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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, 2000
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.)
676 CHASTAIN ROAD, KENNESAW, GA 30144
(Address of principal executive (Zip Code)
offices)
770-422-2888
(Registrant's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, NO PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant 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. / /
As of March 30, 2001, registrant had outstanding 15,621,755 shares of common
stock. As of March 28, 2001, the aggregate market value of the voting stock held
by nonaffiliates of the registrant was approximately $137,181,882.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockhnolder Matters........................................ 11
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item Quantitative and Qualitative Disclosure about Market Risk...
7a. 32
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 33
PART
III
Item Directors and Executive Officers of the Registrant..........
10. 33
Item Executive Compensation......................................
11. 33
Item Security Ownership of Certain Beneficial Owners and
12. Management.................................................. 33
Item Certain Relationships and Related Transaction...............
13. 33
PART IV
Item Exhibits, Financial Statements, Schedules and Reports on
14. Form 8-K.................................................... 33
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K may contain or incorporate by reference
statements which may constitute "forward looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21 of the
Securities Exchange Act of 1934, as amended, including statements relating to
present or future trends or factors generally affecting the banking industry and
specifically affecting Main Street Banks, Inc. (the "Company") operations,
markets and products. Without limiting the foregoing, the words "believes",
"anticipates", "intends", expects" or similar expressions are intended to
identify forward-looking statements. These forward-looking statements involve
certain risks and uncertainties. Actual results could differ materially from
those projected for many reasons including, without limitation, changing events
and trends that have influenced the Company's assumptions. These trends and
events include (i) changes in the interest rate environment which may reduce
margins, (ii) non-achievement of expected growth (iii) less favorable than
anticipated changes in national and local business environment and securities
markets (iv) adverse changes in the regulatory requirements affecting the
Company (v) greater competitive pressures among financial institutions in
Company's market and (vi) greater than expected loan losses. Additional
information and other factors that could affect future financial results are
included in the Company's filings with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for 2000.
PART I
ITEM 1. BUSINESS
Main Street Banks, Inc. (the "Company" or "Main Street") is a financial
holding company which engages through its subsidiaries, Main Street Bank (the
"Bank" or "Main Street Bank") and Williamson, Musselwhite & Main Street
Insurance, Inc. ("Williamson"), 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, Gwinnett, Newton,
Rockdale and Walton counties in Georgia. The Bank, a commercial bank, provides
traditional deposit, lending and mortgage and securities brokerage services.
Prior to January 2, 2001, the Company was known as First Sterling Banks, Inc. On
December 29, 2000, former bank subsidiaries, The Westside Bank and Trust Company
("Westside"), The Eastside Bank and Trust Company ("Eastside") and Community
Bank of Georgia ("Community") were merged into the Bank. The Company was
incorporated on March 16, 1994 as a Georgia business corporation. The Company's
executive offices are located at 676 Chastain Road, Kennesaw, Georgia 30144, and
its telephone number is 770-422-2888. Neither the Company nor the Bank has any
foreign activities.
Since 1995, the Company has been reviewing and analyzing possible
acquisition opportunities in the Atlanta metropolitan area. Its strategic plan
has been to enhance shareholder value by creating a larger organization in North
Georgia. 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 in a
national market.
The first merger occurred in 1996 when the Company merged with Eastside
Holding Corporation, a one-bank holding company located in Snellville, Gwinnett
County, Georgia. In 1999, the Company consummated a merger with Georgia
Bancshares, Inc. and thereby acquired Community located in DeKalb County,
Georgia. In May of 2000, the Company consummated a merger with the former Main
Street Banks Incorporated, the former parent of the Bank. In December of 2000,
the Company consummated a merger with Williamson Insurance Agency, Inc. and
Williamson and Musselwhite Insurance Agency, Inc. (collectively "Williamson").
In January of 2001, the Company consummated a merger with Walton Bank and Trust
Company.
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RECENT DEVELOPMENTS
Effective November 17, 2000, the Company became a financial holding company
under the provisions of the Gramm-Leach-Bliley Act of 1999, which amended the
Bank Holding Company Act and expands the activities in which the Company may
engage. After becoming a financial holding company, in December 2000 the Company
acquired Williamson. Upon consummation of the acquisition, the two insurance
companies were combined with the Main Street Insurance division and the name was
changed to the Williamson, Musselwhite & Main Street Insurance, Inc.
MARKET AREA AND COMPETITION
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 their 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, certificates of deposit and various types of retail and commercial
loans.
Competition for loans is also offered by other financial intermediaries,
including savings and loan associations, mortgage banking firms and real estate
investment trusts, small loan and finance companies, insurance companies, credit
unions, leasing companies, and certain government agencies. Competition for time
deposits and, to a more limited extent, demand and transaction deposits is also
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 greater financial resources than the Company.
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 or the results therefrom.
The Company's marketing strategy emphasizes its local nature and involvement
in the communities located in its' primary service area.
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
nonbank competitors.
EMPLOYEES
As of March 15, 2001, the Company had a total of 368 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 employees is subject to a collective bargaining agreement,
and the Company has never experienced a work stoppage. In the opinion of
management, the Company enjoys excellent relations with its employees.
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PRODUCTS AND SERVICES
The Company provides a full range of traditional banking, mortgage banking,
investment and insurance services to individual and corporate customers.
LENDING
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 for
sale, with the servicing rights, in the secondary market. The Company limits its
interest rate risk on such loans originated by selling individual loans
immediately after the customers lock-in to their rate.
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.
INSURANCE SERVICES
The Company provides insurance services to individuals and businesses
through its subsidiary, Williamson. Williamson 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.
INVESTMENT SERVICES
The Company, through a division of the Bank, provides its customers with
comprehensive investment and brokerage services through an arrangement with SAL
Financial, an affiliate of Sterne, Agee & Leach, Inc. 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.
SUPERVISION AND REGULATION
GENERAL
The Company is a financial holding company registered with the Federal
Reserve Board ("Federal Reserve") and the Georgia Department of Banking and
Finance under the Bank Holding Company Act of 1956 as amended ("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 qualify 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 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 Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve before:
- 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 (5%) percent of
the voting shares of the bank;
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- it or any of its subsidiaries, other than a bank, may acquire all or
substantially all of the assets of any bank; or
- it may merge or consolidate with any other bank holding company.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in activities other than:
- banking;
- managing or controlling banks or other permissible subsidiaries; and
- acquiring or retaining direct or indirect control of any company engaged
in any activities other than activities closely related to banking or
managing or controlling banks.
However, the activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the
anti-affiliation provisions of the Glass-Steagall Act to permit the common
ownership of commercial banks, investment banks and insurance companies. The
Holding Company 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 Bank is subject to regulation, supervision, and examination by the FDIC
and the Georgia Department of Banking and Finance. 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.
CAPITAL ADEQUACY
The 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 profile 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 Tier 1 Capital ratio is 4.0%. At
December 31, 2000, the Company's consolidated Tier 1 Capital and Total Capital
ratios were 11.37% and 12.62%, 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,
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less goodwill and certain other intangible assets (the "Leverage Ratio"), of
3.0% 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 3.0%, plus an additional
cushion of 100 to 200 basis points. The Company's Leverage Ratio at
December 31, 2000, was 8.51%. 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, 2000. Neither the Company nor the Bank has been advised by
any federal banking agency of any 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. See "Prompt Corrective
Action."
SUPPORT OF SUBSIDIARY BANK
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength to, and to commit resources to support, the Bank. This
support may be required at times when, absent such Federal Reserve policy, the
Company may not be inclined to provide it. In addition, any capital loans by a
bank holding company to the 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.
PROMPT CORRECTIVE ACTION
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories ("well capitalized, "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized") and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. 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
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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.
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
nonbank 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 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 nondepository 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, 2000, the Bank had the requisite capital levels to qualify
as well capitalized.
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
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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.
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 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.
SAFETY AND SOUNDNESS STANDARDS
The 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. See "Prompt Corrective Action." 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.
DEPOSITOR PREFERENCE
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
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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.
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.
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 potential 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 cost of interest-bearing liabilities rising at a faster rate than the
yields on interest earning assets of the Company. 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.
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.
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GOVERNMENTAL REGULATION--BANKING
The 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 and the cost of doing
business.
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
uncollectable.
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 all of its real estate mortgage loans in Georgia. Therefore,
conditions of these real estate markets 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, the value of the
collateral securing the Company's loans and the results of operations and
financial condition of the Company.
MONETARY POLICY
The operating results of the Bank are affected by credit policies of
monetary authorities, particularly the Federal Reserve. The instruments of
monetary policy employed by the Federal Reserve include open market operations
in U.S. Government securities, changes in the discount rate on bank borrowings
and changes in reserve requirements against bank deposits. In view of changing
conditions in the national economy and in the money markets, as well as the
effect of action by monetary and fiscal authorities, including the Federal
Reserve, no prediction can be made as to possible future changes in interest
rates, deposit levels and loan demand on the results of operations and business
of the Company.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located at 676 Chastain Road,
Kennesaw, Georgia. The main office of the Bank is located at 1134 Clark Street,
Covington, Georgia. The Bank leases
10
space for its corporate headquarters and various support functions. The Bank has
21 branch offices located in Barrow, Clarke, Cobb, DeKalb, Gwinnett, Newton,
Rockdale and Walton counties, Georgia, 18 of which are owned and three of which
are leased. Deposit and loan operations, proof and purchasing are located in
leased space at 2118 Usher Street in Covington. Human resources and training are
in a bank owned building at 1122 Pace Street in Covington. The Bank's corporate
headquarters and marketing division are in leased space at 1121 Floyd Street,
Covington, Georgia. The bank also leases a building in Covington, adjacent to
the owned facility on Pace Street, which serves as the accounting department.
CERTAIN TRANSACTIONS
The Company's directors and certain business organizations and individuals
associated with them are customers of and have banking transactions with the
Bank in the ordinary course of business. Such transactions include loans,
commitments, lines of credit and letters of credit. All of those transactions
were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and did not and do not involve more than normal risk of
collectibility or present any other unfavorable features. Additional
transactions with these persons and businesses are anticipated in the future.
Robert R. Fowler, III, chairman of the board, has entered into three lease
agreements with the Company, through which he leases to the Company buildings
that it uses for its operations center, corporate and marketing offices, and
accounting and card services facilities. Main Street Banks believes that the
terms of the lease agreements are at least as favorable to it as terms available
from unrelated third parties.
ITEM 3. LEGAL PROCEEDINGS
Neither the registrant nor 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, nor
to the knowledge of the management of the registrant are any such proceedings
contemplated or threatened against it or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 2000.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is traded on the Nasdaq National Market under
the symbol MSBK.
The following table lists the high and low stock price for each quarter
in 2000 and 1999:
FISCAL YEAR 2000 FISCAL YEAR 1999
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First quarter........................... $12.125 $ 8.063 $11.813 $10.688
Second quarter.......................... 11.625 8.625 12.500 10.438
Third quarter........................... 12.188 11.000 12.250 9.250
Fourth quarter.......................... 12.500 11.125 14.500 9.250
11
(b) As of March 8, 2001, there were approximately 2,451 shareholders of the
Company's common stock.
(c) During 2000, dividends of $ 0.04 per share were paid in the first and
second quarters and dividends of $.08 per share were paid in the third
and fourth quarters. The Company currently intends to continue paying
regular cash dividends on a quarterly basis.
Neither the Company's articles of incorporation nor the bylaws set forth
any restriction on the ability of the Company to issue dividends to its
shareholders. The Georgia Business Corporation Code, though, forbids any
distribution which, after being given effect, would leave the 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 Company is a legal entity separate and distinct from its subsidiaries.
Substantially all of the Company's revenues result from amounts paid as
dividends to the Company by its subsidiaries. The Bank is subject to statutory
and regulatory limitations on the payment of dividends to the Company, and the
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 the Federal Deposit Insurance Corporation
Improvement Act of 1991, 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;
and
- 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; or
- the ratio of equity capital total adjusted assets is less than 6%.
The payment of dividends by the 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.
12
ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
EARNINGS
Interest income....................................... $ 80,232 64,185 57,279 52,347 44,347
Interest expense...................................... $ 34,970 24,643 22,586 21,033 18,620
Net interest income................................... $ 45,262 39,542 34,693 31,314 25,727
Non-interest income................................... $ 9,908 9,846 8,837 7,137 5,916
Non-interest expense.................................. $ 33,108 30,543 27,442 23,912 21,080
Operating income(1)................................... $ 14,144 11,211 9,980 8,487 6,489
Net income............................................ $ 12,833 11,232 9,980 8,487 6,489
SELECTED AVERAGE BALANCES
Assets................................................ $ 920,873 788,492 682,530 629,500 536,805
Earning assets........................................ $ 857,120 721,045 624,119 575,046 487,489
Loans................................................. $ 672,174 580,693 480,155 414,712 355,802
Total deposits........................................ $ 776,330 670,669 598,764 564,012 475,737
Shareholders' equity.................................. $ 76,998 70,873 64,970 57,166 52,809
Diluted common shares outstanding..................... 14,494 14,481 14,361 14,272 14,058
YEAR-END BALANCES
Assets................................................ $1,008,801 852,412 715,505 649,268 560,011
Earning assets........................................ $ 940,000 785,539 657,159 593,837 503,267
Loans................................................. $ 694,607 630,990 515,147 450,167 374,197
Total deposits........................................ $ 831,901 706,229 619,176 579,684 499,840
Shareholders' equity.................................. $ 86,422 73,839 68,966 61,309 55,729
Common shares outstanding............................. 14,268 14,179 14,145 13,960 13,917
PER COMMON SHARE
Earnings per share--basic............................. $ 0.90 0.79 0.71 0.61 0.47
Earnings per share--diluted........................... $ 0.89 0.78 0.69 0.59 0.46
Book value............................................ $ 6.06 5.21 4.88 4.39 4.00
Cash dividends paid................................... $ 0.24 0.16 0.15 0.13 0.10
Market price:
Close............................................... $ 12.43 12.06 10.88 9.33 6.513
High................................................ $ 12.50 14.50 13.17 9.72 6.611
Low................................................. $ 8.06 9.25 9.23 6.02 5.444
OPERATING INCOME DATA(1)
Earnings per share--basic............................. $ 0.99 0.79 0.71 0.61 0.47
Earnings per share--diluted........................... $ 0.98 0.77 0.69 0.59 0.46
Operating return on average assets.................... 1.54% 1.42 1.46 1.35 1.21
Operating return on average equity.................... 18.4% 15.8 15.4 14.8 12.3
Price to earnings..................................... 12.7 15.6 15.7 15.7 14.1
FINANCIAL RATIOS
Return on average assets.............................. 1.39% 1.42 1.46 1.35 1.21
Return on average equity.............................. 16.7% 15.8 15.4 14.8 12.3
Average equity to average assets...................... 8.36% 8.99 9.52 9.08 9.84
Dividend payout ratio................................. 24.5% 20.8 21.7 22.0 21.7
Price to earnings..................................... 14.0 15.6 15.7 15.7 14.1
Price to book value................................... 2.05 2.32 2.23 2.13 1.63
NONFINANCIAL
Shareholders.......................................... 2,451 1,582 928 10 989
Employees............................................. 379 380 400 377 344
Banking offices....................................... 21 21 18 22 22
ATMs.................................................. 23 23 21 22 21
- --------------------------
(1) Excludes non-recurring merger related expenses and one-time gains (losses)
pertaining to restructuring the investment portfolio and sales of property
of ($1,311) and $21 in 2000 and 1999, respectively.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations analyzes the major elements of Main Street's consolidated statements
of financial condition and consolidated statements of income. This section
should be read in conjunction with Main Street Banks' consolidated financial
statements and accompanying notes and other detailed information appearing
elsewhere herein.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion contains certain forward-looking statements which
are based on certain assumptions and describe future plans, strategies, and our
expectations. These forward-looking statements include statements identified by
use of the words "may," "should," "will," "contemplate," "continue," "possible,"
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. Our ability to predict results or the actual effect of future plans
or strategies is inherently uncertain and involve five risks and uncertainties
that may cause actual results, performance or such investments to be materially
different from those expressed or implied from such forward looking statements.
