend credit at December 31, 2004 and 2003 include $52.0 million and $75.9 million, respectively, in undisbursed credit lines and $326.4 million and
$173.5 million, respectively, in unfunded construction and development loans. The Companys experience has been that approximately 80 percent of loan commitments are ultimately drawn upon by customers.



The Company issues standby letters of credit, which are conditional
commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and expire in decreasing amounts with terms ranging from one to four years.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral supporting those commitments for which collateral is deemed
necessary. At December 31, 2004, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit was $7.5 million. The fair value of these standby letters of credit was
$69 thousand and $66 thousand at December 31, 2004 and 2003, respectively. This amount was not recorded in the balance sheet as a liability in accordance with FIN 45 due to the immateriality of the amount.



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



Note M - Derivatives



The Company uses interest rate products, primarily interest rate swaps and floors, as part of its management of interest rate risk. As of December 31,
2004 and 2003, the Company was party to interest rate swap and floor contracts with $270.0 million and $285.0 million of notional amounts outstanding. The notional balance does not represent the amount the Company is obligated to pay or receive
under these contracts. Rather, amounts receivable or payable under these contracts are determined based on whether the fixed rate to be received by the Company exceeds the floating rate to be paid by the Company for each interest calculation period.
Regarding interest rate floors, the Company receives a payment from the counterparty if the Prime rate decreases below a certain level. The Company is exposed to credit risk to the extent that a counterparty fails to pay amounts owed to the Company
under these agreements. The Company manages this credit risk by entering into agreements with counterparties with credit ratings acceptable under its risk management policy. These derivatives are designated as cash flow hedges of Prime-based loan
receipts on a designated pool of Prime-based loans.



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



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



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



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The following chart illustrates the Banks derivative positions as of December 31, 2004, dollars in
thousands.



Interest Rate Swaps



|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |        |  
|------------------------------------- |  | --------------- |  | -------- |  | -------- | ------- | ---------- | ---- | - | ----------- | ---- | - | ------------- | ----- | - | ----------- | - | ------ | -
|Type                                  |  | TransactionDate |  | TermDate |  | Notional |         | PayRate    |      |   | ReceiveRate |      |   | CurrentSpread |       |   | MarketValue |  
|Receive Fixed Prime Swap - amortizing |  | Apr-02          |  | Apr-05   |  | $        | 20,000  |            | 5.25 | % |             | 6.63 | % |               | 1.38  | % |             | $ | 68     |  
|Receive Fixed Prime Swap              |  | Mar-03          |  | Mar-06   |  | $        | 50,000  |            | 5.25 | % |             | 5.26 | % |               | 0.01  | % |             | $ | (462   | )
|Receive Fixed Prime Swap              |  | Aug-03          |  | Aug-06   |  | $        | 100,000 |            | 5.25 | % |             | 5.59 | % |               | 0.34  | % |             | $ | (806   | )
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |        |  
|Total Receive Fixed Swaps             |  |                 |  |          |  | $        | 170,000 |            |      |   |             |      |   |               |       |   |             | $ | (1,200 | )
|                                      |  |                 |  |          |  |          |        
|Interest Rate Floors                  |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |        |  
|                                      |  |                 |  |          |  |          |        
|Type                                  |  | TransactionDate |  | TermDate |  | Notional |         | StrikeRate |      |   | CurrentRate |      |   | CurrentSpread |       |   | MarketValue |  
|Prime based Floor                     |  | Jun-03          |  | Jun-05   |  | $        | 100,000 |            | 3.75 | % |             | 5.25 | % |               | -1.50 | % |             | $ |       |  
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |        |  
|Total Interest Rate Floors            |  |                 |  |          |  | $        | 100,000 |            |      |   |             |      |   |               |       |   |             | $ |       |  
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |        |  
|Total Derivative Positions            |  |                 |  |          |  | $        | 270,000 |            |      |   |             |      |   |               |       |   |             | $ | (1,200 | )
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |        |  



The following chart
illustrates the Banks derivative positions as of December 31, 2003, dollars in thousands.



Interest Rate Swaps



|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |      
|------------------------------------- |  | --------------- |  | -------- |  | -------- | ------- | ---------- | ---- | - | ----------- | ---- | - | ------------- | ----- | - | ----------- | - | -----
|Type                                  |  | TransactionDate |  | TermDate |  | Notional |         | PayRate    |      |   | ReceiveRate |      |   | CurrentSpread |       |   | MarketValue
|Receive Fixed Prime Swap - amortizing |  | Apr-02          |  | Apr-05   |  | $        | 35,000  |            | 4.00 | % |             | 6.63 | % |               | 2.63  | % |             | $ | 688  
|Receive Fixed Prime Swap              |  | Mar-03          |  | Mar-06   |  | $        | 50,000  |            | 4.00 | % |             | 5.26 | % |               | 1.26  | % |             | $ | 200  
|Receive Fixed Prime Swap              |  | Aug-03          |  | Aug-06   |  | $        | 100,000 |            | 4.00 | % |             | 5.59 | % |               | 1.59  | % |             | $ | 771  
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |      
|Total Receive Fixed Swaps             |  |                 |  |          |  | $        | 185,000 |            |      |   |             |      |   |               |       |   |             | $ | 1,659
|                                      |  |                 |  |          |  |          |        
|Interest Rate Floors                  |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |      
|                                      |  |                 |  |          |  |          |        
|Type                                  |  | TransactionDate |  | TermDate |  | Notional |         | StrikeRate |      |   | CurrentRate |      |   | CurrentSpread |       |   | MarketValue
|Prime based Floor                     |  | Jun-03          |  | Jun-05   |  | $        | 100,000 |            | 3.75 | % |             | 4.00 | % |               | -0.25 | % |             | $ | 14   
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |      
|Total Interest Rate Floors            |  |                 |  |          |  | $        | 100,000 |            |      |   |             |      |   |               |       |   |             | $ | 14   
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |      
|Total Derivative Positions            |  |                 |  |          |  | $        | 285,000 |            |      |   |             |      |   |               |       |   |             | $ | 1,673
|                                      |  |                 |  |          |  |          |         |            |      |   |             |      |   |               |       |   |             |   |      



