MAIN STREET BANKS INC /NEW/ - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

Securities Exchange Act of 1934

For the quarter ended March 31, 2005

Commission file number 000-25128

MAIN STREET BANKS, INC.

(Exact name of registrant as specified in its charter)


Georgia		58-2104977
(State of Incorporation)		(I.R.S. Employer Identification No.)

3500 Lenox Road, Atlanta, GA		30326
(Address of principal executive offices)		(Zip Code)

770-786-3441

(Registrant’s telephone number)

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

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

As of April 30, 2005, registrant had outstanding 21,359,117 shares of common stock.

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 are “forward-looking statements” within the meaning of, and subject to the protections of, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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

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

•

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

•

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

•

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

•

credit risks of borrowers;

•

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

•

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

•

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

•

changes in accounting rules, policies and practices;

•

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

•

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

•

other factors and risks described in any of our subsequent reports that we make with the Securities and Exchange Commission (the “Commission”) under the Exchange Act.

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

MAIN STREET BANKS, INC.

TABLE OF CONTENTS

FORM 10-Q

March 31, 2005


				Page
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements

			Consolidated Balance Sheets March 31, 2005 (unaudited), December 31, 2004 and March 31, 2004 (unaudited)	3

			Consolidated Statements of Income (unaudited) Three Months Ended March 31, 2005 and 2004	4

			Consolidated Statements of Comprehensive Income (unaudited) Three Months Ended March 31, 2005 and 2004	5

			Consolidated Statements of Cash Flows (unaudited) Three Months ended March 31, 2005 and 2004	6

			Notes to Consolidated Financial Statements (unaudited)	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21

	Item 4.	Controls and Procedures		21

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings		22

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22

	Item 3.	Defaults Upon Senior Securities		22

	Item 4.	Submission of Matters to a Vote of Security Holders		22

	Item 5.	Other Information		22

	Item 6.	Exhibits		22

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Main Street Banks, Inc.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands)


	(Unaudited) March 31, 2005			December 31, 2004			(Unaudited) March 31, 2004
Assets
Cash and due from banks	$	37,017		$	35,090		$	31,901
Interest-bearing deposits in banks		144			318			589
Federal funds sold and securities purchased under agreements to resell		1,242			35,813			5,644
Investment securities available for sale (amortized cost of $292,217, $314,557, and $257,220 at March 31, 2005, December 31, 2004 and March 31, 2004, respectively)		288,158			315,521			263,305
Investment securities held to maturity (fair value of $11,492, $11,260, and $12,186 at March 31, 2005, December 31, 2004 and March 31, 2004, respectively)		11,510			11,716			11,998
Other investments		24,727			23,782			19,205
Mortgage loans held for sale		5,916			4,563			7,208
Loans, net of unearned income		1,743,589			1,699,035			1,511,437
Allowance for loan losses		(24,984	)		(25,191	)		(22,151	)

Loans, net		1,718,605			1,673,844			1,489,286
Premises and equipment, net		53,249			53,470			45,168
Other real estate		1,889			2,141			2,256
Accrued interest receivable		9,577			9,763			8,294
Goodwill and other intangible assets		102,295			102,170			103,381
Bank owned life insurance		57,586			42,056			41,596
Other assets		16,324			16,195			15,802

Total assets	$	2,328,239		$	2,326,442		$	2,045,633

Liabilities
Deposits:
Noninterest-bearing demand	$	254,355		$	230,578		$	232,576
Interest-bearing demand and money market		660,404			652,468			511,626
Savings		43,846			46,999			50,475
Time deposits of $100,000 or more		366,839			370,658			289,722
Other time deposits		420,994			409,507			446,581

Total deposits		1,746,438			1,710,210			1,530,980
Accrued interest payable		4,366			3,955			3,211
Federal Home Loan Bank advances		185,936			201,070			156,472
Federal funds purchased and securities sold under repurchase agreements		56,564			73,368			83,930
Subordinated debentures		51,547			51,547			51,547
Other liabilities		2,898			7,329			4,116

Total liabilities		2,047,749			2,047,479			1,830,256

Shareholders’ Equity
Common stock-no par value per share; 50,000,000 shares authorized; 21,315,955, 21,229,545 and 19,340,676 shares outstanding at March 31, 2005, December 31, 2004 and March 31, 2004, respectively		162,419			161,517			109,117
Treasury stock, at cost, 564,082 shares at March 31, 2005, December 31, 2004 and March 31, 2004, respectively		(8,789	)		(8,789	)		(8,789	)
Retained earnings		131,274			126,448			109,300
Accumulated other comprehensive (loss) income, net of tax		(4,414	)		(213	)		5,749

Total shareholders’ equity		280,490			278,963			215,377

Total liabilities and shareholders’ equity	$	2,328,239		$	2,326,442		$	2,045,633

See accompanying notes to consolidated financial statements

Main Street Banks, Inc.