Factors which could have a material adverse effect on our operations include,
but are not limited to, changes in interest rates and the level and composition
of deposits, loan demand and the values of loan collateral, mortgages,
securities and other interest sensitive assets and liabilities, general economic
conditions, legislation and regulation, monetary and fiscal policies of the
federal government, including policies of the Treasury Department and the
Federal Reserve Board, competition, demand for financial services in our market
area, accounting principles and guidelines, and the failure of assumptions
underlying the establishment of the reserve for loan losses. You should consider
these risks and uncertainties in evaluating forward-looking statements and
should not place undue reliance on such statements. We will not publicly release
the result of any revisions which may be made to any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events. All written or
oral forward statements attributable to Main Street are qualified in their
entirety by these cautionary statements.
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
OVERVIEW
Main Street's net income was $12.8 million, $11.2 million and $10.0 million
for the years ended December 31, 2000, 1999 and 1998, respectively. Basic
earnings per share were $0.90, $0.79 and $0.71 for the same periods,
respectively, and diluted earnings per share were $0.89, $0.78 and $0.69 for the
same periods. Earnings growth from 1998 to 1999 and from 1999 to 2000 resulted
principally from an increase in earning assets in a rising interest rate
environment. Earnings growth was further augmented by an increase in
non-interest income which resulted from the addition and growth of several
fee-based business lines.
On an operating basis, which excludes the impact of merger-related expenses
and other onetime gains (losses) pertaining to restructuring the investment
portfolio and sales of property, the Company's net earnings were $14.1 million,
$11.2 million and $10.0 million for the years ended December 31, 2000, 1999 and
1998, respectively. Diluted earnings per share on an operating basis were $0.98,
$0.77 and $0.69 for the same periods, respectively. Also on an operating basis,
the Company posted returns on average assets of 1.54%, 1.42% and 1.46% for the
same three years, as well as returns on average equity of 18.4%, 15.8% and
15.4%.
14
Total assets at December 31, 2000 and 1999 were $1.0 billion and $852.4
million, respectively. At the same time, total deposits were $831.9 million and
$706.2 million. Loans, net of unearned income, totaled $694.6 million and $631.0
million for the two year-end dates. From year-end 1999 to year-end 2000, the
Company experienced loan and deposit growth of $63.6 million, or 10.1%, and
$125.7 million, or 17.8%, respectively. Shareholder's equity was $86.4 million
and $73.8 million December 31, 2000 and 1999, respectively.
RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income for 2000 was $45.3 million
compared to $39.5 million in 1999, an increase of 14.7% or $5.8 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 18.8% over the December 31, 1999 level. Growth in average loans of 15.8%
provided the bulk of the increase in earning assets and contributed most
significantly to the growth in net interest income. In a rising interest rate
environment, yields on earning assets climbed throughout the year, but did not
rise sufficiently to offset the increased cost of deposits and borrowings. The
resulting shrinkage in net interest spread and net interest margin was due to
intense competition for time deposits in the Company's local markets and an
increasing mix of time deposits required to fund asset growth. While interest
earning assets yielded 9.36% in 2000 versus 8.90% in 1999 (a 46 basis point
increase), the cost of interest bearing liabilities increased 82 basis points
from 4.21% to 5.03%.
Net interest income for 1999 was $39.5 million compared to $34.7 million in
1998, an increase of $4.8 million or 13.8%. This increase was produced solely by
growth in interest-earning assets, as the relatively stable interest rate
environment allowed the Company to maintain its relatively constant spreads and
margins. Average earning assets grew 15.5% from $624.1 million to $721.0
million, an increase which was driven significantly by 20.9% average loan growth
from 1998 to 1999.
15
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.
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
YIELD YIELD YIELD
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
AVERAGE ASSETS INTEREST-EARNING
ASSETS:
Loans, net of unearned
income(1).................. $672,174 $ 68,793 10.23% $580,693 $56,178 9.67% $480,155 $48,834 10.17%
Mortgage loans held for
sale....................... 1,519 124 8.16 1,741 135 7.75 1,563 103 6.59
Investment securities:
Taxable.................... 103,020 6,733 6.54 90,746 5,508 6.07 84,653 5,303 6.26
Non-taxable(3)............. 25,601 1,091 6.46 22,428 1,073 7.25 19,735 1,037 7.96
Interest-bearing deposits.... 1,429 77 5.39% 941 40 4.25% 177 12 6.78%
Federal funds sold........... 53,377 3,414 6.40 24,496 1,251 5.11 37,836 1,990 5.29
-------- -------- ----- -------- ------- ---- -------- ------- -----
Total interest-earning
assets....................... 857,120 80,232 9.36% 721,045 64,185 8.90% 624,119 57,279 9.18%
Non-interest-earning assets
Cash and due from banks...... 36,595 35,513 30,494
Allowance for loan losses.... (9,991) (8,864) (7,681)
Premises and equipment....... 25,960 24,729 23,265
Other real estate owned...... 1,210 1,419 1,046
Other assets................. 9,979 14,650 11,287
-------- -------- --------
Total assets............... $920,873 $788,492 $682,530
======== ======== ========
AVERAGE LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES:
Demand and money market
deposits..................... $181,830 $ 5,406 2.97% $171,771 $ 3,875 2.25% $152,883 $ 3,950 2.59%
Savings deposits............... 42,595 1,061 2.49 43,159 1,093 2.53 35,567 1,023 2.88
Time deposits.................. 409,090 24,888 6.08 330,311 17,502 5.30 301,227 16,883 5.60
FHLB advances.................. 52,290 3,187 6.09 32,353 1,605 4.96 10,860 586 5.40
Federal funds purchased and
other borrowings............. 9,243 428 4.63 7,682 568 7.39 1,891 144 7.62
-------- -------- ----- -------- ------- ---- -------- ------- -----
Total interest-bearing
Liabilities.................. 695,048 34,970 5.03% 585,276 24,643 4.21% 502,428 22,586 4.50%
Non-interest-bearing:
Demand deposits............ 142,815 125,428 109,087
Other liabilities.......... 6,012 6,915 6,045
-------- -------- --------
Total liabilities.......... 843,875 717,619 617,560
Shareholders' equity........... 76,998 70,873 64,970
-------- -------- --------
Total liabilities and
shareholders' equity....... $920,873 $788,492 $682,530
======== ======== ========
Net interest rate spread....... 4.33% 4.69% 4.68%
Net interest income and
margin(4).................... $ 45,262 5.28% $39,542 5.48% $34,693 5.56%
- ------------------------------
(1) Fee income related to loans of $4,627, $4,463 and $3,909 for the years ended
December 31, 2000, 1999, and 1998, respectively, is included in interest
income.
(2) Non-accrual loans were $924, $1,700 and $1,600 at December 31, 2000, 1999
and 1998, 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 net interest income divided by average
interest-earning assets.
16
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.
2000 VS. 1999 1999 VS. 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------ ------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans................................. $ 8,824 $3,791 $12,615 $10,243 $ (2,899) $7,344
Mortgage Loans Held for Sale.......... (17) 6 (11) 12 20 32
Investment securities:
Taxable............................... 745 480 1,225 381 (176) 205
Non-taxable........................... 230 (212) 18 214 (178) 36
Interest-bearing deposits............. 21 16 37 52 (24) 28
Federal funds sold.................... 1,522 641 2,163 (706) (33) (739)
------- ------ ------- ------- -------- ------
Total increase (decrease) in
interest income................... 11,325 4,722 16,047 10,196 (3,290) 6,906
------- ------ ------- ------- -------- ------
Interest-bearing liabilities:
Demand and money market deposits...... 226 1,305 1,531 665 (740) (75)
Savings deposits...................... (13) (19) (32) 219 (149) 70
Time deposits......................... 4,175 3,211 7,386 1,629 (1,010) 619
FHLB advances......................... 989 593 1,582 1,161 (142) 1,019
Federal funds purchased and other
borrowings.......................... 115 (255) (140) 441 (17) 424
------- ------ ------- ------- -------- ------
Total increase (decrease) in interest
expense............................... 5,492 4,835 10,327 4,115 (2,058) 2,057
------- ------ ------- ------- -------- ------
Increase (decrease) in net interest
income................................ $ 5,833 $ (113) $ 5,720 $ 6,081 $ (1,232) $4,849
======= ====== ======= ======= ======== ======
PROVISION FOR LOAN LOSSES. Management's policy is to maintain the allowance
for loan losses at a level sufficient to absorb estimated losses inherent in the
loan portfolio. The allowance is increased by the provision for loan losses and
decreased by charge-offs, net of recoveries. In determining inherent losses,
management considers financial services industry trends, conditions of
individual borrowers, historical loan loss experience and the general economic
environment. As these factors change, the level of loan loss provision changes.
The allowance for loan losses at December 31, 2000 was $10.4 million,
representing 1.50% of outstanding loans, compared to $9.3 million or 1.48% of
outstanding loans as of December 31, 1999. The provision for loan losses charged
against earnings was $2.1 million in 2000 compared to $1.7 million in 1999, an
increase of $400,000.
Net loans charged off in 2000 was $971,000 compared to $629,000 in 1999 and
$376,000 in 1998. The 1999 provision of $1.7 million was $300,000 higher than
the provision of $1.4 million made in 1998.
NON-INTEREST INCOME. For 2000, non-interest income totaled $9.9 million, an
increase of $100,000 over non-interest income of $9.8 million in 1999. Excluding
a merger related restructuring of the Company's investment portfolio and the
resulting pretax loss of $509,000, non-interest income totaled $10.4 million
which represented a 10.2% increase over 1999. The growth in fee income is mainly
a result of higher service charges on and the growth in number of demand deposit
accounts. The increase is also attributed to the growth in the Company's
investment brokerage and insurance services. Non-interest income in 1999
increased $1.0 million over the $8.8 million total for 1998. This increase is
17
again the result of growth in demand deposit accounts, increased pricing on
these accounts and growth in the Company's investment and insurance business
lines.
The following table presents the major categories of non-interest income:
YEARS ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Service charges on deposit accounts......................... $4,688 $4,300 $3,838
Mortgage fee income......................................... 1,066 1,213 1,346
Investment fee income....................................... 428 278 123
Insurance fee income........................................ 2,308 1,764 1,527
Gain on sale of SBA loans................................... 68 42 200
Net realized gains (losses) on securities................... (509) 9 41
Other non-interest income................................... 1,859 2,240 1,762
------ ------ ------
Total non-interest income......................... $9,908 $9,846 $8,837
====== ====== ======
NON-INTEREST EXPENSE. For the years ended 2000, 1999 and 1998, non-interest
expense totaled $33.1 million, $30.5 million and $27.4 million, respectively.
The following table presents the major categories of non-interest expense:
YEARS ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Salaries and employee benefits.............................. $17,947 $16,590 $15,425
Occupancy and equipment expense............................. 4,580 4,230 3,754
Data processing fees........................................ 555 477 361
Professional fees........................................... 855 970 350
Regulatory assessments...................................... 317 241 161
Intangible amortization..................................... 439 439 439
Other....................................................... 8,415 7,596 6,952
------- ------- -------
Total non-interest expense................................ $33,108 $30,543 $27,442
======= ======= =======
For 2000, non-interest expense increased 8.5% or $2.6 million over 1999.
Salaries and employee benefits grew from $16.6 million to $17.9 million, a 7.8%
increase, due to the opening of two new banking offices and growth throughout
the Company, including the investment, insurance and mortgage business lines.
Occupancy and equipment costs also rose due to the new banking facilities. With
rapid growth in its market, the Company believes that the opening of de novo
banking facilities is a prudent strategy to employ on a limited basis.
Comparing 1999 to 1998, non-interest expenses rose 11.3% with higher
salaries and employee benefits constituting the largest portion of this
increase. Personnel related costs rose from $15.4 million to $16.6 million or a
7.8% increase. Occupancy and equipment increased $12.7%. These increases were
mainly the result of new banking offices and the construction and opening of a
new operations center. Professional fees grew from $350,000 to $970,000 due
largely to the Company's use of consulting firms to conduct a staffing
efficiency study, a margin improvement program and a review of interest-bearing
product profitability.
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 2000, income tax expense was $7.2 million
compared to $5.9 million in 1999. In 1998, income tax expense was $4.7 million.
The Company's effective tax rates in 2000, 1999 and 1998, respectively, were
35.9%, 34.4% and 31.9%.