Note N 
Related Party Transactions



Directors, executive officers,
and their related interests were customers of the Company and had other transactions with the Company in the ordinary course of business. Loans outstanding to certain directors, executive officers, and their related interests at December 31, 2004
and 2003 were $2.04 million and $1.44 million, respectively. For the years ended December 31, 2004 and 2003, $3.81 million and $3.14 million, respectively of such loans were made and loan repayments totaled $3.13 million and $2.79 million for the
respective years. It is the policy of the Company that such transactions are made on substantially the same terms as those prevailing at the time for comparable loans to other persons and do not involve more than normal risks of collectability or
present other unfavorable features. All of these loans are in a current and performing status as of the report date. These individuals and their related interests also maintain customary demand and time deposit accounts with the Company. These
totaled approximately $2.20 million and $2.07 million at December 31, 2004 and 2003, respectively.



The Company has operating leases for bank premises that are owned by related parties. These related parties consist of an individual who is a primary
shareholder and member of the Board of Directors, and also an individual who is an Executive Officer of the Company. Terms for these related party leases are substantially the same as those that would be expected to prevail in the marketplace.
During 2004, 2003 and 2002, total lease payments under these related party leases totaled approximately $550,000, $398,000 and $212,000, respectively.



The Company has entered into various construction contracts with a related party. The Company has contracts with the related party for the construction of
a new professional building located on Highway 278 in Covington, Georgia and 2 new branch offices located in Conyers, Georgia and Winder, Georgia. These contracts were completed in 2004 and as of December 31, 2004, the Company has paid $6.5 million,
including approximately $132,295 for various real estate leases, related to these contracts. The Company believes that the terms of these contracts are at least as favorable to it as terms available from unrelated third parties.



Note O  Employee Benefits



The Company sponsors a 401(k) Employee Savings Plan that permits employees
to defer annual cash compensation as specified under the plan. All employees of the Company who are over the age of 21 and have worked 1,000 hours or more in their first 12 months of employment or 1,000 hours or more in any calendar year thereafter
are eligible to participate, except for project consultants or employees hired for the first time by the Company after January 1, 2003. Employees are generally vested after 5 years of service. The Board of Directors determines the annual Company
contribution, which was $530,916, $423,758 and $326,285, in 2004, 2003 and 2002, respectively.



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The Company has a Management Incentive Bonus Plan for key executives that provides annual cash awards, if
approved, based on eligible compensation and achieving earnings goals. The Company also has a General Bonus Plan that provides for annual cash awards to eligible employees as established by the Board of Directors. The total expense under these plans
was $8.0 million, $5.1 million and $3.3 million in 2004, 2003 and 2002, respectively.



Note P  Stock Options and Long-Term Compensation Plans



The Company has a nonqualified Restricted Stock Award Plan and a Long-term Incentive Plan which grant restricted stock and other stock based compensation
to key executives and officers of the Company. In the case of restricted stock, Company executives and officers designated as an eligible executive will vest in the number of shares of common stock awarded under the plan based on service
over a five-year period. A total of 960,000 shares were authorized to be issued under the plans, with 761,742 shares of restricted stock issued as of December 31, 2004. No restricted stock has been issued under these plans since December 31, 2000.



In 2000 and 2001, respectively, the Board of Directors and
Shareholders approved the Omnibus Stock Ownership and Long-Term Incentive Plan (Omnibus Plan) under which incentive stock options and non-qualified stock options to acquire shares of common stock, restricted stock, stock appreciation
rights or units may be granted to eligible employees. A total of 800,000 shares were initially authorized to be issued under the plan and the Board of Directors and Shareholders approved an additional 800,000 shares to be used under the plan in
2003. Under the plan, 177,920 and 157,225 shares of restricted stock were issued as of December 31, 2004 and 2003, respectively. A total of 59,377 and 26,756 shares were vested with 118,543 and 130,469 shares issued and unvested as of December 31,
2004 and 2003.



During 2004, the Company issued 20,695 shares
of restricted stock and granted 49,319 options under the Omnibus Plan. Including all types of awards, which include the above-mentioned option and restricted stock awards, the total number of share awards outstanding under the Omnibus Plan were
1,005,751 and 935,737 shares at December 31, 2004 and 2003, respectively. Option prices under all stock option plans are equal to the fair value of the Companys common stock on the date of the grant. The options vest over time periods
determined by the Compensation Committee of the Board of Directors and expire ten years from date of grant.



