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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 September 30, 2003

Commission file number 000-25128

MAIN STREET BANKS, INC.
(Exact name of registrant as specified in its charter)

Georgia
(State of Incorporation)
 676 Chastain Road, Kennesaw, GA
(Address of principal executive offices)		   58-2104977
(I.R.S. Employer Identification No.)
 30144
(Zip Code)

770-422-2888
(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 ý    No o

        Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

        Yes ý    No o

        As of October 31, 2003 registrant had outstanding 18,934,770 shares of common stock.


MAIN STREET BANKS, INC.
TABLE OF CONTENTS

 
    
   Page
PART I. FINANCIAL INFORMATION    

Item 1.
 
Financial Statements (unaudited)
 
 

 
 
    Consolidated Balance Sheets
        September 30, 2003, December 31, 2002 and September 30, 2002
 
2

 
 
    Consolidated Statements of Income (unaudited)
        Three Months Ended September 30, 2003 and 2002 and
        Nine Months Ended September 30, 2003 and 2002
 
3

 
 
    Consolidated Statements of Comprehensive Income (unaudited)
        Three Months Ended September 30, 2003 and 2002 and
        Nine Months Ended September 30, 2003 and 2002
 
4

 
 
    Consolidated Statements of Cash Flows (unaudited)
        Nine Months Ended September 30, 2003 and 2002
 
5

 
 
    Notes to Consolidated Financial Statements (unaudited)
 
6

Item 2.
 
Management's Discussion and Analysis of
    Financial Condition and Results of Operations
 
12

Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
22

Item 4.
 
Controls and Procedures
 
22

PART II. OTHER INFORMATION
 
 

Item 1.
 
Legal Proceedings
 
23

Item 2.
 
Changes in Securities
 
23

Item 3.
 
Defaults Upon Senior Securities
 
23

Item 4.
 
Submission of Matters to a Vote of Security Holders
 
23

Item 5.
 
Other Information
 
23

Item 6.
 
Exhibits and Reports on Form 8-K
 
23

 
 
Signatures
 
25

 
 
Exhibit 31.1 Certification of CEO
 
26

 
 
Exhibit 31.2 Certification of CFO
 
27

 
 
Exhibit 32.1
 
28

 
 
Exhibit 32.2
 
29

1


PART I.—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

MAIN STREET BANKS, INC.
CONSOLIDATED BALANCE SHEETS

 
   (Unaudited)
September 30,
2003
   December 31,
2002
   (Unaudited)
September 30,
2002
  
Assets                    
Cash and due from banks   $ 39,559,729   $ 43,711,817   $ 63,599,884  
Interest-bearing deposits in banks     693,409     1,782,121     1,271,296  
Federal funds sold and securities purchased under agreements to resell     15,919,619     54,656,351     28,345,897  
Investment securities available for sale (costs of $243,620,558, $201,404,160, and $209,405,916 at September 30, 2003, December 31, 2002 and September 30, 2002, respectively)     247,867,031     208,455,409     216,610,155  
Investment securities held to maturity (fair value of $743,002, $754,704, and $756,253 at September 30, 2003, December 31, 2002 and September 30, 2002, respectively)     688,005     687,562     687,417  
Other investments     17,081,869     3,699,368     4,868,600  
Mortgage loans held for sale     6,490,437     8,175,522     12,751,028  
Loans, net of unearned income     1,411,950,618     982,486,447     860,297,666  
Allowance for loan losses     (20,765,376 )   (14,588,582 )   (12,684,649 )
   
 
 
 
Loans, net     1,391,185,242     967,897,865     847,613,017  
Premises and equipment, net     41,726,221     31,674,673     27,873,737  
Other real estate     1,366,820     815,880     2,271,881  
Accrued interest receivable     8,069,190     6,437,290     7,406,373  
Goodwill and other intangible assets     94,919,932     16,372,018     1,757,109  
Bank owned life insurance     35,274,639     30,904,434     30,444,481  
Other assets     10,275,482     6,719,791     4,801,748  
   
 
 
 
Total assets     1,911,117,625     1,381,990,101     1,250,302,623  
   
 
 
 

Liabilities
 
 
 
 
 
 
 
 
 
 
Deposits:                    
  Noninterest-bearing demand     224,032,272     184,130,490     183,416,645  
  Interest-bearing demand and money market     468,008,614     330,230,983     297,426,699  
  Savings     44,643,939     47,261,815     43,858,654  
  Time deposits of $100,000 or more     254,152,103     197,098,700     171,063,638  
  Other time deposits     446,803,841     370,205,897     322,986,604  
   
 
 
 
Total deposits     1,437,640,769     1,128,927,885     1,018,752,240  
Accrued interest payable     3,343,309     3,723,167     3,234,028  
Federal Home Loan Bank advances     159,739,071     50,000,000     50,000,000  
Federal funds purchased and securities sold under repurchase agreements     61,575,200     47,666,699     56,349,937  
Trust preferred securities     50,000,000     5,155,000     —  
Other liabilities     4,753,559     14,860,481     5,309,564  
   