18
FINANCIAL CONDITION
LOANS. At December 31, 2000, loans, net of unearned income, were $694.6
million, an increase of $63.6 million or 10.1% over net loans at December 31,
1999 of $631.0 million. The growth in the loan portfolio was attributable to a
consistent focus on quality loan production and strong loan markets in the state
and region. The bank's loan portfolio experienced growth in all major categories
of loans at December 31, 2000. Real estate-construction loans increased $19.3
million or 17% from December 31, 1999. There was also a strong increase in
commercial and industrial loans from December 31, 1999 to December 31, 2000,
with an increase of $22.2 million or 31.1%. 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 following table summarizes the loan portfolio of Main Street Banks by
type of loan:
DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial................. $ 93,819 $ 71,589 $ 52,643 $ 50,898 $ 39,125
Real estate--construction................. 136,372 117,047 93,887 81,908 53,674
Real estate--mortgage..................... 405,227 379,650 316,531 269,303 232,352
Consumer and other........................ 59,189 62,704 52,086 48,058 49,046
-------- -------- -------- -------- --------
$694,607 $630,990 $515,147 $450,167 $374,197
======== ======== ======== ======== ========
Mortgage loans held for sale.............. $ 2,248 $ 1,357 $ 4,283 0 0
======== ======== ======== ======== ========
Percent of loans by category to total
loans (Excluding loans held for sale):
Commercial and industrial................. 13.51% 11.35% 10.22% 11.31% 10.46%
Real estate--construction................. 19.63% 18.55% 18.23% 18.20% 14.34%
Real estate--mortgage..................... 58.34% 60.16% 61.44% 59.81% 62.09%
Consumer and other........................ 8.52% 9.94% 10.11% 10.68% 13.11%
-------- -------- -------- -------- --------
100.00% 100.00% 100.00% 100.00% 100.00%
======== ======== ======== ======== ========
To accomplish Main Street's lending objectives, management seeks to achieve
consistent loan growth within its primary market areas while maximizing loan
yields and maintaining a high quality loan portfolio. Main Street Banks monitors
its lending objectives primarily through its eastern and western division senior
loan committees. In addition to the senior loan committees, larger credits are
reviewed by the banks' executive loan committee. Main Street's lending
objectives are clearly defined in its Lending Policy, which is reviewed annually
and approved by the board of directors. The senior loan committee in each
division is chaired by that division's credit officer. Members of the senior
loan committee include the president of Main Street Bank, regional executives
from the respective divisions, its risk management officer and various lending
officers. The executive loan committee is chaired by the president of the bank,
and it includes the division senior credit officers and the risk management
officer.
Generally, all loans with total related debt of between $250,000 and
$2,500,000 are reviewed for approval by the senior loan committee. However, for
certain loans that have been identified as low risk loans, i.e., residential
mortgage loans and consumer loans, the division executives have approval
authority up to $500,000. The next level of approval authority rests with the
executive loan committee, which has approval authority for loan relationships
with committed debt of $5,000,000. The company has established an internal limit
of $5,000,000, and any relationship which exceeds this limit must be approved by
the board of directors. The board of directors is generally responsible for
ratifying the actions of the senior loan committee and the executive loan
committee and serving as the ultimate
19
approval authority for single advances or total commitments over $5 million.
Additionally, Main Street Banks' board of directors is responsible for approving
all new loan requests for which a borrower's total debt exceeds $5 million.
Main Street Banks primarily focuses on the following loan categories:
(1) commercial, (2) real estate construction, (3) real estate mortgage and
(4) consumer loans. Main Street Banks' management has strategically located its
branches in high growth markets and has taken advantage of a surge in
residential and industrial growth in northeastern Georgia.
Real estate mortgage lending has significantly contributed to Main Street's
loan growth during the past several years. Generally, these loans are
owner-occupied and are amortized over a 15 year to 20 year period with a three
to five year maturity. The underwriting criteria for these loans is very similar
to the underwriting criteria used in the mortgage industry. Typically, a
borrower's debt to income ratio can not exceed 36% and the loan to appraised
value ratio cannot exceed 89.9%. However, Main Street's knowledge of its
customers and its market allows the company to be more flexible in meeting its
customers' needs. Main Street also underwrites commercial mortgage loans. 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.
Main Street Banks also perfects its interest in equipment or other business
assets of the borrower and obtains personal guaranties.
Main Street also underwrites loans to finance the construction of
residential and non-residential 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. Main Street 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 borrower's 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, Main Street believes that it
can monitor and manage this risk properly.
Main Street also underwrites commercial and industrial loans. Generally,
these loans are for working capital purposes and are secured by inventory,
accounts receivable or equipment. Main Street 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. Main Street will also perfect its interest
in equipment or other business assets of the borrower and obtain personal
guaranties. Main Street Banks does not originate and does not currently hold in
its portfolio any foreign loans. Main Street 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 company'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 for 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
20
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 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 and real
estate-construction portfolios and the amount of such loans with predetermined
interest rates and floating rates in each maturity range as of December 31, 2000
are summarized as follows:
AFTER ONE
ONE YEAR OR YEAR THROUGH AFTER FIVE
LESS FIVE YEARS YEARS TOTAL
----------- ------------ ---------- --------
(DOLLARS IN THOUSANDS)
Commercial and industrial......................... $ 44,227 $35,957 $13,635 $ 93,819
Real estate--construction......................... 131,661 3,150 1,561 136,372
-------- ------- ------- --------
Total........................................... $175,888 $39,107 $15,196 $230,191
======== ======= ======= ========
Loans with a predetermined interest rate.......... $ 89,353 $32,218 $14,125 $135,696
Loans with a floating interest rate............... 86,535 6,889 1,071 94,495
-------- ------- ------- --------
Total......................................... $175,888 $39,107 $15,196 $230,191
======== ======= ======= ========
NON-PERFORMING ASSETS. Main Street has formal procedures in place to assist
management in maintaining the overall quality of its loan portfolio. Main Street
has established written guidelines contained in its Lending Policy for the
collection of past due loan accounts. These guidelines explain in detail Main
Street'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. Main Street's Management has effective credit
management processes to make officers aware of its lending policy and the
collection policy contained therein on a continuous basis. Main Street'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. Main Street's lending approach, as well
as a healthy local economy, has resulted in strong asset quality. Main Street
had non-performing assets of $2.9 million, $2.6 million, and $2.3 million as of
December 31, 2000, 1999 and 1998, respectively. For 2000, 1999 and 1998, 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 $109,997, $172,402 and $82,407 respectively. Management
is not aware of any loans that meet the definition of a troubled debt
restructuring as of December 31, 2000 or 1999. Main Street Banks 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 cost to
sell. Main Street usually disposes of real estate acquired through foreclosure
within one year; however, if it is unable to dispose of the foreclosed property,
the property's value is assessed annually and written down to its fair value
less cost to sell.
21
The following table presents information regarding non-performing assets at
the dates indicated:
DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-performing Assets
Non-accrual loans................................... $ 924 $1,743 $1,562 $1,006 $1,353
Other real estate and repossessions................. 1,926 964 1,338 1,366 1,189
Total non-performing assets......................... $2,850 $2,707 $2,900 $2,372 $2,542
Loans past due 90 days or more and still accruing... $1,735 $ 426 $ 700 $ 874 $ 156
Ratio of past due loans to loans, net of unearned
income(1)......................................... 0.25% 0.07% 0.14% 0.19% 0.04%
Ratio of non-performing assets to loans, net of
unearned income, and other real estate(1)......... 0.41% 0.43% 0.56% 0.52% 0.68%
- ------------------------
(1) Excludes mortgage loans held for sale.
Management is not aware of any potential problem loans other than those
noted in the table above.
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
economic environment, the history of charged-off loans and recoveries, size and
composition of the loan portfolio, non-performing and past-due loans, and other
aspects of the loan portfolio. Main Street's management has established an
allowance for loan losses which it believes is adequate for anticipated losses
in its loan portfolio. Based on a continuous credit evaluation of the loan
portfolio, management presents a quarterly review of the allowance for loan
losses to Main Street'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, Main Street'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 reserve for loan losses. Also, Main Street's
management reviews activity in the allowance for loan losses, such as
charge-offs and recoveries, during each quarter to identify trends.
Main Street's credit management processes include a loan review program as
one of the processes to evaluate the credit risk in the loan portfolio. Through
the loan review process, Main Street maintains an internally critized classified
loan list which, along with the delinquency report of loans, which serves as a
tool to assist management assess 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, or poor financial condition which may jeopardize
recoverability of the debt. Loans classified as "doubtful" are those loans that
have characteristics similar to substandard loans but have an increased risk of
loss, or at least a portion of the loan may require being charged-off. Loans
classified as "loss" are those loans that are in the process of being
charged-off. For the year ended 2000, net charge-offs totaled $970,892 or 0.14%
of average loans outstanding for the period, net of unearned income, compared to
$629,525 or 0.11% in net charge-offs during 1999. Main Street's net charge-offs
totaled $376,697 or 0.08% of average loans, net of unearned income, outstanding
in 1998. Main Street recorded a provision for loan losses of $2,054,000,
$1,730,000 and $1,400,000 in 2000, 1999 and 1998, respectively. At December 31,
2000, the allowance for loan
22
losses totaled $10.4 million, or 1.50% of total loans, net of unearned income.
At December 31, 1999, the allowance for loan losses was $9.32 million, or 1.48%
of total loans, net of unearned income.
The following table presents an analysis of the allowance for loan losses
and other related data:
YEARS ENDED DECEMBER 31
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Average loans outstanding (net of unearned
income)................................. $672,174 $580,693 $480,155 $414,712 $355,802
Total loans, net of unearned income, at
end of period........................... 694,607 630,990 515,147 450,167 374,197
Allowance for loan losses at beginning of
period.................................. 9,318 8,217 7,168 6,062 5,611
Provision for loans losses................ 2,054 1,730 1,426 2,085 1,162
Charge-offs:
Commercial and industrial............... (330) (320) (307) (111) (151)
Real estate............................. (482) (74) (166) (273) (271)
Consumer................................ (511) (582) (337) (885) (558)
Recoveries:
Commercial and industrial............... 48 43 66 39 49
Real estate............................. 95 55 131 38 59
Consumer................................ 209 249 236 213 161
-------- -------- -------- -------- --------
Net charge-offs........................... $ (971) $ (629) $ (377) $ (979) $ (711)
-------- -------- -------- -------- --------
Allowance for loan losses at end of
period.................................. $ 10,401 $ 9,318 $ 8,217 $ 7,168 $ 6,062
======== ======== ======== ======== ========
Ratio of allowance to end of period
loans................................... 1.50% 1.48% 1.60% 1.59% 1.62%
Ratio of net charge-offs to average
loans................................... 0.14% 0.11% 0.08% 0.24% 0.20%
Ratio of allowance to end of period non-
performing Loans........................ 1125.65% 534.60% 526.06% 712.52% 448.04%
The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information. The
allocation is made for analytical purposes and is not necessarily indicative of
the categories in which future losses may occur. The total allowance is
available to absorb losses from any segment of loans.
DECEMBER 31
------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ----------- -------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for loan
losses applicable to:
Commercial and industrial.......... $ 1,405 13.51% $1,058 11.35% $ 840 10.22%
Real estate........................ 8,110 77.97 7,335 78.72 6,546 79.67
Consumer and other................. 886 8.52 925 9.93 831 10.11
------- ------ ------ ------ ------ ------
Total allowance for loan losses.... $10,401 100.00% $9,318 100.00% $8,217 100.00%
======= ====== ====== ====== ====== ======
23
DECEMBER 31,
-----------------------------------------------
1997 1996
---------------------- ----------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
-------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Balance of allowance for loan losses applicable to:
Commercial and industrial.............................. $ 811 11.31% $ 634 10.46%
Real estate............................................ 5,592 78.02 4,634 76.44
Consumer and other..................................... 765 10.67 794 13.10
------ ------ ------ -------
Total allowance for loan losses........................ $7,168 100.00% $6,062 100.00%
====== ====== ====== =======
Main Street believes that the allocation of its allowance for loan losses is
reasonable. Where management is able to identify specific loans or categories of
loans where specific amounts of reserve are required, allocations are assigned
to those categories. Federal and state bank regulators also require that a bank
maintain a reserve that is sufficient to absorb an estimated amount of
unidentified potential losses based on management's perception of economic
conditions, loan portfolio growth, historical charge-off experience and exposure
concentrations.
Main Street believes that the allowance for loan losses at December 31, 2000
is adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance that Main Street will not sustain losses in future periods which
could be substantial in relation to the size of the allowance at December 31,
2000.
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 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.
INVESTMENT SECURITIES. Main Street uses its securities portfolio both as a
source of income and as a source of liquidity. At December 31, 2000, investment
securities totaled $153.5 million, an increase of $41.3 million from $112.2
million at December 31, 1999. At December 31, 2000, investment securities
represented 15.2% of total assets, compared to 13.6% of total assets at December
31, 1999. The average yield on a fully taxable equivalent basis on the
investment portfolio for the year ended December 31, 2000 was 6.52% compared to
a yield of 6.30% for the year ended December 31, 1999 and 6.58% for the year
ended December 31, 1998. At December 31, 1999, investment securities represented
18.2% of total deposits and 15.7% of total assets. Approximately $28.1 million
or 41.7% of investment securities reprice within one year.
24
The following table summarizes the contractual maturity of investment
securities and their weighted average yields.