A summary of the Companys stock option activity and related information is as follows:



|                                |  |                                 |   |      |                                |       |        |           |   |                                |   |        |  |           |                                |  |   |      
|------------------------------- |  | ------------------------------- | - | ---- | ------------------------------ | ----- | ------ | --------- | - | ------------------------------ | - | ------ |  | --------- | ------------------------------ |  | - | -----
|                                |  | For the Year Ended December 31,
|                                |  | 2004                            |   | 2003 |                                | 2002 
|                                |  | Number                          |   |      | Weighted-AverageExercise Price |       | Number |           |   | Weighted-AverageExercise Price |   | Number |  |           | Weighted-AverageExercise Price
|Under option, beginning of year |  | 1,314,780                       |   |      | $                              | 12.72 |        | 1,465,509 |   |                                | $ | 12.77  |  | 1,152,353 |                                |  | $ | 9.89 
|Granted                         |  | 49,319                          |   |      |                                | 26.78 |        | 142,704   |   |                                |   | 24.41  |  | 483,521   |                                |  |   | 18.31
|Exercised                       |  | (213,971                        | ) |      |                                | 12.79 |        | (215,416  | ) |                                |   | 8.28   |  | (127,125  | )                              |  |   | 7.31 
|Terminated                      |  | (74,444                         | ) |      |                                | 19.53 |        | (78,017   | ) |                                |   | 11.09  |  | (43,240   | )                              |  |   | 13.77
|                                |  |                                 |   |      |                                |       |        |           |   |                                |   |        |  |           |                                |  |   |      
|Under option, end of year       |  | 1,075,684                       |   |      |                                | 13.34 |        | 1,314,780 |   |                                |   | 12.72  |  | 1,465,509 |                                |  |   | 12.77
|Exercisable, end of year        |  | 766,046                         |   |      | $                              | 10.59 |        | 823,952   |   |                                | $ | 9.28   |  | 633,719   |                                |  | $ | 8.01 



Following is a summary
of the status of options outstanding at December 31, 2004:



|                         |  |              |  |                                |       |                                           |   |                   |         |                                |   |      
|------------------------ |  | ------------ |  | ------------------------------ | ----- | ----------------------------------------- | - | ----------------- | ------- | ------------------------------ | - | -----
|                         |  | Under Option |  | Options Exercisable           
|Range of Exercise Prices |  | Number       |  | Weighted-AverageExercise Price |       | Weighted-AverageRemainingContractual Life |   | NumberExercisable |         | Weighted-AverageExercise Price
|                         |  |              |  |                                |      
|3.55 - 4.82              |  | 116,347      |  | $                              | 4.16  |                                           | 1 |                   | 116,347 |                                | $ | 4.16 
|6.99 - 8.46              |  | 259,950      |  |                                | 7.86  |                                           | 4 |                   | 259,950 |                                |   | 7.86 
|11.50 - 11.94            |  | 312,964      |  |                                | 11.72 |                                           | 6 |                   | 253,697 |                                |   | 11.70
|13.00 - 19.40            |  | 96,658       |  |                                | 16.45 |                                           | 6 |                   | 57,285  |                                |   | 16.21
|19.61 - 27.16            |  | 289,765      |  | $                              | 22.64 |                                           | 8 |                   | 78,767  |                                | $ | 21.38
|                         |  |              |  |                                |       |                                           |   |                   |         |                                |   |      
|                         |  | 1,075,684    |  |                                |       |                                           |   |                   | 766,046 |                                |   |      



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Note Q  Regulatory Matters



The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking
agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements.
The regulations require the Company and the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Companys and the Banks assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Companys and the Banks capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.



Quantitative measures established by regulation to ensure capital adequacy
require the Banks to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital (as defined) to total average assets (as defined), and minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets (as
defined). To be considered adequately capitalized (as defined) under the regulatory framework for prompt corrective action, the Company and the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based, and total risk-based ratios. The following
is a summary of the Companys and the Banks capital ratios at December 31, 2004 and 2003:



|                           |  |                        |         |       |       |   |              |   |         |  |       |                 |  |      |                 |  |       |  
|-------------------------- |  | ---------------------- | ------- | ----- | ----- | - | ------------ | - | ------- |  | ----- | --------------- |  | ---- | --------------- |  | ----- | -
|                           |  | COMPANY                |         |       | BANK  |   |              |   |         |  |       |                
|                           |  | ActualAmount           |         | Ratio |       |   | ActualAmount |   | Ratio   |  |       | MinimumRequired |  |      | WellCapitalized | 
|                           |  | (Dollars in Thousands) |         |       |       |   |              |   |        
|As of December 31, 2004    |  |                        |         |       |       |   |              |   |         | 
|Leverage ratio             |  | $                      | 227,864 |       | 10.49 | % |              | $ | 218,188 |  | 10.08 | %               |  | 4.00 | %               |  | 5.00  | %
|Risk based capital ratios: |  |                        |         |       |       |   |              |   |         |  |       |                 |  |      |                 |  |       |  
|Tier 1 risk based capital  |  |                        | 227,864 |       | 12.33 | % |              |   | 218,188 |  | 11.92 | %               |  | 4.00 | %               |  | 6.00  | %
|Risk-based capital         |  |                        | 250,981 |       | 13.59 | % |              |   | 238,522 |  | 13.04 | %               |  | 8.00 | %               |  | 10.00 | %
|                           |  |                        |         |       |       |  
|As of December 31, 2003    |  |                        |         |       |       |   |              |   |         |  |       |                 |  |      |                 |  |       |  
|Leverage ratio             |  | $                      | 134,772 |       | 7.28  | % |              | $ | 143,710 |  | 7.78  | %               |  | 4.00 | %               |  | 5.00  | %
|Risk based capital ratios: |  |                        |         |       |       |   |              |   |         |  |       |                 |  |      |                 |  |       |  
|Tier 1 risk based capital  |  |                        | 134,772 |       | 8.79  | % |              |   | 143,710 |  | 9.40  | %               |  | 4.00 | %               |  | 6.00  | %
|Risk-based capital         |  |                        | 170,213 |       | 11.11 | % |              |   | 162,849 |  | 10.65 | %               |  | 8.00 | %               |  | 10.00 | %