Consolidated Statements of Income (Unaudited)

(dollars in thousands except per share data)


	Three months ended March 31,
	2005		2004
	(unaudited)
Interest income:
Loans, including fees	$	29,591	$	24,782
Investment securities:
Taxable		2,761		2,247
Non-taxable		340		418
Federal funds sold and other short-term investments		66		30
Interest-bearing deposits in banks		12		5
Other investments		225		206

Total interest income		32,995		27,688
Interest expense:
Interest-bearing demand and money market		3,501		1,322
Savings		62		89
Time deposits		5,192		4,463
Other time deposits		44		56
Federal funds purchased		493		35
Federal Home Loan Bank advances		1,179		866
Interest expense on junior subordinated debentures		749		575
Other interest expense		164		356

Total interest expense		11,384		7,762

Net interest income		21,611		19,926
Provision for loan losses		2,209		1,561

Net interest income after provision for loan losses		19,402		18,365
Non-interest income:
Service charges on deposit accounts		1,897		1,881
Other customer service fees		340		357
Mortgage banking income		692		883
Investment agency commissions		401		315
Insurance agency income		3,174		2,772
Income from SBA lending		829		486
Income on bank owned life insurance		530		822
Investment securities gains, net		224		304
Other income		—		21

Total non-interest income		8,087		7,841
Non-interest expense:
Salaries and other compensation		7,933		8,041
Employee benefits		1,620		1,640
Net occupancy and equipment expense		2,052		1,860
Data processing fees		510		557
Professional services		469		438
Communications & supplies		962		1,051
Marketing expense		291		370
Regulatory agency assessments		68		91
Amortization of intangible assets		129		141
Other expense		1,630		1,390

Total non-interest expense		15,664		15,579

Income before income taxes		11,825		10,627
Income tax expense		3,642		3,030

Net income	$	8,183	$	7,597

Earnings per share - Basic	$	0.38	$	0.39
Earnings per share - Diluted	$	0.38	$	0.38
Dividends declared per share	$	0.153	$	0.135
Weighted average common shares outstanding - Basic		21,278		19,281
Weighted average common shares outstanding - Diluted		21,818		19,911

Main Street Banks, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)


	Three Months Ended
	March 31, 2005			March 31, 2004
	(unaudited)
Net income	$	8,183		$	7,597

Other comprehensive income, net of tax:
Unrealized (losses) gains on securities available for sale		(3,330	)		1,371
Unrealized (losses) gains on derivative contracts		(723	)		662
Less reclassification adjustment for net gains included in net income		(148	)		(201	)

Comprehensive income	$	3,982		$	9,429

Main Street Banks, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)


	Three months ended March 31,
	2005			2004
	(Unaudited)
Operating activities
Net income		8,183			7,597
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,209			1,561
Depreciation and amortization of premises and equipment		937			1,147
Amortization of intangible assets		129			141
Loss on sales of other real estate		72			125
Investment securities gains, net		(224	)		(304	)
Net amortization of investment securities		286			294
Net accretion of loans purchased		4			(2	)
Loss on sales of premises and equipment		536			68
Net increase in mortgage loans held for sale		(1,353	)		(1,537	)
Gain on mortgage loan sales		(286	)		(883	)
Gains on sales of SBA loans		(829	)		(486	)
Deferred income tax provision		(2,342	)		(932	)
Deferred net loan fees (cost amortization)		(8	)		(486	)
Vesting in restricted stock award plan		330			184
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable		186			(112	)
Increase cash surrender value of bank-owned life insurance		(529	)		(823	)
Increase in accrued interest payable		411			191
Increase (decrease) in prepaid expenses		(2,258	)		(2,930	)
Other		(749	)		(2,007	)

Net cash provided by operating activities		4,705			806
Investing activities
Purchases of investment securities available for sale		(14,958	)		(41,289	)
Purchases of investment securities held to maturity		—			(1,210	)
Purchases of other investments		(945	)		446
Maturities, paydowns and calls of investment securities available for sale		11,444			10,270
Proceeds from sales of investment securities available for sale		25,491			16,379
Net increase in loans funded		(81,681	)		(87,922	)
Proceeds from the sale of loans held for sale		37,128			19,811
Purchase of bank-owned life insurance		(15,000	)		(5,000	)
Purchases of premises and equipment		(1,253	)		(4,028	)
Proceeds from sales of premises and equipment		16			87
Proceeds from sales of other real estate		783			379
Improvements to other real estate		(127	)		(103	)
Net cash paid for acquisitions		(200	)		181

Net cash used in investing activities		(39,302	)		(91,999	)
Financing activities
Net increase in demand and savings accounts		28,561			33,460
Increase (decrease) in time deposits		7,667			39,117
Decrease in Federal Funds purchased		(16,803	)		(28,929	)
(Decrease) increase in Federal Home Loan Bank advances		(15,134	)		14,867
Dividends paid		(3,241	)		(2,601	)
Proceeds from issuance of common stock		729			734

Net cash provided by financing activities		1,779			56,648
Net decrease in cash and cash equivalents		(32,818	)		(34,545	)
Cash and cash equivalents at beginning of period		71,221			72,679

Cash and cash equivalents at end of period	$	38,403		$	38,134

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	7,018		$	4,550
Income taxes		3,800			3,410
Supplemental disclosures of noncash transactions
Loans transferred to other real estate acquired through foreclosure	$	738		$	2,471

Main Street Banks, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

Note A – Significant Accounting Policies

Basis of Presentation: The unaudited consolidated financial statements include the accounts of the parent company Main Street Banks, Inc. (“Company”) and its direct and indirect wholly owned subsidiaries, Main Street Bank (“Bank”), Main Street Insurance Services, Inc. (“MSII”), Piedmont Settlement Services, Inc. (“Piedmont”) and MSB Payroll Solutions, LLC. All significant inter-company transactions and balances have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements for the Company have been prepared in accordance with accounting principles generally accepted in the United States, followed within the financial services industry for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statement presentation. In the opinion of management, all adjustments (consisting solely of normal recurring adjustments) considered necessary for a fair presentation of the financial position and results of operations for interim periods have been included.

