Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

Commission file number 000-25128

MAIN STREET BANKS, INC.

(Exact name of registrant as specified in its charter)

770-786-3441

(Registrant’s telephone number)

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

NONE

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

Common Stock, no par value

(Title of Class)

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

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

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

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

$444,215,225

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

21,298,505

DOCUMENTS INCORPORATED BY REFERENCE

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

Table of Contents

MAIN STREET BANKS, INC.

TABLE OF CONTENTS

FORM 10-K

DECEMBER 31, 2004

1

Table of Contents

SPECIAL CAUTIONARY NOTICE

REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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

2

Table of Contents

PART I

Item 1. Business

Business Overview

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

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

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

The Parent Company

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

Subsidiary Bank

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

Insurance Subsidiary

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

Products and Services

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

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

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

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

3

Table of Contents

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

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

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

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

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

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

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

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

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

4

Table of Contents

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

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

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

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

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

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

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

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

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

5

Table of Contents

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

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

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

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

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

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

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

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

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

6

Table of Contents

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

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

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

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

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

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

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

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

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

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

7

Table of Contents

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

Business Combinations

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

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

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

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

Market Area and Competition

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

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

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

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

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

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

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

Employees

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

8

Table of Contents

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

Government Monetary Fiscal Policy

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

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

Supervision and Regulation

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

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

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

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

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

9

Table of Contents

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

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

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

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

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

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

10

Table of Contents

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

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

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

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

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

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

11

Table of Contents

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

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

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

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

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

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

FDIC Insurance Assessments

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

12

Table of Contents

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

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

Capital Adequacy

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

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

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

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

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

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

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

Safety and Soundness Standards

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

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

13

Table of Contents

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

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

Risk Factors

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

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

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

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

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

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

14

Table of Contents

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

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

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

Website Availability of Reports Filed with the Securities and Exchange Commission

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

Item 2. Properties

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

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

Item 3. Legal Proceedings

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

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

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

15

Table of Contents

PART II

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

Purchases of Equity Securities

Market Prices. Our common stock trades on the NASDAQ under the symbol “MSBK.”

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

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

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

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

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

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

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

16

Table of Contents

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

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

17

Table of Contents

Item 6. Selected Financial Data

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

18

Table of Contents

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

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

Executive Overview

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

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

The strong 2004 operating results were highlighted by:

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

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

Critical Accounting Policies

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

19

Table of Contents

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

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

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

Net Income and Earnings per Share

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

Earning Assets and Liabilities

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

20

Table of Contents

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

Interest rate spread

21

Table of Contents

Results of Operations

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

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

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

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

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

22

Table of Contents

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