 
 
 
Total liabilities     1,717,051,908     1,250,333,232     1,133,645,769  

Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
Common stock-no par value per share; 50,000,000 shares authorized; 18,933,178, 16,242,498 and 15,979,634 shares outstanding at September 30, 2003, December 31, 2002 and September 30, 2002, respectively     99,454,457     46,912,168     30,672,959  
Retained earnings     99,132,523     86,041,957     85,018,306  
Accumulated other comprehensive income, net of tax     4,267,326     5,561,196     6,189,660  
Treasury stock, at cost, 564,082, 464,082 and 379,682 shares at September 30, 2003, December 31, 2002 and September 30, 2002, respectively     (8,788,589 )   (6,858,452 )   (5,224,071 )
   
 
 
 
Total shareholders' equity     194,065,717     131,656,869     116,656,854  
   
 
 
 
Total liabilities and shareholders' equity   $ 1,911,117,625   $ 1,381,990,101   $ 1,250,302,623  
   
 
 
 

See accompanying notes to consolidated financial statements.

2

MAIN STREET BANKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2003
   2002
   2003
   2002
  
Interest income:                          
  Loans, including fees   $ 23,774,469   $ 17,361,867   $ 64,127,176   $ 50,854,468  
  Investment securities:                          
    Taxable     1,952,469     1,994,410     6,172,267     5,429,918  
    Non-taxable     413,969     449,463     1,294,256     1,211,710  
  Federal funds sold and other short-term investments     3,982     56,020     70,502     449,402  
  Interest-bearing deposits in banks     4,700     9,696     19,566     48,812  
  Other investments     160,278     50,639     302,919     162,827  
   
 
 
 
 
Total interest income     26,309,867     19,922,095     71,986,686     58,157,137  
Interest expense:                          
  Interest-bearing demand and money market     1,533,317     701,464     4,447,123     1,915,530  
  Savings     80,733     97,617     258,919     322,884  
  Time deposits of $100,000 or more     1,911,103     1,548,606     5,048,434     4,985,390  
  Other time deposits     2,378,300     2,818,137     6,676,179     9,285,691  
  Federal funds purchased     19,308     483,437     40,037     873,077  
  Federal Home Loan Bank advances     679,715     326,882     1,473,855     1,091,117  
  Trust preferred securities     580,096     —     872,504     —  
  Other interest expense     362,260     17,730     1,140,323     57,924  
   
 
 
 
 
Total interest expense     7,544,832     5,993,873     19,957,374     18,531,613  
   
 
 
 
 
Net interest income     18,765,035     13,928,222     52,029,312     39,625,524  
Provision for loan losses     (1,146,000 )   (217,000 )   (3,994,000 )   (2,276,000 )
   
 
 
 
 
Net interest income after provision for loan losses     17,619,035     13,711,222     48,035,312     37,349,524  
Non-interest income:                          
  Service charges on deposit accounts     2,092,139     1,848,215     5,690,303     5,138,774  
  Other customer service fees     388,960     341,058     1,148,287     1,006,448  
  Mortgage banking income     1,118,464     710,706     2,630,186     1,752,468  
  Investment agency commissions     88,616     89,185     232,718     291,886  
  Insurance agency income     1,188,538     1,145,510     3,604,645     2,821,830  
  Income from SBA lending     405,936     153,588     1,290,115     628,719  
  Income on bank owned life insurance     748,129     468,362     1,671,861     1,367,802  
  Other income     212,063     577,330     653,493     1,197,190  
  Gain (loss) on sales of premises and equipment     (7,901 )   (15,835 )   (91,129 )   (12,733 )
  Investment securities gains     300,837     —     616,872     —  
   
 
 
 
 
Total non-interest income     6,535,781     5,318,119     17,447,351     14,192,384  
Non-interest expense:                          
  Salaries and other compensation     6,799,573     5,510,648     18,617,678     14,775,321  
  Employee benefits     1,283,603     820,555     3,536,489     2,330,320  
  Net occupancy and equipment expense     1,772,929     1,406,481     4,657,345     3,890,984  
  Data processing fees     449,812     348,814     1,201,930     769,129  
  Professional services     824,785     721,208     1,786,574     954,836  
  Communications & supplies     983,575     814,169     2,567,577     2,090,099  
  Marketing expense     198,803     355,263     781,215     801,362  
  Regulatory agency assessments     73,557     81,782     240,878     194,831  
  Amortization of intangible assets     106,750     56,475     257,698     123,675  
  Other expense     1,874,717     1,423,472     4,658,793     4,044,059  
   
 
 
 
 
Total non-interest expense     14,368,104     11,538,867     38,306,177     29,974,616  
   
 
 
 
 