The results of operations for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005, or for any other period. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2004, included in the Company’s Annual Report on Form 10-K.

Certain previously reported amounts have been reclassified to conform to current financial statement presentation. These reclassifications had no effect on net income or stockholders’ equity.

Note B - Acquisition

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


Assets acquired:
Cash and Cash equivalents	$	180
Other assets		33
Goodwill		4,717
Intangible assets		2,781

Total Assets	$	7,711

Liabilities acquired:
Other liabilities		711

Total Liabilities	$	711

Note C – Other Accounting Matters

The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004) (“SFAS No. 123R”), “Share-Based Payment,” in December 2004. SFAS No. 123R is a revision of FASB Statement 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock

Issued to Employees,” and its related implementation guidance. The Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement was to be effective as of the beginning of the first annual reporting period that begins after June 15, 2005. The adoption of this statement is expected to have a material impact on the financial condition and operating results of the Company.

In April 2005, the Securities and Exchange Commission (“SEC”) announced that it would provide for a phased-in implementation process for SFAS No. 123R. The SEC would require that registrants adopt Statement 123R’s fair value method of accounting for share-based payments to employees no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company has elected to adopt SFAS No. 123R beginning in January 2006.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. In December 2003, the FASB revised Interpretation No. 46 (FIN 46R”). The Company determined that certain trusts created by it to issue trust preferred securities required deconsolidation due to the provisions of FIN 46R. Accordingly, as of March 31, 2004, the Company was required to deconsolidate these trusts. The deconsolidation required the Company to remove $50.0 million in trust preferred securities from its consolidated financial statements and to record junior subordinated debentures payable to these trusts of $51.5 million and record the Company’s investment in the trusts of $1.5 million in other assets. The trust preferred securities had been counted as Tier 1 capital for regulatory purposes as minority interests in consolidated subsidiaries. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in Tier 1 capital for regulatory capital purposes until further notice, even though the trusts that issued the trust preferred securities were not consolidated with their parent bank holding companies under FIN 46. On May 6, 2004, the Federal Reserve proposed changes to its capital adequacy rules that would continue to include limited amounts of qualified trust preferred securities as Tier 1 capital, notwithstanding the change in GAAP resulting from FIN 46 and FIN 46R.

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

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

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

Note D - Earnings per Common Share

The Company accounts for earnings per share in accordance with FASB Statement No. 128, Earnings Per Share (“Statement 128”). Basic earnings per share (“EPS”) is computed by dividing net income available to common shareholders by

the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to the shares outstanding the additional net effect of employee stock options that could be exercised into common shares. The computation of diluted earnings per share is as follows:


	Three months ended
	March 31, 2005		March 31, 2004
	(Amounts in thousands except per share data)
Basic and diluted net income	$	8,183	$	7,597
Basic earnings per share	$	0.38	$	0.39
Diluted earnings per share	$	0.38	$	0.38

Basic weighted average shares		21,278		19,281
Effect of employee stock options		540		630

Diluted weighted average shares		21,818		19,911

Note E – Commitments and Contingencies

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

The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as are used for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company issues standby letters of credit, which are conditional commitments issued to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and expire in decreasing amounts with terms ranging from one to four years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds various assets as collateral supporting those commitments for which collateral is deemed necessary. This amount was not recorded in the balance sheet as a liability in accordance with FIN 45 due to the immateriality of the amount.

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

The following represents the Company’s commitments to extend credit and standby letters of credit:

Note F - Loans

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

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

The Company occasionally sells the guaranteed portion of Small Business Administration (“SBA”) loans to third parties and retains the servicing rights for these loans. The Company has limited recourse related to these sales if a loan sold by the Bank defaults within 90 days of sale. The servicing asset for the sold portion of the SBA loans is included in Loans, net of unearned income. The Company repurchased two loans totaling $170 thousand during the quarter ended March 31, 2005.

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

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

The following table represents the composition of the Company’s loan portfolio:


	March 31, 2005			December 31, 2004			March 31, 2004
	(Dollars in thousands)
Loans
Commercial and industrial	$	131,835		$	127,476		$	116,735
Real estate construction		441,951			401,815			314,171
Residential mortgage		292,668			288,703			280,454
Real estate - other		839,695			846,945			762,816
Consumer and other		40,511			36,967			39,063

Total loans receivable		1,746,660			1,701,906			1,513,239
Less:
Purchase premium		337			527			838
Deferred net loan fees		(3,398	)		(3,390	)		(2,607	)
Unearned income		(10	)		(8	)		(33	)

Loans net of unearned income		1,743,589			1,699,035			1,511,437
Allowance for loan losses		(24,984	)		(25,191	)		(22,151	)

Loans, net	$	1,718,605		$	1,673,844		$	1,489,286

Mortgage loans held for sale	$	5,916		$	4,563		$	7,208

Composition of loan portfolio as a percentage
Commercial and industrial		7.55	%		7.49	%		7.71	%
Real estate construction		25.30	%		23.61	%		20.76	%
Residential mortgage		16.76	%		16.96	%		18.53	%
Real estate - other		48.07	%		49.76	%		50.41	%
Consumer and other		2.32	%		2.18	%		2.59	%

Total loans receivable		100.00	%		100.00	%		100.00	%

At March 31, 2005 the Company had a market value adjustment on loans that were acquired in the First Colony Bancshares, Inc. acquisition of $0.5 million which is reflected in the loan amounts above. This balance is being amortized monthly.