DECEMBER 31, 2000
----------------------------------------------------------------------------------------------
AFTER ONE YEAR AFTER FIVE YEARS
BUT WITHIN FIVE BUT WITHIN TEN
WITHIN ONE YEARS YEARS AFTER TEN YEARS
------------------- ------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury
securities......... $ 200 5.51% $ 88 5.83% $ 1,104 5.25% $ -- --% $ 1,392
U.S. government
agencies and
corporations....... 31,276 6.40 49,525 6.36 3,447 6.85 1,565 6.13 85,813
Mortgage-backed
securities......... -- -- 4,665 6.08 9,190 7.14 24,995 6.46 38,850
States and political
subdivisions....... 1,389 5.00 9,061 4.61 6,153 5.17 10,934 5.23 27,537
------- ---- ------- ---- ------- ---- ------- ---- --------
Total................ $32,865 6.27% $63,339 6.11% $19,894 6.38% $37,494 6.08% $153,592
======= ==== ======= ==== ======= ==== ======= ==== ========
The following table presents the amortized costs and fair value of
securities classified as available for sale and held-to-maturity at
December 31, 2000, 1999 and 1998:
2000 1999 1998
-------------------- -------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
HELD TO MATURITY SECURITIES
States and political
subdivisions.................. $ 17,852 $ 17,958 $ 15,541 $ 15,182 $ 12,497 $ 13,044
======== ======== ======== ======== ======== ========
AVAILABLE FOR SALE SECURITIES
U.S.Treasury securities......... $ 1,392 $ 1,369 $ 3,992 $ 3,942 $ 3,991 $ 4,041
U.S. Government agencies and
corporations.................. 85,813 86,101 44,496 42,732 34,413 34,501
Mortgage-backed securities...... 38,850 38,601 42,583 40,886 51,242 51,162
States & political
subdivisions.................. 9,685 9,565 9,733 9,092 10,438 10,654
-------- -------- -------- -------- -------- --------
$135,740 $135,636 $100,804 $ 96,652 $100,084 $100,358
======== ======== ======== ======== ======== ========
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 securities are deemed to have high credit ratings,
and minimum regular monthly cash flows of principal and interest are guaranteed
by the issuing agencies.
At December 31, 2000, 64.3% of the mortgage-backed securities Main Street
held had contractual final maturities of more than ten 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
25
rate mortgage-backed securities do not tend to experience heavy prepayments of
principal and consequently, the average life of this security will not be unduly
shortened. If interest rates begin to fall, prepayments will increase, and the
average life of these securities will decrease.
Main Street has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." At the date
of purchase, Main Street is required to classify debt and equity securities into
one of three categories: held-to-maturity, trading or available-for-sale. At
each reporting date, the appropriateness of the classification is reassessed.
Investments in debt 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. Main Street
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.
DEPOSITS. Main Street offers a variety of deposit accounts having a wide
range of interest rates and terms. Main Street's deposits consist of demand,
savings, money market and time accounts. Main Street relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits. Main Street has a limited amount of brokered deposits. Main Street's
lending and investing activities are funded principally by deposits,
approximately 44.4% of which are demand, money market and savings deposits.
Deposits at December 31, 2000 were $831.9 million, an increase of $125.7 million
or 17.8% from $706.2 million at December 31, 1999. Non-interest-bearing deposits
were $132.3 million at December 31, 2000, an increase of $7.4 million, or 5.9%
from $124.9 million at December 31, 1999. Certificates of Deposit were $462.9 at
December 31, 2000, an increase of $102.0 million, or 28.3% from $360.8 million
at December 31, 1999.
The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 2000, 1999 and 1998 are presented below:
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Non-interest bearing demand deposits...... $142,815 --% $125,428 --% $109,087 --%
Demand and money market deposits.......... 181,830 2.97 171,771 2.25 $152,883 2.58
Savings deposits.......................... 42,595 2.49 43,159 2.53 35,567 2.88
Time deposits............................. 409,090 6.08 330,311 5.30 301,227 5.60
-------- ---- -------- ---- -------- ----
Total deposits........................ $776,330 4.04% $670,669 3.35% $598,764 3.65%
======== ==== ======== ==== ======== ====
The following table sets forth the amount of Main Street's certificates of
deposit that are $100,000 or greater by time remaining until maturity:
DECEMBER 31, 2000
----------------------
(DOLLARS IN THOUSANDS)
Three months or less.................................. $ 24,057
Over three through six months......................... 33,912
Over six through 12 months............................ 56,223
Over 12 months........................................ 31,241
--------
Total............................................. $145,433
========
26
OTHER BORROWINGS. Deposits are the primary source of funds for Main
Street's lending and investment activities. Occasionally, it obtains additional
funds from the Federal Home Loan Bank (FHLB) and correspondent banks. At
December 31, 2000, Main Street Banks had borrowings of $52.1 million in the form
of FHLB advances and $32.6 million in Federal Funds Purchased and securities
sold under repurchase agreements compared to $49.1 million and $18.9 million,
respectively, at December 31, 1999. Main Street Banks' weighted average interest
rate on FHLB advances for the period ended December 31, 2000 was 6.42%. For a
more detailed discussion of the borrowings of Main Street Banks, see note 7 to
Main Street Banks' Consolidated Financial Statements included herein.
INTEREST RATE SENSITIVITY AND LIQUIDITY. Main Street Banks' asset liability
and funds management policy provides management with the necessary guidelines
for effective funds management and a measurement system for monitoring its net
interest rate sensitivity position. Main Street manages its sensitivity position
within established guidelines.
Interest rate risk is managed by the asset liability committee which is
composed of senior officers of Main Street, in accordance with policies approved
by its board of directors. The asset liability committee formulates strategies
based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the asset liability committee considers
the impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economies, liquidity, business
strategies and other factors. The asset liability committee meets regularly to
review, among other things, the sensitivity of assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activities, commitments to
originate loans and the maturities of investments and borrowings. Additionally,
the asset liability committee reviews liquidity, cash flow flexibility,
maturities of deposits and consumer and commercial deposit activity. Main Street
Banks' management uses two methodologies to manage interest rate risk: (i) an
analysis of relationships between interest-earning assets and interest-bearing
liabilities; and (ii) an interest rate shock simulation model. Main Street
Banks' has traditionally managed its business to reduce its overall exposure to
changes in interest rates.
Main Street manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. Main Street Banks has in the
past, and may utilize interest rate swaps, financial options, or financial
futures contracts in order to reduce interest rate risk. No such interest rate
protection instruments were in effect at the end of 2000.
An interest rate sensitive asset or liability is one that, within a defined
time period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest-earning
assets and interest-bearing liabilities at specific points in time (gap) and by
analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive gap,
when the amount of its interest-earning assets maturing or repricing within a
given period exceeds the amount of its interest-bearing liabilities also
maturing or repricing within that time period. Conversely, a company is
considered to be liability sensitive, or having a negative gap, when the amount
of its interest-bearing liabilities maturing or repricing within a given period
exceeds the amount of its interest-earning assets also maturing or repricing
within that time period. During a period of rising interest rates, a negative
gap would tend to affect net interest income adversely, while a positive gap
would tend to result in an increase in net interest income. During a period of
falling interest rates, a negative gap would tend to result in an increase in
net interest income, while a positive gap would tend to affect net interest
income adversely.
27
The following table sets forth an interest rate sensitivity analysis for
Main Street at December 31, 2000:
VOLUMES SUBJECT TO REPRICING WITHIN
-------------------------------------------------------------
AFTER ONE
0-30 DAYS 31-180 DAYS 181-365 DAYS YEAR TOTAL
--------- ----------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment Securities................ $ 2,111 $ 11,484 $ 15,833 $128,115 $157,543
Loans................................ 212,836 111,467 84,005 286,299 694,607
Mortgage Loans Held for Sale......... 2,248 -- -- -- 2,248
Interest Bearing Deposits in Banks... 505 -- -- -- 505
Federal funds sold and short term
investments........................ 85,097 -- -- -- 85,097
-------- -------- --------- -------- --------
Total interest-earning assets.......... 302,797 122,951 99,838 414,414 940,000
-------- -------- --------- -------- --------
Interest-bearing liabilities:
Demand, money market and savings
deposits........................... 8,443 42,214 50,657 135,404 236,718
Time deposits........................ 26,242 175,457 177,184 83,985 462,868
Borrowings........................... -- 5,000 15,000 32,128 52,128
-------- -------- --------- -------- --------
Total interest-bearing
liabilities...................... 34,685 222,671 242,841 251,517 751,714
-------- -------- --------- -------- --------
Period gap............................. $268,112 $(99,720) $(143,003) $162,897 $188,286
======== ======== ========= ========
Cumulative gap......................... $268,112 $168,392 $ 25,389 $188,286
======== ======== ========= ========
Period gap to total assets............. 26.58% (9.89)% (14.18)% 16.15%
Cumulative gap to total assets......... 26.58% 16.69% 2.51% 18.66%
Shortcomings are inherent in any gap analysis since certain assets and
liabilities may not move proportionally as interest rates change. In addition to
gap analysis, Main Street Banks uses an interest rate risk simulation model and
shock analysis to test the interest rate sensitivity of net interest income and
the balance sheet, respectively. Contractual maturities and repricing
opportunities of loans are incorporated in the model as are prepayment
assumptions, maturity data and call options within the investment portfolio.
Assumptions based on past experience are incorporated into the model for non-
maturity deposit accounts. Based on Main Street's December 31, 2000 simulation
analysis, the simulation model estimates that a 200 basis point rise or decline
in rates over the next 12 month period would have an adverse impact of no more
than 4% on its net interest income for the period. The change is relatively
small, despite the company's asset sensitive position.
As a financial institution, Main Street's primary component of market risk
is interest rate volatility. Fluctuations in interest rates will ultimately
impact both the level of income and expense recorded on most of Main Street
Banks' assets and liabilities, and the market value of all interest-earning
assets and interest-bearing liabilities, other than those which have a short
term to maturity. Based upon the nature of Main Street's operations, it is not
subject to foreign exchange or commodity price risk. Main Street Banks does not
own investment securities held as trading assets.
Main Street Banks' exposure to market risk is reviewed on a regular basis.
Interest rate risk is the potential of economic losses due to future interest
rate changes. These economic losses can be reflected as a loss of future net
interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximizing income. Main Street
Banks' management recognizes these inherent risks and has structured processes
and systems to identify, measure and control these risks.
28
Liquidity involves Main Street Banks' 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, Main Street Banks' liquidity needs
have primarily been met by growth in core deposits, as previously discussed,
together with advances from the Federal Home Loan Bank. Although access to
purchased funds from correspondent banks is available and has been utilized on
occasion to take advantage of investment opportunities, Main Street Banks does
not generally rely on these external funding sources. The cash and federal funds
sold position, supplemented by amortizing investment and loan portfolios, have
generally created an adequate liquidity position.
IMPACT OF INFLATION. The effects of inflation on the local economy and on
Main Street Banks' 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. Main
Street Banks attempts to control the impact of interest rate fluctuations by
managing the 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
such as those experienced in 1999 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. For a more detailed explanation of how the Company manages
its interest rate risk, see "--Financial Condition--Interest rate sensitivity
and liquidity at page 27.
CAPITAL RESOURCES. Capital management consists of providing equity to
support both current and future operations. Main Street is subject to capital
adequacy requirements imposed by the Federal Reserve Board and Main Street Bank
is subject to capital adequacy requirements imposed by the FDIC and the Georgia
Department of Banking and Finance. Both the Federal Reserve Board and the FDIC
have adopted risk-based capital requirements for assessing bank holding company
and bank capital adequacy. These standards define and establish minimum capital
requirements in relation to assets and off-balance sheet exposure, adjusted for
credit risk. The risk-based capital standards currently in effect are designed
to make regulatory capital requirements more sensitive to differences in risk
profiles among bank holding companies and banks, to account for off-balance
sheet exposure and to minimize disincentives for holding liquid assets. 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 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
29
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.
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. Main Street Bank 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, the
FDIC has promulgated regulations setting the levels at which an insured
institution such as Main Street Bank would be considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." Under the FDIC's regulations, Main Street
Bank is classified "well capitalized" for purposes of prompt corrective action.
See "Supervision and Regulation" (page 5).
Shareholders' equity increased to $86.4 million at December 31, 2000 from
$73.8 million at December 31, 1999, an increase of $12.6 million or 17.1%. This
increase was primarily the result of net income of $12.8 million and net
unrealized gains on investment securities held for sale of $2.4 million, less
dividends declared on common stock of $3.5 million.
The following table provides a comparison of Main Street's and its banking
subsidiary's leverage and risk-weighted capital ratios as of December 31, 2000
to the minimum and well capitalized regulatory standards:
MINIMUM REQUIRED FOR TO BE WELL CAPITALIZED
CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE ACTUAL RATIO AT
PURPOSES PROVISIONS ACTION DECEMBER 31, 2000
-------------------- ----------------------- -----------------
Main Street:
Leverage ratio..................... 4.00% 5.00% 8.51%
Tier 1 risk-based capital ratio.... 4.00 6.00 11.37
Risk-based capital ratio........... 8.00 10.00 12.62
Banking Subsidiary:
Leverage ratio..................... 4.00% 5.00% 8.32%
Tier 1 risk-based capital ratio.... 4.00 6.00 10.70
Risk-based capital ratio........... 8.00 10.00 11.95
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes new accounting
and reporting activities for derivatives. The standard requires all derivatives
to be measured at fair value and recognized as either assets or liabilities in
the statement of condition. Under certain conditions, a derivative may be
specifically designated as a hedge. Accounting for the changes in fair value of
a derivative depends on the intended use of the derivative and the resulting
designation. In July 1999, the Financial Accounting Standards Board issued
SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133" ("SFAS No. 137"). In
June 2000, the Financial Accounting Standards Board issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities,"("SFAS No. 138") which amends the accounting and reporting standards
of SFAS No. 133 for certain derivative instruments and certain hedging
activities and is effective simultaneously with SFAS No. 133. Main Street
adopted the standards as of January 1, 2001. The adoption of the standards by
Main Street as of January 1, 2001, had no material effect on earnings and
financial position based on Main Street's limited use of derivatives.
30
QUARTERLY RESULTS (UNAUDITED)
The following table sets forth certain consolidated quarterly financial
information of Main Street. 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. The results for any quarter are
not necessarily indicative of results for any future period. This information
should be read in conjunction with Main Street Banks' consolidated financial
statements and the notes thereto included elsewhere in this report.