Income before income taxes     9,786,712     7,490,474     27,176,486     21,567,292  
Income tax expense     2,668,556     2,274,784     7,923,863     6,575,603  
   
 
 
 
 
Net income   $ 7,118,156   $ 5,215,690   $ 19,252,623   $ 14,991,689  
   
 
 
 
 
Earnings per share:                          
  Basic   $ 0.38   $ 0.33   $ 1.10   $ 0.96  
  Diluted   $ 0.36   $ 0.32   $ 1.06   $ 0.93  
Dividends declared per share   $ 0.120   $ 0.105   $ 0.360   $ 0.315  
Weighted average common shares outstanding:                          
  Basic     18,913,088     15,716,848     17,512,489     15,667,429  
  Diluted     19,602,219     16,218,286     18,186,159     16,187,355  

See accompanying notes to consolidated financial statements.

3

MAIN STREET BANKS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2003
   2002
   2003
   2002
Net income   $ 7,118,156   $ 5,215,690   $ 19,252,623   $ 14,991,689

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on securities available for sale     (2,325,343 )   1,751,395     (1,912,979 )   3,069,649
Unrealized gains on derivative contracts     399,477     1,400,000     619,109     1,400,000
Less reclassification adjustment for net (gains) included in net income     (198,552 )   —     (407,136 )   —
   
 
 
 
Comprehensive income   $ 4,993,738   $ 8,367,085   $ 17,551,617   $ 19,461,338
   
 
 
 

See accompanying notes to consolidated financial statements.

4

MAIN STREET BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
   Nine Months Ended
September 30,
  
 
   2003
   2002
  
Operating activities              
Net income   $ 19,252,623   $ 14,991,689  
Adjustments to reconcile net income to net cash provided by operating activities:              
  Provision for loan losses     3,994,000     2,276,000  
  Depreciation and amortization of premises and equipment     2,236,127     1,787,502  
  Amortization of intangible assets     257,699     123,675  
  Loss on sales of other real estate     148,818     7,364  
  Investment securities gains     (616,872 )   —  
  Net amortization of investment securities     1,190,058     439,903  
  Net accretion of loans purchased     (22,904 )   (52,215 )
  Loss on sales of premises and equipment     91,129     12,733  
  Net decrease in mortgage loans held for sale     1,685,085     (3,557,045 )
  Gain on mortgage loan sales     (2,630,186 )   (574,813 )
  Gains on sales of SBA loans     (1,290,115 )   (505,551 )
  Deferred income tax (benefit) provision     2,214,053     (1,581,334 )
  Deferred net loan fees (cost amortization)     (553,726 )   40,694  
  Vesting in restricted stock award plan     347,259     370,926  
Changes in operating assets and liabilities:              
  (Increase) in accrued interest receivable     (565,779 )   (1,762,570 )
  (Decrease) in accrued interest payable     (1,132,223 )   (1,336,151 )
  Other     (2,692,921 )   (84,851 )
   
 
 
Net cash provided by operating activities     21,912,125     10,595,956  

Investing activities
 
 
 
 
 
 
 
Purchases of investment securities available for sale     (129,729,831 )   (125,995,591 )
Purchases of other investments     (11,754,423 )   (750,000 )
Maturities, paydowns and calls of investment securities available for sale     65,397,747     30,387,822  
Proceeds from sales of investment securities available for sale     19,619,773     —  
Net increase in loans funded     (141,551,797 )   (48,161,718 )
Purchases of premises and equipment     (7,164,522 )   (2,764,912 )
Purchase of treasury stock     (1,930,137 )   —  
Proceeds from sales of premises and equipment     7,507     45,066  
Proceeds from sales of other real estate     2,408,206     1,312,496  
Improvements to other real estate     (194,798 )   —  
Net cash paid for acquisitions     (32,994,404 )   (300,000 )
   
 
 
Net cash used in investing activities     (237,886,679 )   (146,226,837 )

Financing activities
 
 
 
 
 
 
 
Net increase in demand and savings accounts     70,163,361     62,788,697  
(Decrease) increase in time deposits     (43,645,897 )   47,782,742  
Increase in federal funds purchased     13,908,501     40,845,582  
Net increase (decrease) in Federal Home Loan Bank advances     94,739,071     (25,121,250 )
Proceeds from issuance of trust preferred securities     44,845,000     —  
Dividends paid     (6,084,377 )   (4,955,101 )
Proceeds from issuance of common stock     —     753,076  
Payments to repurchase common stock     (1,928,637 )   (4,189,196 )
   
 
 
Net cash provided by financing activities     171,997,022     117,904,550  
Net decrease in cash and cash equivalents     (43,977,532 )   (17,726,331 )
Cash and cash equivalents at beginning of period     100,150,289     110,943,408  
   
 
 
Cash and cash equivalents at end of period   $ 56,172,757   $ 93,217,077  
   
 
 
Supplemental disclosures of cash flow information              
Cash paid during the peri