Note G - Stock Options and Long-term Compensation Plans

The Company has elected to follow Accounting Principles Board Opinion No. 25 “Accounting for Stock issued to Employees” (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No.148, requires pro forma disclosures of net income and earnings per share for companies not adopting its fair value accounting method for stock-based employee compensation. The pro-forma disclosure below uses the fair value method of SFAS 123 to measure compensation expense for stock-based employee compensation plans. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing model does not necessarily provide a reliable single measure of the fair value of its employee stock options.

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


	Three months ended
	March 31, 2005			March 31, 2004
Net income	$	8,183		$	7,597
Earnings per share - Basic		0.38			0.39
Earnings per share - Diluted		0.38			0.38

Compensation cost - Fair Value		271			95
Less: Tax Effect		(92	)		(32	)

Net compensation costs - Fair Value		179			63

Net Income, Pro-forma		8,004			7,534
Earnings per share - Basic		0.38			0.39
Earnings per share - Diluted		0.37			0.38

Note H – Goodwill and Other Intangible Assets

Intangible assets related to capital lease rights are being amortized over the term of the related lease using the straight-line method. Core deposit intangible assets are amortized over a period of 5 to 20 years. All other intangible assets are being amortized over a 15 year period using the straight-line method.

The Company recognized amortization expense on intangible assets for the three month periods ending March 31, 2005 and 2004 of $128,750 and $140,644, respectively.

Goodwill and other intangible assets at March 31, 2005 and 2004 are as follows:


	March 31,
	2005			2004
	(Dollars in thousands)
Goodwill	$	98,552		$	98,930
Intangible assets
Core deposit intangibles		1,877			3,221
Existing expirations		2,713			2,836
Covanents not to compete		305			689
Lease rights		248			248

Total goodwill and intangible assets		103,695			105,924
Accumulated amortization		(1,400	)		(2,543	)

Net goodwill and intangible assets	$	102,295		$	103,381

Selected Financial Data

The following table sets forth selected unaudited financial data as of and for the three month period ending March 31, 2005 and 2004. This data should be read in conjunction with the consolidated financial statements and the notes thereto and the information contained in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected historical financial data as of and for the three month period ended March 31, 2005 and 2004 are derived from our unaudited financial statements and related notes. In the opinion of our management, this information reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of this data as of those dates and for those periods. Results for the three month period ended March 31, 2005, are not necessarily indicative of results on an annualized basis or for any future period.


	Three months ended March 31,
	2005			2004
	(unaudited) (in thousands except per share data)
RESULTS OF OPERATIONS
Net interest income	$	21,611		$	19,926
Net interest income (tax equivalent)		21,786			20,205
Provision for loan losses		2,209			1,561
Non-interest income		8,087			7,841
Non-interest expense		15,664			15,579
Net income		8,183			7,597
SELECTED AVERAGE BALANCES
Loans, net of unearned income	$	1,731,089		$	1,470,876
Investment securities		316,742			260,866
Earning assets		2,092,064			1,770,541
Total assets		2,335,055			1,986,972
Deposits		1,709,580			1,466,087
Shareholders’ equity		280,723			205,272
PERIOD-END BALANCES
Loans, net of unearned income	$	1,743,589		$	1,511,437
Earning assets		2,075,286			1,819,386
Total assets		2,328,239			2,045,633
Deposits		1,746,438			1,530,980
Long-term obligations *		237,483			208,019
Shareholders’ equity		280,490			215,377
PER COMMON SHARE
Earnings per share - Basic	$	0.38		$	0.39
Earning per share - Diluted	$	0.38		$	0.38
Book value per share at end of period	$	13.16		$	11.04
End of period shares outstanding		21,316			19,341
Weighted average shares outstanding
Basic		21,278			19,281
Diluted		21,818			19,911
STOCK PERFORMANCE
Market Price:
Closing	$	26.45		$	27.34
High		35.34			27.50
Low		26.35			24.90
Trading volume		4,241			1,704
Cash dividends per share	$	0.153		$	0.135
Dividend payout ratio		40.66	%		36.69	%
Price to earnings	$	17.58		$	17.87
Price to book value		2.01			2.48
PERFORMANCE RATIOS
Return on average assets		1.40	%		1.53	%
Return on average equity		11.66	%		14.80	%
Average loans as percentage of average deposits		101.26	%		100.33	%
Net interest margin (tax equivalent)		4.18	%		4.58	%
Average equity to average assets		12.02	%		10.33	%
Efficiency ratio		52.49	%		56.11	%

*	Long-term obligations include Federal Home Loan Bank advances and junior subordinated debentures.

ITEM 2. 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 March 31, 2005 as compared to December 31, 2004 and operating results for the three month period ended March 31, 2005 as compared to the three month period ended March 31, 2004. These comments should be read in conjunction with the Company’s unaudited consolidated financial statements and accompanying notes appearing elsewhere herein.

Overview

The Company’s total assets increased $1.8 million or 0.08% since December 2004. Federal funds sold decreased $34.6 million primarily due to an increase in loan demand. Loans increased 2.62% or $44.6 million since December 2004, while the investment portfolio decreased $27.4 million. Goodwill and intangible assets increased by $0.1 million. Total deposits increased by 2.11% or $36.2 million due primarily to an ongoing deposit campaign and use of brokered and national deposits.