2000 QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest income......................................... $18,045 $19,330 $20,826 $22,030
Interest expense........................................ 7,125 7,997 9,494 10,352
Net interest income..................................... 10,920 11,333 11,332 11,678
Provision for loan losses............................... 550 454 455 595
Securities gains (losses)............................... -- (513) -- 4
Earnings before income taxes............................ 5,092 4,086 5,361 5,469
Operating income(1)..................................... 3,323 3,632 3,500 3,690
Net income.............................................. 3,323 2,320 3,500 3,690
Net income per share, basic............................. $ 0.24 $ 0.17 $ 0.24 $ 0.25
Net income per share, diluted........................... $ 0.24 $ 0.16 $ 0.24 $ 0.25
Operating net income per share, diluted(1).............. $ 0.24 $ 0.25 $ 0.24 $ 0.25
1999 QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- -------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Interest income......................................... $14,616 $15,393 $16,422 $17,754
Interest expense........................................ 5,642 5,809 6,236 6,956
Net interest income..................................... 8,974 9,584 10,186 10,798
Provision for loan losses............................... 435 520 395 380
Securities gains (losses)............................... (3) (1) 14 (1)
Earnings before income taxes............................ 3,858 3,621 4,641 4,995
Operating income(2)..................................... 2,503 2,593 2,891 3,224
Net income.............................................. 2,575 2,456 3,007 3,194
Net income per share, basic............................. $ 0.18 $ 0.17 $ 0.21 $ 0.23
Net income per share, diluted........................... $ 0.18 $ 0.17 $ 0.21 $ 0.22
Operating net income per share, diluted(2).............. $ 0.17 $ 0.18 $ 0.20 $ 0.22
- ------------------------
(1) Excludes non-recurring merger related expenses and onetime losses pertaining
to restructuring of investment portfolio of $1,312 in second quarter 2000.
(2) Excludes non-recurring merger related expenses of $137 in second quarter
1999 and $29 in fourth quarter 1999. Excludes non-recurring onetime gains
from sales of property net of merger expenses of $72 in first quarter 1999
and $116 in third quarter 1999.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The discussion on Market Risk appears under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Interest Rate Sensitivity and Liquidity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries are included on pages F-1 through F-34 of this Annual Report on
Form 10-K.
Consolidated Balance Sheets--December 31, 2000 and 1999
Consolidated Statements of Income--Years Ended December 31, 2000, 1999, and
1998
Consolidated Statements of Stockholders' Equity--Years Ended December 31,
2000, 1999 and 1998
Consolidated Statements of Cash Flows--Years Ended December 31, 2000, 1999
and 1998
Notes to Consolidated Financial Statements
Years ended December 31, 2000, 1999 and 1998
CONTENTS
Report of Independent Auditors.............................. F-1
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Income........................... F-3
Consolidated Statements of Changes in Shareholders'
Equity.................................................... F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to Consolidated Financial Statements.................. F-6
32
REPORT OF INDEPENDENT AUDITORS
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, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. 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 did not audit the financial statements of First Sterling Banks,
Inc. and Subsidiaries, prior to their restatement for the 2000 pooling of
interests as described in Note 16, which statements reflect total assets
constituting 41% in 1999, and net interest income constituting 38% in 1999 and
35% in 1998 of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for First Sterling Banks, Inc. and Subsidiaries,
prior to their restatement for the 2000 pooling of interests as described in
Note 16, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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, 2000 and 1999, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
January 25, 2001
F-1
MAIN STREET BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------------
2000 1999
-------------- ------------
ASSETS
Cash and due from banks..................................... $ 38,972,556 $ 36,110,722
Interest-bearing deposits in banks.......................... 504,846 1,733,612
Federal funds sold and securities purchased under agreement
to resell................................................. 85,096,897 35,620,000
Investment securities available for sale.................... 135,636,327 96,652,446
Investment securities held to maturity (fair value of
$17,957,536 and $15,182,297 at December 31, 2000 and 1999,
respectively)............................................. 17,851,829 15,541,492
Other investments........................................... 3,645,900 3,374,756
Mortgage loans held for sale................................ 2,248,415 1,356,664
Loans, net of unearned income............................... 694,607,431 630,990,126
Allowance for loan losses................................... (10,400,896) (9,317,788)
-------------- ------------
Loans, net.................................................. 684,206,535 621,672,338
Premises and equipment, net................................. 26,311,604 26,702,843
Other real estate........................................... 1,917,687 899,400
Accrued interest receivable................................. 6,516,333 3,526,663
Goodwill and other intangible assets........................ 945,534 1,384,300
Other assets................................................ 4,946,936 7,836,965
-------------- ------------
Total assets................................................ $1,008,801,399 $852,412,201
============== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing demand.............................. $ 132,314,871 $124,932,088
Interest-bearing demand and money market................ 193,950,449 178,966,344
Savings................................................. 42,767,549 41,481,575
Time deposits of $100,000 or more....................... 145,433,134 91,625,058
Other time deposits..................................... 317,434,910 269,223,566
-------------- ------------
Total deposits.............................................. 831,900,913 706,228,631
Accrued interest payable.................................... 5,393,279 3,025,862
Federal Home Loan Bank advances............................. 52,127,500 49,142,500
Federal funds purchased and securities sold under repurchase
agreements................................................ 32,615,659 18,876,938
Other liabilities........................................... 341,847 1,298,971
-------------- ------------
Total liabilities........................................... 922,379,198 778,572,902
SHAREHOLDERS' EQUITY
Common stock--no par value per share; 50,000,000 shares
authorized; issued and outstanding, 14,268,102 shares in
2000 and 14,179,163 in 1999............................... 28,531,015 28,109,930
Retained earnings........................................... 58,993,537 49,562,302
Accumulated other comprehensive loss........................ (68,476) (2,799,058)
Treasury stock, 169,082 shares in 2000 and 1999............. (1,033,875) (1,033,875)
-------------- ------------
Total shareholders' equity.................................. 86,422,201 73,839,299
-------------- ------------
Total liabilities and shareholders' equity.................. $1,008,801,399 $852,412,201
============== ============
SEE ACCOMPANYING NOTES.
F-2
MAIN STREET BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Interest income:
Loans, including fees..................................... $68,916,896 $56,313,192 $48,937,441
Interest on investment securities:
Taxable................................................. 6,732,881 5,508,325 5,302,886
Non-taxable............................................. 1,090,510 1,072,659 1,036,936
Federal funds sold........................................ 3,414,383 1,251,305 1,989,555
Interest-bearing deposits in banks........................ 77,258 39,587 11,875
----------- ----------- -----------
Total interest income....................................... 80,231,928 64,185,068 57,278,693
Interest expense:
Interest-bearing demand and money market.................. 5,406,235 3,874,897 3,950,080
Savings................................................... 1,061,313 1,093,252 1,023,383
Time deposits of $100,000 or more......................... 6,580,409 4,371,506 4,318,615
Other time deposits....................................... 18,307,476 13,130,625 12,564,543
Federal Funds purchased................................... 406,483 351,056 88,266
Federal Home Loan Bank advances........................... 3,186,754 1,605,471 586,113
Other..................................................... 20,907 216,462 55,105
----------- ----------- -----------
Total interest expense...................................... 34,969,577 24,643,269 22,586,105
Net interest income......................................... 45,262,351 39,541,799 34,692,588
Provision for loan losses................................... 2,054,000 1,730,000 1,426,000
----------- ----------- -----------
Net interest income after provision for loan losses......... 43,208,351 37,811,799 33,266,588
Noninterest income:
Service charges on deposit accounts....................... 4,687,796 4,300,090 3,837,554
Investment securities (losses) gains...................... (508,601) 9,037 41,445
Gain on sales of premises and equipment................... 48,985 547,933 55,284
Gain on sales of loans.................................... 456,930 351,262 496,880
Other income.............................................. 5,222,952 4,638,140 4,406,205
----------- ----------- -----------
Total noninterest income.................................... 9,908,062 9,846,462 8,837,368
Noninterest expense:
Salaries and other compensation........................... 15,060,692 14,462,705 13,365,445
Employee benefits......................................... 2,886,713 2,127,267 2,059,634
Net occupancy and equipment expense....................... 4,579,975 4,230,312 3,753,918
Professional services..................................... 855,231 970,294 350,327
Regulatory agency assessments............................. 317,433 240,753 161,351
Amortization of intangible assets......................... 438,767 438,767 438,767
Merger expense............................................ 1,085,774 308,908 105,531
Other expense............................................. 7,883,699 7,764,384 7,207,312
----------- ----------- -----------
Total noninterest expense................................... 33,108,284 30,543,390 27,442,285
Income before income taxes.................................. 20,008,129 17,114,871 14,661,671
Income tax expense.......................................... 7,175,329 5,882,514 4,681,812
----------- ----------- -----------
Net income.................................................. $12,832,800 $11,232,357 $ 9,979,859
=========== =========== ===========
Earnings per share:
Basic..................................................... $ .90 $ .79 $ .71
=========== =========== ===========
Diluted................................................... $ .89 $ .78 $ .69
=========== =========== ===========
Weighted average common shares outstanding:
Basic................................................... 14,220,939 14,157,902 14,018,616
=========== =========== ===========
Diluted................................................. 14,494,464 14,481,066 14,361,069
=========== =========== ===========
SEE ACCOMPANYING NOTES.
F-3
MAIN STREET BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK TREASURY STOCK OTHER TOTAL
------------------------ ---------------------- RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
---------- ----------- -------- ----------- ----------- ------------- -------------
Balance at January 1, 1998...... 5,310,367 $27,161,563 65,750 $(1,033,875) $35,110,833 $ 70,563 $61,309,084
Comprehensive income, net of
tax:
Net income.................. -- -- -- -- 9,979,859 -- 9,979,859
Other comprehensive income:
Net unrealized losses on
investment securities
held for sale arising in
the current year........ -- -- -- -- -- 8,107 8,107
Less reclassification
adjustment for net gains
included in net
income.................. -- -- -- -- -- (3,253) (3,253)
-----------
Comprehensive income.......... 9,984,713
Cash dividends declared --
$.15 per share.............. -- -- -- -- (2,337,007) -- (2,337,007)
Cash dividends declared by
pooled companies:
Main Street Banks, Inc. --
$.27 per share............ -- -- -- -- (644,242) -- (644,242)
Other pooled companies...... -- -- -- -- (112,615) -- (112,615)
Common stock issued pursuant
to:
Restricted stock award
plan...................... 132,000 680,000 -- -- -- -- 680,000
Common stock split(1)....... 1,378,665 -- 65,750 -- -- -- --
Common stock split of Main
Street Banks,
Incorporated(2)........... 6,523,200 -- -- -- -- -- --
Exercise of stock options... 10,376 85,939 -- -- -- -- 85,939
---------- ----------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 1998.... 13,354,608 27,927,502 131,500 (1,033,875) 41,996,828 75,417 68,965,872
Comprehensive income, net of
tax:
Net income.................. -- -- -- -- 11,232,357 -- 11,232,357
Other comprehensive income:
Net unrealized losses on
investment securities
held for sale arising in
the current year........ -- -- -- -- -- (2,886,740) (2,886,740)
Less reclassification
adjustment for net gains
included in net
income.................. -- -- -- -- -- 12,265 12,265
-----------
Comprehensive income.......... 8,357,882
Cash dividends declared --
$.16 per share.............. -- -- -- -- (792,892) -- (792,892)
Cash dividends declared by
pooled companies:
Main Street Banks, Inc. --
$.27 per share............ -- -- -- -- (2,825,168) -- (2,825,168)
Other pooled companies.... -- -- -- -- (108,291) -- (108,291)
Common stock issued pursuant
to:
Restricted stock award
plan...................... 4,000 20,000 -- -- -- -- 20,000
Stock dividend.............. 790,269 -- 37,582 -- -- -- --
Exercise of stock options... 32,886 173,428 -- -- -- -- 173,428
Stock forfeited under
restricted stock award
plan........................ (2,600) (11,000) -- -- -- -- (11,000)
Tax benefit from exercise of
stock options............... -- -- -- -- 59,468 -- 59,468
---------- ----------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 1999.... 14,179,163 $28,109,930 169,082 $(1,033,875) $49,562,302 $(2,799,058) $73,839,299
---------- ----------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 1999.... 14,179,163 $28,109,930 169,082 $(1,033,875) $49,562,302 $(2,799,058) $73,839,299
Comprehensive income, net of
tax:
Net income.................. -- -- -- -- 12,832,800 -- 12,832,800
Other comprehensive income:
Net unrealized gains on
investment securities
held for sale arising in
the current year........ -- -- -- -- -- 2,394,905 2,394,905
Less reclassification
adjustment for net
losses included in net
income.................. -- -- -- -- -- 335,677 335,677
-----------
Comprehensive income.......... 15,563,382
Cash dividends declared --
$.24 per share.............. -- -- -- -- (2,611,923) -- (2,611,923)
Cash dividends declared by
pooled companies:
Main Street Banks, Inc. --
$.08 per share............ -- -- -- -- (706,320) -- (706,320)
Other pooled companies...... -- -- -- -- (138,140) -- (138,140)
Common stock issued pursuant
to:
Exercise of stock options... 69,955 301,485 -- -- -- -- 301,485
Restricted stock award
plan...................... 22,500 135,000 -- -- -- -- 135,000
Stock forfeited under
restricted stock award
plan........................ (3,516) (15,400) -- -- -- -- (15,400)
Tax benefit from exercise of
stock options............... -- -- -- -- 54,818 -- 54,818
---------- ----------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 2000.... 14,268,102 $28,531,015 169,082 $(1,033,875) $58,993,537 $ (68,476) $86,422,201
========== =========== ======= =========== =========== =========== ===========
- ----------------------------------
(1) Stock split consisted of a 2 for 1, effected in the form of a dividend to
shareholders of record on March 16, 1998.
(2) Stock split consisted of a 4 for 1, effected in the form of a dividend to
shareholders of record on September 1, 1998.
SEE ACCOMPANYING NOTES.