Banking regulations
limit the amount of dividends that may be paid to the Parent without prior approval of the applicable regulatory agency. Under current state banking laws, the approval of the Georgia Department of Banking and Finance is required if the total of all
dividends declared by the Banks in the calendar year exceeds 50 percent of the net profits for the previous calendar year and the ratio of equity capital to adjusted total assets is less than 6 percent. At December 31, 2004, The Bank had $1.7
million available to pay additional dividends to the Parent. During 2003, the Bank received approval from the Georgia Department of Banking and Finance to pay additional dividends to the Parent for the purpose of completing the acquisition of the
First National Bank of Johns Creek. Accordingly, at December 31, 2003, the Company would have required further Georgia Department of Banking and Finance approval to pay additional dividends.



Note R  Legal Matters



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



Note S  Fair Value of Financial Instruments



The assumptions used in the estimation of the fair value of the Companys financial instruments are detailed below. Where quoted prices are not
available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future
cash flows. The following disclosures should not be considered a surrogate of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since
purchase, origination or issuance.



Short-term financial
instruments are valued at their carrying amounts reported in the balance sheet, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach applies to cash and cash equivalents,
short-term investments, short-term borrowings and certain other assets and liabilities.



65



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##### Table of Contents

Investment securities - The fair value of investment securities held to maturity and available for sale
is estimated based on published bid prices or bid quotations received from securities dealers. The carrying amount of other investments approximates fair value.



Loans - For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For
all other loans, fair values are calculated by discounting the contractual cash flows using estimated market rates which reflect the credit and interest rate risk inherent in the loan, or by using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining maturities.



Mortgage loans held for sale - The carrying amount of mortgage loans held for sale approximates fair value.



Deposits - The fair value of deposits with no stated maturity, such as demand, NOW and MMDA, and savings accounts, is equal to the amount payable on
demand. The fair value of time deposits is based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities.



Fair values for long-term debt and guaranteed preferred beneficial interests in debentures are based on quoted market prices
for similar instruments or estimated using discounted cash flow analysis and the Companys current incremental borrowing rates for similar types of instruments.



Derivatives - Derivative instruments (interest rate swaps and floors) are recorded on the balance sheet at fair value. Fair
value is estimated based on published bid prices or bid quotations for interest rate swaps and floors received from securities dealers.



Off-balance sheet instruments - Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the borrowers credit standing.



Subordinated debt and Trust preferred securities - The carrying amount of subordinated debt and trust preferred securities approximates fair value.



Accrued interest - The carrying amount of accrued interest
receivable and payable approximates fair value.



Estimated fair
values of the Companys financial instruments are as follows:



|                                                                        |  |                        |           |                      |   |                |  |                     |           |  |   |          
|----------------------------------------------------------------------- |  | ---------------------- | --------- | -------------------- | - | -------------- |  | ------------------- | --------- |  | - | ---------
|                                                                        |  | At December 31, 2004   |           | At December 31, 2003
|                                                                        |  | CarryingAmount         |           | EstimatedFair Value  |   | CarryingAmount |  | EstimatedFair Value
|                                                                        |  | (Dollars in Thousands)
|Financial Assets:                                                       |  |                        |           |                      |   |                |  |                     |           |  |   |          
|Cash and due from banks                                                 |  | $                      | 35,090    |                      | $ | 35,090         |  | $                   | 39,839    |  | $ | 39,839   
|Interest-bearing deposits                                               |  |                        | 318       |                      |   | 318            |  |                     | 1,021     |  |   | 1,021    
|Federal Funds sold and securities purchased under agreement to resell   |  |                        | 35,813    |                      |   | 35,813         |  |                     | 31,820    |  |   | 31,820   
|Investment securities available for sale                                |  |                        | 315,521   |                      |   | 315,521        |  |                     | 247,392   |  |   | 247,392  
|Investment securities held to maturity                                  |  |                        | 11,716    |                      |   | 11,260         |  |                     | 10,788    |  |   | 10,780   
|Other investments                                                       |  |                        | 23,782    |                      |   | 23,782         |  |                     | 19,651    |  |   | 19,651   
|Loans                                                                   |  |                        | 1,699,035 |                      |   | 1,695,426      |  |                     | 1,443,326 |  |   | 1,446,360
|Mortgage loans held for sale                                            |  |                        | 4,563     |                      |   | 4,563          |  |                     | 5,671     |  |   | 5,671    
|Accrued interest receivable                                             |  |                        | 9,763     |                      |   | 9,763          |  |                     | 8,182     |  |   | 8,182    
|                                                                        |  |                        |           |                     
|Financial Liabilities:                                                  |  |                        |           |                      |   |                |  |                     |           |  |   |          
|Non-interest bearing deposits                                           |  | $                      | 930,045   |                      | $ | 930,045        |  | $                   | 761,217   |  | $ | 761,217  
|Interest bearing deposits                                               |  |                        | 780,165   |                      |   | 820,917        |  |                     | 697,186   |  |   | 730,250  
|Federal Funds purchased and securities sold under repurchase agreements |  |                        | 73,368    |                      |   | 73,368         |  |                     | 43,859    |  |   | 43,859   
|FHLB and other borrowings                                               |  |                        | 201,070   |                      |   | 200,442        |  |                     | 210,605   |  |   | 210,842  
|Subordinated Debt                                                       |  |                        | 51,547    |                      |   | 51,547         |  |                     |           |  |   |          
|Trust preferred securities                                              |  |                        |           |                      |   |                |  |                     | 50,000    |  |   | 50,000   
|Accrued interest payable                                                |  |                        | 3,955     |                      |   | 3,955          |  |                     | 3,020     |  |   | 3,020    
|                                                                        |  |                        |           |                     
|Off-balance-sheet instruments:                                          |  |                        |           |                      |   |                |  |                     |           |  |   |          
|Undisbursed credit lines                                                |  | $                      | 51,979    |                      | $ | 474            |  | $                   | 53,101    |  | $ | 484      
|Unfunded construction and development loans                             |  |                        | 326,407   |                      |   | 2,978          |  |                     | 196,310   |  |   | 1,791    
|Standby letters of credit                                               |  |                        | 7,513     |                      |   | 69             |  |                     | 7,234     |  |   | 66       