Return on average equity for the three months ended March 31, 2004 was 11.66% on average equity of $280.7 million. This compares to 14.80% on average equity of $205.3 million for the same period in 2003. Return on average assets for the three months ended March 31, 2005 was 1.40%. This compares to 1.53% for the same period in 2004.

Results of Operations for the Three Months Ended March 31, 2005 and 2004

Interest Income

Interest income for the three months ended March 31, 2005 was $33.0 million, an increase of $5.3 million, or 19.13% compared to $27.7 million for the same period in 2004. Interest on federal funds sold decreased due to the Company’s decision to use the funds to fund loan growth. Average earning assets for the three month period increased $0.3 billion, or 16.67% to $2.1 billion as of March 31, 2005 compared to $1.8 billion as of March 31, 2004. Yield on average earning assets increased 7 basis points to 6.36% from 6.29% for the quarter ended March 31, 2005 and 2004, respectively as a result of a shift in the Company’s loan mix from short-term fixed rate loans to variable rate loans of like maturity and rising interest rates.

Interest Expense

Interest expense on deposits and other borrowings for the three months ended March 31, 2005 was $11.4 million, a $3.6 million, or 46.15% increase from March 31, 2004. While average interest bearing liabilities increased $0.2 billion, or 11.11% to $2.0 billion for the three months ended March 31, 2005 compared to $1.8 billion for the three months ended March 31, 2004, the yield on average interest bearing liabilities increased 47 basis points to 2.23% from 1.76% as of March 31, 2005 and 2004, respectively. The increase is due to rising interest rates, competition in the Atlanta market for deposits, and the increased cost of funding loan growth through brokered certificates of deposits, Federal Home Loan Bank advances and federal funds purchased.

Net Interest Income

Net interest income for the three months ended March 31, 2005 increased $1.7 million, or 8.54% to $21.6 million compared to $19.9 million for the same period ending March 31, 2004. The increase was mainly attributable to growth. The Company’s net interest margin decreased to 4.18% for the three months ended March 31, 2005 compared to 4.58% as of March 31, 2004.

Provision for Loan Losses

The provision for loan losses was $2.2 million for the three months ended March 31, 2005 as compared to $1.6 million for the three months ended March 31, 2004. The increase was due to identification of additional impairment of a former loan officer’s portfolio and was also impacted by new loan growth. The Credit Committee continues to monitor asset indicators to determine the adequacy of the loan loss reserve. These factors include changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries and current economic conditions. Management believes that the overall real estate market conditions in metropolitan Atlanta appear to be stable to improving and the national economy improved during the most recent quarter. Management believes that the allowance for loan losses was adequate at March 31, 2005.

Non-interest Income

Non-interest income was $8.1 million for the three months ended March 31, 2005 an increase of $0.3 million, or 3.85% compared to $7.8 million for the three months ended March 31, 2004. The major components of the increase were insurance agency income and income from the sale of SBA loans. Insurance agency income increased $0.4 million, or 14.29% to $3.2

million from $2.8 million for the three months ended March 31, 2005 and 2004, respectively. The income from the sale of SBA loans increased $0.3 million, or 60.00% to $0.8 million from $0.5 million for the three months ended March 31, 2005 and 2004, respectively. The income from bank owned life insurance decreased $0.3 million, or (37.5%) to $0.5 million from $0.8 million for the three months ended March 31, 2005 and 2004, respectively. The decline was due to the receipt of policy benefits in the first quarter of 2004. The gain on the sale of securities declined by $0.1 million during the three months ending March 31, 2005 for the same period in 2004.

Non-interest Expense

Non-interest expense decreased $0.2 million or 1.27% to $15.7 million from $15.6 million for the three months ended March 31, 2005 and 2004, respectively. Salaries were $7.9 million, a decrease of $0.1 million, or 1.25% from the three months ended March 31, 2004. The Company’s full-time equivalent employees declined by 27 to 517 as of March 31, 2005 from 544 for the same period in 2004. The Company’s efficiency ratio was 52.49% for the three months ended March 31, 2005 compared to 56.11% for the three months ended March 31, 2004.

Income Taxes

The amount of income tax expense is influenced by the amount of taxable income, the amount of tax-exempt income, and the amount of nondeductible expenses. For the three months ended March 31, 2005 and 2004, the provision for taxes was $3.6 million and $3.0 million, respectively. The effective tax rate for the three months ended March 31, 2005 was 30.81% compared to 28.51% for the same period in 2004. This effective rate increase is due to changes in the level of tax-advantaged loans and investments and is impacted by federal and state tax planning strategies.

Capital

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

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

The guideline for a minimum ratio of capital to total risk-weighted assets (including certain off- balance-sheet activities, such as standby letters of credit) is 8%. At least half of the total capital must consist of Tier 1 Capital, which includes common equity, retained earnings and a limited amount of qualifying preferred stock and qualifying trust preferred securities, less goodwill. The remainder may consist of non-qualifying preferred stock, qualifying subordinated, perpetual, and/or mandatory convertible debt, term subordinated debt and intermediate term preferred stock and up to 45% of the pretax unrealized holding gains on available-for-sale equity securities with readily determinable market values that are prudently valued, and a limited amount of any loan loss allowance (“Tier 2 Capital” and, together with Tier 1 Capital, “Total Capital”).