F-4
MAIN STREET BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------------
2000 1999 1998
------------- -------------- -------------
OPERATING ACTIVITIES
Net income.................................................. $ 12,832,800 $ 11,232,357 $ 9,979,859
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses............................... 2,054,000 1,730,000 1,426,000
Depreciation and amortization of premises and equipment... 2,151,696 1,891,269 1,615,876
Amortization of intangible assets......................... 438,767 438,767 438,767
Gain on sales of other real estate........................ (6,618) (478) 22,438
Investment securities losses (gains)...................... 508,601 (9,037) (41,465)
Net accretion of investment securities.................... (220,957) (45,225) (33,502)
Net accretion of loans purchased.......................... (60,882) (109,828) (69,695)
Gain on sales of premises and equipment................... (48,985) (547,758) (55,284)
Net (increase) decrease in mortgage loans held for sale... (502,676) 2,926,250 (4,282,914)
Gains on sales of mortgage loans.......................... (389,075) (339,662) (456,293)
Gains on sales of other loans............................. (67,855) (11,600) (40,587)
Deferred income tax benefit............................... (101,653) (245,728) (13,145)
Deferred net loan fees.................................... (35,874) 100,270 100,120
Vesting in restricted stock award plan.................... 372,147 443,832 493,000
Changes in operating assets and liabilities:
Increase in accrued interest receivable................. (2,989,670) (1,123,244) (8,667)
Increase in accrued interest payable.................... 2,367,417 607,639 31,564
Other................................................... (1,959,124) (132,393) (1,415,693)
------------- -------------- -------------
Net cash provided by operating activities................... 14,342,059 16,805,431 7,690,379
INVESTING ACTIVITIES
Purchases of investment securities held to maturity......... (4,543,940) (4,272,280) (3,764,460)
Purchases of investment securities available for sale....... (59,399,538) (38,240,654) (67,808,727)
Purchases of other investments.............................. (271,144) (1,016,177) (14,000)
Maturities of investment securities held to maturity........ 2,245,688 1,237,790 5,617,764
Maturities and calls of investment securities available for
sale...................................................... 9,879,854 33,084,833 49,842,256
Proceeds from sales of investment securities available for
sale...................................................... 14,284,195 4,420,285 10,294,738
Net increase in loans funded................................ (63,460,629) (116,816,252) (66,358,179)
Purchases of premises and equipment......................... (2,213,375) (4,016,002) (4,965,096)
Proceeds from sales of premises and equipment............... 501,903 1,367,599 491,506
Proceeds from sales of other real estate.................... 1,205,001 573,924 1,668,069
Improvements to and first lien payoffs on other real
estate.................................................... -- -- (119,079)
------------- -------------- -------------
Net cash used in investing activities....................... (101,771,958) (123,676,934) (75,115,208)
FINANCING ACTIVITIES
Net increase in demand and savings accounts................. 23,652,862 37,981,434 33,163,296
Increase in time deposits................................... 102,019,420 49,071,174 6,328,834
Increase in federal funds purchased......................... 13,738,721 15,478,760 1,539,901
Net increase in Federal Home Loan Bank advances............. 2,985,000 29,142,500 18,000,000
Dividends paid.............................................. (4,157,624) (3,726,352) (2,930,756)
Proceeds from the issuance of common stock.................. 301,485 173,428 70,939
------------- -------------- -------------
Net cash provided by financing activities................... 138,539,864 128,120,944 56,172,214
------------- -------------- -------------
Net increase in cash and cash equivalents................... 51,109,965 21,249,441 (11,252,615)
Cash and cash equivalents at beginning of year.............. 73,464,334 52,214,893 63,467,508
------------- -------------- -------------
Cash and cash equivalents at end of year.................... $ 124,574,299 $ 73,464,334 $ 52,214,893
============= ============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest.................................................. $ 32,602,160 $ 24,035,630 $ 22,578,993
============= ============== =============
Income taxes, net......................................... $ 5,902,230 $ 4,328,806 $ 4,686,170
============= ============== =============
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS
Loans transferred to real estate acquired through
foreclosure............................................... $ 2,213,878 $ 630,321 $ 614,120
============= ============== =============
Bank owned premises transferred to other real estate........ $ -- $ -- $ 685,000
============= ============== =============
Sales of other real estate financed......................... $ -- $ -- $ 166,429
============= ============== =============
SEE ACCOMPANYING NOTES.
F-5
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Main Street Banks, Inc. (the "Parent" or "Company") is a bank holding
company which conducts business primarily in Barrow, Clarke, Cobb, DeKalb,
Gwinnett, Newton, Rockdale and Walton counties in Georgia through its wholly
owned subsidiaries, Main Street Bank ("Main Street" or the "Bank") and
Williamson, Musselwhite & Main Street Insurance, Inc. ("Williamson"). Prior to
January 2, 2001, the Parent was known as First Sterling Banks, Inc. On
December 29, 2000, former bank subsidiaries, The Westside Bank & Trust Company
("Westside"), The Eastside Bank & Trust Company ("Eastside"), and Community Bank
of Georgia ("Community") were merged into Main Street Bank. 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.
The consolidated financial statements of Main Street Banks, Inc. and
Subsidiaries are prepared in accordance with accounting principles generally
accepted in the United States, 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 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 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.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Parent and
its wholly owned subsidiaries, the Bank and Williamson. All significant
intercompany transactions and balances have been eliminated in consolidation.
As described more fully in Note 16, the accompanying financial statements
have been restated to account for the pooling of interests between the former
First Sterling Banks, Inc. and Main Street Banks, Incorporated, which occurred
on May 24, 2000, the pooling of interests between the former First Sterling
Banks, Inc. and Georgia Bancshares Inc., which occurred on April 23, 1999 and
the pooling of interests between the Company and Williamson, which occurred on
December 28, 2000. In business combinations accounted for as
poolings-of-interests, the financial position and results of operations and cash
flows of the respective companies are restated as though the companies were
combined for all periods presented.
INVESTMENT SECURITIES
Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. Investment securities are classified as held-to-maturity
when the Company has the positive intent and the ability to hold the securities
to maturity. Held to maturity securities are stated at amortized cost.
F-6
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment securities not classified as held-to-maturity are classified as
available for sale. Available for sale securities are stated at fair value with
the unrealized gains and losses, net of tax, reported as a separate component of
comprehensive income. Other investments are stated at amortized cost.
Realized gains and losses, and declines in value determined to be other than
temporary are included in net investment securities gains (losses). The cost of
securities sold is based on the specific identification method.
The cost of investment securities classified as held-to-maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to expected maturity, or in the case of mortgage-backed securities,
over the estimated life of the security. Such amortization and accretion is
included in interest income from investments.
SECURITIES PURCHASED UNDER RESELL AGREEMENTS
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 amounts advanced under resell agreements represent short-term loans and
are combined with Federal funds sold in the balance sheet. 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, other than mortgage loans held for sale, are stated at the principal
amounts outstanding reduced by purchase discount, 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 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.
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.
MORTGAGE LOANS HELD FOR SALE
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.
F-7
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 inherent losses on 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.
PREMISES 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. Leasehold
improvements are amortized over the shorter of the estimated useful lives of the
improvements or the term of the related lease.
OTHER REAL ESTATE
Other real estate 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 writedowns of other real
estate are charged to current operations.
GOODWILL AND OTHER INTANGIBLE ASSETS
Substantially all costs in excess of net assets of entities acquired are
being amortized using the straight-line method over periods ranging from 10 to
15 years. Other intangibles related to entities acquired are being amortized
over periods ranging from 5 to 10 years using the straight-line method.
Intangible assets related to capital lease rights are being amortized over the
term of the related lease using the straight-line method. Accumulated
amortization was $3,728,467 and $3,289,700 at December 31, 2000 and 1999,
respectively. Amortization expense totaled $438,767 for each of the years ended
December 31, 2000, 1999 and 1998.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
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 on a daily basis.
F-8
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
EARNINGS PER SHARE
The Company accounts for earnings per share in accordance with Financial
Accounting Standards Board Statement No. 128, "Earnings Per Share"
("Statement 128").
The computation of diluted earnings per share is as follows:
YEAR ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Numerator:
Basic and diluted net income........ $12,832,800 $11,232,357 $ 9,979,859
=========== =========== ===========
Denominator:
Basic weighted average shares....... 14,220,939 14,157,902 14,018,616
Effect of employee stock options.... 273,525 323,164 342,453
----------- ----------- -----------
Diluted weighted average shares..... 14,494,464 14,481,066 14,361,069
=========== =========== ===========
Diluted earnings per share............ $.89 $.78 $.69
=========== =========== ===========
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 incurred
or received.
COMPREHENSIVE INCOME
Financial Accounting Standards Board 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.
F-9
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and federal funds sold. Generally, federal funds are purchased
and sold for one-day periods.
RECLASSIFICATION
Certain previously reported amounts have been reclassified to conform to
current presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 138,
"Accounting for Derivative Instruments and Hedging Activities"
("Statement 138") which amended certain provisions of Statement 133.
Statement 138 requires all derivatives to be recorded at their fair value on the
statement of financial condition. Accounting for the changes in fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. Statement 138 is effective for the Company on January 1, 2001. The
adoption of the standard did not result in a material financial impact based on
the Company's limited use of derivatives.
2. 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 at December 31, 2000 and 1999 were approximately
$12,843,000 and $9,561,000 respectively. The Company maintained cash balances
and reserves which were adequate to meet these requirements.
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are as
follows:
DECEMBER 31, 2000
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ----------- ------------
HELD TO MATURITY SECURITIES
States and political subdivisions.......... $ 17,851,829 $290,134 $ (184,427) $ 17,957,536
============ ======== =========== ============
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities................... $ 1,392,095 $ 812 $ (24,084) $ 1,368,823
U.S. Government agencies and
corporations............................. 85,813,485 645,869 (358,578) 86,100,776
States and political subdivisions.......... 9,684,023 76,843 (194,876) 9,565,990
Mortgage-backed securities................. 38,850,476 221,734 (471,472) 38,600,738
------------ -------- ----------- ------------
Total...................................... $135,740,079 $945,258 $(1,049,010) $135,636,327
============ ======== =========== ============
F-10
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
3. INVESTMENT SECURITIES (CONTINUED)
DECEMBER 31, 1999
-----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ----------- -----------
HELD TO MATURITY SECURITIES
States and political subdivisions........... $ 15,541,492 $ -- $ (359,195) $15,182,297
============ ======= =========== ===========
AVAILABLE FOR SALE SECURITIES
U.S. Treasury securities.................... $ 3,992,001 $ 1,166 $ (51,117) $ 3,942,050
U.S. Government agencies and corporations... 43,513,475 -- (1,763,306) 41,750,169
States and political subdivisions........... 9,733,328 22,228 (664,043) 9,091,513
Mortgage-backed securities.................. 42,582,513 41,457 (1,738,256) 40,885,714
Equity securities........................... 983,000 -- -- 983,000
------------ ------- ----------- -----------
Total................................... $100,804,317 $64,851 $(4,216,722) $96,652,446
============ ======= =========== ===========
Other investments are composed of the following:
DECEMBER 31
-----------------------
2000 1999
---------- ----------
Federal Home Loan Bank stock......................... $3,283,400 $3,010,500
Southeast Bankcard Association stock................. 40,000 40,000
North Georgia Bank stock............................. 150,000 150,000
Banker's Bank stock.................................. 172,500 172,500
Other................................................ -- 1,756
---------- ----------
$3,645,900 $3,374,756
========== ==========
The amortized cost and estimated fair value of investment securities held to
maturity and available for sale at December 31, 2000, 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.
INVESTMENT SECURITIES INVESTMENT SECURITIES
HELD TO MATURITY AVAILABLE FOR SALE
------------------------- ---------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- ----------- ------------ ------------
Due in one year or less................. $ 1,023,943 $ 1,026,589 $ 31,840,720 $ 31,780,043
Due after one year through five years... 7,710,892 7,740,654 55,628,508 55,990,654
Due after five years through ten
years................................. 4,730,000 4,766,020 15,163,838 15,280,178
Due after ten years..................... 4,386,994 4,424,273 33,107,013 32,585,452
----------- ----------- ------------ ------------
$17,851,829 $17,957,536 $135,740,079 $135,636,327
=========== =========== ============ ============
During 2000, 1999 and 1998, proceeds from sales of investment securities
available for sale were $14,284,195, $4,420,285 and $10,294,738, respectively,
with gross realized gains and losses of $(512,836), $(4,913) and $23,912,
respectively.
Securities with a carrying value of $97,238,723 and $74,739,835 and
estimated fair values of $97,451,526 and $73,504,077 at December 31, 2000 and
1999, respectively, were pledged to secure public deposits.
F-11
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
4. LOANS
Loans are summarized as follows:
DECEMBER 31
---------------------------
2000 1999
------------ ------------
Consumer.................................................... $ 59,458,283 $ 63,137,206
Residential mortgage........................................ 143,159,271 131,633,723
Construction................................................ 136,372,092 117,047,523
Commercial.................................................. 93,819,147 71,589,891
Real estate--other.......................................... 263,499,971 249,439,792
------------ ------------
Total loans................................................. 696,308,764 632,848,135
Less:
Purchase discount......................................... (228,712) (289,594)
Deferred net loan fees.................................... (1,203,758) (1,135,101)
Unearned income........................................... (268,863) (433,314)
Allowance for loan losses................................. (10,400,896) (9,317,788)
------------ ------------
Loans, net.................................................. $684,206,535 $621,672,338
============ ============
Nonaccrual loans were $923,717 and $1,742,913 at December 31, 2000 and 1999,
respectively. The allowance for loan losses related to these loans was $137,282
and $221,112 at December 31, 2000 and 1999, respectively. The average recorded
investment in these loans was $1,150,942, $1,693,856 and $1,070,431 for the
years ended December 31, 2000, 1999 and 1998, respectively. If such loans had
been on an accrual basis, interest income would have been approximately
$109,997, $172,402, and $82,407 higher for the years ended December 31, 2000,
1999, and 1998, respectively.
An analysis of activity in the allowance for loan losses is as follows:
YEAR ENDED DECEMBER 31
-------------------------------------
2000 1999 1998
----------- ---------- ----------
Balance at beginning of year............................ $ 9,317,788 $8,217,313 $7,168,010
Provision for loan losses............................. 2,054,000 1,730,000 1,426,000
Loans charged off..................................... (1,322,162) (977,452) (809,277)
Recoveries of loans previously charged off............ 351,270 347,927 432,580
----------- ---------- ----------
Balance at end of year.................................. $10,400,896 $9,317,788 $8,217,313
=========== ========== ==========
A substantial portion of the Company's loans are secured by real estate in
north Georgia communities, primarily in Barrow, Clarke, Cobb, DeKalb, 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.