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Note T  Stock Repurchase Plan



On March 31, 2002, the Company announced a stock repurchase program whereby the Company was authorized to acquire up to
500,000 shares of its common stock. The shares are to be repurchased from time to time in the open market at prevailing market prices or in privately negotiated transactions. The extent and time of any repurchase will depend on market conditions and
other corporate considerations. This repurchase plan replaced a plan approved in September 2001, which authorized the repurchase of up to 150,000 shares of common stock. Repurchased shares will be available for use in connection with the
Companys stock option plans and other compensation programs, or for other corporate purposes as determined by the Companys Board of Directors. During fiscal 2003 and 2002, the Company repurchased 100,000 shares and 295,000 shares
respectively, of its outstanding common stock under this repurchase plan. No repurchases were made in 2004.



Note U  Parent Company



Main Street Banks, Inc.

(Parent
Company)

Condensed Balance Sheet



|                                           |  |                        |         |      |   |        
|------------------------------------------ |  | ---------------------- | ------- | ---- | - | -------
|                                           |  | December 31,          
|                                           |  | 2004                   |         | 2003
|                                           |  | (Dollars in Thousands)
|ASSETS                                     |  |                        |         |      |   |        
|Cash and cash equivalents                  |  | $                      | 1,096   |      | $ | 1,786  
|Investment in subsidiaries                 |  |                        | 323,474 |      |   | 244,400
|Other Assets                               |  |                        | 5,182   |      |   | 4,271  
|                                           |  |                        |         |      |   |        
|TOTAL ASSETS                               |  | $                      | 329,752 |      | $ | 250,457
|                                           |  |                        |         |      |   |        
|LIABILITIES AND SHAREHOLDERS EQUITY       |  |                        |         |      |   |        
|Liabilities                                |  | $                      | 50,789  |      | $ | 49,914 
|Shareholders equity                       |  |                        | 278,963 |      |   | 200,543
|                                           |  |                        |         |      |   |        
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |  | $                      | 329,752 |      | $ | 250,457
|                                           |  |                        |         |      |   |        



Main Street Banks,
Inc.

(Parent Company)

Condensed Statement of Income



|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|----------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------ | ---- |  | - | ------
|                                                                                    |  | December 31,          
|                                                                                    |  | 2004                   |        | 2003 |   |        | 2002
|                                                                                    |  | (Dollars in Thousands)
|Income                                                                              |  |                        |        |      |   |        |      |  |   |       
|Dividends from subsidiaries                                                         |  | $                      | 13,224 |      | $ | 23,219 |      |  | $ | 14,500
|Other income                                                                        |  |                        | 60     |      |   | (23    | )    |  |   | 106   
|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|Total Income                                                                        |  | $                      | 13,284 |      | $ | 23,196 |      |  | $ | 14,606
|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|                                                                                    |  |                        |       
|Expenses                                                                            |  |                        |        |      |   |        |      |  |   |       
|Salaries and employee benefits                                                      |  | $                      | 720    |      | $ | 649    |      |  | $ | 428   
|Other expenses                                                                      |  |                        | 3,752  |      |   | 2,488  |      |  |   | 921   
|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|Total Expenses                                                                      |  | $                      | 4,472  |      | $ | 3,137  |      |  | $ | 1,349 
|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|                                                                                    |  |                        |       
|Income before income tax benefit and equity in undistributed income of subsidiaries |  |                        | 8,812  |      |   | 20,059 |      |  |   | 13,257
|Income tax benefit                                                                  |  |                        | 1,337  |      |   | 901    |      |  |   | 428   
|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|Income before equity in undistributed income of subsidiaries                        |  |                        | 10,149 |      |   | 20,960 |      |  |   | 13,685
|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|Equity in undistributed income of subsidiaries                                      |  |                        | 20,801 |      |   | 5,739  |      |  |   | 6,786 
|                                                                                    |  |                        |        |      |   |        |      |  |   |       
|Net Income                                                                          |  | $                      | 30,950 |      | $ | 26,699 |      |  | $ | 20,471
|                                                                                    |  |                        |        |      |   |        |      |  |   |       



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##### Table of Contents

Main Street Banks, Inc.