In addition, the federal agencies have established minimum leverage ratio guidelines for bank holding companies and state banks, which provide for a minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets (“leverage ratio”) equal to 3%, plus an additional cushion of 1.0% to 2.0%, if the institution has less than the highest regulatory rating. The guidelines also provide that institutions 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. Higher capital may be required in individual cases, depending upon a bank holding company’s risk profile. All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks, including the volume and severity of their problem loans. Lastly, the Federal Reserve’s guidelines indicate that the Federal Reserve will continue to consider a “Tangible Tier 1 Leverage Ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity.

The capital measures used by the federal banking regulators are the Total Capital ratio, the Tier 1 Capital ratio, and the leverage ratio. Under the regulations, a bank holding company or a bank will be (i) well capitalized if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, a leverage ratio of 5% or greater, and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure.

The Georgia Department has adopted generally the same definitions for capital adequacy as the Federal Reserve and the FDIC. Under Georgia Department policies, Georgia state banks must maintain not less than 4.5% Tier 1 capital, and generally

most institutions will require at least 5.5% Tier 1 capital. Additional capital may be required based on the Georgia Department’s consideration of the quality, type and diversification of assets, current and historical earnings, provisions for liquidity with particular emphasis on asset/liability mismatches and sensitivity to market risks in the asset portfolios, the quality of management, and the existence of other activities that may expose the institution to risk, including the degree of leverage and risk undertaken by any parent company or affiliates. Further, the Georgia Department’s policies generally require that Georgia bank holding companies maintain a Tier 1 capital ratio of 4.0%, although higher ratios are required for holding companies experiencing or anticipating higher growth, and for those companies with significant financial or operational weaknesses, or higher risk profiles.

The Federal Reserve, the FDIC and the Georgia Department have not advised the Company or the Bank of any specific minimum capital ratios applicable to them.

In December 2003, the Board approved a $100.0 million shelf offering. As described below, we raised $51.1 million in December 2004 through the sale of common stock. The net proceeds from the future sale of the securities, if any, would be used for general corporate purposes, including repurchasing shares of our common stock, acquisitions of other companies, and extending credit to, or funding investments in, our subsidiaries. The precise amounts and timing of the use of the net proceeds will depend upon the Company’s, and subsidiaries’ of the Company, funding requirements and the availability of other funds. Until the Company uses the net proceeds from the sale of any of our securities for general corporate purposes, the Company would use the net proceeds to reduce short-term indebtedness or for temporary investments. The Company expects that it will, on a recurrent basis, engage in additional financings as the need arises to finance our growth, through acquisitions or otherwise, or to fund subsidiaries of the Company. The SEC declared the Form S-3 registration statement effective on January 15, 2004.

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

At March 31, 2005, the Company and the Bank were well capitalized for regulatory purposes. The following table provides a comparison of the Company’s and the Bank’s leverage and risk-weighted capital ratios as of March 31, 2005 to the minimum and well-capitalized regulatory standards:


	Company		Bank		Minimum Required		Well Capitalized
Leverage ratio	10.47	%	9.92	%	4.00	%*	5.00	%
Risk based capital ratios:
Tier 1 risk based capital	12.26	%	11.74	%	4.00	%	6.00	%
Total risk-based capital	13.51	%	12.99	%	8.00	%	10.00	%

*	4.5% to 5.5% for Georgia Department purposes

Non-Performing Assets

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

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

However, if the loan is deemed to be in process of collection, it may be maintained on an accrual basis. The Company’s management conducts continuous training and communicates regularly with loan officers to make them aware of its lending policy and the collection policy contained therein. The Company’s management has also staffed its collection department with properly trained staff to assist lenders with collection efforts and to maintain records and develop reports on delinquent borrowers. Management is not aware of any loans that meet the definition of a troubled debt restructuring as of March 31, 2005. The Company records real estate acquired through foreclosure at the lesser of the outstanding loan balance or the fair value at the time of foreclosure, less estimated costs to sell.

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

In the first quarter of 2005, non-performing assets increased by $6.6 million to $21.0 million. The increase was attributable to loans made by a former loan officer of Main Street Bank and several smaller relationships that are generally well-secured by real estate in accordance with bank policy. The collateral securing these loans is currently being sold or is in the process of foreclosure.

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


	March 31, 2005			December 31, 2004			March 31, 2004
	(Dollars in thousands)
Non-performing assets
Non-accrual loans
Commercial and industrial	$	3,696		$	3,405		$	992
Real estate - construction		4,609			2,069			396
Real estate - mortgage		3,170			2,892			1,699
Real estate - other		7,555			3,844			1,629
Consumer and other		7			45			106
Other real estate and repossessions		2,006			2,166			2,256

Total non-performing assets	$	21,043		$	14,421		$	7,078
Loans past due 90 days or more and still accruing	$	4,223		$	5,658		$	5,934
Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income		0.24	%		0.33	%		0.39	%
Ratio of non-performing assets to loans, net of unearned income and other real estate		1.21	%		0.85	%		0.47	%

Loans and Allowance for Loan Losses

At March 31, 2005, loans, net of unearned income, were $1.744 billion, an increase of $0.045 billion or 2.65% over net loans at December 31, 2004 of $1.699 billion. The growth in the loan portfolio was attributable to a consistent focus on quality loan production and strong loan markets in the state. Residential mortgage and commercial real estate loans decreased $3.3 million or 0.29% from December 31, 2004 while real estate construction loans increased $40.1 million or 9.99% over the same period. The Company continues to monitor the composition of the loan portfolio to evaluate the adequacy of the allowance for loan losses in light of changes in the economic environment on the loan portfolio.