F-12
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
5. PREMISES AND EQUIPMENT
Premises and equipment are composed of the following:
DECEMBER 31
----------------------------
2000 1999
------------- ------------
Land........................................................ $ 7,043,149 $ 7,091,513
Buildings and leasehold improvements........................ 17,346,764 16,688,161
Furniture, fixtures and equipment........................... 13,072,314 12,431,420
Construction in process..................................... 524,405 283,474
------------- ------------
Less accumulated depreciation and amortization.............. (11,675,028) (9,791,725)
------------- ------------
$ 26,311,604 $ 26,702,843
============= ============
Depreciation and amortization expense totaled $2,151,696, $1,891,269 and
$1,615,876 for the periods ended December 31, 2000, 1999 and 1998, respectively.
The Company leases certain buildings and various equipment under operating
leases. Minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 2000 are as follows:
2001........................................................ $ 315,915
2002........................................................ 294,804
2003........................................................ 286,805
2004........................................................ 244,342
2005........................................................ 210,824
Thereafter.................................................. 3,097,533
----------
Total minimum lease payments................................ $4,450,224
==========
Rental expense for all operating leases was $415,299, $287,350 and $211,942
in 2000, 1999 and 1998, respectively.
6. INTEREST BEARING DEPOSITS
A summary of time deposits by year of maturity at December 31, 2000 is as
follows:
2001........................................................ $380,904,287
2002........................................................ 63,228,193
2003........................................................ 7,604,012
2004........................................................ 3,980,754
2005 and after.............................................. 7,150,798
------------
Total time deposits......................................... $462,868,044
============
The Company had $145,433,134 and $91,625,058 in time deposits over $100,000
at December 31, 2000 and 1999, respectively. Interest expense on these deposits
was $6,580,409, $4,371,506 and $4,318,615 for the years ended December 31, 2000,
1999 and 1998, respectively.
F-13
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
7. BORROWINGS
At December 31, 2000 and 1999 the Company had advances from the Federal Home
Loan Bank totaling $52,127,500 and $49,142,500, respectively. Interest payments
and principal payments are due at various maturity dates through 2009 with fixed
rates ranging from 5.51% to 7.15%. 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 is allowed to borrow up to 75% of the
balance of the eligible loans pledged as collateral. At December 31, 2000 and
1999 the Company's line with the Federal Home Loan Bank was approximately
$77,500,000 and $55,700,000, respectively. The Company's weighted average
interest rate on borrowings for the years ended December 31, 2000, 1999 and 1998
was 6.42%, 5.64% and 5.52%, respectively. Of the $52,127,500 balance outstanding
at December 31, 2000, $20,015,000 matures in 2001, $15,015,000 matures in 2002,
$15,000 matures in 2003, $15,000 matures in 2004, $7,015,000 matures in 2005,
and $10,052,500 matures thereafter.
8. INCOME TAXES
Income tax expense is summarized as follows:
YEAR ENDED DECEMBER 31
------------------------------------
2000 1999 1998
---------- ---------- ----------
Current income tax expense............................... $7,276,982 $6,128,242 $4,694,975
Deferred income tax benefit.............................. (101,653) (245,728) (13,145)
---------- ---------- ----------
$7,175,329 $5,882,514 $4,681,812
========== ========== ==========
A reconciliation of income tax computed at statutory rates to total income
tax expense is as follows:
YEAR ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Pretax income......................................... $20,008,129 $17,114,871 $14,661,671
Income tax computed at statutory rate................. $ 6,802,764 $ 5,819,056 $ 4,984,968
Increase (decrease) resulting from:
Tax-exempt interest................................. (470,974) (464,315) (417,521)
Nondeductible interest on tax-exempt investments.... 59,500 65,866 27,505
Nondeductible merger expenses....................... 330,800 -- --
Amortization of goodwill............................ 35,790 35,790 35,790
Other, net.......................................... 417,449 426,117 51,070
----------- ----------- -----------
$ 7,175,329 $ 5,882,514 $ 4,681,812
=========== =========== ===========
F-14
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
8. INCOME TAXES (CONTINUED)
The following summarizes the significant components of the Company's
deferred tax assets and (liabilities):
DECEMBER 31
-----------------------
2000 1999
---------- ----------
Reserve for loan losses..................................... $3,182,654 $2,782,707
Depreciation on premises and equipment...................... (598,890) (495,401)
Core deposit intangible..................................... 122,142 47,038
Deferred net loan fees...................................... 417,833 336,556
Net unrealized losses on investment securities available for
sale...................................................... 35,276 1,458,736
Other, net.................................................. (459,474) (108,288)
---------- ----------
Net deferred tax asset...................................... $2,699,541 $4,021,348
========== ==========
9. EMPLOYEE BENEFITS
The Company sponsors a 401(k) Employee Savings Plan that permits employees
to defer annual cash compensation as specified under the plan. The Board of
Directors determines the annual Company contribution, which was $226,045,
$251,166, and $248,385 in 2000, 1999 and 1998, respectively.
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 $1,185,623,
$1,057,961 and $823,584 in 2000, 1999 and 1998, respectively.
10. 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, 2000 and 1999 were $6,086,150 and
$11,407,106, respectively. For the periods ended December 31, 2000 and 1999,
$618,227 and $4,234,233, respectively of such loans were made and loan
repayments totaled $5,939,183 and $1,260,092 for the respective periods. It is
the policy of the Company that such transactions be 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 collectibility or present other
unfavorable features. These individuals and their related interests also
maintain customary demand and time deposit accounts with the Company.
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, member of the Board of Directors, and an Executive Officer of the
Company, and also members of this individual's family. Terms for these related
party leases are substantially the same as those that would be expected to
prevail in the marketplace. During 2000, 1999 and 1998, total lease payments
under these related party leases totaled approximately $250,000, $220,000 and
$160,000, respectively.
F-15
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
11. STOCK OPTIONS AND LONG-TERM COMPENSATION PLANS
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.
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 792,605 and 765,960 shares of restricted stock issued as
of December 31, 2000 and 1999. A total of 649,955 and 565,160 shares were vested
with 142,650 and 200,800 shares issued and unvested as of December 31, 2000 and
1999. As of December 31, 2000, no additional restricted stock will be issued
under these plans.
In 2000, the Board of Directors 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.
During 2000, the Company issued 22,500 shares of restricted stock under the
Omnibus Plan.
The Company has various stock option plans with common stock reserved for
key employees and directors. At December 31, 2000 and 1999, the Company had
483,450 and 212,357 shares of its authorized but unissued common stock reserved
for future grants under the stock option plans. During 2000, 294,000 options
were granted under the Omnibus Plan and 175,703 options were granted under the
2000 Directors Stock Option Plan. 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:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
2000 1999 1998
--------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------- --------- -------- --------- -------- ---------
Under option, beginning of year.... 669,746 $ 5.98 634,596 $ 5.32 612,543 $4.96
Granted.......................... 469,753 11.85 72,809 11.46 74,568 9.43
Exercised........................ (69,955) 4.31 (32,886) 5.27 (13,037) 5.44
Terminated....................... -- -- (4,773) 6.24 (39,478) 7.58
--------- ------ -------- ------ -------- -----
Under option, end of year.......... 1,069,544 8.67 669,746 5.98 634,596 5.32
========= ====== ======== ====== ======== =====
Exercisable, end of year........... 775,494 7.41 608,911 5.49 557,072 4.80
========= ====== ======== ====== ======== =====
F-16
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
11. STOCK OPTIONS AND LONG-TERM COMPENSATION PLANS (CONTINUED)
Following is a summary of the status of options outstanding at December 31,
2000:
UNDER OPTION
- ------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED- -----------------------
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL NUMBER EXERCISE
RANGE OF EXERCISE PRICES NUMBER PRICE LIFE EXERCISABLE PRICE
- ------------------------ --------- --------- ----------- ----------- ---------
$ 3.07 - $ 4.55 259,254 $ 3.64 5 years 259,254 $ 3.64
$ 4.82 - $ 7.19 214,965 6.34 7 years 214,965 6.34
$ 7.40 - $ 9.72 31,869 9.48 8 years 31,869 9.48
$11.08 - $13.20 563,456 11.82 10 years 269,406 11.64
--------- -------
1,069,544 775,494
========= =======
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 2000, 1999 and 1998: risk-free interest of 5.28%, 6.47% and
5.12%, respectively; dividend yield of 2.29%, 1.27% and 1.71%, respectively;
volatility factor of the expected market price of the Company's common stock of
.448, .356 and .378, respectively; and a weighted-average expected life of the
options of 8 years in 2000 and 7 years in 1999 and 1998. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of the fair value
of its employee stock options. The weighted-average fair value of options
granted during 2000, 1999 and 1998 was $5.23, $5.01 and $3.82, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options granted in 2000, 1999 and 1998 is amortized to expense over the options'
vesting period. The Company's pro forma information follows:
YEAR ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
----------- ----------- ----------
Pro forma net income................................... $12,190,044 $11,016,434 $9,939,323
Pro forma net income per share:
Basic.............................................. $ .86 $ .78 $ .71
Diluted............................................ $ .84 $ .76 $ .69
12. 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.
F-17
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
12. REGULATORY MATTERS (CONTINUED)
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 in the regulations) 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 as set forth in the following tables.
As of its most recent regulatory notification, the Company and the Bank was
considered well capitalized under current regulatory guidelines. There are no
conditions or events since that notification that management believes have
changed the category.
The following is a summary of the Company's and the Bank's capital ratios at
December 31, 2000. Information for December 31, 1999 and 1998 is prepared for
the former banking subsidiaries prior to their merger with Main Street on
December 29, 2000.
FOR CAPITAL TO BE WELL CAPITALIZED
ACTUAL ADEQUACY UNDER PROMPT CORRECTIVE
AMOUNT RATIO PURPOSES RATIO ACTION PROVISIONS RATIO
----------- -------- ----------- -------- ----------------------- --------
Company:
As of December 31, 2000
Total Capital (to Risk Weighted
Assets)........................... $94,964,000 12.62% $60,197,840 8% $75,247,300 10%
Tier 1 Capital (to Risk Weighted
Assets)........................... 85,546,000 11.37% 30,098,920 4% 45,148,380 6%
Tier 1 Capital (to Average
Assets)........................... 85,546,000 8.51% 40,205,240 4% 50,256,550 5%
As of December 31, 1999
Total Capital (to Risk Weighted
Assets)........................... 82,778,000 12.40% 53,402,000 8% 66,753,000 10%
Tier 1 Capital (to Risk Weighted
Assets)........................... 74,948,000 11.23% 26,701,000 4% 40,052,000 6%
Tier 1 Capital (to Average
Assets)........................... 74,948,000 8.58% 34,966,000 4% 43,707,000 5%
AS OF DECEMBER 31, 2000
Main Street:
Total Capital (to Risk Weighted
Assets)........................... $93,455,000 11.95% $62,582,240 8% $78,227,800 10%
Tier 1 Capital (to Risk Weighted
Assets)........................... 83,669,000 10.70% 31,291,120 4% 46,936,680 6%
Tier 1 Capital (to Average
Assets)........................... 83,669,000 8.32% 40,230,000 4% 50,287,500 5%
AS OF DECEMBER 31, 1999
Main Street:
Total Capital (to Risk Weighted
Assets)........................... $50,875,000 13.42% $30,327,920 8% $37,909,900 10%
Tier 1 Capital (to Risk Weighted
Assets)........................... 46,118,000 12.17% 15,163,960 4% 22,745,940 6%
Tier 1 Capital (to Average
Assets)........................... 46,118,000 9.27% 19,917,920 4% 24,897,400 5%
Westside:
Total Capital (to Risk Weighted
Assets)........................... $12,463,000 11.37% $8,770,000 8% $10,962,000 10%
Tier 1 Capital (to Risk Weighted
Assets)........................... 11,408,000 10.41% 4,385,000 4% 6,577,000 6%
Tier 1 Capital (to Average
Assets)........................... 11,408,000 6.99% 6,533,000 4% 8,166,000 5%
Eastside:
Total Capital (to Risk Weighted
Assets)........................... $ 9,937,000 9.92% $8,019,000 8% $10,022,000 10%
Tier 1 Capital (to Risk Weighted
Assets)........................... 8,854,000 8.83% 4,009,000 4% 6,014,000 6%
Tier 1 Capital (to Average
Assets)........................... 8,854,000 7.49% 4,726,000 4% 5,908,000 5%
Community:
Total Capital (to Risk Weighted
Assets)........................... $ 9,364,000 11.50% $6,517,000 8% $ 8,146,000 10%
Tier 1 Capital (to Risk Weighted
Assets)........................... 8,429,000 10.35% 3,259,000 4% 4,888,000 6%
Tier 1 Capital (to Average
Assets)........................... 8,429,000 8.88% 3,799,000 4% 4,748,000 5%
F-18
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
13. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
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
consolidated 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.
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, 2000 and 1999 include $39,078,000 and $21,371,000, respectively, in
undisbursed credit lines and $71,263,000 and $33,708,000, 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. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Company had $2,339,000 and $630,000 in irrevocable standby letters of credit
outstanding at December 31, 2000 and 1999, respectively.
The Company was not required to perform under any standby letters of credit
during 2000 or 1999.
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.
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.
F-19
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
14. LITIGATION
The Company, in the normal course of business, is subject to various pending
or threatened lawsuits in which claims for monetary damages are asserted.
Although it is not possible for the Company to predict the outcome of these
lawsuits or the range of any possible loss, management, after consultation with
legal counsel, does not anticipate that the ultimate aggregate liability, if
any, arising from these lawsuits will have a material adverse effect on the
Company's financial position or operating results.
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions in estimating fair
values of financial instruments:
Cash and cash equivalents--The carrying amount of cash and cash equivalents
approximates fair value.
Interest-bearing deposits--The carrying amount of interest-bearing deposits
approximates fair value.
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 certificates of deposit is based on the
discounted value of contractual cash flows using the rates currently offered
for deposits of similar remaining maturities.
Accrued interest--The carrying amount of accrued interest receivable and
payable approximates fair value.
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.