(Parent Company)

Condensed Statement of Cash Flows



|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | December 31,           |        
|                                                                                  |  | 2004                   |         |   | 2003 |   |         | 2002 | 
|                                                                                  |  | (Dollars in Thousands) |        
|Operating Activities                                                              |  |                        |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $                      | 30,950  |   |      | $ | 26,699  |      |  | $ | 20,471  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                        |         |   |      |   |         |      |  |   |         |  
|Undistributed income of subsidiaries                                              |  |                        | (20,801 | ) |      |   | (5,739  | )    |  |   | (6,786  | )
|Other                                                                             |  |                        | 1,431   |   |      |   | (701    | )    |  |   | (2,007  | )
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  | $                      | 11,580  |   |      | $ | 20,259  |      |  | $ | 11,678  |  
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|                                                                                  |  |                        |        
|Investing Activities                                                              |  |                        |         |   |      |   |         |      |  |   |         |  
|Investment in subsidiaries                                                        |  |                        | (51,100 | ) |      |   |        |      |  |   |        |  
|Net cash paid for acquisitions                                                    |  |                        |        |   |      |   | (10,793 | )    |  |   |        |  
|Other                                                                             |  |                        | (3,746  | ) |      |   |        |      |  |   |        |  
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash provided by investing activities                                         |  | $                      | (54,846 | ) |      | $ | (10,793 | )    |  | $ |        |  
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|                                                                                  |  |                        |        
|Financing Activities                                                              |  |                        |         |   |      |   |         |      |  |   |         |  
|Dividends paid                                                                    |  | $                      | (10,461 | ) |      | $ | (8,361  | )    |  | $ | (6,601  | )
|Proceeds from sale of common stock                                                |  |                        | 53,037  |   |      |   | 1,921   |      |  |   | 930     |  
|Payments to repurchase common stock                                               |  |                        |        |   |      |   | (1,931  | )    |  |   | (5,825  | )
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Net cash used in financing activities                                             |  | $                      | 42,576  |   |      | $ | (8,371  | )    |  | $ | (11,496 | )
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Net increase/(decrease) in cash                                                   |  |                        | (690    | ) |      |   | 1,095   |      |  |   | 182     |  
|Cash at the beginning of the year                                                 |  |                        | 1,786   |   |      |   | 691     |      |  |   | 509     |  
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  
|Cash at the end of the year                                                       |  | $                      | 1,096   |   |      | $ | 1,786   |      |  | $ | 691     |  
|                                                                                  |  |                        |         |   |      |   |         |      |  |   |         |  



Note V 
Subsequent Events



None.



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure



None.



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##### Table of Contents

Item 9A. Controls and Procedures



Managements assessment of Internal controls



Evaluation of Disclosure Controls and Procedures.The Company conducted an evaluation, with the participation of its Chief Executive Officer and Principal Accounting Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures as of December 31, 2004. The Companys disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized, and reported on a timely basis.



Based upon that evaluation, the Chief Executive Officer and Principal Accounting Officer concluded that, for the reasons set forth below, the Companys disclosure controls and procedures were not effective as of
December 31, 2004 to give reasonable assurance in alerting them in a timely fashion to material information relating to the Company that is required to be included in the reports that the Company files under the Exchange Act.



Managements Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Principal Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004 based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting was not
effective as of December 31, 2004 due to a material weakness.



A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.
As of December 31, 2004, the Company has determined that a combination of control deficiencies relating to inadequate staffing and a lack of financial accounting expertise exists. Although no material misstatements were discovered, until this
deficiency is remediated, there is a more than remote likelihood that a material misstatement to the annual or interim Consolidated Financial Statements could occur and not be prevented or detected by the Companys controls in a timely manner.
Because of this material weakness, we have concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 based on the criteria in the Internal Control Integrated Framework.



Managements assessment of the effectiveness of the
Companys Internal Control over Financial Reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears below.



Changes in Internal Control over Financial Reporting.
Management of the Company has evaluated, with the participation of the Companys Chief Executive Officer and Principal Accounting Officer, changes in the Companys internal controls over financial reporting (as defined in Rule
13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth quarter of 2004. In connection with such evaluation, the Company has determined that there have been changes in internal control over financial reporting during the fourth quarter that
have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting. As discussed in Managements Report on Internal Control Over Financial Reporting, the Company identified a
material weakness in internal controls over financial reporting relating to the Companys lack of resources and financial expertise during 2004.



The lack of resources and financial expertise arose due to staff turnover, a reduction in force program, and the inability of the Company to fill
accounting, treasury and other financial related positions as many organizations were seeking similar expertise. As of December 31, 2004, the Company has not fully remediated the material weakness in the Companys internal control over
financial reporting. However, the Company has taken the following remedial actions:



| |  |  | Executive management has taken a more active role in the account level review process,
| | - |  | --------------------------------------------------------------------------------------



| |  |  | The Company is diligently seeking to complete its staffing of key positions,
| | - |  | ----------------------------------------------------------------------------



| |  |  | The Company is utilizing the services of third parties when necessary to provide needed expertise, and
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | The Company has developed a training program to develop the required expertise needed within the Company.
| | - |  | ---------------------------------------------------------------------------------------------------------



Other than the changes identified above, there have been no changes to the Companys internal control over financial reporting that
occurred since the beginning of the Companys fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



Chief Executive Officer and Principal Accounting Officer
Certifications. The Companys Chief Executive Officer and Principal Accounting Officer have filed with the Securities and Exchange Commission the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and
31.2 to the Companys 2004 Form 10-K.