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

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

The Company’s risk management processes include a loan review program to evaluate the credit risk in the loan portfolio and ensure credit grade accuracy. The credit review department is independent of the loan function and reports to the Executive Vice President of Risk Management. Through the loan review process, the Company maintains a classified loan watch list which, along with the delinquency report of loans, serves as a tool to assist management in assessing the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans classified as “substandard” are those loans with clear and

defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain financial ratios, uncertain repayment sources, deterioration in underlying collateral values, or poor financial condition which may jeopardize recoverability of the debt. Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans but have an increased risk of loss, or at least a portion of the loan may require being charged-off. Loans classified as “loss” are those loans that are in the process of being charged-off.

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

•

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

•

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

When determining the adequacy of the allowance for loan losses, management considers changes in the size and character of the loan portfolio, changes in nonperforming and past due loans, historical loan loss experience, the existing risk of individual loans, concentrations of loans to specific borrowers or industries and current economic conditions. Management does not believe these factors have significantly changed over the periods presented. Historically, we believe our estimates of the level of allowance for loan losses required have been appropriate and our expectation is that the primary factors considered in the provision calculation will continue to be consistent with prior trends.

For the three month period ending March 31, 2005, net charge-offs totaled $2.4 million or 0.56% (annualized) of average loans outstanding for the period, net of unearned income, compared to $0.56 million or 0.15 % (annualized) in net charge-offs for the same period in 2004. The provision for loan losses for the three months ended March 31, 2005 was $2.2 million compared to $1.6 million for the same period in 2004. The allowance for loan losses totaled $25.0 million or 1.43% of total loans, net of unearned income at March 31, 2005, compared to $25.2 million or 1.47% of total loans at December 31, 2004. In its loan loss reserve analysis, the Company establishes specific reserves for its large criticized loan relationships. During the first quarter of 2005, the Company took charge-offs against several loans that had large specific reserves established in the fourth quarter of 2004. These charge-offs were concentrated in a problem loan portfolio extended by a loan officer who is no longer employed by the Company. The Company’s percentage of loans in a criticized status has been stable and is consistent with prior years. Economic conditions in the Company’s market area continue to be favorable. Based on these factors and the elimination of large specific reserves through loan charge-offs the Company’s allowance for loan losses as a percentage of loans declined.

The following table presents an analysis of the allowance for loan losses for the three-month period ended March 31, 2005 and 2004:


	Three Months Ended March 31,
	2005					2004
	(Dollars in thousands)
Balance of allowance for loan losses at beginning of period	$	25,191				$	21,152
Provision charged to operating expense		2,209					1,561
Charge-offs:
Commercial and industrial		2,017		56.72	%		196		29.74	%
Real estate - construction		—		0.00	%		34		5.16	%
Real estate - mortgage		961		27.02	%		196		29.74	%
Real estate - other		231		6.50	%		—		0.00	%
Consumer and other		347		9.76	%		233		35.36	%

Total charge-offs		3,556		100.00	%		659		100.00	%
Recoveries:
Commercial and industrial		334		29.30	%		30		30.93	%
Real estate - construction		—		0.00	%		—		0.00	%
Real estate - mortgage		537		47.11	%		2		2.06	%
Real estate - other		161		14.12	%		—		0.00	%
Consumer and other		108		9.47	%		65		67.01	%

Total recoveries		1,140		100.00	%		97		100.00	%

Net charge-offs		2,416					562

Balance of allowance for loan losses at end of period	$	24,984				$	22,151

Net annualized charge-offs as a percentage of average loans		0.56	%				0.15	%
Reserve for loan losses as a percentage of loans at end of period		1.43	%				1.47	%

Interest Rate Sensitivity and Liquidity

Asset Liability Management

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

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

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

Interest Rate Risk

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

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

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

The Company uses three standard scenarios – rates unchanged, rising rates, and declining rate – in analyzing interest rate sensitivity. The rising and declining rate scenarios cover a 100 basis point upward and downward rate shock. The following table illustrates the expected effect a given interest rate shift would have on the fair market value of the Balance Sheet and the annualized projected net interest income of the Company as of March 31, 2005:


Change in Interest Rates	Increase / (Decrease) in FMV of Balance Sheet		Increase / (Decrease) in Net Interest Income
+ 100 basis points	5.71	%	6.29	%
- 100 basis points	(6.84	)%	(5.56	)%

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

Derivative Instruments and Hedging Activities

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

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

Interest rate swaps are currently utilized by the Company to hedge the interest rate risk associated with pools of loans that bear interest based upon the prime rate. The interest rate swaps synthetically convert the floating interest rate payments received on pools of assets bearing interest based upon the prime rates to fixed interest receipts. The Company assesses hedge effectiveness and measures hedge ineffectiveness on a quarterly basis for each hedging relationship. The Company performs its effectiveness testing by comparing the present value of the cumulative change in the variable interest payments on each swap to the present value of the cumulative change in the overall variable receipts on the underlying loans since the inception of the hedge. Hedge ineffectiveness is recognized to the extent that the cumulative change on the swap exceeds the cumulative change on the hedged variable interest receipts on the loans. If the ratio of the cumulative changes in the variable interest payments on a swap to the cumulative changes in the variable receipts on the underlying loans is outside of the range of 80% to 125%, the Company considers the hedging relationship to no longer be highly effective and would dedesignate the interest rate swap from its hedging relationship. Subsequent changes in the value of the derivative would be remeasured directly through earnings.