F-20
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
15. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
DECEMBER 31
---------------------------------------------------------
2000 1999
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
------------ ------------ ------------ ------------
Financial assets:
Cash and due from banks............. $ 38,972,556 $ 38,972,556 $ 36,110,722 $ 36,110,722
Interest-bearing deposits........... 504,846 504,846 1,733,612 1,733,612
Investment securities held to
maturity.......................... 17,851,829 17,957,536 15,541,492 15,182,297
Investment securities available for
sale.............................. 135,636,327 135,636,327 96,652,446 96,652,446
Other investments................... 3,645,900 3,645,900 3,374,756 3,374,756
Loans (net of unearned income)...... 694,607,431 681,746,890 630,990,126 626,417,262
Mortgage loans held for sale........ 2,248,415 2,248,415 1,356,664 1,356,664
Accrued interest receivable......... 6,516,333 6,516,333 3,526,663 3,526,663
Financial liabilities:
Noncontractual deposits............. 369,032,869 384,045,529 345,380,007 348,820,174
Contractual deposits................ 462,868,044 458,023,056 360,848,624 360,650,812
Securities sold under repurchase
agreements........................ 32,615,659 32,615,659 18,876,938 18,876,938
Federal Home Loan Advances.......... 52,127,500 52,127,500 49,142,500 49,142,500
Accrued interest payable............ 5,393,279 5,393,279 3,025,862 3,025,862
Off-balance-sheet instruments:
Undisbursed credit lines............ 39,078,000 356,551 21,371,000 194,991
Unfunded construction and
development loans................. 71,263,000 650,210 33,708,000 307,555
Standby letters of credit........... 2,339,000 21,341 630,000 5,748
16. BUSINESS COMBINATIONS
On December 28, 2000, the Company effected a business combination and merger
with Williamsom Insurance Agency, Inc. and Williamson & Musselwhite Insurance
Agency, Inc. Under the terms of the transaction, the outstanding shares of the
capital stock of the two insurance agencies were converted into shares of the
common stock of the Company. The combination was accounted for as a pooling of
interests and, accordingly, all prior financial statements have been restated to
include the financial results of Williamson Insurance Agency, Inc. and
Williamson & Musselwhite Insurance Agency, Inc.
On May 24, 2000, the Company effected a business combination and merger with
the former Main Street Banks, Incorporated (the former parent of Main Street
Bank). Under the terms of the transaction, Main Street Banks, Incorporated
shareholders received 1.01 shares of First Sterling Banks, Inc. in common stock
for each share of Main Street Banks, Incorporated stock owned prior to the
merger. The combination was accounted for as a pooling of interests and,
accordingly, all prior financial statements have been restated to include the
financial results of Main Street Banks, Incorporated.
F-21
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
16. BUSINESS COMBINATIONS (CONTINUED)
On April 23, 1999, the Company effected a business combination and merger
with Georgia Bancshares, Inc. by exchanging 1,461,632 shares of its common stock
for all of the common stock of Georgia Bancshares, Inc. The combination was
accounted for as a pooling of interests and, accordingly, all prior financial
statements have been restated to include the financial results of Georgia
Bancshares, Inc.
The results of operations of the separate companies for periods prior to the
combination are summarized as follows:
YEAR ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Net interest income:
Main Street Banks, Inc., exclusive of
pre-acquisition amounts........................... $36,364,900 $13,868,247 $ 8,877,106
Georgia Bancshares, Inc.(1) ........................ -- 1,220,175 3,278,715
The former Main Street Banks, Incorporated(2) ...... 8,880,630 24,438,403 22,522,013
Williamson Insurance Agency......................... 14,245 14,259 15,202
Williamson & Musselwhite Insurance Agency........... 2,576 715 (448)
----------- ----------- -----------
Total................................................. $45,262,351 $39,541,799 $34,692,588
=========== =========== ===========
Net income:
Main Street Banks, Inc., exclusive of
pre-acquisition amounts........................... $ 9,062,895 $ 3,536,180 $ 2,471,194
Georgia Bancshares, Inc.(1) ........................ -- 313,921 844,306
The former Main Street Banks, Incorporated(2) ...... 3,544,112 7,233,666 6,515,375
Williamson Insurance Agency......................... 38,386 40,808 31,027
Williamson & Musselwhite Insurance Agency........... 187,407 107,782 117,957
----------- ----------- -----------
$12,832,800 $11,232,357 $ 9,979,859
=========== =========== ===========
- ------------------------
(1) 1999 amounts reflect the results of operations from January 1, 1999 through
the effective merger date of April 23, 1999. Results of operations for the
period from April 24, 1999 through December 31, 1999 are included in Main
Street Banks, Inc. amounts.
(2) 2000 amounts reflect the results of operations from January 1, 2000 through
the effective merger date of May 24, 2000. Results of operations for the
period from May 25, 2000 through December 31, 2000 are included in Main
Street Banks, Inc. amounts.
F-22
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
17. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheet of the Parent
at December 31, 2000 and 1999, and the statements of income and cash flows for
the years ended December 31, 2000, 1999 and 1998:
CONDENSED BALANCE SHEET
DECEMBER 31
-------------------------
2000 1999
----------- -----------
ASSETS
Cash and cash equivalents.......................... $ 1,052,645 $ 2,112,333
Investment in subsidiaries......................... 85,018,738 71,766,066
Other assets....................................... 460,993 687,328
----------- -----------
Total assets....................................... $86,532,376 $74,565,727
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities........................................ $ 110,175 $ 726,428
Shareholders' equity............................... 86,422,201 73,839,299
----------- -----------
Total liabilities and shareholders' equity......... $86,532,376 $74,565,727
=========== ===========
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
--------------------------------------
2000 1999 1998
----------- ----------- ----------
Income:
Dividends from subsidiaries.......... $ 5,616,908 $ 3,874,267 $3,616,560
Expenses:
Salaries and employee benefits....... 150,115 93,367 10,500
Merger expense....................... 1,0085,774 308,908 105,531
Other expense........................ 660,191 336,078 302,844
----------- ----------- ----------
Total expense.......................... 1,896,080 738,353 418,875
----------- ----------- ----------
Income before income tax benefit and
equity in undistributed income of
subsidiaries......................... 3,720,828 3,135,914 3,197,685
Income tax benefit..................... 421,342 174,777 151,057
----------- ----------- ----------
Income before equity in undistributed
income of subsidiaries............... 4,142,170 3,310,691 3,348,742
Equity in undistributed income of
subsidiaries......................... 8,690,630 7,921,666 6,631,117
----------- ----------- ----------
Net income............................. $12,832,800 $11,232,357 $9,979,859
=========== =========== ==========
F-23
MAIN STREET BANKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000 AND 1999
17. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
OPERATING ACTIVITIES
Net income............................. $12,832,800 $11,232,357 $ 9,979,859
Adjustments to reconcile net income to
net cash provided by operating
activities:
Undistributed income of
subsidiaries..................... (8,690,630) (7,921,666) (6,631,117)
Other.............................. (1,345,719) 60,415 (576,724)
----------- ----------- -----------
Net cash provided by operating
activities........................... 2,796,451 3,371,106 2,772,018
FINANCING ACTIVITIES
Dividends paid......................... (4,157,624) (3,726,352) (2,930,756)
Proceeds from issuance of common stock
options.............................. 301,485 173,428 70,939
----------- ----------- -----------
Net cash used in financing
activities........................... (3,856,139) (3,552,924) (2,859,817)
----------- ----------- -----------
Net decrease in cash................... (1,059,688) (181,818) (87,799)
Cash at beginning of year.............. 2,112,333 2,294,151 2,381,950
----------- ----------- -----------
Cash at end of year.................... $ 1,052,645 $ 2,112,333 $ 2,294,151
=========== =========== ===========
18. SUBSEQUENT EVENTS
In October 2000, the Company announced its intent to acquire Walton Bank and
Trust Company ("Walton"). Walton is a community bank located in Monroe, Georgia,
with total assets of $62,000,000. The acquisition was accounted for as a pooling
of interests. The acquisition was completed on January 25, 2001. Under the terms
of the purchase agreement, the Company exchanged 2.752 shares of its common
stock for each share of Walton's common stock.
The following presents certain pro forma operating results (unaudited) of
the Company as if the acquisition had occurred on January 1, 1998.
YEAR ENDED DECEMBER 31
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Pro forma net interest income......................... $48,236,251 $42,037,757 $36,969,165
Pro forma net income.................................. 13,924,800 12,092,357 10,672,859
Pro forma earnings per share:
Basic............................................. $ .90 $ .79 $ .70
Diluted........................................... $ .88 $ .77 $ .68
F-24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company's former independent accountants were terminated on May 25,
2000. The former accountant's reports on the financial statements of the Company
for each of the past two years did not contain an adverse opinion or a
disclaimer of opinion and neither was modified as to uncertainty, audit scope or
accounting principles. The decision to change accountants was recommended by the
Company's audit committee and approved by its Board of Directors. During the
Company's two most recent fiscal years and any subsequent interim period
preceding the previous accountants' termination, there were no disagreements
with the former accountants on any matter of accounting principles or practices,
financial statement disclosure or audit scope or procedure that would have
required the filing of a current report on Form 8-K. Ernst & Young, LLP was
retained on May 25, 2000 to act as the Company's new independent accountant.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS, OF THE REGISTRANT
The information set forth under the caption "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 2001 Annual Meeting is
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation", "Stock
Options" and "Director Compensation" of the Proxy Statement of the Company for
the 2001 Annual Meeting is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership" of the
Proxy Statement of the Company for the 2001 Annual Meeting is incorporated by
reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions" and
"Officers" of the Proxy Statement of the Company for the 2001 Annual Meeting is
incorporated by reference herein.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) (2) Financial statements and schedules--See Item 8
(b) Reports on Form 8-K
Current report on Form 8-K filed on October 10, 2000 contains a press
release of the Company dated September 26, 2000 announcing the proposed
acquisition of Walton Bank & Trust Company and a press release of the
Company dated September 26, 2000 announcing the proposed acquisition of the
Williamson Group.
(c) The following are filed with or incorporated by reference into this report.
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
2.1 Merger Agreement dated September 26, 2000, among the
Registrant, Main Street Bank and Walton Bank & Trust Co.,
(incorporated for reference as APPENDIX A to the Proxy
Statement/Prospectus set forth in Part I of the
Registration Statement No. 333-50762 on Form S-4)
33
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1 Restated Articles of Incorporation of First Sterling Banks,
Inc. (incorporated by reference to Exhibit 3.1 to
Registration Statement No. 333-50762 of Form S-4)
3.2 Bylaws of First Sterling Banks, Inc. (incorporated by
reference to Exhibit 3.2 to Registration Statement No.
33-78046 of form S-4)
4.1 See page 1 of Registrant's Articles of Incorporation
(defining its common stock)
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
Exhibit 10.11 to form S-4 (File No. 333-33844)
(incorporated by reference)
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 filed 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 Appendix B to the Proxy Statement for the
Registrant's 2001 Annual Meeting.
10.16 Form of Omnibus Stock Ownership and Long Term Incentive Plan
Incentive Stock Option Agreement
10.17 Form of Omnibus Stock Ownership and Long Term Incentive Plan
Restricted Stock Grant Agreement.
10.18 Employment Agreement dated May 24, 2000 between Registrant
and Edward C. Milligan (incorporated by referenced to
Exhibit 10.13 to Registration Statement No. 333-50762 on
form S-4)
34
EXHIBIT NO. DESCRIPTION
- --------------------- ------------------------------------------------------------
10.19 Employment Agreement dated May 24, 2000 between the
Registrant and Robert R. Fowler, III (incorporated by
referenced to Exhibit 10.14 to Registration Statement
No. 333-50762 on Form S-4)
10.20 Employment Agreement dated May 24, 2000 between the
Registrant and Sam B. Hay (incorporated by referenced to
Exhibit 10.15 to Registration Statement No. 333-50762 on
form S-4)
10.21 Employment Agreement dated May 24, 2000 between the
Registrant and Joseph K. Strickland, Jr. (incorporated by
referenced to Exhibit 10.16 to Registration Statement
No. 333-50762 on Form S-4)
21 The sole subsidiaries of the Company are Main Street Bank
and Williamson, Musselwhite & Main Street Insurance, Inc.
23.1 Consent of Ernst & Young LLP concerning the consolidated
financial statements of Main Street Banks, Inc.
23.2 Consent of Mauldin & Jenkins, LLC concerning the financial
statements of Walton Bank & Trust Co. and First Sterling
Banks, Inc.
23.3 Consent of Porter Keadle Moore, LLP concerning the financial
statements of Georgia Bancshares, Inc.
99.1 Independent Auditor's Report of Mauldin & Jenkins, LLC for
First Sterling Banks, Inc. and Subsidiaries relating to
First Sterling Banks, Inc. and Subsidiaries' consolidated
balance sheets as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the
period ended December 31, 1999.
99.2 Report of Independent Certified Public Accountants of Porter
Keadle Moore, LLP for Georgia Bancshares, Inc. and
Subsidiary for Georgia Bancshares, Inc. and Subsidiary's
consolidated balance sheet as of December 31, 1998 and
1997, and the related statements of earnings,
comprehensive income, changes in stockholders' equity and
cash flows for each of the three years in the period ended
December 31, 1998.
35
SIGNATURES
In accordance with 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/ EDWARD C. MILLIGAN Date: March 30, 2001
-------------------------------------- ------------------------
Edward C. Milligan, PRESIDENT
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
In accordance with the Exchange Act, 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/ BARBARA J. BOND Date: March 30, 2001
-------------------------------------- ------------------------
Barbara J. Bond, SECRETARY/TREASURER,
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
By: /s/ EUGENE L. ARGO Date: March 30, 2001
-------------------------------------- ------------------------
Eugene L. Argo, DIRECTOR
By: /s/ ROBERT R. FOWLER, III Date: March 30, 2001
-------------------------------------- ------------------------
Robert R. Fowler, III, DIRECTOR
By: /s/ SAMUEL B. HAY, III Date: March 30, 2001
-------------------------------------- ------------------------
Samuel B. Hay, III, DIRECTOR
By: /s/ P. HARRIS HINES Date: March 30, 2001
-------------------------------------- ------------------------
P. Harris Hines, DIRECTOR
By: /s/ HARRY L. HUDSON, JR. Date: March 30, 2001
-------------------------------------- ------------------------
Harry L. Hudson, Jr., DIRECTOR
By: /s/ C. CANDLER HUNT Date: March 30, 2001
-------------------------------------- ------------------------
C. Candler Hunt, DIRECTOR
By: /s/ FRANK B. TURNER Date: March 30, 2001
-------------------------------------- ------------------------
Frank B. Turner, DIRECTOR
36