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Report of Independent Registered Public Accounting Firm as to Internal Control Over Financial Reporting



Board of Directors

Main Street Banks, Inc.



We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting, that
Main Street Banks, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of a material weakness related to inadequate staffing and the lack of financial expertise, based on criteria
established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Main Street Banks, Inc.s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.



Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified and included in managements assessment. In its assessment as of December 31, 2004, management
identified as a material weakness a combination of control deficiencies relating to inadequate staffing and lack of financial accounting expertise. Although no material misstatements were discovered, until this deficiency is remediated, there is a
more than remote likelihood that a material misstatement to the annual or interim Consolidated Financial Statements could occur and not be prevented or detected by the Companys controls in a timely manner. This material weakness was considered
in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 financial statements, and this report does not affect our report dated March 4, 2005 on those financial statements.



In our opinion, managements assessment that Main Street Banks, Inc. did
not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, because of the effect of the material weakness described
above on the achievement of the objectives of the control criteria, Main Street Banks, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on the COSO control criteria.



We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Main Street Banks, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders equity, and cash flows
for each of the three years in the period ended December 31, 2004, and our report dated March 4, 2005 expressed an unqualified opinion thereon.



/s/ Ernst & Young LLP



Atlanta, GA

March 4, 2005



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Item 9B. Other Information



None



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PART III

Item 10. Directors and Executive Officers of the Registrant



The information set forth under the captions Board of Directors,
Officers and Reports required by Section 16 (a) of the Securities Exchange Act of 1934 of the Proxy Statement of the Company for the 2005 Annual Meeting is incorporated herein by reference.



Item 11. Executive Compensation



The information set forth under the captions Executive Compensation, Stock Options and Director Compensation of the Proxy Statement of the Company for the 2005 Annual Meeting is incorporated herein by
reference.



Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters



The information set forth under the captions Security Ownership of the Proxy Statement of the Company for the 2005 Annual Meeting is
incorporated herein by reference.



Item 13. Certain Relationships and Related Transactions



The information set forth under the captions Certain Transactions and Officers of the Proxy Statement of the Company for the 2005 Annual Meeting is incorporated herein by reference.



Item 14. Principal Accountant Fees and Services



The information set forth under the caption Ratification of Independent Auditors of the Proxy Statement of the Company for the 2005 Annual Meeting is incorporated herein by reference.



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PART IV

Item 15. Exhibits and Financial Statement Schedules



The following are filed with or incorporated by reference into this report



|            |  |                                                                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                   
|            | 
|3.1         |  | Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrants Form 8-K filed on December 8, 2004)                                                        
|            | 
|3.2         |  | Amended and restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrants Form 8-K filed on December 8, 2004)                                                               
|            | 
|10.1        |  | Registrants 1994 Substitute Incentive Stock Option Plan for The Westside Bank & Trust Companys Incentive Stock Option Plan filed as Exhibit 4.4 to Form S-8 (File No. 33-97300)
(incorporated by reference)*
|            | 
|10.2        |  | Form of Registrants 1994 Incentive Stock Option Agreement filed as Exhibit 4.5 to Form S-8 (File No. 33-97300) (incorporated by reference)*                                                                  
|            | 
|10.3        |  | Registrants 1995 Directors Stock Option Plan filed as Exhibit 4.4 to Form S-8 (File No. 33-81053) (incorporated by reference)*                                                                               
|            | 
|10.4        |  | Form of Registrants 1995 Directors Stock Option Agreement filed as Exhibit 4.5 to Form S-8 (File No. 33-81053) (incorporated by reference)*                                                                  
|            | 
|10.5        |  | Registrants 1996 Substitute Incentive Stock Option Plan filed as Exhibit 4.1 to Form S-8 (File No. 333-15069) (incorporated by reference)*                                                                   
|            | 
|10.6        |  | Form of Registrants 1996 Substitute Incentive Stock Option Agreement filed as Exhibit 4.2 to Form S-8 (File No. 333-15069) (incorporated by reference)*                                                      
|            | 
|10.7        |  | Registrants 1997 Directors Stock Option Plan filed as Exhibit 4.1 to Form S-8 (File No. 333-56473) (incorporated by reference)*                                                                              
|            | 
|10.8        |  | Form of Registrants 1997 Directors Stock Option Agreement filed as Exhibit 4.2 to Form S-8 (File No. 333-56473) (incorporated by reference)*                                                                 
|            | 
|10.9        |  | Registrants 1997 Incentive Stock Option Plan filed as Exhibit 4.1 to Form S-8 (File No. 333-74555) (incorporated by reference)*                                                                              
|            | 
|10.10       |  | Form of Registrants 1997 Incentive Stock Option Agreement filed as Exhibit 4.2 to Form S-8 (File No. 333-74555) (incorporated by reference)*                                                                 
|            | 
|10.11       |  | Registrants 1999 Directors Stock Option Plan included as Appendix B to the Joint Proxy Statement/Prospectus set forth in Part I of the Registration Statement*                                               
|            | 
|10.12       |  | Form of Registrants 1999 Directors Stock Option Agreement filed as Exhibit 4.2 to Form S-8 (File No. 333-88645) (incorporated by reference)*                                                                 
|            | 
|10.13       |  | Registrants 2000 Directors Stock Option Plan files as Exhibit 4.1 to Form S-8 (File No. 333-49436) (incorporated by reference)*                                                                              
|            | 
|10.14       |  | Form of Registrants 2000 Directors Stock Option Agreement filed as Exhibit 4.2 to Form S-8 (File No. 333-49436) (incorporated by reference)*                                                                
|            | 
|10.15       |  | Registrants Omnibus Stock Ownership and Long Term Incentive Plan filed as Exhibit 4.1 to Form S-8 (File No. 33365188) (incorporated by reference)*                                                           
|            | 
|10.16       |  | Form of Registrants Omnibus Stock Ownership and Long Term Incentive Plan Incentive Plan Option Agreement filed as Exhibit 4.2 to File S-8 (File No. 333-65188) (incorporated by
reference)*                  
|            | 
|10.17       |  | Form of Registrants Omnibus Stock Ownership and Long Term Incentive Plan Restricted Stock Grant Agreement filed as Exhibit 4.3 to Form S-8 (File No. 333-65188)*                                             
|            | 
|10.18       |  | Employment Agreement dated May 24, 2000 between the Registrant and Robert R. Fowler, III (incorporated by reference to Exhibit 10.14 to Registration Statement No. 333-50762 on Form
S-4)*                    
|            | 
|10.19       |  | Employment Agreement dated April 11, 2002 between the Registrant and Max S. Crowe (incorporated by reference to Exhibit 10.22 of the Registrants Form 10-Q filed with the Commission on
August 13, 2002)*    
|            | 
|10.20       |  | Employment Agreement dated May 15, 2002 between the Registrant and John T. Monroe (incorporated by reference to Exhibit 10.23 to the Registrants Form 10-Q filed with the Commission on
November 14, 2002)*  
|            | 
|10.21       |  | Employment agreement dated September 8, 2004 between the Registrant and Sam B Hay III (incorporated by reference to the Registrants Form 8-K filed with the Commission on September 15,
2004)*               