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

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

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

The following chart illustrates the Bank’s derivative positions as of March 31, 2005. Market values have been determined by published bid prices or bid quotations for interest rate swaps and floors received from securities dealers.

Interest Rate Swaps


Type	Transaction Date	Term Date	Notional		Pay Rate		Receive Rate		Current Spread		Market Value
Received Fixed Prime Swap - amortizing	Apr-02	Apr-05	$	20,000,000	5.75	%	6.63	%	0.88	%	$	8,435
Received Fixed Prime Swap	Mar-03	Mar-06	$	50,000,000	5.75	%	5.26	%	-0.49	%	$	(712,224	)
Received Fixed Prime Swap	Aug-03	Aug-06	$	100,000,000	5.75	%	5.59	%	-0.16	%	$	(1,644,643	)

Total Received Fixed Swaps			$	170,000,000							$	(2,348,432	)
*Interest Rate Floors*
Type	Transaction Date	Term Date	Notional		Strike Rate		Current Rate		Current Spread		Market Value
Prime based Floor	Jun-03	Jun-05	$	100,000,000	3.75	%	5.75	%	-2.00	%	$	—

Total Interest Rate Floors			$	100,000,000							$	—

Total Derivative Positions			$	270,000,000							$	(2,348,432	)

Liquidity

Liquidity involves the Company’s ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis. During the past three years, the Company’s liquidity needs have primarily been met by growth in deposits, advances from Federal Home Loan Bank (“FHLB”), purchases of federal funds, and capital from retained earnings and acquisitions. The FHLB allows member banks to borrow against their eligible collateral to satisfy their liquidity requirements. As of March 31, 2005, the Company had $62.4 million available on its FHLB line based on current eligible collateral. Federal funds purchased and other short-term borrowings are additional sources of liquidity and, basically, represent the Company’s incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. As of March 31, 2005, the Company had $12.5 million in federal funds purchased and $44.1 million in securities sold under repurchase agreements. The Company’s cash and federal funds sold and cash flows from amortizing investment and loan portfolios have generally created an adequate liquidity position. Executive management reviews liquidity monthly. This review is from a regulatory as well as static and a forecasted standpoint.

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Additional information required by Item 305 of Regulation S-K is set forth under Item 2 of this report.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Principal Accounting Officer have evaluated the Company’s disclosure controls and procedures as of the end of the quarterly period covered by this Form 10-Q and have concluded that the Company’s disclosure controls and procedures continue to be ineffective as of that date in ensuring that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized, and reported within the time period required by the SEC’s rules and forms. During the first quarter of 2005 the Company made the following changes to internal controls to address the previously disclosed material weakness related to staffing levels and expertise:

•

Provided internal training for income taxes and hired an independent third party to provide additional tax expertise for the Company

•

Provided internal training and guidance for reconciliations and utilized an independent third party to provide additional expertise for improving the reconciliation process

•

Established additional procedures and controls to ensure that the integrity of the financial review process was maintained while staffing levels and expertise were being remediated

•

Utilized a third party vendor for asset/liability modeling

•

Increased staff in our SBA lending division to allow for additional segregation of duties and responsibilities

As reported on a Form 8-K, The Company’s Chief Financial Officer resigned in January 2005. The Company continues its search for a new Chief Financial Officer. The Company plans to have a new Chief Financial Officer hired prior to the end of the second quarter of 2005. There were no other changes in the Company’s internal control over financial reporting that may have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. – OTHER INFORMATION

ITEM 1. 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 the Company’s knowledge, no such material proceedings were threatened against it or its subsidiaries. From time to time, the Company and its subsidiaries are parties to legal proceedings in the ordinary course of business. After consultation with legal counsel, the Company does not anticipate that the current litigation matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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 first quarter of 2005.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a)

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


Exhibit No.		Description
3.1		Articles of Incorporation of Main Street Banks, Inc. (incorporated by reference to Exhibit 3.1 to Registration Statement No. 33-78046 on Form S-4) as amended by Certificate of Merger and Name Change (incorporated by reference to Exhibit 3.1 of the December 31, 1996, Form 10-KSB)

3.2		Bylaws of Main Street Banks, Inc. (incorporated by reference to Exhibit 3.2 to Registration Statement No. 33-78046 on Form S-4)

10.1		Employment agreement dated September 8, 2004 between the Registrant and Sam B Hay III (incorporated by reference to the Registrant’s Form 8-K filed with the Commission on September 15, 2004) *

10.2		Employment agreement dated September 8, 2004 between the Registrant and Edward C. Milligan (incorporated by reference to the Registrant’s Form 8-K filed with the Commission on September 15, 2004) *

31.1		Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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

SIGNATURES

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


	MAIN STREET BANKS, INC.

Date: May 9, 2005	By:	/s/ SAMUEL B. HAY, III
		Samuel B. Hay. III, Chief Executive Officer

Date: May 9, 2005	By:	/s/ DAVID D. DUNCAN
		David D. Duncan, Principal Accounting Officer

For the Period Ended
March 31,

(Dollars in Thousands)

Commitments to extend credit

Standby letters of credit