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|      |  |                                                                                                                                                                                                     
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.22 |  | Employment agreement dated September 8, 2004 between the Registrant and Edward C. Milligan (incorporated by reference to the Registrants Form 8-K filed with the Commission on September
15, 2004)*
|      | 
|21    |  | Subsidiaries of the Registrant **                                                                                                                                                                   
|      | 
|23.1  |  | Consent of Independent Auditor, Ernst & Young LLP                                                                                                                                                   
|      | 
|31.1  |  | Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7241).                                                                                  
|      | 
|31.2  |  | Certificate of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7241).                                                                             
|      | 
|32.1  |  | Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).                                                                                  
|      | 
|32.2  |  | Certificate of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).                                                                             



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



|** | Filed with the Registrants Form 10-K filed with the Commission on March 15, 2004.
|-- | ----------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



MAIN STREET BANKS,
INC.

(Registrant)



|                                            |  |                        |  |  |  |  |  |                     
|------------------------------------------- |  | ---------------------- |  |  |  |  |  | --------------------
|                                            |  |                        |  | 
|By:                                         |  | /s/ SAMUEL B. HAY, III |  |  |  |  |  | Date: March 14, 2005
|Samuel B. Hay, III, Chief Executive Officer |  |                        |  |  |  | 
|(Principal Executive Officer)               |  |                        |  |  |  | 



|                               |  |                     |  |  |  |  |  |                     
|------------------------------ |  | ------------------- |  |  |  |  |  | --------------------
|                               |  |                     |  | 
|By:                            |  | /s/ DAVID D. DUNCAN |  |  |  |  |  | Date: March 14, 2005
|David D. Duncan, Controller    |  |                     |  |  |  | 
|(Principal Accounting Officer) |  |                     |  |  |  | 



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:



|                                |  |                           |  |  |  |  |  |                     
|------------------------------- |  | ------------------------- |  |  |  |  |  | --------------------
|                                |  |                           |  | 
|By:                             |  | /s/ EDWARD C. MILLIGAN    |  |  |  |  |  | Date: March 14, 2005
|Edward C. Milligan, Chairman    |  |                           |  |  |  | 
|                                |  |                           |  | 
|By:                             |  | /s/ ROBERT R. FOWLER, III |  |  |  |  |  | Date: March 14, 2005
|Robert R. Fowler, III, Director |  |                           |  |  |  | 
|                                |  |                           |  | 
|By:                             |  | /s/ P. HARRIS HINES       |  |  |  |  |  | Date: March 14, 2005
|P. Harris Hines, Director       |  |                           |  |  |  | 
|                                |  |                           |  | 
|By:                             |  | /s/ HARRY L. HUDSON       |  |  |  |  |  | Date: March 14, 2005
|Harry L. Hudson, Director       |  |                           |  |  |  | 
|                                |  |                           |  | 
|By:                             |  | /s/ C. CANDLER HUNT       |  |  |  |  |  | Date: March 14, 2005
|C. Candler Hunt, Director       |  |                           |  |  |  | 
|                                |  |                           |  | 
|By:                             |  | /s/ FRANK B. TURNER       |  |  |  |  |  | Date: March 14, 2005
|Frank B. Turner, Director       |  |                           |  |  |  | 
|                                |  |                           |  | 
|By:                             |  | /s/ KEN T. DRISKELL       |  |  |  |  |  | Date: March 14, 2005
|Ken T. Driskell, Director       |  |                           |  |  |  | 
|                                |  |                           |  | 
|By:                             |  | /s/ JOHN R. BURGESS       |  |  |  |  |  | Date: March 14, 2005
|John R. Burgess, Sr., Director  |  |                           |  |  |  | 



75